<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-12040
SUN HEALTHCARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 85-0410612
(State of Incorporation) (I.R.S. Employer
Identification No.)
101 Sun Lane, NE
Albuquerque, New Mexico 87109
(505) 821-3355
(Address and telephone number of Registrant)
5131 Masthead St., NE
Albuquerque, New Mexico 87109
(Former name, former address and former fiscal year,
if changed since last report)
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 twelve 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 ninety days.
Yes X No
------- -----
As of May 8, 1996, there were 49,037,096 shares of the Registrant's $.01 par
value Common Stock outstanding, net of treasury shares.
<PAGE>
- --------------------------------------------------------------------------------
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
INDEX
FORM 10-Q - FOR THE QUARTER ENDED MARCH 31, 1996
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Page Numbers
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 3 - 4
Consolidated Statements of Earnings
For the three months ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows
For the three months ended March 31, 1996 and 1995 6 - 7
Notes to Consolidated Financial Statements 8 - 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16 - 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
---------- ---------------
(In thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $17,096 $23,102
Restricted cash 1,782 1,914
Accounts receivable, net of allowance
for doubtful accounts of $10,000
as of March 31, 1996, and $11,035
as of December 31, 1995 256,752 236,797
Other receivables 28,149 29,976
Prepaids and other assets 18,019 18,300
Deferred tax asset 20,082 27,098
---------- ----------
Total current assets 341,880 337,187
---------- ----------
Property and equipment, net 226,627 201,132
Restricted cash -- 8,132
Goodwill, net 425,073 421,660
Other assets, net 69,158 62,856
Deferred tax asset 7,183 8,902
---------- ----------
Total assets $1,069,921 $1,039,869
---------- ----------
---------- ----------
</TABLE>
(Continued on next page)
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
--------- ------------
(In thousands, except share data)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $15,028 $10,417
Accounts payable 27,834 33,000
Accrued compensation and benefits 25,754 23,742
Workers' compensation accrual 6,378 6,339
Other accrued liabilities 25,376 26,542
--------- ---------
Total current liabilities 100,370 100,040
--------- ---------
Long-term debt, net of current portion 388,859 348,460
Other long-term liabilities 16,280 17,052
--------- ---------
Total liabilities 505,509 465,552
--------- ---------
Minority interest 4,860 5,275
Commitments and contingencies
Stockholders' equity:
Preferred stock of $.01 par value,
authorized 5,000,000 shares,
none issued -- --
Common stock of $.01 par value,
authorized 100,000,000 shares,
51,067,212 and 47,916,367 shares
issued at March 31, 1996, and
December 31, 1995, respectively 511 479
Additional paid-in capital 608,762 568,054
Retained earnings 16,116 777
Cumulative translation adjustment (356) (268)
--------- ---------
625,033 569,042
--------- ---------
Less:
Common stock held in treasury,
at cost 2,030,116 shares
as of March 31, 1996 25,069 --
Grantor stock trust, at market
3,050,000 shares as of
March 31, 1996 40,412 --
--------- ---------
Total stockholders' equity 559,552 569,042
--------- ---------
Total liabilities and stockholders'
equity $1,069,921 $1,039,869
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------- -------------
1996 1995
------------- -------------
(In thousands, except share data)
<S> <C> <C>
Total net revenues $320,291 $256,734
---------- ----------
Costs and expenses:
Operating 264,629 209,369
Corporate general and administrative 14,200 12,547
Provision for losses on accounts receivable 1,220 1,338
Depreciation and amortization 8,251 6,474
Interest, net 6,426 3,737
Conversion expense -- 3,256
---------- ----------
Total costs and expenses 294,726 236,721
---------- ----------
Earnings before income taxes and extraordinary loss 25,565 20,013
Income taxes 10,226 9,187
---------- ----------
Net earnings before extraordinary loss 15,339 10,826
Extraordinary loss from early
extinguishment of debt,
net of income tax benefit of $2,372 -- (3,413)
---------- ----------
Net earnings $15,339 $7,413
---------- ----------
---------- ----------
Pro forma data:
Historical earnings before income
taxes and extraordinary loss $20,013
Pro forma income taxes 9,472
----------
Pro forma net earnings before extraordinary loss 10,541
Extraordinary loss (3,413)
----------
Pro forma net earnings $7,128
----------
----------
Net earnings per common and common equivalent share:
Primary
Net earnings before extraordinary loss $0.32 $0.22
Extraordinary loss -- (0.07)
---------- ----------
Net earnings $0.32 $0.15
---------- ----------
---------- ----------
Fully diluted
Net earnings before extraordinary loss $0.31 $0.21
Extraordinary loss -- (0.06)
---------- ----------
Net earnings $0.31 $0.15
---------- ----------
---------- ----------
Weighted average number of common and common
equivalent shares outstanding:
Primary 47,785,704 47,953,097
---------- ----------
---------- ----------
Fully diluted 52,530,863 52,937,657
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------- -------------
1996 1995
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
Net earnings $15,339 $7,413
Adjustments to reconcile net earnings
to net cash provided by (used for)
operating activities -
Extraordinary loss -- 5,785
Conversion expense -- 3,256
Depreciation and amortization 8,251 6,474
Provision for losses on accounts
receivable 1,220 1,338
Other, net 37 (181)
Changes in operating assets and
liabilities:
Accounts receivable (21,021) (34,452)
Other current assets 472 (287)
Other current liabilities (5,532) (6,970)
Income taxes payable 9,338 791
---------- --------
Net cash provided by (used for)
operating activities 8,104 (16,833)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,443) (27,898)
Acquisitions, net of cash acquired (19,332) (10,123)
Purchase of minority interest in Ashborne PLC (4,271) --
Cash flows from assets held for sale -- (1,875)
Other assets expenditures (2,541) (3,968)
--------- --------
Net cash used for investing activities (31,587) (43,864)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings 44,440 111,300
Long-term debt repayments (2,060) (2,024)
Repurchase of 11 3/4% Senior
Subordinated Notes due 2002 -- (89,370)
Conversion of Mediplex 6 1/2% Convertible
Subordinated Debentures due 2003 -- (16,859)
Proceeds from issuance of common stock 328 823
Purchases of treasury stock (25,069) --
Other financing activities (100) (220)
--------- --------
Net cash provided by financing
activities 17,539 3,650
--------- --------
Effect of exchange rate on cash and cash equivalents (62) --
--------- --------
Net decrease in cash and cash equivalents (6,006) (57,047)
Cash and cash equivalents at beginning of period 23,102 78,738
--------- --------
Cash and cash equivalents at end of period $17,096 $21,691
--------- --------
--------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued on next page)
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------- -------------
1996 1995
------------ -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION (IN THOUSANDS):
Cash paid during period for:
Interest, net of $78 and $1,277 capitalized
in the three months ended March 31, 1996,
and March 31, 1995, respectively $8,434 $8,797
------------ -------------
------------ -------------
Income taxes $888 $6,024
------------ -------------
------------ -------------
SUPPLEMENTARY SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
(IN THOUSANDS, EXCEPT SHARE DATA)
In January 1995, the Company issued 1,582,905
shares of its Common Stock upon the conversion
of $39,449 of principal amount of
6 1/2% Convertible Subordinated Debentures
(Note 4).
The Company's acquisitions during the three
months ended March 31, 1996 and 1995, involved
the following (in thousands):
Value of assets acquired $22,738 $21,361
Liabilities assumed (3,406) (3,196)
Value of stock issued -- (8,042)
------------ -------------
Cash payments made, net of cash received
from others: $19,332 $10,123
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management of Sun Healthcare Group, Inc. (the "Company"
or "Sun"), the accompanying interim consolidated financial statements
present fairly the Company's financial position at March 31, 1996, and
December 31, 1995, and the results of its operations and its cash flows
for the three month periods ended March 31, 1996 and 1995. All adjustments
are of a normal and recurring nature. These statements are presented in
accordance with the rules and regulations of the United States Securities
and Exchange Commission ("SEC"). Accordingly, they are unaudited, and
certain information and footnote disclosures normally included in the
Company's annual consolidated financial statements have been condensed or
omitted, as permitted under the applicable rules and regulations. Readers
of these statements should refer to the Company's audited consolidated
financial statements and notes thereto for the year ended December 31,
1995, which are included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995. The results of operations presented in
the accompanying financial statements are not necessarily representative of
operations for an entire year.
2. ACQUISITIONS
On May 5, 1995, a wholly owned subsidiary of the Company merged with and
into Golden Care, Inc. ("Golden Care"). Golden Care provides respiratory
therapy services to long-term and subacute care facilities. Under the
terms of the merger agreement, the Company issued 2,106,904 shares of its
common stock in exchange for all of the outstanding common stock of Golden
Care. The merger was accounted for as a pooling of interests and
accordingly, the Company's March 31, 1995 financial statements have been
restated to include the accounts and operations of Golden Care.
On June 21, 1995, a wholly owned subsidiary of the Company merged with and
into CareerStaff Unlimited, Inc. ("CareerStaff"). CareerStaff provides
temporary staffing of physical, occupational and speech therapists to the
health care industry. Under the terms of the merger agreement, the Company
issued 6,080,600 shares of its common stock in exchange for all the
outstanding common stock of CareerStaff. The merger was accounted for as a
pooling of interests, and accordingly, the Company's March 31, 1995
financial statements have been restated to include the accounts and
operations of CareerStaff.
<PAGE>
Separate results of the operations for the periods presented prior to the
consummation of the respective mergers are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1995
-------
<S> <C>
Net revenues:
Sun $233,693
CareerStaff 20,153
Golden Care 3,131
Less intercompany revenues (243)
-------
$256,734
-------
-------
Net earnings:
Sun $5,681
CareerStaff 1,025
Golden Care 707
-------
$7,413
-------
-------
Pro forma net earnings (See Note 7):
Sun $5,681
CareerStaff 1,025
Golden Care 422
-------
$7,128
-------
-------
</TABLE>
During the three months ended March 31, 1996, the Company acquired the
ownership or the leasehold rights to two long-term care facilities in the
United Kingdom and seven long-term care facilities in the United States.
As of December 31, 1995, six of these facilities were under the control of
the Company pursuant to operating leases. The Company also acquired two
outpatient rehabilitation clinics in Canada and a pharmacy in the United
Kingdom.
<PAGE>
3. COMMITMENTS
As of March 31, the Company had capital commitments of approximately
$17,500,000 including various contracts related to improvements to existing
facilities and the construction of one new long-term care facility in the
United States and capital commitments of approximately 12,400,000 British
pounds ($18,900,000 as of March 31, 1996) under various contracts related
to the development and construction of eight new long-term care facilities
in the United Kingdom.
4. LONG-TERM DEBT
In January 1995, the Company completed a tender offer (the "Tender Offer")
for $78,698,000 of the 11 3/4% Senior Subordinated Notes due 2002 (the
"11 3/4% Notes") at a price of $1,120 per $1,000 of principal amount of
notes. The Company recorded an extraordinary loss, net of related tax
benefits, of $3,413,000 as a result of the extinguishment of such debt.
Concurrent with the Tender Offer, the Company deleted by amendment certain
covenants contained in the original indenture which restricted the Company
from fully integrating Mediplex into its operations. In addition, the
amendments modified certain provisions relating to mergers and
consolidations and events of default. In conjunction with the amendments,
the Company became a co-obligor on the remaining outstanding 11 3/4% Notes.
In January 1995, $39,449,000 of the 6 1/2% Convertible Subordinated
Debentures due 2003 (the "6 1/2% Debentures") were converted. Pursuant to
the conversion terms under the indenture relating to the 6 1/2% Debentures,
the Company paid $13,603,000 and issued 1,582,905 shares of the Company's
common stock to the converting holder. In addition, the Company paid a
$3,256,000 conversion fee plus accrued interest to the converting holder,
which was expensed in the first quarter of 1995, to induce conversion.
Conversion of the remaining $22,424,000 of the outstanding 6 1/2% Debentures
would require the issuance of an additional 899,771 shares of the Company's
common stock and a payment of $7,732,000 in cash pursuant to the conversion
terms under the indenture relating to the 6 1/2% Debentures.
5. EMPLOYEE BENEFIT PLANS
(a) GRANTOR STOCK TRUST
In the first quarter of 1996, the Company sold 3,050,000 newly issued
shares of the Company's common stock to a newly established Grantor Stock
Trust ("Trust"). The Trust will be used to fund future obligations under
certain
<PAGE>
of the Company's benefit plans. The sale of the shares is recorded as an
increase in stockholders' equity with a corresponding reduction for the
shares held by the Trust. As employee benefits are satisfied, the amount
of shares held by the Trust is reduced and stockholders' equity
correspondingly increases.
The Trust delivered a promissory note for approximately $37,700,000 to the
Company. The cash portion of the purchase price represents the par value
of the shares of the Company's common stock sold to the Trust. Amounts
owed by the Trust will be repaid periodically with cash received from the
Company or will be forgiven by the Company thereby enabling the release of
shares from the Trust to satisfy the Company's obligations for certain
employee benefit plans.
As of March 31, 1996, no shares had been released from the Trust.
(b) STOCK OPTION PLAN
During the first quarter of 1996, the Company adopted the 1996 Combined
Incentive and Nonqualified Stock Option Plan (the "Plan"). The Plan
reserves 3,000,000 shares of the Company's common stock for future issuance
pursuant to the grant of stock options and authorizes the Board of
Directors or a committee appointed by the Board of Directors to administer
the Plan and to grant to certain employees, officers and consultants of the
Company incentive stock options or nonqualified stock options at an
exercise price not less than the fair market value per share of the
Company's common stock at the date of grant. Each option grant under the
Plan expires not later than ten years from the date of grant. As of
March 31, 1996, an option to purchase 25,000 shares was outstanding under
the Plan. All options granted under the Plan are subject to defeasance
prior to approval of the Plan by the Company's stockholders at the
Company's annual meeting of stockholders in 1996.
6. COMMON STOCK REPURCHASE
In the first quarter of 1996, the Company repurchased 2,030,116 shares of
its outstanding common stock at a cost, including commissions, of
$25,069,000.
7. PRO FORMA INCOME TAXES
For financial reporting purposes, a pro forma provision for income taxes
has been reflected in the accompanying consolidated statements of earnings
to present taxes on the results of operations for Golden Care for the three
months ended March 31, 1995, as if Golden Care had not elected S
corporation status and was subject to and liable for Federal and state
income taxes as a C corporation prior to the termination of its S
corporation status. Golden Care terminated its S corporation status for
Federal and state income tax purposes upon merging with the Company on May
5, 1995.
<PAGE>
8. NET EARNINGS PER SHARE
Net earnings per common and common equivalent share is based upon the
weighted average number of common shares outstanding during the period
including the common stock transactions of CareerStaff and Golden Care plus
the effect of incremental common shares contingently issuable in respect to
stock options.
Fully diluted net earnings is determined on the assumption that the 6%
Debentures and the 6 1/2% Debentures were converted as of the dates of
issuance and acquisition on March 1, 1994, and June 23, 1994, respectively.
Net earnings is adjusted for the interest on the debentures, net of the
interest related to additional assumed borrowings to fund the cash
consideration on conversion of the 6 1/2% Debentures and the related
income tax benefits.
9. OTHER EVENTS
(a) GOVERNMENT INVESTIGATION
The Company's rehabilitation therapy subsidiary has been under
investigation by the United States Department of Health and Human
Services' Office of Inspector General (the "OIG") since the
beginning of 1995. The allegations underlying the investigation have still
not been fully disclosed to the Company. The Company has cooperated and
continues to cooperate with the investigation. In addition, the Company
has taken a number of steps in its efforts to expedite the investigation.
These steps include, among other things: furnishing the government with
its analysis of the law and regulations relevant to certain of the issues
being reviewed; inviting government officials to tour the operations of
the Company's long-term care facilities; and encouraging attorneys at the
Department of Justice to become more actively involved in this matter in
light of that department's greater resources to analyze and resolve the
relevant legal and regulatory issues. Although the Company believes these
steps have been useful, it is unable to predict when the investigation will
be concluded and it understands that the government is still in the process
of collecting additional information.
The Company believes that the investigation includes a review of whether
the Company's rehabilitation therapy subsidiary has engaged in improper
practices, including the provision of, and billing for, concurrent
therapy services and unnecessary or unordered services to residents of
skilled nursing facilities. In addition, the Company's rehabilitation
therapy subsidiary provides therapy services to, among others, the
Company's long-term care subsidiary. The Company understands that the
government is also reviewing claims filed by its long-term care subsidiary
with respect to these services. At this stage, the Company understands
that the government is seeking to determine whether the long-term care
subsidiary properly disclosed its relationship with the rehabilitation
therapy subsidiary and properly reported the costs of its transactions with
the rehabilitation therapy subsidiary. If there have been improper
practices or the investigation is broader in scope, depending on the nature
and extent of such impropriety, the investigation could result in the
imposition of civil, administrative, or criminal fines, penalties, or
restitutionary relief, and may have a negative impact on the Company.
From time to time the negative publicity surrounding the government
investigation has slowed the Company's success in obtaining additional
outside contracts in the rehabilitation therapy business, and resulted in
declines in therapist productivity and affected the private pay enrollment
in certain facilities. The Company is unable to determine at this time
when the investigation is to be concluded, however, based on the facts
currently available, it does not believe that the outcome of the
government investigation will have a material adverse effect on the
Company's results of operations or financial condition.
<PAGE>
(b) LITIGATION
A holder of CareerStaff's common stock has filed a lawsuit (the
"CareerStaff Litigation") as a purported class action against CareerStaff
and the directors of CareerStaff alleging breach of fiduciary duty in
entering into a merger agreement with the Company and against the Company
alleging that the Company aided and abetted the alleged breach of fiduciary
duty by the CareerStaff directors. In February 1996, the plaintiff filed a
status report with the court stating that the plaintiff intends to file a
stipulation of dismissal without prejudice. The Company believes that the
CareerStaff Litigation is without merit; however, there can be no assurance
that the CareerStaff Litigation will not have an impact on the Company's
accounting for the merger.
On June 30, 1995, two civil class-action complaints were filed against the
Company and certain of its current and former directors and officers in the
United States District Court for the District of New Mexico. Two more
complaints, based on the same underlying events, were filed on August 30,
1995. On October 6 and October 10, 1995, two additional complaints were
filed, also based on the same underlying events. These six complaints were
consolidated by a court order dated November 27, 1995, and an amended class
action complaint, captioned IN RE SUN HEALTHCARE GROUP, INC. LITIGATION
(the "Complaint"), was filed in the United States District Court for the
District of New Mexico on January 26, 1996. The Complaint was purportedly
brought on behalf of all persons who either exchanged their shares of
common stock of CareerStaff for shares of Sun common stock pursuant to a
merger agreement between CareerStaff and the Company, or who purchased
shares of Sun common stock between October 26, 1994, and June 27, 1995.
The Complaint alleges that defendants misrepresented or failed to disclose
material facts about the OIG investigation and about the Company's
operations and financial results, which plaintiffs contend artificially
inflated the price of the Company's securities.
On or about January 23, 1996, two of the Golden Care selling stockholders
filed a lawsuit (the "Golden Care Litigation") against the Company and
certain of its officers and directors in the United States District Court
for the Southern District of Indiana. Plaintiffs allege, among other
things, that the Company did not disclose material facts concerning the OIG
investigation and that the Company's financial results were misstated. The
Complaint purports to state claims, INTER ALIA, under federal and state
securities laws and for breach of contract, including a breach of the
registration rights agreement pursuant to which Sun agreed to register the
shares for resale by such Golden Care selling stockholders. The Company
believes that the Golden Care Litigation is without merit; however, there
can be no assurance that the Golden Care Litigation will not have an impact
on the Company's accounting for the merger.
<PAGE>
A derivative action has been filed in the United States District Court for
the District of New Mexico, captioned BRICKELL PARTNERS V. TURNER, ET AL.,
alleging breach of fiduciary duty by certain current and former of the
Company's directors and officers based on substantially the same events as
those set forth in the above described securities class actions. The
complaint has not been served on any defendant.
The Company has reviewed the allegations in the complaints, believes them
to be without merit, and intends to defend itself vigorously. Relief
sought in the foregoing actions is unspecified. The Company believes the
shareholder actions will not have a material adverse impact on its results
of operations or financial condition.
(c) SALE OF SUNSURGERY
In the first quarter of 1996, the Company announced that the Company had
reached an agreement in principle for the sale of SunSurgery Corporation,
its ambulatory surgery subsidiary.
10. SUMMARIZED FINANCIAL INFORMATION
Summarized financial information of The Mediplex Group, Inc. ("Mediplex"),
whose 6 1/2% Debentures and 11 3/4% Notes became a co-obligation between
the Company and Mediplex subsequent to the acquisition of Mediplex by the
Company on June 23, 1994, is provided below (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------- ------------
<S> <C> <C>
Current assets $ 124,235 $ 128,281
Noncurrent assets $ 451,009 $ 461,592
Current Liabilities $ 33,676 $ 34,823
Noncurrent Liabilities $ 90,463 $ 91,150
Due to Parent $ 159,482 $ 169,273
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Net revenues $116,814 $101,630
-------- --------
Costs and expenses 107,895 97,155
-------- --------
Earnings before intercompany
charges, income taxes and
extraordinary loss 8,919 4,475
Intercompany charges(1) 12,811 4,429
-------- --------
Earnings (loss) before income taxes
and extraordinary loss (3,892) 46
Income taxes (benefit) (847) 1,568
-------- --------
Net earnings (loss) before
extraordinary loss (3,045) (1,522)
Extraordinary loss, net of income
tax benefit - (3,413)
-------- --------
Net earnings (loss) $(3,045) $(4,935)
-------- --------
-------- --------
</TABLE>
(1) Through various intercompany agreements entered into by Sun and Mediplex,
Sun provides management services, licenses the use of its trademarks and
acts on behalf of Mediplex to make financing available for its operations.
Sun charged Mediplex for management services totaling $7,977,000 and
$4,429,000 for the three months ended March 31, 1996 and 1995,
respectively. On September 30, 1995, Sun and Mediplex finalized licensing
agreements and financing agreements which were effective January 1, 1995.
Royalty fees charged to Mediplex for the three months ended March 31, 1996,
for the use of Sun trademarks were $1,603,000. Intercompany interest
charged to Mediplex for the three months ended March 31, 1996, for advances
from Sun was $3,231,000. Prior to September 30, 1995, Sun did not charge
Mediplex for the licensing agreements and the financing agreements.
<PAGE>
ITEM 2.
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company, whose subsidiaries began operations in 1989 with the
acquisition of seven long-term care facility operations, has achieved
significant growth through acquisitions of long-term and subacute care
facilities ("facilities") and the provision of therapy and institutional
pharmaceutical services. The Company's strategy is to increase profitability
through the provision of ancillary services such as rehabilitation and
respiratory therapy and institutional pharmacy to both affiliated and
nonaffiliated facilities. These ancillary services have significantly higher
margins than the margins associated with routine services provided to residents
of facilities. The Company's earnings growth historically has resulted from its
acquisition of facilities, expansion of ancillary services through acquisitions,
use of its long-term care operations as a base for expansion of ancillary
services and provision of ancillary services to nonaffiliated facilities.
The Company's results of operations for the three months ended March
31, 1996, as compared to the results of operations for the three months ended
March 31, 1995, reflect the acquisition of facilities, the growth of the
Company's existing facility operations, the expansion of the Company's therapy
service operations and temporary therapy staffing services and the growth of the
Company's institutional pharmaceutical service operations. On May 5, 1995, the
Company acquired Golden Care, Inc. ("Golden Care"), a provider of respiratory
therapy services to facilities, and on June 21, 1995, the Company acquired
CareerStaff Unlimited, Inc. ("CareerStaff"), a provider of temporary staffing of
physical, occupational and speech therapists to the health care industry. Both
transactions were accounted for as poolings of interest; accordingly, the
Company's financial condition and results of operations for the three months
ended March 31, 1995, has been restated to reflect the combined operations.
At March 31, 1995, the Company had 139 long-term and subacute care
facilities with 15,266 licensed beds, including 21 long-term care facilities
with 1,024 registered beds operated by Exceler Health Care PLC in the United
Kingdom. Between March 31, 1995, and March 31, 1996, the Company acquired or
developed 25 long-term and subacute care facilities with 2,432 licensed beds.
The Company's therapy service operations include the provision of
physical, occupational and speech therapy, and the provision of respiratory care
and distribution of related equipment and supplies. At March 31, 1996, the
Company provided its therapy services to 664 nonaffiliated facilities, an
increase of 134 facilities from the 530 nonaffiliated facilities serviced at
March 31, 1995.
<PAGE>
At March 31, 1996 and 1995, the Company's temporary therapy staffing
operations had 19 and 17 division offices, respectively.
Between March 31, 1995, and March 31, 1996, the Company acquired an
institutional regional pharmacy in South Carolina and developed an institutional
regional pharmacy in Massachusetts.
The following table sets forth certain operating data for the Company
as of the dates indicated:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Long-term and Subacute Care Facility Operations
Long-term and subacute care facilities:
Domestic operations 132 118
Foreign operations 32 21
------ ------
Total 164 139
------ ------
------ ------
Licensed beds:
Domestic operations 16,063 14,242
Foreign operations 1,635 1,024
------ ------
Total 17,698 15,266
------ ------
------ ------
Therapy Service Contracts:
Nonaffiliated facilities 664 530
Affiliated facilities 128 112
------ ------
Total 792 642
------ ------
------ ------
Temporary Therapy Staffing Service:
Hours billed to nonaffiliates 544,982 414,139
Institutional Pharmaceutical Contracts:
Nonaffiliated facilities 276 215
Affiliated facilities 106 95
------ ------
Total 382 310
------ ------
------ ------
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the amount and percentages of certain
elements of total net revenues for the periods presented (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1996 1995
---------- ---------
<S> <C> <C> <C> <C>
Long-term and subacute care services $205,528 64% $175,597 68%
Therapy services to nonaffiliates 52,648 16 38,464 15
Temporary therapy staffing services to
nonaffiliates 26,037 8 19,910 8
Institutional pharmaceutical services to
nonaffiliates 16,117 5 10,800 4
Foreign operations 11,634 4 4,841 2
Ambulatory surgery 6,868 2 5,800 2
Management fees and other 1,459 1 1,322 1
------- --- ------- ---
Total net revenues $320,291 100% $256,734 100%
--------- ---- --------- ----
--------- ---- --------- ----
</TABLE>
Revenues for the long-term and subacute care services include revenues
billed to patients for therapy services and institutional pharmaceutical
services provided by the Company's affiliated operations. Revenues for therapy
services provided to affiliated facilities were $26,666,000 and $20,117,000 for
the three months ended March 31, 1996 and 1995, respectively. Revenues provided
to affiliated facilities for institutional pharmaceutical services were
$4,817,000 and $2,514,000 for the three months ended March 31, 1996 and 1995,
respectively.
<PAGE>
The following table presents the percentage of total net revenues
represented by certain items for the Company for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
----- ------
<S> <C> <C>
Total net revenues 100% 100%
---- ----
Costs and expenses:
Operating 82.6 81.6
Corporate general and
administrative 4.4 4.9
Provision for losses on
accounts receivable 0.4 0.5
Depreciation and amortization 2.6 2.5
Interest, net 2.0 1.5
Conversion expense - 1.2
---- ----
Total costs and expenses 92.0 92.2
---- ----
Earnings before income taxes
and extraordinary loss 8.0 7.8
Income taxes(1) 3.2 3.7
---- ----
Net earnings before
extraordinary loss 4.8 4.1
Extraordinary loss - 1.3
---- ----
Net earnings 4.8% 2.8%
---- ----
---- ----
</TABLE>
(1) Income taxes for the three months ended March 31, 1995, represents pro
forma taxes of Golden Care prior to its election to be taxed as a C Corporation,
which occurred in May 1995.
The results of the Company's ambulatory surgery operations and foreign
operations are immaterial to the Company's consolidated results, and
therefore this discussion excludes any description of the results of the
Company's ambulatory surgery and foreign operations. The Company has reached
an agreement in principle to sell its ambulatory surgery subsidiary.
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Total net revenues for the three months ended March 31, 1996, increased 25%
from $256,734,000 for the three months ended March 31, 1995 to $320,291,000.
Net revenues from long-term and subacute care services, which includes
revenues generated from therapy and institutional pharmaceutical services
provided at the Company's facilities, increased 17% from $175,597,000 for the
three months ended March 31, 1995, to $205,528,000 for the three months ended
March 31, 1996. Approximately $20,477,000 or 68% of this increase results
from 14 facilities acquired or opened since March 31, 1995 and three
facilities opened during the three months ended March 31, 1995. The
remaining net revenue increase of $9,454,000 is primarily attributable to an
increase in revenue per patient day since March 31, 1995, on a same facility
basis for the 115 facilities in operation all of the three months ended March
31, 1996 and 1995. The increase in revenue per patient day was a result of
overall rate increases and the expansion of subacute services since March 31,
1995.
Net revenues from therapy services increased 37% from $38,464,000 for the
three months ended March 31, 1995, to $52,648,000 for the three months ended
March 31, 1996, primarily as a result of the increased services to nonaffiliated
facilities from 530 facilities at March 31, 1995, to 664 facilities at March 31,
1996.
Net revenues from temporary therapy staffing services increased 31% from
$19,910,000 for the three months ended March 31, 1995, to $26,037,000 for the
three months ended March 31, 1996, primarily as a result of the increased
service hours billed to nonaffiliates from 414,139 hours in 1995 to 544,982
hours in 1996. The increase in service hours billed is attributable primarily
to the expansion of services at division offices open for over a year and to new
offices established through acquisitions.
Net revenues from institutional pharmaceutical services increased 49% from
$10,800,000 for the three months ended March 31, 1995, to $16,117,000 for the
three months ended March 31, 1996. The growth in net revenues is primarily the
result of the inclusion of a full quarter's revenues in institutional
pharmaceutical services revenues from the opening or acquisition of three
regional pharmacies during 1995. The growth in net revenues is also a result of
the increase in services to nonaffiliated facilities from 215 at March 31, 1995,
to 276 at March 31, 1996.
Operating expenses, which includes rent expense of $21,473,000 and
$17,342,000 for the three months ended March 31, 1996 and 1995, respectively,
increased 26% from $209,369,000 for the three months ended March 31, 1995 to
$264,629,000 for the three months ended March 31, 1996. The increase
resulted primarily from the acquisition and development of 25 facilities and
the growth in therapy and temporary staffing services. Operating expenses as
a percentage of net revenues increased from 81.6% for the three months ended
March 31, 1995, to 82.6% for the three months ended March 31, 1996. This
increase is primarily attributable to increased operating costs without a
corresponding increase in billing rates due to competitive pressures. This
increase can also be attributed to acquisitions since March 31, 1995, which
during the integration period have experienced lower operating margins as the
Company implements its business strategy.
<PAGE>
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, increased 13% from $12,547,000 for the
three months ended March 31, 1995, to $14,200,000 for the three months ended
March 31, 1996. As a percentage of net revenues, corporate general and
administrative expenses decreased from 4.9% for the three months ended March 31,
1995, to 4.4% for the three months ended March 31, 1996. The decrease is due to
increases in net revenues without a proportionate increase in corporate general
and administrative expenses.
Depreciation and amortization increased 27% from $6,474,000 for the three
months ended March 31, 1995, to $8,251,000 for the three months ended March 31,
1996. As a percentage of net revenues, depreciation and amortization expense
remained constant at 2.6% and 2.5% for the three months ended March 31, 1996 and
1995, respectively.
Net interest expense increased 72% from $3,737,000 for the three months
ended March 31, 1995, to $6,426,000 for the three months ended March 31,
1996. As a percentage of net revenues, interest expense increased from 1.5%
for the three months ended March 31, 1995, to 2.0% for the three months ended
March 31, 1996. The increase is primarily due to increased borrowings under
the Company's credit facility most of which was used to fund acquisitions,
capital expenditures and the repurchase of $25,000,000 of the Company's
common stock.
The Company incurred a nonrecurring charge of $3,256,000 in connection with
the payment of an inducement fee to effect the conversion in January 1995 of
$39,449,000 of the 6 1/2% Convertible Debentures. In addition in 1995, the
Company recorded an extraordinary charge of $3,413,000, net of the related tax
benefit, in connection with the tender offer, completed in January 1995, for
$78,698,000 principal amount of the 11 3/4% Senior Subordinated Notes.
The Company's effective tax rate was 40% for the three months ended March
31, 1996, as compared to the pro forma effective tax rate of 41% for the
three months ended March 31, 1995, after excluding the nondeductible
conversion fee. The pro forma provision for income taxes for the three
months ended March 31, 1995, reflects tax expense that would have been
recorded if Golden Care had been subject to and liable for Federal and state
income taxes as a C corporation prior to the termination of its S corporation
status in May 1995.
Net earnings increased 115% from pro forma net earnings of $7,128,000 for
the three months ended March 31, 1995, to $15,339,000 for the three months
ended March 31, 1996. Net earnings increased 11% from pro forma net earnings
before the extraordinary loss for early extinguishment of debt and the
conversion fee of $13,797,000 for the three months ended March 31, 1995, to
$15,339,000 for the three months ended March 31, 1996. As a percentage of
net revenues, net earnings were 4.8% for the three months ended March 31,
1996, as compared to 5.4% for the three months ended March 31, 1995, before
the extraordinary loss for early extinguishment of debt and the conversion
fee. The decline in net earnings as a percentage of net revenues is
primarily due to increased operating costs and to acquisitions since March
31, 1995 (as discussed above).
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had working capital of $241,510,000,
including cash and cash equivalents of $17,096,000, as compared to working
capital of $237,147,000, including cash and cash equivalents of $23,102,000
at December 31, 1995. For the three months ended March 31, 1996, net cash
provided by operations was $8,104,000 compared to net cash used for
operations for the three months ended March 31, 1995, of $16,833,000. The
net cash provided by operations for the three months ended March 31, 1996,
reflects the Company's growth in net earnings and a reduction in the
Company's working capital requirements. This was offset by the net cash
required to fund an increase in accounts receivable. Accounts
receivable increased because the first quarter Medicare interim rates
received by the long-term care facilities were lower than the reimbursement
due for services provided and the growth in the therapy and institutional
pharmaceutical services businesses since December 1995. Other significant
operating uses of cash for the three months ended March 31, 1996, were
payments of $8,512,000 for interest.
The Company incurred $5,443,000 and $27,898,000 in capital expenditures
for the three months ended March 31, 1996 and 1995, respectively.
Substantially all such expenditures during the three months ended March 31,
1996, were for the continued development and construction of eight new
facilities in the United Kingdom, two corporate office buildings and routine
capital expenditures. These expansions were financed through borrowings and
from restricted cash. The Company had capital expenditure commitments, as of
March 31, 1996, of approximately $17,500,000 in the United States and
12,400,000 British pounds ($18,900,000 as of March 31, 1996) in the United
Kingdom. These include contractual commitments to improve existing
facilities and develop and construct one and eight facilities in the United
States and United Kingdom, respectively.
The Company paid $19,332,000 and $10,123,000 for acquisitions during the
three months ended March 31, 1996 and 1995, respectively. During the three
months ended March 31, 1996, the Company acquired the ownership or the leasehold
rights to two long-term care facilities in the United Kingdom and seven
long-term care facilities in the United States. As of December 31, 1995, six of
these facilities were under the control of the Company pursuant to operating
leases. The Company also acquired two outpatient rehabilitation clinics in
Canada and a pharmacy in the United Kingdom.
In 1995, the Company accrued $3,905,000 for costs to respond to and to
defend itself against various shareholder litigation suits and the
investigation of the Company's rehabilitation therapy subsidiary by the
Office of the Inspector General (the "OIG"). In the three months ended March
31, 1996, the Company charged $831,000 against the accrual.
In January 1995, the Company and Mediplex completed a Tender Offer for
$78,698,000 of the 11 3/4% Senior Subordinated Notes due 2002 (the "11 3/4%
Notes") at
<PAGE>
a price of $1,120 per $1,000 principal amount of the 11 3/4% Notes (the "Tender
Offer"). The Company recorded an extraordinary loss, net of related tax
benefits, of $3,413,000 as a result of the extinguishment of debt. The Tender
Offer was financed with the net proceeds of $111,878,000 from the December 1994
common stock offering of 5,365,000 of the Company's shares.
In January 1995, $39,449,000 of the 6 1/2% Convertible Debentures were
converted. Pursuant to the conversion terms under the indenture relating to
the 6 1/2% Convertible Debentures, the Company paid $13,603,000 and issued
1,582,905 shares of common stock to the converting holder. In addition, the
Company paid the accrued interest plus a $3,256,000 conversion fee to the
converting holder to induce conversion. The January 1995 conversion was
funded through borrowings under the Credit Facility. Conversion of the
remaining $22,424,000 of outstanding 6 1/2% Convertible Debentures would
require the issuance of an additional 899,771 shares of common stock and a
payment of $7,732,000 in cash pursuant to the conversion terms under the
indenture relating to the 6 1/2% Convertible Debentures.
In the first quarter of 1996, the Company repurchased 2,030,116 shares of
the Company's outstanding common stock at a cost, including commissions, of
$25,069,000. The Company borrowed under its credit facility to fund the
repurchase.
The Company's ongoing capital requirements relate to the costs associated
with its facilities under construction, routine capital expenditures and
potential acquisitions.
The Company believes that its current borrowing capacity under its credit
facility and cash from operations will be sufficient to satisfy its working
capital needs, routine capital expenditures, current debt service obligations
and to fund additional potential conversions of 6 1/2% Convertible
Debentures. The Company anticipates that it will fund its construction
commitments as well as its requirements relating to future growth through (i)
the available borrowing capacity under its credit facility, (ii) the use of
operating leases and common stock in the future as a means of acquiring
facilities and new operations and (iii) the availability of sale leaseback
financing through real estate investment trusts and other financing sources.
However, there can be no assurance that the Company may not require
additional sources of financing in the next twelve months, particularly if it
pursues acquisitions requiring significant cash consideration. Such
financing may come from accessing the public securities markets. However,
the Company's access to the public market may be adversely affected by the
status of the OIG investigation. In addition, such acquisitions may require
approval of the various lenders under the Company's credit facility. If such
sources of financing are not available, the Company may not be able to pursue
growth opportunities as actively as it has in the past, and may be required
to alter certain of its operating strategies.
EFFECTS FROM CHANGES IN REIMBURSEMENT
The Company derives a substantial percentage of its total revenues from
Medicare, Medicaid and private insurance. The Company's results of
operations and financial condition can be significantly affected by the
revenue reimbursement process, which in the Company's industry is complex and
can involve lengthy delays between the time that revenue is recognized and
the time that reimburseement is received. The Company has from time to time
experienced delays in receiving reimbursements. Various cost containment
measures
<PAGE>
adopted by governmental and private pay sources have begun to restrict the
scope and amount of reimbursable health care expenses and limit increases in
reimbursement rates for medical services. Any reductions in reimbursement
levels under Medicaid, Medicare or private payor programs and any changes in
applicable government regulations or interpretations of existing regulations
could significantly affect the Company's profitability. Furthermore,
government programs are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which may materially affect the rate of payment to the
Company's facilities and ambulatory surgery centers and its therapy and
institutional pharmaceutical businesses. There can be no assurance that
payments under governmental or private payor programs will remain at levels
comparable to present levels or will be adequate to cover the costs of
providing services to patients eligible for assistance under such programs.
Significant decreases in utilization and limits on reimbursement could have a
material adverse effect on the Company's results of operations and financial
condition including the possible impairment of certain assets.
In October 1993, the Health Care Financing Administration ("HCFA") issued a
directive to fiscal intermediaries that administer the Medicare reimbursement
policies to review costs incurred by providers of occupational therapy and
speech therapy. Although HCFA has published salary equivalency guidelines for
physical therapy and respiratory therapy, no such standards exist for
occupational therapy and speech therapy. The directive indicated HCFA's intent
to develop salary equivalency guidelines for occupational and speech therapy.
Implementation of this directive and the development of salary equivalency
guidelines could directly or indirectly limit reimbursement for certain of the
Company's rehabilitation therapy services. Reimbursement for such services is
currently evaluated under Medicare's reasonable cost principles. In April and
June 1995, HCFA provided information to intermediaries for their use in
determining reasonable costs for occupational and speech therapy. The salary
information set forth in such directives, although not intended to be applied as
absolute limits of reasonable costs, could substantially lower the reimbursement
rates. While the effect of these directives is still uncertain, they are a
factor considered by such intermediaries in determining reasonable costs, which
could result in a decrease in the Company's revenues or, with respect to
rehabilitation therapy services provided to Company operated facilities, a
retroactive adjustment of Medicare reimbursement for some prior periods. An
adjustment of reimbursement rates with respect to therapy services provided to
nonaffiliated facilities could result in indemnity claims against the Company,
based on the terms of substantially all of the Company's existing contracts with
such facilities, for payments previously made by such facilities to the Company
that are reduced by Medicare in the audit process. The Company derives a
significant percentage of its net earnings from the provision of therapy
services; a change in reimbursement resulting from implementation of this
directive or a reduction in reimbursement rates as a result of a change in
application of reasonable cost guidelines could have a material adverse affect
on the Company's financial condition and results of operations, depending on the
rates adopted and the Company's costs for providing these services.
<PAGE>
Current Medicare regulations that apply to transactions between related
parties, such as the Company's subsidiaries, are relevant to the amount of
Medicare reimbursement that the Company is entitled to receive for the
rehabilitation and respiratory therapy and institutional pharmaceutical services
that it provides to Company operated facilities. These Medicare regulations
require that, among other things, a substantial part of the rehabilitation and
respiratory therapy services or institutional pharmaceutical services, as the
case may be, of the relevant subsidiary be transacted with nonaffiliated
entities in order for the Company to receive reimbursement for services provided
to Company operated facilities at the rates applicable to services provided to
nonaffiliated entities. The Medicare regulations do not indicate a specific
level of services that must be provided to nonaffiliated entities in order to
satisfy the "substantial part" requirement of such regulations. Net revenues
from rehabilitation therapy services provided to nonaffiliated facilities
represented 67% and 64% of total rehabilitation services net revenues for the
three months ended March 31, 1996, and the twelve months ended December 31,
1995, respectively. Respiratory therapy services provided to nonaffiliated
facilities represented 56% and 64% of total respiratory therapy services net
revenues for the three months ended March 31, 1996, and the period from the date
of acquisition of Golden Care on May 5, 1995, to December 31, 1995,
respectively. The Company's respiratory therapy operations did not provide
services to nonaffiliated facilities prior to the acquisition of Golden Care on
May 5, 1995. Net revenues from institutional pharmaceutical services provided
to nonaffiliated facilities represented 77% and 78% of total institutional
pharmaceutical services revenues for the three months ended March 31, 1996, and
the twelve months ended December 31, 1995, respectively. The Company believes
that it satisfies the requirements of these regulations regarding nonaffiliated
business. Consequently, it has claimed and received reimbursements under
Medicare for rehabilitation and respiratory therapy and institutional
pharmaceutical services provided to patients in its own facilities at a higher
rate than if it did not satisfy these requirements. If the Company is unable to
satisfy these regulations, the reimbursement that the Company receives for
rehabilitation and respiratory therapy and institutional pharmaceutical services
provided to its own facilities would be materially and adversely affected. If,
upon audit by relevant reimbursement agencies, such agencies find that these
regulations have not been satisfied, and if, after appeal, such findings are
sustained, the Company could be required to refund some or all of the difference
between its cost of providing these services and the higher amount actually
received. While the Company believes that it has satisfied and will continue to
satisfy these regulations, there can be no assurance that its position would
prevail if contested by relevant reimbursement agencies. The foregoing
statements with respect to the Company's ability to satisfy these regulations
are forward looking and could be affected by a number of factors, including the
interpretation of Medicare regulations by the relevant reimbursement agencies
and the Company's ability to provide services to nonaffiliated facilities.
The Company's subsidiaries, including those which provide subacute and
<PAGE>
long-term care, rehabilitation and respiratory therapy and institutional
pharmaceutical services, are engaged in industries which are extensively
regulated. As such, in the ordinary course of business, the operations of these
subsidiaries are continuously subject to state and Federal regulatory scrutiny,
supervision and control. Such regulatory scrutiny often includes inquiries,
investigations, examinations, audits, site visits and surveys, some of which may
be non-routine.
In addition to being subject to the direct regulatory oversight of state
and Federal regulatory agencies, these industries are frequently subject to the
regulatory supervision of fiscal intermediaries. Fiscal intermediaries are
agents of HCFA who interpret and implement applicable laws and regulations and
make decisions about the appropriate reimbursement to be paid under Medicare and
Medicaid. The Company's subsidiaries are subject to the oversight of several
different intermediaries. Those different intermediaries have taken varying
interpretations of the applicable laws and regulations. The lack of uniformity
in the interpretation and implementation of such laws and regulations reflects
in part the fact that the statutory standards are subject to interpretation and
the manuals which are published and utilized by HCFA and the intermediaries in
performing their regulatory functions are often not sufficiently specific to
provide clear guidance in the areas which are the subject of regulatory
scrutiny.
<PAGE>
It is the policy of the Company to comply with all applicable laws and
regulations, and the Company believes that its subsidiaries are in substantial
compliance with all material laws and regulations which are applicable to their
businesses. However, given the extent to which the interpretation and
implementation of applicable laws and regulations varies and the lack of clear
guidance in the areas which are the subject of regulatory scrutiny, there can be
no assurance that the business activities of the Company's subsidiaries will
not from time to time become the subject of regulatory scrutiny, or that such
scrutiny will not result in interpretations of applicable laws or regulations by
government regulators or intermediaries which differ materially from those taken
by the Company's subsidiaries.
The Company's rehabilitation therapy subsidiary has been under
investigation by the United States Department of Health and Human Services'
Office of Inspector General (the "OIG") since the beginning of 1995.
The allegations underlying the investigation have still not been fully
disclosed to the Company. The Company has cooperated and continues to
cooperate with the investigation. In addition, the Company has taken a
number of steps in its efforts to expedite the investigation. These steps
include, among other things: furnishing the government with its analysis
of the law and regulations relevant to certain of the issues being reviewed;
inviting government officials to tour the operations of the Company's long-term
care facilities; and encouraging attorneys at the Department of Justice to
become more actively involved in this matter in light of that department's
greater resources to analyze and resolve the relevant legal and regulatory
issues. Although the Company believes these steps have been useful, it is
unable to predict when the investigation will be concluded and it understands
that the government is still in the process of collecting additional
information.
The Company believes that the investigation includes a review of whether
the Company's rehabilitation therapy subsidiary has engaged in improper
practices, including the provision of, and billing for, concurrent therapy
services and unnecessary or unordered services to residents of skilled
nursing facilities. In addition, the Company's rehabilitation therapy
subsidiary provides therapy services to, among others, the Company's
long-term care subsidiary. The Company understands that the government is
also reviewing claims filed by its long-term care subsidiary with respect to
these services. At this stage, the Company understands that the government
is seeking to determine whether the long-term care subsidiary properly
disclosed its relationship with the rehabilitation therapy subsidiary and
properly reported the costs of its transactions with the rehabilitation
therapy subsidiary. If there have been improper practices or the investigation
is broader in scope, depending on the nature and extent of such impropriety,
the investigation could result in the imposition of civil, administrative, or
criminal fines, penalties, or restitutionary relief, and may have a negative
impact on the Company. From time to time the negative publicity surrounding
the government investigation has slowed the Company's success in obtaining
additional outside contracts in the rehabilitation therapy business, and
resulted in declines in therapist productivity and affected the private pay
enrollment in certain facilities. The Company is unable to determine at this
time when the investigation is to be concluded, however, based on the facts
currently available, it does not believe that the outcome of the government
investigation will have a material adverse effect on the Company's results of
operations or financial condition. The foregoing statements with respect to
the outcome of the government investigation are forward looking and could be
affected by a number of factors, including the actual scope of the government
investigation, the government's factual findings and the government's
interpretation of Federal statutes and regulations.
LITIGATION
Prior to the Company's acquisition of CareerStaff, a holder of
CareerStaff's common stock filed a lawsuit (the "CareerStaff Litigation") as
a purported class action against CareerStaff and the directors of CareerStaff
alleging breach of fiduciary duty in entering into a merger agreement with the
Company and against the Company alleging that the Company aided and abetted the
alleged breach of fiduciary duty by the CareerStaff directors. In February
1996, the plaintiff filed a status report with the court
<PAGE>
stating that the plaintiff intended to file a stipulation of dismissal without
prejudice. The Company believes that the CareerStaff Litigation is without
merit; however, there can be no assurance that the CareerStaff Litigation will
not have an impact on the Company's accounting for the merger.
On June 30, 1995, two civil class action complaints were filed against the
Company and certain of its current and former directors and officers in the
United States District Court for the District of New Mexico. Two more
complaints, based on the same underlying events, were filed on August 30, 1995.
On October 6 and October 10, 1995, two additional complaints were filed, also
based on the same underlying events. These six complaints were consolidated by
a court order dated November 27, 1995, and an amended class action complaint,
captioned IN RE SUN HEALTHCARE GROUP, INC. LITIGATION (the "Complaint") was
filed in the United States District Court for the District of New Mexico on
January 26, 1996. The Complaint was purportedly brought on behalf of all
persons who either exchanged their shares of common stock of CareerStaff for
shares of the Company's common stock pursuant to a merger agreement between
CareerStaff and the Company, or who purchased shares of the Company's common
stock between October 26, 1994, and June 27, 1995. The Complaint alleges that
defendants misrepresented or failed to disclose material facts about the OIG
investigation and about the Company's operations and financial results, which
plaintiffs contend artificially inflated the price of the Company's securities.
On or about January 23, 1996, two of the Golden Care selling stockholders
filed a lawsuit (the "Golden Care Litigation") against the Company and certain
of its officers and directors in the United States District Court for the
Southern District of Indiana. Plaintiffs allege, among other things, that the
Company did not disclose material facts concerning the OIG investigation and
that the Company's financial results were misstated. The Complaint purports to
state claims, INTER ALIA, under federal and state securities laws and for breach
of contract, including a breach of the registration rights agreement pursuant to
which the Company agreed to register the shares being registered for resale by
such Golden Care selling stockholders. The Company believes that the Golden
Care Litigation is without merit; however, there can be no assurance that the
Golden Care Litigation will not have an impact on the Company's accounting for
the merger.
A derivative action has been filed in the United States District Court for
the District of New Mexico, captioned BRICKELL PARTNERS V. TURNER, ET AL.,
alleging breach of fiduciary duty by certain current and former of the Company's
directors and officers based on substantially the same events as those set forth
in the above described securities class actions. The complaint has not been
served on any defendant.
The Company has reviewed the allegations in the complaints, believes them
to be without merit, and intends to defend itself vigorously. Relief sought in
these actions is unspecified. The Company believes the shareholder actions will
not have a material adverse impact on its results of operations or financial
condition. The foregoing
<PAGE>
statements with respect to the possible outcomes of the CareerStaff Litigation,
the Golden Care Litigation and the shareholder actions are forward looking and
could be affected by a number of factors, including judicial interpretations of
applicable law, the uncertainties and risks inherent in any litigation,
particularly a jury trial, the existence, scope and number of any
subsequently-filed complaints, and the scope of insurance coverage. In
addition, the outcome of the shareholder actions could be affected by the
outcome of the OIG investigation and all factors that could affect that outcome.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is found in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
is hereby incorporated herein by reference.
ITEM 5. OTHER INFORMATION
The Company has established a trust designed to acquire, hold and
distribute shares of the Company's common stock to fund certain employee
compensation and benefit obligations over the next 15 years. The trust will
not increase or alter the amount of benefits or compensation which will be
paid under existing plans, but offers the Company enhanced financial
flexibility in providing the funding requirements of those plans. It will be
administered by an independent trustee.
The Company initially sold 3,050,000 shares to the trust for $30,500 and
a promissory note for approximately $37.7 million. The promissory note will
be paid over time as shares are released from the trust to meet Company
compensation and benefit obligations. The Company can determine the timing of
distribution of shares from the trust to fund compensation and benefits,
subject to a minimum distribution schedule.
The shares will be voted in accordance with directions from eligible
employees as specified in a trust agreement with the trustee. Eligible
employees include those who have purchased shares through the Company's
employee stock purchase program. Shares held by the trust will not affect
the earnings per share calculations or return on average stockholders' equity
until after they are transferred out of the trust.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) 1996 Combined Incentive and Nonqualified Stock Option Plan
(as amended through April 23, 1996)
(10.2) Lease Agreement for West Magic Care Center dated as of August 1,
1987, between Skyview Associates ("Lessor") and Don Bybee and A.
Keith Holloway ("Lessee")
(10.3) First Amendment to Lease Agreement for West Magic Care Center
dated as of January 1, 1996, between Skyview Associates
("Lessor") and Sunrise Healthcare Corporation ("Lessee")
(10.4) Unconditional Guaranty of Lease dated as of January 1, 1996,
between Sun Healthcare Group, Inc. ("Guarantor") and Skyview
Associates ("Lessor")
(11.1) Computation of Earnings per Share.
(27) Financial Data Schedule
(b) Reports on Form 8-K
Report dated February 22, 1996, reporting the appointment of Robert D.
Woltil as the Registrant's Chief Financial Officer, the appointment of
Martin Mand to the Registrant's Board of Directors, the announcement by the
Registrant of a $25,000,000 common stock repurchase program and the
reporting of various fourth quarter earnings announcements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN HEALTHCARE GROUP, INC.
Date: May 14, 1996 By: /S/ Robert D. Woltil *
--------------------------------
Robert D. Woltil
Chief Financial Officer
*Signing on the behalf of the Registrant and as principal financial officer.
<PAGE>
EXHIBIT 10.1
SUN HEALTHCARE GROUP, INC.
1996 COMBINED INCENTIVE AND NONQUALIFIED
STOCK OPTION PLAN (AS AMENDED THROUGH APRIL 23, 1996)
SECTION 1. PURPOSE. The purpose of the Sun Healthcare Group,
Inc. 1996 Combined Incentive and Nonqualified Stock Option Plan (the
"Plan") is to enable Sun Healthcare Group, Inc. (the "Company") to attract
and retain the services of people with training, experience and ability,
and to provide additional incentive to such persons by granting them an
opportunity to participate in the ownership of the Company.
SECTION 2. STOCK SUBJECT TO PLAN. The stock subject to this Plan
shall be the Company's common stock, par value $.01 per share (the "Common
Stock"). Such shares may be treasury shares, authorized but unissued
shares, reacquired Common Stock or shares released from the trust
established in connection with the Company's Grantor Trust Stock Ownership
Program. Subject to adjustment as provided in Section 10, the aggregate
amount of Common Stock reserved for issuance or delivery upon exercise of
all options granted under this Plan shall not exceed 3,000,000 shares of
Common Stock, as constituted on the date of adoption of this Plan by the
Board of Directors. If any option granted under this Plan shall expire or
terminate for any reason without having been exercised in full, the
unpurchased shares subject thereto shall thereupon again be available for
purposes of this Plan.
SECTION 3. ADMINISTRATION. The Plan shall be administered by
the Board of Directors of the Company, in accordance with the following
terms and conditions:
3.1 GENERAL AUTHORITY. Subject to the express provisions of the
Plan, the Board of Directors shall have the authority, in its discretion,
to determine all matters relating to options to be granted under the Plan,
including the selection of individuals to be granted options, the number
of shares to be subject to each option, the exercise price, the term, and
all other terms and conditions thereof. Grants under this Plan to
persons eligible need not be identical in any respect, even when made
simultaneously. The Board of Directors may from time to time adopt rules
and regulations relating to the administration of the Plan. The
interpretation and construction by the Board of Directors of any terms or
provisions of this Plan or any option issued hereunder, or of any rule or
regulation promulgated in connection herewith, shall be conclusive and
binding on all interested parties. The Board of Directors, in its sole
discretion, may grant incentive stock options ("Incentive Stock Options")
as such term is defined in Section 422(b) of the Internal Revenue Code of
1986, as amended (the "Code"), and/or nonqualified stock options
("Nonqualified Stock Options"). A Nonqualified Stock Option is a stock
option which is not an Incentive Stock Option. The type of option
granted, whether an Incentive Stock Option or a Nonqualified Stock
Option, shall be clearly identified by the Board of Directors when
granted. The term "option" when used in this Plan should refer to
Incentive Stock Options and Nonqualified Stock Options, collectively.
<PAGE>
2
3.2 DIRECTORS. A member of the Board of Directors who is also
an employee of the Company may be eligible to participate in or
receive or hold options under this Plan, PROVIDED, HOWEVER, that no
member of the Board of Directors shall vote with respect to the
granting of an option hereunder to himself or herself, as the case
may be.
3.3 DELEGATION TO A COMMITTEE. Notwithstanding the
foregoing, the Board of Directors, if it so determines, may delegate
to a committee of the Board of Directors any or all authority for the
administration of the Plan, and thereafter references to the Board of
Directors in this Plan shall be deemed to be references to the
committee to the extent provided in the resolution establishing the
committee.
3.4 PERSONS SUBJECT TO SECTION 16(b). Notwithstanding anything
in the Plan to the contrary, the Board of Directors, in its absolute
discretion, may bifurcate the Plan so as to restrict, limit or
condition the use of any provision of the Plan to participants who
are officers and directors subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), without so
restricting, limiting or conditioning the Plan with respect to other
participants.
3.5 REPLACEMENT OF OPTIONS. The Board of Directors, in its
absolute discretion, may grant options subject to the condition that
options previously granted at a higher or lower exercise price under
the Plan be canceled or exchanged in connection with such grant.
The number of shares covered by the new options, the exercise price,
the term and the other terms and conditions of the new option shall
be determined in accordance with the Plan and may be different from
the provisions of the canceled or exchanged options. Alternatively,
the Board of Directors may, with the agreement of the Optionee, amend
previously granted options to establish the exercise price at the
then current fair market value of the Company's Common Stock,
maintaining existing vesting and expiration dates.
3.6 LOANS TO OPTIONEES. The Board of Directors, in its
absolute discretion, may provide that the Company loan to Optionees
sufficient funds to exercise any option granted under the Plan and/or
to pay withholding tax due upon exercise of such option. The Board
of Directors shall have the authority to make such determinations at
the time of grant or exercise and shall establish repayment terms
thereof, including installments, maturity and interest rate.
SECTION 4. ELIGIBILITY. Options may be granted to persons for
any reason in connection with such persons' employment by the Company or
any of its subsidiary corporations (as that term is used in Section 422(b)
of the Code, hereafter a "Subsidiary") or in connection with employment by
a parent or subsidiary corporation of the Company that assumes any option
issued under the Plan in a transaction to which Section 424(a) of the Code
applies. Employment may be by virtue of either being an employee or
independent contractor of the Company. Any
<PAGE>
3
individual to whom an option is granted under this Plan shall be referred
to hereinafter as "Optionee." Any Optionee may receive one or more grants
of options as the Board of Directors shall from time to time determine, and
such determinations may be different as to different Optionees and may vary
as to different grants; PROVIDED, HOWEVER, that no Optionee shall receive a
grant or grants of options with respect to more than 200,000 shares of
Common Stock in any Plan year. Optionees who are not employees will only
be eligible to receive Nonqualified Stock Options.
SECTION 5. TERMS AND CONDITIONS OF OPTIONS. Options granted
under this Plan shall be evidenced by written agreements which shall
contain such terms, conditions, limitations and restrictions as the Board
of Directors shall deem advisable and which are not inconsistent with this
Plan. Each option granted hereunder shall clearly indicate whether it is
an Incentive Stock Option or a Nonqualified Stock Option. Notwithstanding
the foregoing, all such options shall include or incorporate by reference
the following terms and conditions:
5.1 NUMBER OF SHARES. The maximum number of shares that may be
purchased pursuant to the exercise of each option and the price per
share at which such option is exercisable (the "exercise price")
shall be as established by the Board of Directors, PROVIDED that the
exercise price shall not be less than the fair market value per share
of the Common Stock at the time the option is granted, as determined
in good faith by the Board of Directors.
5.2 DURATION OF OPTIONS. Subject to the restrictions contained
in Section 9, the term of each option shall be established by the
Board of Directors and, if not so established, shall be ten years
from the date it is granted, but in no event shall the term of any
Incentive Stock Option exceed ten years.
5.3 EXERCISABILITY. Each option or portion thereof shall
become exercisable upon such date or dates as are established by the
Board of Directors. The Board of Directors, in its sole discretion,
may provide for the acceleration of vesting of an option, in whole or
in part, based on such factors or criteria (including specified
performance criteria) as the Board may determine. Notwithstanding
the above, except as provided in Section 10.2, no portion of any
option shall become exercisable before six months after the date of
grant of the option.
5.4 INCENTIVE STOCK OPTION. Any option which is issued as an
Incentive Stock Option under this Plan, shall, notwithstanding any
other provisions of this Plan, or the option terms to the contrary,
contain all of the terms, conditions, restrictions, rights and
limitations required to be an Incentive Stock Option, and any
provision to the contrary shall be disregarded.
<PAGE>
4
SECTION 6. NONTRANSFERABILITY OF OPTIONS. Options granted under this
Plan and the rights and privileges conferred hereby may not be transferred,
assigned, pledged or hypothecated in any manner (whether by operation of
law or otherwise) other than by will or the applicable laws of descent and
distribution and shall not be subject to execution, attachment or similar
process. Upon any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of any option under this Plan or any right or privilege
conferred hereby, contrary to the provisions hereof, or upon the sale or
levy or any attachment or similar process, such option thereupon shall
terminate and become null and void. During an Optionee's lifetime, any
options granted under this Plan are personal to him or her and are
exercisable solely by such Optionee.
SECTION 7. CERTAIN LIMITATIONS REGARDING INCENTIVE STOCK
OPTIONS. The grant of Incentive Stock Options shall be subject to the
following special limitations:
7.1 LIMITATION ON AMOUNT OF GRANTS. In no event shall any Optionee
be granted Incentive Stock Options that in the aggregate (together with
all other Incentive Stock Options granted by the Company or any parent or
Subsidiary) entitle the Optionee to purchase, in any calendar year during
which such options first become exercisable, stock of the Company, any
parent or any Subsidiary having a fair market value (determined as of the
time such options are granted) in excess of $100,000, plus the amount of
any unused limit carry-over permitted under the applicable provisions of
the Code. No limitation shall apply to Nonqualified Stock Options.
7.2 GRANTS TO 10% SHAREHOLDERS. Incentive Stock Options may be
granted to a person owning more than 10% of the total combined voting
power of all classes of stock of the Company and any parent or Subsidiary
only if (i) the exercise price is at least 110% of the fair market value
of the stock at the time of grant and (ii) the option is not exercisable
after the expiration of five years from the date of grant.
SECTION 8. EXERCISE OF OPTIONS. Options shall be exercised in
accordance with the following terms and conditions:
8.1 PROCEDURE. Options shall be exercised by delivery to the
Company of written notice of the number of shares with respect to which
the option is exercised.
8.2 PAYMENT. Payment of the option price shall be made in full
within five business days of the notice of exercise of the option and
shall be in cash or bank-certified or cashier's checks, or personal check
if permitted by the Board of Directors. To the extent permitted by
applicable laws and regulations (including, but not limited to, federal
tax and securities laws and regulations), an option may be exercised by
delivery of shares of Common Stock of the Company held by the Optionee
having a fair market value equal to the exercise price, such fair market
value to be determined in good faith by the Board of Directors. Such
payment in stock may occur in the context of a single exercise of
<PAGE>
5
an option or successive and simultaneous exercises, sometimes referred to
as "pyramiding," which provides that, rather than physically exchanging
certificates for a series of exercises, bookkeeping entries will be made
pursuant to which the Optionee is permitted to retain his existing stock
certificate and a new stock certificate is issued for the net shares.
If the Company's Common Stock is registered under the 1934 Act, and
if permitted by the Board of Directors, and to the extent permitted by
applicable laws and regulations (including, but not limited to, federal
tax and securities laws and regulations), an option also may be exercised
by delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver to the Company
the amount of sale or loan proceeds to pay the exercise price.
8.3 FEDERAL WITHHOLDING TAX REQUIREMENTS. Upon exercise of an
option, the Optionee shall, upon notification of the amount due and prior
to or concurrently with the delivery of the certificates representing the
shares, pay to the Company amounts necessary to satisfy applicable
federal, state and local withholding tax requirements or shall otherwise
make arrangements satisfactory to the Company for such requirements. Such
arrangements may include payment of the appropriate withholding tax in
shares of stock of the Company having a fair market value equal to such
withholding tax, either through delivery of shares held by the Optionee or
by reduction in the number of shares to be delivered to the Optionee upon
exercise of such option.
SECTION 9. TERMINATION OF EMPLOYMENT, DISABILITY AND DEATH.
9.1 GENERAL. If the employment of the Optionee by the Company,
a parent or a Subsidiary shall terminate for any reason other than death,
disability, retirement or cause as hereinafter provided, the option may be
exercised by the Optionee at any time prior to the expiration of three
months after the date of such termination of employment (unless by its
terms the option sooner terminates or expires), but only if and to the
extent the Optionee was entitled to exercise the option at the date of such
termination.
9.2 DISABILITY. If the employment of the Optionee by the
Company, a parent or a Subsidiary is terminated because of the Optionee's
disability (as herein defined), the option may be exercised by the Optionee
at any time prior to the expiration of one year after the date of such
termination (unless by its terms the option sooner terminates or expires),
but only if and to the extent the Optionee was entitled to exercise the
option at the date of such termination. For purposes of this section, an
Optionee will be considered to be disabled if the Optionee is unable to
engage in any substantial gainful activity by reason of any medically
determinable mental or physical impairment which can be expected to result
in death or which has lasted or can be expected to last a continuous period
of not less than 12 months.
<PAGE>
6
9.3 DEATH. In the event of the death of an Optionee while in
the employ of the Company, a parent or a Subsidiary, the option shall be
exercisable on or prior to the expiration of one year after the date of
such death (unless by its terms the option sooner terminates and expires),
but only if and to the extent the Optionee was entitled to exercise the
option at the date of such death and only by the Optionee's personal
representative if then subject to administration as part of the Optionee's
estate, or by the person or persons to whom such Optionee's rights under
the option shall have passed by the Optionee's will or by the applicable
laws of descent and distribution.
9.4 RETIREMENT. If the employment of the Optionee by the
Company, a parent or a Subsidiary is terminated because of the Optionee's
retirement (as herein defined), the option may be exercised by the Optionee
at any time prior to the expiration of the stated term of the option, but
only if and to the extent the Optionee was entitled to exercise the option
at the date of such termination; PROVIDED, HOWEVER, that if the Optionee
dies within such stated term, any unexercised option held by such Optionee
shall thereafter be exercisable, to the extent to which it was exercisable
at the time of death, for a period of one year from the date of such death
or until the expiration of the stated term of the option, whichever period
is shorter. For purposes of this section, "retirement" means retirement
from active employment with the Company, a parent or any Subsidiary on or
after the attainment of age 62, or such other retirement date as may be
approved by the Committee for purposes of the Plan and specified in the
applicable award agreement.
9.5 TERMINATION FOR CAUSE. If the Optionee's employment with
the Company, a parent or a Subsidiary is terminated for cause, any option
granted hereunder shall automatically terminate as of the first advice or
discussion thereof, and such Optionee shall thereupon have no right to
purchase any shares pursuant to such option. "Termination for cause" shall
mean dismissal for dishonesty, conviction or confession of a crime
punishable by law (except minor violations), intoxication while at work,
fraud, misconduct or disclosure of confidential information.
9.6 WAIVER OR EXTENSION OF TIME PERIODS. The Board of Directors
shall have the authority, prior to or within the times specified in this
Section 9 for the exercise of any such option, to extend such time period
or waive in its entirety any such time period to the extent that such time
period expires prior to the expiration of the term of such option. In
addition, the Board of Directors may, pursuant to a specific resolution
adopted at the time of grant, modify or eliminate the time periods
specified in this Section 9. However, no Incentive Stock Option may be
exercised after the expiration of ten years from the date such option is
granted. If an Optionee holding an Incentive Stock Option exercises such
option, by permission, after the expiration of the time period specified in
this Section 9, the option will no longer be treated as an Incentive Stock
Option under the Code and shall automatically be converted into a
Nonqualified Stock Option.
<PAGE>
7
9.7 TERMINATION OF OPTIONS. To the extent that the option of
any deceased Optionee or of any Optionee whose employment is terminated
shall not have been exercised within the limited periods prescribed in this
Section 9, all further rights to purchase shares pursuant to such option
shall cease and terminate at the expiration of such period. No Incentive
Stock Option may be exercised after the expiration of ten years from the
date such option is granted, notwithstanding any provision to the contrary.
9.7 NONEMPLOYEE OPTIONEES. Options granted to Optionees who are
not employees of the Company, a parent or a subsidiary at the time of grant
shall not be subject to the provisions of this Section 9, except as
specifically provided in the option.
SECTION 10. OPTION ADJUSTMENTS.
10.1 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The aggregate
number and class of shares on which options may be granted under this Plan,
the number and class of shares covered by each outstanding option and the
exercise price per share thereof (but not the total price), and all such
options shall each be proportionately adjusted for any increase or decrease
in the number of issued shares of Common Stock of the Company resulting
from a split-up or consolidation of shares, or the payment of any stock
dividend, or any other change in the outstanding Common Stock of the
Company by reason of a recapitalization, reorganization, merger,
combination or exchange of shares, without the receipt of consideration by
the Company.
10.2 CHANGE OF CONTROL. In addition to any adjustments
permitted under Section 10.1, in the event of a change in control of the
Company (as hereinafter defined), (i) all options then outstanding shall
become fully exercisable and (ii) in the case of a change in control
involving a merger of, or consolidation involving, the Company in which the
Company is not the surviving corporation (the "Surviving Entity"), each
outstanding option granted hereunder and not exercised (a "Predecessor
Option") shall be converted into an option (a "Substitute Option") to
acquire common stock of the Surviving Entity, which Substitute Option shall
have the same terms and conditions as the Predecessor Option, with
appropriate adjustments as to the number and kind of shares and exercise
prices. For purposes of this Plan, a "change in control" shall be deemed
to have occurred if (i) any "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the 1934 Act), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company
(an "Acquiring Person"), is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the 1934 Act), directly or indirectly, of more than
33-1/3% of the then outstanding voting stock of the Company; (ii) the
shareholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 80% of the combined voting power of the voting securities
of the Company or such surviving entity outstanding
<PAGE>
8
immediately after such merger or consolidation; (iii) the shareholders of
the Company approve a plan of reorganization (other than a reorganization
under the United States Bankruptcy Code) or complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all
or substantially all of the Company's assets; or (iv) during any period of
two consecutive years (beginning on or after the adoption of this Plan),
individuals who at the beginning of such period constitute the Board of
Directors and any new director (other than a director who is a
representative or nominee of an Acquiring Person) whose election by the
Board of Directors or nomination for election by the Company's shareholders
was approved by a vote of at least a majority of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, no longer
constitute a majority of the Board of Directors; PROVIDED, HOWEVER, that a
change in control shall not be deemed to have occurred in the event of (x)
a sale or conveyance in which the Company continues as a holding company of
an entity or entities that conduct the business or businesses formerly
conducted by the Company or (y) any transaction undertaken for the purpose
of reincorporating the Company under the laws of another jurisdiction, if
such transaction does not materially affect the beneficial ownership of the
Company's capital stock.
10.3 FRACTIONAL SHARES. In the event of any adjustment in the
number of shares covered by any option, any fractional shares resulting
from such adjustment shall be disregarded and each such option shall cover
only the number of full shares resulting from such adjustment.
10.4 DETERMINATION OF BOARD OF DIRECTORS TO BE FINAL. All such
adjustments shall be made by the Board of Directors, and its determination
as to what adjustments shall be made, and the extent thereof, shall be
final, binding and conclusive.
SECTION 11. SECURITIES REGULATIONS.
11.l COMPLIANCE. Shares shall not be issued with respect to an
option granted under this Plan unless the exercise of such option and the
issuance and delivery of such shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, any applicable
state securities laws, the Securities Act of 1933, as amended, the 1934
Act, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall
further be subject to the approval of counsel for the Company with respect
to such compliance. The inability of the Company to obtain from any
regulatory body having jurisdiction the authority deemed by the Company's
counsel to be necessary for the lawful issuance and sale of any shares
hereunder shall relieve the Company of any liability in respect of the
nonissuance or sale of such shares as to which such requisite authority
shall not have been obtained.
11.2 REPRESENTATIONS BY OPTIONEE. As a condition to the
exercise of an option, the Company may require the Optionee to represent
and warrant at the time of any such exercise that the shares are being
purchased only for investment and without any present intention to sell
<PAGE>
9
or distribute such shares, if, in the opinion of counsel for the Company,
such representation is required by any relevant provision of the laws
referred to in Section 11.1. At the option of the Company, a stop transfer
order against any shares of stock may be placed on the official stock books
and records of the Company, and a legend indicating that the stock may not
be pledged, sold or otherwise transferred unless an opinion of counsel was
provided (concurred in by counsel for the Company) and stating that such
transfer is not in violation of any applicable law or regulation may be
stamped on the stock certificate in order to assure exemption from
registration. The Board of Directors may also require such other action or
agreement by the Optionees as may from time to time be necessary to comply
with the federal and state securities laws. This provision shall not
obligate the Company to undertake registration of options or stock
hereunder.
SECTION 12. EMPLOYMENT RIGHTS. Nothing in this Plan or any
option or right granted pursuant hereto shall confer upon any Optionee any
right to be continued in the employment of the Company, a parent or any
Subsidiary of the Company or to remain a director, or to interfere in any
way with the right of the Company, a parent or any Subsidiary, in its sole
discretion, to terminate such Optionee's employment at any time or to
remove the Optionee as a director at any time.
SECTION 13. AMENDMENT AND TERMINATION.
13.1 ACTION BY SHAREHOLDERS. The Plan may be terminated,
modified or amended by the shareholders of the Company.
13.2 ACTION BY BOARD OF DIRECTORS. The Board of Directors may
also terminate the Plan or modify or amend the Plan in such respects as it
shall deem advisable in order to conform to any changes in law or
regulation applicable thereto, or in other respects; PROVIDED, HOWEVER,
that the Board of Directors may not, without further approval by the
shareholders of the Company:
(i) Change the number of shares in the aggregate which may be sold
pursuant to options granted under the Plan;
(ii) Increase the period during which options may be granted or
exercised (except as otherwise permitted under Section 9.6 hereof); or
(iii) Change the terms of the Plan which causes the Plan to lose
its qualification as an incentive stock option plan under Section 422(b)
of the Code.
No termination, suspension or amendment of the Plan may, without
the consent of each Optionee to whom any option shall theretofore have been
granted, adversely affect the rights of such Optionees under such options.
<PAGE>
10
13.3 AUTOMATIC TERMINATION. Unless the Plan shall theretofore
have been terminated as herein provided, this Plan shall terminate ten
years from the earlier of (i) the date on which the Plan is adopted; or
(ii) the date on which this Plan is approved by the shareholders of the
Company. No option may be granted after such termination or during any
suspension of this Plan. The amendment or termination of this Plan shall
not, without the consent of the Optionee, alter or impair any rights or
obligations under any option theretofore granted under this Plan.
SECTION 14. COMPLIANCE WITH SECTION 16 OF THE 1934 ACT. With
respect to persons subject to Section 16 of the 1934 Act, transactions
under this Plan are intended to comply with all applicable conditions of
Rule 16b-3 or its successors under the 1934 Act. To the extent any
provision of this Plan or action by Plan administrators fails to comply, it
shall be deemed null and void to the extent permitted by law and deemed
advisable by the Plan administrators.
SECTION 15. EFFECTIVE DATE OF THE PLAN. This Plan shall become
effective on the date of its adoption by the Board of Directors of the
Company, and options may be granted immediately thereafter, but any option
granted under the Plan is subject to defeasance unless and until the Plan
shall have been approved by the shareholders. If such shareholder approval
is not obtained, the Plan and any options granted thereunder shall be null
and void.
<PAGE>
Exhibit 10.2
LEASE AGREEMENT
THIS LEASE AGREEMENT made and entered into this 1st day of August, 1987, by
and between SKYVIEW ASSOCIATES, an Illinois limited partnership (hereinafter
referred to as "Lessor"), and DON BYBEE and A. KEITH HOLLOWAY (hereinafter
referred to as "Lessee").
W I T N E S S E T H:
WHEREAS, Lessor has entered into a contract to purchase a certain tract of
land which is improved with a nursing home facility, located at Twin Falls,
Idaho, all as more particularly described in Exhibit "A" attached hereto and
made a part hereof (which tract and nursing home facility, together with any
other improvements now or hereafter located on the tract and all easements,
tenements, hereditaments and appurtenances thereto are hereinafter referred to
as the "Demised Premises"); and
WHEREAS, Lessor has entered into a contract to purchase the furnishings,
furniture, equipment and fixtures to be used in or about the Demised Premises
(hereinafter collectively referred to as the "Personal Property"); and
WHEREAS, following the closing of the purchase of the Demised Premises and
Personal Property, Lessor desires to lease the Demised Premises and Personal
Property to the Lessee and Lessee desires to lease the Demised Premises and
Personal Property from Lessor; and
WHEREAS, the parties hereto have agreed to the terms and conditions of this
Lease;
NOW THEREFORE, it is agreed that the use and occupancy of the Demised
Premises, and the use of the Personal Property shall be subject to and in
accordance with the terms, conditions and provisions of this Lease.
<PAGE>
ARTICLE I - DEFINITIONS
1.1 The terms defined in this Article shall, for all purposes of this
Lease and all agreements supplemental hereto, have the meaning herein specified.
(a) "Demised Premises" shall mean the real estate described in
Exhibit A and all improvements located thereon.
(b) "Personal Property" shall mean all furniture, fixtures, equipment
and supplies located on the Demised Premises.
(c) "Leased Property" shall mean the Demised Premises and the
Personal Property.
(d) "Lease Year" shall mean a twelve month period commencing on
January 1st of each year and ended on December 31st of each year.
(e) All other terms shall be as defined in other sections of this
Lease.
ARTICLE II - DEMISED PREMISES AND PERSONAL PROPERTY
2.1 Lessor, for and in consideration of the rents, and covenants and
agreements hereinafter reserved, mentioned and contained on the part of the
Lessee, its successors and assigns, to be paid, kept and performed, does hereby
lease unto Lessee the Demised Premises together with the Personal Property to be
used in and upon the Demised Premises for the term hereinafter specified, for
use and operation therein and thereon of a skilled and intermediate care nursing
home, in full compliance with all the rules and regulations and minimum
standards applicable thereto, as prescribed by the State of Idaho and such other
governmental authorities having jurisdiction thereof.
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ARTICLE III - TERM OF LEASE
3.1 The term of this Lease shall be for a period of two hundred thirty-
three (233) months commencing on August 1, 1987 (said date is hereafter referred
to as the "Commencement Date"), and shall expire on the last day of the 233rd
month following the Commencement Date, unless sooner terminated as hereinafter
provided.
ARTICLE IV - RENT
4.1 (a) Lessee shall pay to Lessor, or as Lessor shall direct, as fixed
annual rental for the Demised Premises and the Personal Property over and above
all other and additional payments to be made by Lessee as provided in this Lease
the following amounts:
(i) For the period from August 1, 1987 to December 31, 1987 the sum of
$35,000.00 per month, provided however that no rent shall be due for the months
of August, 1987 and September, 1987;
(ii) For the second Lease Year an annual rent of $468,000.00;
(iii) For the third Lease Year an annual rent of $489,360.00
(iv) For the fourth Lease Year and for each Lease Year thereafter during
the balance of the term of the Lease, the annual rental for each Lease Year
shall be an amount equal to 102% of the annual rental for the immediately
preceding Lease Year.
(b) In addition to the fixed annual rental set forth in paragraph
4.1(a), Lessee shall assume all obligations with respect to a certain loan from
First Security Bank of Twin Falls in the amount of approximately Eighty-Six
Thousand Dollars ($86,000.00) relating to the purchase of furniture (the
"Furniture Loan") for the Demised Premises. Failure by Lessee to make payments
with respect to the Furniture Loan shall constitute a default with respect to
the payment of rent.
4.2 In the event the Commencement Date shall be other than the first day
of the month, Lessee shall pay to Lessor a pro
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rata portion of the rent for the month and a pro rata portion of all tax,
insurance and other deposits provided for in this Lease. All fixed annual
rental payments shall be made in equal monthly installments and shall be paid in
advance on the first day of each month (together with all tax and insurance
deposits required in this Lease). Unless otherwise notified in writing all
checks shall be made payable to Skyview Associates and shall be sent c/o Harvey
Angell, 55 W. Monroe, Suite 1690, Chicago, Illinois 60631.
4.3 This Lease is and shall be deemed and construed to be an absolutely
net lease and the rent specified herein shall be net to the Lessor in each year
during the term of this Lease. The Lessee shall pay all costs, expenses and
obligations of every kind whatsoever relating to the Demised Premises which may
arise or become due during the term of this Lease, except for any principal and
interest payments relating to any mortgage on the Demised Premises. Lessee does
hereby indemnify the Lessor against any and all such costs, expenses and
obligations. Lessor shall not be required to provide any service or do any act
or thing with respect to the Personal Property or the Demised Premises,
including the buildings and improvements thereon and the appurtenances thereto.
ARTICLE V - LATE CHARGES
5.1 If payment of any sums required to be paid or deposited by Lessee to
Lessor under this Lease, and payments made by Lessor under any provision hereof
for which Lessor is entitled to reimbursement by Lessee, shall become overdue
for a period of ten (10) days beyond the date on which they are due and payable
as in this Lease provided, a late charge of 3% per month on the sums so overdue
shall become immediately due and payable to Lessor as liquidated damages for
Lessee's failure to make prompt payment and said late charges shall be payable
on the first day of the month
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next succeeding the month during which such late charges become payable. If
non-payment of any late charges shall occur, Lessor shall have, in addition to
all other rights and remedies, all the rights and remedies provided for herein
and by law in the case of non-payment of Rent. No failure by Lessor to insist
upon the strict performance by Lessee of Lessee's obligations to pay late
charges shall constitute a waiver by Lessor of its rights to enforce the
provisions of this Article in any instance thereafter occurring.
ARTICLE VI - PAYMENT OF TAXES AND ASSESSMENTS
6.1 Lessee will pay or cause to be paid, as provided herein, as
Additional Rent, before any fine, penalty, interest or cost may be added thereto
for the non-payment thereof, all taxes, assessments, licenses and permit fees,
charges for public utilities, and all governmental charges, general and special,
ordinary and extraordinary, foreseen and unforeseen, of any kind and nature
whatsoever which during the term of this Lease may have been, or may be
assessed, levied, confirmed, imposed upon or become due and payable out of or in
respect of, or become a lien on the Demised Premises and/or Personal Property or
any part thereof (hereinafter collectively referred to as "Taxes and
Assessments").
6.2 Any Taxes and Assessments relating to a fiscal period of any
authority, a part of which is included within the term of this Lease and a part
of which is included in a period of time before or after the term of this Lease,
shall be adjusted pro rata between Lessor and Lessee and each party shall be
responsible for its pro rata share of any such Taxes and Assessments.
6.3 Nothing herein contained shall require Lessee to pay income taxes
assessed against Lessor, or capital levy, franchise, estate, succession or
inheritance taxes of Lessor.
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6.4 Lessee shall have the right to contest the amount or validity, in
whole or in part, of any Taxes and Assessments by appropriate proceedings
diligently conducted in good faith, but only after payment of such Taxes and
Assessments, unless such payment would operate as a bar to such contest or
interfere materially with the prosecution thereof, in which event, Lessee may
postpone or defer such payment only if:
(1) Neither the Demised Premises nor any part thereof would by
reason of such postponement or deferment be in danger of being forfeited or
lost, and
(2) Lessee shall have deposited with Lessor, to be held in
trust, cash or securities satisfactory to Lessor in an amount equal to not less
than one hundred fifty percent (150%) of the amount of such Taxes and
Assessments which at such time shall be actually due and payable, and such
additional amounts from time to time as may be necessary to keep on deposit at
all times an amount equal to one hundred fifty percent (150%) of such Taxes and
Assessments at any time actually due and payable, together with all interest and
penalties in connection therewith and all charges that may or might be assessed
against or become a charge on the Demised Premises or any part thereof in such
proceedings.
The cash so deposited shall not bear interest and the cash or securities so
deposited shall be held by Lessor until the Demised Premises or any part thereof
shall have been released and discharged and shall thereupon be returned to the
Lessee, less the amount of any loss, cost, damage and reasonable expense that
Lessor or a Mortgagee of Lessor may sustain in connection with the Taxes and
Assessments so contested.
6.5 Upon the termination of any such proceedings, Lessee shall pay the
amount of such Taxes and Assessments or part thereof as finally determined in
such proceedings, the payment of which may have been deferred during the
prosecution of such
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proceedings, together with any costs, fees, interest, penalties of other
liabilities in connection therewith, and such payment, at Lessee's request,
shall be made by Lessor out of the amount deposited with respect to such Taxes
and Assessments as aforesaid. In the event such amount is insufficient, then
the balance due shall be paid by Lessee.
6.6 Lessor shall not be required to join in any proceedings referred to
in this Article, unless the provisions of any law, rule or regulation at the
time in effect shall require that such proceedings be brought by and/or in the
name of Lessor, in which event Lessor shall join in such proceedings or permit
the same to be brought in its name. Lessor shall not ultimately be subjected to
any liability for the payment of any costs or expenses in connection with any
such proceedings, and Lessee will indemnify and save harmless Lessor from any
such costs and expenses. Lessee shall be entitled to any refund of any real
estate taxes and penalties or interest thereon received by Lessor but previously
reimbursed in full by Lessee.
6.7 If any income, profits or revenue tax shall be levied, assessed or
imposed upon the income, profits or revenue arising from rents payable
hereunder, partially or totally in lieu of or as a substitute for real estate or
personal property taxes imposed upon the Demised Premises or Personal Property,
then Lessee shall be responsible for the payment of such tax.
ARTICLE VII - TAX AND INSURANCE DEPOSITS
7.1 Lessee shall be required to make deposits for annual real estate
taxes and insurance premiums and will make monthly deposits with Lessor, of an
amount equal to one-twelfth (1/12) of the annual real estate taxes or such
greater amount as may be required by any mortgage and an amount equal to one-
twelfth (1/12) of the annual premiums for insurance on the Demised
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<PAGE>
Premises and Personal Property. Said deposits shall be due and payable on the
first (1st) day of each month as Additional Rent, shall not bear interest and
shall be held by Lessor and/or a mortgagee of the Lessor to pay the real estate
taxes and insurance premiums as they become due and payable. If the total of
the monthly payments as made under this Article shall be insufficient to pay the
real estate taxes and insurance premiums when due, then Lessee shall on demand
pay Lessor the amount necessary to make up the deficiency in its pro rata share
in the initial year of the term hereof and thereafter shall pay the full
deficiency upon demand.
ARTICLE VIII - OCCUPANCY
8.1 During the term of this Lease, the Demised Premises shall be used
and occupied by Lessee for and as a skilled care and/or intermediate care
nursing home and for no other purpose. Lessee shall at all times maintain in
good standing and full force all the licenses issued by the State of Idaho and
any other governmental agencies permitting the operation on the Demised Premises
of a skilled and/or intermediate care nursing home facility.
8.2 Lessee will not suffer any act to be done or any condition to exist
on the Demised Premises which may be dangerous or which may, in law, constitute
a public or private nuisance or which may void or make voidable any insurance
then in force on the Demised Premises.
8.3 Upon termination of this Lease for any reason, Lessee will return to
Lessor the Demised Premises qualified and sufficient for licensing by all
governmental agencies having jurisdiction over the Demised Premises as a skilled
and/or intermediate care nursing home with licenses in full force and good
standing. All the Demised Premises, with the improvements located
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thereon and all the Personal Property shall be surrendered in good
order, condition and repair.
ARTICLE IX - INSURANCE
9.1 Lessee shall, at its sole cost and expense, during the full term of
this Lease, maintain fire and casualty insurance with extended coverage
endorsement on the Leased Property with a responsible company or companies
approved by Lessor, which approval will not be unreasonably withheld. Such
insurance shall, at all times, be maintained (without any co-insurance clause,
if possible) in an amount as may be required by any mortgagee of the Demised
Premises or, absent such requirement, in an amount sufficient to prevent Lessor
and Lessee from becoming co-insurers under applicable provisions of the
insurance policies. Such insurance shall at all times be payable to Lessor and
Lessee as their interests may appear, and shall contain a loss-payable clause to
the holder of any mortgage to which this Lease shall be subject and subordinate,
as said mortgagee's interest may appear.
9.2 Lessee shall also, at Lessee's sole cost and expense, cause to be
issued and shall maintain during the entire term of this Lease:
(1) A public liability policy naming Lessor and Lessee, as
insured, and insuring them against claims for bodily injury, or property damage
occurring upon, in or about the Demised Premises, or in or upon the adjoining
streets, sidewalks, passageways and areas, such insurance to afford protection
to the limits of not less than $1,000,000.00 per each occurrence and
$1,000,000.00 in the aggregate and an umbrella liability policy of not less than
$5,000,000.00 per each occurrence;
(2) Boiler explosion insurance, in the amount of not less than
$100,000.00, under the terms of which Lessor and Lessee will be indemnified, as
their interests may appear, against
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any loss or damage which may result from any accident or casualty in connection
with any boiler used in the Demised Premises, whereby any person or persons may
be injured or killed or property damaged in or about the Demised Premises; and
(3) Medical Malpractice insurance in the amount of $500,000.00.
9.3 All policies of insurance shall provide:
(1) They are carried in favor of the Lessor, Lessee, and any
mortgagee, as their respective interests may appear, and any loss shall be
payable as therein provided, notwithstanding any act or negligence of Lessor or
Lessee, which might otherwise result in forfeiture of insurance; and
(2) They shall not be cancelled, terminated, reduced or
materially modified without at least twenty (20) days' prior written notice to
Lessor.
(3) A standard mortgagee clause in favor of any mortgagee, and
shall contain, if obtainable, a waiver of the insurer's right of subrogation
against funds paid under the standard mortgagee endorsement which are to be used
to pay the cost of any repairing, rebuilding, restoring or replacing.
9.4 The originals of all insurance policies required by this Article
shall be delivered to Lessor at least five (5) days prior to the Commencement
Date.
9.5 Lessee shall at all times keep in effect business interruption
insurance with a loss of rents endorsement naming Lessor as an insured in an
amount at least sufficient to cover:
(1) The aggregate of the cost of all Taxes and Assessments due
during the period of the next succeeding twelve (12) months following the
occurrence of the business interruption; and
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(2) The cost of all insurance premiums for insurance required to
be carried by Lessee for such twelve (12) month period; and
(3) The aggregate of the amount of the monthly rental for the
next succeeding twelve (12) month period.
All proceeds of any business interruption insurance shall be applied,
first, to the payment of any and all fixed rental payments for the next
succeeding twelve (12) months; second, to the payment of any Taxes and
Assessments and insurance deposits required for the next succeeding twelve (12)
months; and, thereafter, after all necessary repairing, rebuilding, restoring or
replacing has been completed as required by the pertinent Articles of this Lease
and the pertinent sections of any mortgage, any remaining balance of such
proceeds shall be paid over to the Lessee.
9.6 In the event the amount of such insurance proceeds exceed Ten
Thousand Dollars ($10,000.00), such insurance proceeds as may be paid to Lessee
and Lessor shall be deposited with Lessor to be held and disbursed for the
repairing, rebuilding, restoring or replacing of the Demised Premises or any
portion thereof, or any improvements from time to time situated thereon or
therein subject to the pertinent provisions of any mortgage and in accordance
with the provisions of this Lease.
No sums shall be paid by Lessor toward such repairing, rebuilding,
restoring or replacing unless it shall be first made to appear to the reasonable
satisfaction of Lessor that the amount of money necessary to provide for any
such repairing, rebuilding, restoring or replacing (according to any plans or
specifications which may be adopted therefor) in excess of the amount received
from any such insurance policies has been expended or provided by Lessee for
such repairing, rebuilding, restoring or replacing, and that the amount received
from such insurance
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policies is sufficient to complete such work. In the event there is any amount
required in excess of the amount received from such insurance policies, Lessee
shall deposit such excess funds with Lessor so that the total amount available
will be sufficient to complete such repairing, rebuilding, restoring or
replacing in accordance with the provisions of any mortgage and any plans and
specifications submitted in connection therewith, free from any liens or
encumbrances of any kind whatsoever and the funds held by Lessor shall be
disbursed only upon the presentment of architect's or general contractor's
certificates, waivers of lien, contractor's sworn statements, and other evidence
of cost and payments as may be reasonably required.
ARTICLE X - LESSOR'S RIGHT TO PERFORM
10.1 Should Lessee fail to perform any of its covenants herein agreed to
be performed, Lessor may, but shall not be required, make such payment or
perform such covenants, and all sums so expended by Lessor thereon shall
immediately be payable by Lessee to Lessor, with interest thereon, at the rate
of fifteen percent (15%) per annum from date thereof until paid, and in
addition, Lessee shall reimburse Lessor for Lessor's reasonable expenses in
enforcing or performing such covenants, including reasonable attorney's fees.
Any such costs or expenses incurred or payments made by the Lessor shall be
deemed to be Additional Rent payable by Lessee and collectible as such by
Lessor.
10.2 Performance of and/or payment to discharge said Lessee's obligations
shall be optional with Lessor and such performance and payment shall in no way
constitute a waiver of, or a limitation upon, Lessor's other rights hereunder.
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ARTICLE XI - REPAIRS AND MAINTENANCE
11.1 Throughout the term of this Lease, Lessee, at its sole cost and
expense, will keep and maintain, or cause to be kept and maintained, the Demised
Premises (including the grounds, sidewalks and curbs abutting the same) and the
Personal Property in good order and condition without waste and in a suitable
state of repair at least comparable to that which existed immediately prior to
the Commencement Date (ordinary wear and tear excepted), and will make or cause
to be made, as and when the same shall become necessary, all structural and
nonstructural, exterior and interior, replacing, repairing and restoring
necessary to that end. All replacing, repairing and restoring required of
Lessee shall be (in the reasonable opinion of Lessor) of first class quality at
least equal to the original work and shall be in compliance with all standards
and requirements of law, licenses and municipal ordinances necessary to operate
the Demised Premises as a skilled and/or intermediate care nursing home. Any
items of Personal Property that are uneconomical to repair shall be replaced by
new items of like kind and all replacement items shall become part of the
Personal Property. No items of Personal Property shall be removed from the
Demised Premises except in connection with repair or replacement such items.
11.2 In the event that any part of the improvements located on the
Demised Premises or the Personal Property shall be damaged or destroyed by fire
or other casualty (any such event being called a "Casualty"), Lessee shall,
promptly replace, repair and restore the same as nearly as possible to the
condition it was in immediately prior to such Casualty, in accordance with all
of the terms, covenants and conditions and other requirements of this Lease and
any mortgage applicable in the event of such Casualty. The Demised Presmises
and the Personal Property shall be so replaced, repaired and restored as to be
of at least equal value and
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substantially the same character as prior to such Casualty. If the estimated
cost of any such restoring, replacing or repairing is Fifty Thousand Dollars
($50,000) or more, the plans and specifications for same shall be first
submitted to and approved in writing by Lessor, which approval shall not be
unreasonably withheld, and Lessee shall immediately select an independent
architect, approved by Lessor who shall be in charge of such repairing,
restoring or replacing. Lessee covenants that it will give to Lessor prompt
written notice of any Casualty affecting the Demised Premises in excess of Fifty
Thousand Dollars ($50,000). Provided that Lessee is not in default under the
Lease, Lessee shall have the right, at any time and from time to time, to remove
and dispose of any Personal Property which may have become obsolete or unfit for
use, or which is no longer useful in the operation of the Demised Premises,
provided Lessee promptly replaces any such Personal Property so removed or
disposed of with other personal property free of any security interest, lien or
encumbrance. Said personal property shall be of the same character and least
equal usefulness and quality to any such Personal Property so removed or
disposed of and such replacement property shall automatically become the
property of and shall belong to the Lessor, and Lessee shall execute such bills
of sale or other documents reasonably requested by Lessor to vest the ownership
of such personal property in Lessor.
ARTICLE XII - ALTERATIONS AND DEMOLITION
12.1 Lessee will not remove or demolish any improvement or building which
is part of the Demised Premises or any portion thereof or allow it to be removed
or demolished, without the prior written consent of the Lessor. Subject to the
terms of any mortgage secured by the Demised Premises, Lessee agrees that it
will not make, authorize or permit to be made any changes or
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alterations in or to the Demised Premises in excess of $5,000.00 without first
obtaining the Lessor's written consent thereto. All alterations, improvements
and additions to the Demised Premises shall be in quality and class at least
equal to the original work and shall become the property of the Lessor and shall
meet all building and fire codes, and all other applicable codes, rules,
regulations, laws and ordinances.
ARTICLE XIII - COMPLIANCE WITH LAWS AND ORDINANCES
13.1 Throughout the term of this Lease, Lessee, at its sole cost and
expense, will obey, observe and promptly comply with all present and future
laws, ordinances, orders, rules, regulations and requirements of any federal,
state and municipal governmental agency or authority having jurisdiction over
the Demised Premises and the operation thereof as a skilled and/or intermediate
care nursing home, which may be applicable to the Personal Property and the
nursing home and the Demised Premises and including, but not limited to, the
sidewalks, alleyways, passageways, vacant land, parking spaces, curb cuts, curbs
adjoining the Demised Premises, whether or not such law, ordinance, order,
rules, regulation or requirement shall necessitate structural changes or
improvements.
13.2 Lessee shall likewise observe and comply with the requirements of
all policies of public liability and fire insurance and all other policies of
insurance at any time in force with respect to the Demised Premises.
13.3 Lessee shall promptly apply for and procure and keep in good
standing and in full force and effect all necessary licenses, permits and
certifications required by any governmental authority for the purpose of
maintaining and operating on the Demised Premises a skilled and/or intermediate
care nursing home
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which at all times shall be qualified to participate in the Medicaid
reimbursement program.
13.4 Lessee will deliver or mail to Lessor wherever rent is then paid in
form required for notices within ten (10) days of receipt thereof copies of all
exit interviews, inspection reports and surveys and administrative hearing
and/or court action from all state, federal and local governmental bodies
regarding the Demised Premises or the nursing home operated thereon. Lessee
shall notify Lessor within twenty-four (24) hours after receipt thereof of any
notice from any governmental agency terminating or suspending or threatening
termination or suspension, of any license or certification relating to the
Demised Premises or the nursing home operated thereon.
ARTICLE XIV - DISCHARGE OF LIENS
14.1 Lessee will not create or permit to be created or to remain, and
Lessee will discharge, any lien, encumbrance or charge levied on account of any
mechanic's, laborer's or materialman's lien or any conditional sale, security
agreement or chattel mortgage, or otherwise, which might be or become a lien,
encumbrance or charge upon the Demised Premises or any part thereof or the
income therefrom or the Personal Property, for work or materials or personal
property furnished or supplied to, or claimed to have been supplied to or at the
request of Lessee.
14.2 If any mechanic's, laborer's or materialman's lien caused
or charged to Lessee shall at any time be filed against the Demised Premises or
Personal Property, Lessee shall have the right to contest such lien or charge,
provided, Lessee within thirty (30) days after notice of the filing thereof,
will cause the same to be discharged of record or in lieu thereof to secure
Lessor against said lien by deposit with Lessor of such security as may be
reasonably demanded by Lessor to protect against such lien. If
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Lessee shall fail to cause such lien to be discharged within the period
aforesaid, or to otherwise secure Lessor as aforesaid, then in addition to any
other right or remedy, Lessor may, upon ten (10) days notice, but shall not be
obligated to, discharge the same either by paying the amount claimed to be due
or by processing the discharge of such lien by deposit or by bonding
proceedings. Any amount so paid by Lessor and all costs and expenses incurred
by Lessor in connection therewith, together with interest thereon at the rate of
fifteen percent (15%) per annum, but not in excess of the maximum amount
permitted by law, shall constitute Additional Rent payable by Lessee under this
Lease and shall be paid by Lessee to Lessor on demand. Except as herein
provided, nothing contained herein shall in any way empower Lessee to do or
suffer any act which can, may or shall cloud or encumber Lessor's or mortgagee's
interest in the Demised Premises.
ARTICLE XV - INSPECTION OF PREMISES BY LESSOR
15.1 At any time, during reasonable business hours, Lessor and/or its
authorized representative shall have the right to enter and inspect the Demised
Premises and Personal Property.
15.2 Lessor agrees that the person or persons upon entering and
inspecting the Demised Premises and Personal Property will cause as little
inconvenience to the Lessee as may reasonably be possible under the
circumstances.
ARTICLE XVI - CONDEMNATION
16.1 In case all or substantially all of the Demised Premises leased
hereunder shall be taken or sold under the threat of such taking for any public
use by act of any public authorities, then this Lease shall terminate as of the
date possession is taken by the condemnor. If all or substantially all of the
Leased Property shall be taken, the net proceeds of any condemnation
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award, settlement or compromise for the Leased Property taken shall be allocated
between Lessor and Lessee in the proportion in which the value of Lessor's
interest under this Lease plus the value of Lessor's reversionary interest in
the Leased Property, both as of the date of the taking of possession bears to
the value of Lessee's interest (taking into consideration its rental
obligations) under this Lease as of the date of such taking; except that Lessor
shall in no event receive less than the purchase price paid, by Lessor when it
acquired the Leased Property. For the purposes of this paragraph "substantially
all of the Demised Premises leased hereunder" shall be deemed to have been taken
if upon the taking of less than the whole of the Demised Premises that portion
of the Demised Premises not so taken shall not by itself be adequate for the
conduct therein of Lessee's business.
In the event of a partial condemnation the result of which shall be
a reduction in the number of licensed beds on the Demised Premises, Lessee shall
have the right to terminate this Lease by written notice to Lessor within thirty
(30) days following the issuance of the condemnation order or conveyance of the
property, whichever is earlier. If Lessee does not elect to terminate this
Lease, Lessor shall hold in trust that portion, if any, of such award,
settlement or compromise which shall be allocable to consequential damage to
buildings and improvements not taken, and Lessor shall pay out such portion to
Lessee to reimburse Lessee for the cost of restoring the Demised Premises as a
complete structural unit, as such restoration work progresses in accordance with
the procedure for making insurance proceeds available for restoration, repair or
rebuilding as set forth in paragraph 9.6. In the event of a partial
condemnation which does not result in a termination of this Lease, the annual
rent rate payable under paragraph 4.1 hereof shall not be reduced.
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ARTICLE XVII - RENT ABSOLUTE
17.1 The Personal Property and the Demised Premises are let and leased
subject to the rights of any parties in possession thereof and the state of the
title thereof as of the date the Lessor acquired title from seller, to any state
of facts which an accurate survey or physical inspection thereof might show, and
to all zoning regulations, restrictions, rules and ordinances, building
restrictions and other laws and regulations now in effect or hereafter adopted
by any governmental authority having jurisdiction thereover. Lessee has
examined the Personal Property and the Demised Premises and has found the same
satisfactory. Lessee acknowledges that the Personal Property and the Demised
Premises are the property of Lessor and that Lessee has the leasehold rights as
set forth in the terms and conditions of this Lease.
As a material inducement to Lessor in the making of and entry into
this Lease, Lessee hereby expressly agrees as follows:
(a) It is the responsibility of the Lessee to be fully
acquainted with the nature, in all respects, of the Demised Premises, including
(but not by way of limitation); the soil and geology thereof, the waters thereof
and thereunder; the drainage thereof; the manner of construction and the
condition and state of repair and lack of repair of all improvements of every
nature; the nature, provisions and effect of all health, fire, zoning, building,
subdivision and all other use and occupancy laws, ordinances, and regulations
applicable thereto; and the nature and extent of the rights of others with
respect thereto, whether by way of reversion, easement, right of way,
prescription, adverse possession, profit, servitude, lease, tenancy, lien,
encumbrance, license, contract, reservation, condition, right of re-entry,
possibility of reverter, sufferance or otherwise. Lessor makes no
representation as to, and has no duty to be informed with respect
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to, any of the matters set forth in the preceeding sentence. Lessee hereby
accepts the Demised Premises as suitable and adequate in all respects for the
conduct of the business and the uses of the Demised Premises contemplated under
the provisions of the Lease.
(b) Lessee expressly covenants and agrees that it hereby takes
this Lease and the leasehold estate hereby established upon and subject to
Lessor's title as it was acquired from seller, including all rights, rights of
way, easements, profits, servitudes, reservations, restrictions, conditions,
exceptions, reversions, possibilities of reverter, liens, encumbrances,
occupancies, tenancies, licenses, clouds, claims and defects, known and unknown
and whether of record or not. In the event of any defect in Lessor's title to
the Demised Premises which shall require that Lessee vacate the Demised
Premises, then in such event Lessee shall have the right, upon 30 days prior
written notice to Lessor, to terminate this Lease.
(c) Lessee hereby expressly waives any and all rights which it
might otherwise have against Lessor by reason of any of the foregoing, including
(but not limited to) the requirements of any inspection or examination by Lessee
of the Demised Premises.
This Lease shall continue in full force and effect, and the
obligations of Lessee hereunder shall not be released, discharged or otherwise
affected, by reason of: (i) any damage to or destruction of the Demised Premises
or any part thereof or the taking of the Demised Premises or any part thereof by
condemnation, requisition or otherwise for any reason, (ii) any restriction or
prevention of or interference with any use of the Demised Premises or any part
thereof, including any restriction or interference with or circumstance which
prevents the use of the Demised Premises as contemplated by paragraph 8.1, (iii)
any frustration of Lessee's purposes hereunder, (iv) any claim which Lessee has
or
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might have against Lessor, or (v) any other occurrence whatsoever, whether
similar or dissimilar to the foregoing.
ARTICLE XVIII - ASSIGNMENT AND SUBLETTING
18.1 During the term of the Lease, Lessee shall not assign this Lease or
in any manner whatsoever sublet, assign or transfer all or any part of the
Demised Premises or in any manner whatsoever transfer or assign an interest in
the Demised Premises or any interest in the Lessee or sell or assign a majority
of the outstanding shares in Lessee without the prior written consent of the
Lessor. Any violation or breach or attempted violation or breach of the
provisions of this Article by Lessee, or any acts inconsistent herewith shall
vest no right, title or interest herein or hereunder or in the Demised Premises,
in any such transferee or assignee; and Lessor may, at its exclusive option,
terminate this Lease and invoke the provisions of this Lease relating to
default.
ARTICLE XIX - ACTS OF DEFAULT
19.1 The following acts or events shall be deemed to be an Event of
Default (herein an "Event of Default") on the part of the Lessee:
(1) The failure of Lessee to pay when due any rental payment, or
any part thereof, or any other sum or sums of money due or payable to the Lessor
under the provisions of this Lease, when such failure shall continue for a
period of ten (10) days;
(2) The failure of Lessee to perform, or the violation by Lessee
of, any of the covenants, terms, conditions or provisions of this Lease, if
such failure or violation shall not be cured within thirty (30) days after
notice by Lessor to Lessee;
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(3) The removal by any local, state or federal agency having
jurisdiction over the operation of the nursing home located on the Demised
Premises of fifty percent (50%) or more of the patients located in the nursing
home;
(4) The failure of Lessee to comply, or the violation by Lessee
of, any of the terms, conditions or provisions of any mortgage relating to the
Demised Premises, if such failure or violation shall not be cured within twenty
(20) days (or such lesser period as may be provided in the mortgage) after
notice thereof by Lessor to Lessee;
(5) The voluntary transfer by Lessee of 10 or more
patients located in the nursing home and such transfer is not for reason
relating to the health and well being of the patients that were transferred;
(6) The failure of Lessee to replace, within thirty (30) days
after notice by Lessor to Lessee, a substantial portion of the Personal Property
previously removed by Lessee;
(7) The making by Lessee of an assignment for the benefit of
creditors;
(8) The levying of a writ of execution or attachment on or
against the property of Lessee which is not discharged or stayed by action of
Lessee contesting same, within thirty (30) days after such levy or attachment
(provided if the stay is vacated or ended, this paragraph shall again apply);
(9) If proceedings are instituted in a court of competent
jurisdiction for the reorganization, liquidation or involuntary dissolution of
the Lessee or for its adjudication as a bankrupt or insolvent, or for the
appointment of a receiver of the property of Lessee, and said proceedings are
not dismissed and any receiver, trustee or liquidator appointed therein is not
discharged within thirty (30) days after the institution of said proceedings;
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(10) The sale of the interest of Lessee in the Demised Premises
under execution or other legal process;
(11) The failure of Lessee to give notice to Lessor not later
than ten (10) days after receipt by Lessee of any notice, claim or demand from
any governmental authority, or any officer acting on behalf thereof, of any
violation of any law, order, ordinance, rule or regulation with respect to the
operation of the nursing home located on the Demised Premises;
(12) The failure on the part of Lessee during the term of this
Lease to cure or abate any violation claimed by any governmental authority, or
any officer acting on behalf thereof, of any law, order, ordinance, rule or
regulation pertaining to the operation of the nursing home located on Demised
Premises, and within the time permitted by such authority for such cure or
abatement;
(13) The institution of any proceedings against Lessee by any
governmental authority either (i) to revoke any license granted to Lessee for
the operation of a skilled and/or intermediate care nursing home within the
Demised Premises or (ii) decertify the nursing home operated in the Demised
Premises from participation in the Medicaid reimbursement program;
(14) The abandonment of the Demised Premises by Lessee.
ARTICLE XX - RIGHT TO CONTEST
20.1 Lessee shall have the right upon written notice thereof to the
Lessor, to contest by appropriate legal proceedings, diligently conducted in
good faith, the validity or application of any law, regulation or rule
mentioned herein, and to delay compliance therewith pending the prosecution of
such proceedings; provided, however, that no civil or criminal liability would
thereby be incurred by Lessor and no lien or charge would thereby
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be imposed upon or satisfied out of the Demised Premises and further provided
that the effectiveness and good standing of any license, certificate or permit
affecting the Demised Premises or the nursing home operated thereon would
continue in full force and effect during the period of such contest.
ARTICLE XXI - LESSOR'S REMEDIES UPON DEFAULT
21.1 In the event of any Event of Default on the part of Lessee, Lessor
may, if it so elects, upon ten (10) days prior written notice to Lessee of such
election, and with or without any demand whatsoever upon Lessee, forthwith
terminate this Lease and Lessee's right to possession of the Demised Premises,
or, at the option of the Lessor, terminate Lessee's right to possession of the
Demised Premises without terminating this Lease. Upon any such termination of
this Lease, or upon any such termination of Lessee's right to possession
without termination of this Lease, Lessee shall vacate the Demised Premises
immediately, and shall quietly and peaceably deliver possession thereof to the
Lessor, and Lessee hereby grants to the Lessor full and free license to enter
into and upon the Demised Premises in such event with or without process of law
and to repossess the Demised Premises and Personal Property as the Lessor's
former estate. In the event of any such termination of this Lease, the Lessor
shall again have possession and enjoyment of the Demised Premises and Personal
Property to the extent as if this Lease had not been made, and thereupon this
Lease and everything herein contained on the part of Lessee to be done and
performed shall cease and terminate, all, however, without prejudice to and
without relinquishing the rights of the Lessor to rent (which, upon such
termination of this Lease and entry of Lessor upon the Demised Premises, shall,
in any event, be the right to receive rent due up to the time of such
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entry) or any other right given to the Lessor hereunder or by operation of law.
21.2 In the event of any Event of Default and Lessor elects either to
terminate this Lease or to terminate Lessee's right to possession of the Demised
Premises, then all licenses, certifications, permits and authorizations issued
by any governmental agency, body or authority in connection with or relating to
the Demised Premises and the nursing home operated thereon shall be deemed as
being assigned to Lessor. Lessor shall also have the right to continue to
utilize the telephone number and name used by Lessee in connection with the
operation of the nursing home located on the Demised Premises. This Lease shall
be deemed and construed as an assignment for purposes of vesting in Lessor all
right, title and interest in and to (i) all licenses, certifications, permits
and authorizations obtained in connection with the operation of the nursing home
located on the Demised Premises and (ii) the name and telephone number used in
connection with the operation of the nursing home located on the Demised
Premises. Lessee hereby agrees to take such other action and execute such
other documents as may be necessary in order to vest in Lessor all right, title
and interest to the items specified herein.
21.3 If Lessee abandons the Demised Premises or otherwise entitles Lessor
so to elect, and the Lessor elects to terminate Lessee's right to possession
only, without terminating this Lease, Lessor may, at its option, enter into
the Demised Premises, remove Lessee's signs and other evidences of tenancy and
take and hold possession thereof as in the foregoing paragraph 21.1 of this
Article provided, without such entry and possession terminating this Lease or
releasing Lessee, in whoe or in part, from Lessee's obligation to pay the rent
hereunder for the full remaining term of this Lease, and in any such case,
Lessee shall pay to Lessor a sum equal to the entire amount of the rent reserved
hereunder and
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required to be paid by Lessee up to the time of such termination of the right
of possession plus any other sums then due hereunder. Upon and after entry into
possession without termination of this Lease, Lessor may attempt to relet the
Demised Premises or any part thereof for the account of Lessee for such rent, or
shall operate the nursing home located on the Demised Premises for such time and
upon such terms as Lessor in its sole discretion shall determine. In any such
case, Lessor may make repairs, alterations and additions in or to the Demised
Premises, and redecorate the same to the extent deemed by Lessor desirable, and
Lessee shall, upon demand, pay the cost thereof, together with Lessor's expenses
of reletting. If the consideration collected by Lessor upon any such reletting
is not sufficient to pay monthly the full amount of rent reserved in this Lease,
together with the reasonable costs of repairs, alternations, additions,
redecorating and Lessor's expenses, Lessee shall pay to the Lessor the amount of
each montlhly deficiency upon demand.
21.4 Lessee's liability to Lessor for damages for default in payment of
rent or otherwise hereunder shall in all events survive the termination by
Lessor of the Lease or the termination by Lessor of Lessee's right to
possession only, as hereinabove provided. Upon such termination of the Lease or
at any time after such termination of Lessee's right to possession, Lessor may
recover from Lessee and Lessee shall pay to Lessor as liquidated and final
damages, whether or not Lessor shall have collected any current monthly
deficiencies under the foregoing paragraph, and in lieu of such current
deficiencies after the date of demand for such final damages, the amount
thereof found to be due by a Court of Competent Jurisidiction, which amount thus
found may be equal to:
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(a) the remainder, if any, of rent and charges due from Lessee
for the period up to and including the date of the termination of the Lease or
Lessee's right to possession; and
(b) the amount of any current monthly deficiencies accruing and
unpaid by Lessee up to and including the date of Lessor's demand for final
damages hereunder; and
(c) the excess, if any, of
(i) the present value, discounted at the rate of 10% per
annum of the rent reserved for what would have been the remainder of the
term of this Lease together with charges to be paid by Lessee under the
Lease;
(ii) the present value, discounted at the rate of 10% per
annum of the ten fair rental value of the Demised Premises and the Personal
Property.
If any statute or rule governing a proceeding in which such
liquidated final damages are to be proved shall validly limit the amount
thereof to an amount less than the amount above agreed upon, Lessor shall be
entitled to the maximum amount allowable under such statute or rule of law.
21.5 Except for default by Lessee in the payment of rent or any
additional payment requried hereunder, in any case where Lessor shall have
given to Lessee a written notice specifying a situation which, as hereinbefore
provided, must be remedied by Lessee within a certain time period, and, if for
causes beyond Lessee's control, it would not reasonably be possible for Lessee
to remedy such situation within such period, then, provided Lessee, immediately
upon receipt of such notice, shall advise Lessor in writing of Lessee's
intention to institute, and shall, as soon as reasonably possible thereafter,
duly institute, and thereafter diligently prosecute to completion, all steps
necessary to remedy such situation and shall remedy the same, and provided that
any license or certification necessary for the operation of
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the Demised Premises, as a skilled and/or intermediate care nursing home is not
affected thereby, this Lease and the term and estate hereby granted shall not
expire and terminate at the expiration of such time period as otherwise
hereinbefore provided.
ARTICLE XXII - LIABILITY OF LESSOR
22.1 It is expressly agreed by the parties that in no case shall Lessor
be lliable, under any express or implied covenant, agreement or provisions of
this Lease, for any damages whatsoever to Lessee beyond the loss of rent
reserved in this Lease, accruing after or upon any act of breach hereunder on
the part of Lessor and for which damages may be sought to be recovered against
Lessor. Anything to the contrary notwithstanding, under no circumstances shall
any personal liability attach to or be imposed upon Lessor or any partner of
Lessor.
ARTICLE XXIII - CUMULATIVE REMEDIES OF LESSOR
23.1 The specific remedies to which Lessor may resort under the terms of
this Lease are cumulative and are not intended to be exclusive of any other
remedies or means of redress to which Lessor may be lawfully entitled in case of
any breach of threatened breach by Lessee of any provision or provisions of this
Lease. The failure of Lessor to insist, in any one or more cases, upon the
strict performance of any of the terms, covenants, conditions, provisions or
agreements of this Lease, or to exercise any option herein contained, shall not
be construed as a waiver or relinquishment for the future of any such term,
covenant, condition, provisions, agreement or option.
ARTICLE XXIV - SECURITY FOR RENT
24.1 Lessor shall have a first lien paramount to all others except any
mortgagee on every right and interest of Lessee
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in and to this Lease, and on any furnishings, equipment, fixtures, accounts
receivable or other property of any kind belonging to Lessee. Such lien is
granted for the purpose of securing the payments of rents, charges, penalties,
and damages herein covenanted to be paid by Lessee, and for the purpose of
securing the performance of all of Lessee's obligations under this Lease. Such
lien shall be in addition to all rights to Lessor given and provided by law.
This Lease shall constitute a security agreement under the Uniform Commercial
Code granting Lessor a security interest in any furnishings, equipment,
fixtures, account receivable or other personal property of any kind belonging to
Lessee.
ARTICLE XXV - INDEMNIFICATION
25.1 To the extent insurance proceeds do not cover same, Lessee agrees to
protect, indemnify and save harmless the Lessor from and against any and all
claims, demands, and causes of action of any nature whatsover for injury to or
death of persons or loss of or damage to property, occurring on the Demised
Premises or any adjoining sidewalks, streets or ways, or in any manner growing
out of or connected with the use and occupation of the Demised Premises or the
condition thereof, or the use of any existing or future sewer system, or the use
of any adjoining sidewalks, streets or ways during the term of this Lease, and
Lessee further agrees to pay any reasonable attorneys' fees and expenses
incident to the defense by Lessor of any such claims, demands or causes of
action.
ARTICLE XXVI - SUBORDINATION PROVISIONS
26.1 This Lease (and Lessee's interest in the Demised Premises and
Personal Property) shall be subject and subordinate to any mortgage to any
lender which may now or hereinafter affect the Demised Premises and/or personal
Property, and to all renewals, modifications, consolidations, replacements and
executions
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thereof, provided that any such renewals, modifications, consolidations and
extensions do not require monthly payments thereon of principal and interest, in
excess of the monthly rental payment from time to time required hereunder. In
the event Lessor shall replace the financing currently encumbering the Demised
Premises with replacement financing, Lessor shall inform Lessee of the terms and
conditions of the replacement financing and Lessee shall have the opportunity to
review the terms and conditions thereof. Lessee agrees to execute and deliver
upon demand such further instruments subordinating this Lease to any such liens
or encumbrances as shall be desired by Lessor.
ARTICLE XXVII - LESSEE'S FAITHFUL
COMPLIANCE WITH MORTGAGE
27.1 Anything in this Lease contained to the contrary notwithstanding,
lessee shall at all times and in all respects fully, timely and faithfully
comply with and observe each and all of the conditions, covenants, and
provisions required on the part of the Lessor under any mortgage (and to any
renewals, modifications, extensions, replacements and/or consolidations thereof)
to which this Lease is subordinate or to which it later may become subordinate,
including, without limitation, such conditions, covenants and provisions thereof
as relate to the care, maintenance, repair, insurance, restoration, preservation
and condemnation of the Demised Premises, notwithstanding that such conditions,
covenants and provisions may require compliance and observance to a standard or
degree in excess of that required by the provisions of this Lease, or may
require performance not required by the provisions of this Lease, and shall not
do or permit to be done anything which would constitute a breach of or default
under any obligation of the Lessor under any mortgage, it being the intention
hereof that Lessee shall so comply with and
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observe each and all of such covenants, conditions and provisions of any
mortgage affecting the Demised Premises so that they will at all times be in
good standing and there will not be any default on the part of the Lessor
thereunder. However, nothing in this Article contained shall be construed to
obligate Lessee to pay any part of the principal or interest secured by any
mortgage, except as may otherwise be provided in this Lease.
ARTICLE XXVIII - MORTGAGE RESERVES
28.1 Any tax, insurance or other reserve required by the holder of any
mortgage against the Demised Premises during the term of this Lease shall be
paid by the Lessee to Lessor.
ARTICLE XXIX - LESSEE'S ATTORNMENT
29.1 Lessee covenants and agrees that, if by reason of a default upon the
part of the Lessor herein in the performance of any of the terms and conditions
of any mortgage, and the estate of the Lessor thereunder are terminated by
summary dispossession proceedings or otherwise, Lessee will attorn to the then
holder of such mortgage or the purchaser in such foreclosure proceedings, as the
case may be, and will recognize such holder of the mortgage or such purchaser as
the Lessor under this Lease. Lessee covenants and agrees to execute and
deliver, at any time and from time to time, upon the request of Lessor or of the
holder of such mortgage or the purchaser in foreclosure proceedings, any
instrument which may be necessary or appropriate to evidence such attornment.
Lessee further waives the provisions of any statute or rule of law now or
hereafter in effect which may terminate this Lease or give or purport to give
Lessee any right of election to terminate this Lease or to surrender possession
of the Demised Premises in the event any such proceedings are brought against
the Lessor under such Mortgage or the holder of any such Mortgage, and agrees
that
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this Lease shall not be affected in any way whatsoever by any such proceedings.
29.2 If Lessor shall default in the performance of any of the terms,
provisions, covenants or conditions under any mortgage, or fails to pay the
amounts due thereunder when due, then immediately upon notice of such default or
failure on the part of Lessor, Lessee shall have the right to cure such
defaults, and to make such payments as are due from Lessor, directly to the
holder of the mortgage, as the case may be, and to the extent such payments are
accepted by the holder of the mortgage, to deduct the amounts expended by Lessee
to cure such defaults from the next succeeding rental payment or payments due
under this Lease, and such deductions shall not constitute a default under this
Lease.
ARTICLE XXX - REPRESENTATIONS AND WARRANTIES
30.1 Lessee represents, warrants and covenants to Lessor as follows:
(a) Lessee has full right and power to enter into, or perform its
obligations under this Lease and has taken all requisite action to authorize
the execution, delivery and performance of this Lease.
ARTICLE XXXI - SECURITY DEPOSIT
31.1 As additional security for the faithful and prompt performance of its
obligations hereunder, Lessee, on the Commencement Date, shall deposit with
Lessor, a security deposit in the amount of Seventy Thousand Dollars
($70,000.00) which shall guarantee all obligations, including payment by Lessee
of all amounts due under this Lease. Said security deposit may be applied by
Lessor for the purpose of curing any default or defaults of Lessee hereunder, in
which event Lessee shall replenish
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said deposit in full by promptly paying to Lessor the amount so applied.
ARTICLE XXXII - OPTION TO PURCHASE
32.1 Lessor hereby grants to Lessee an option to purchase (hereinafter
called the "Purchase Option") the Demised Premises and Personal Property for a
purchase price of Four Million Seven Hundred Thousand Dollars ($4,700,000)
payable in cash at closing. Lessee shall exercise the Purchase Option by giving
written notice (hereinafter called the "Exercise Notice") to Lessor between the
85th and 91st month of the Lease term. The Exercise Notice shall specify a
closing date for completion of the purchase and sale and said closing date shall
be no later than the last day of the 91st month of the lease term.
Simultaneous with the delivery of the Exercise Notice, Lessee shall deposit with
Lessor, as an earnest money deposit in connection with the purchase and sale
pursuant to the Purchase Option, the sum of Two Hundred Thirty-Five Thousand
Dollars ($235,000.00). Lessee shall have the right to assume any mortgage
financing encumbering the Demised Premises and Personal Property on the closing
date, provided however that Lessor and any partners of affiliates of Lessor are
released for all liability and obligation with respect to any financing assumed
by Lessee.
ARTICLE XXXIII - FINANCIAL STATEMENTS
33.1 Within 120 days after the end of each of its fiscal years, Lessee
shall furnish to Lessor full and complete financial statements of the operations
of the Demised Premises and nursing home operated thereon for such annual fiscal
period which shall be prepared by a Certified Public Accountant reasonably
approved by Lessor, which approval shall not be unreasonably withheld, and
which shall contain a statement of capital changes, balance sheet
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and detailed income and expense statement (collectively called "Financial
Statements") as of the end of the fiscal year. In addition, Lessee shall
furnish Lessor, within 10 days following filing, a copy of its federal income
tax return for the preceding year. Each such statement shall be certified as
being true and correct by an officer of Lessee.
33.2 Within thirty (30) days after each calendar quarter, Lessee shall
furnish to Lessor copies of all Financial Statements for the Demised Premises
received by Lessee for the preceding calendar quarter.
33.3 At all times, Lessee shall keep and maintain full and correct records
and books of account of the operations of Lessee in the Demised Premises and
records and books of account of the entire business operations of Lessee in
accordance with sound accounting practices. Upon request by Lessor, Lessee
shall make available for inspection by Lessor or its designee, during reasonable
business hours, the said records and books of account covering the entire
business operations of Lessee on the Demised Premises.
ARTICLE XXXIV - MISCELLANEOUS
34.1 Lessee, upon paying the fixed rental, Additional Rent and all other
charges herein provided, and for observing and keeping the covenants,
agreements, terms and conditions of this Lease on its part to be performed,
shall lawfully and quietly hold, occupy and enjoy the Demised Premises during
the term of this Lease, and subject to its terms, without hinderance by Lessor
or by any other person or persons claiming under Lessor.
34.2 All payments to be made by the Lessee hereunder, whether or not
designated as Additional Rent, shall be deemed Additional Rent, so that in
default of payment when due, the
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Lessor shall be entitled to all of the remedies available at law or equity, or
under this Lease, for the nonpayment of rent.
34.3 It is understood and agreed that the granting of any consent by
Lessor to Lessee to perform any act of Lessee requiring Lessor's consent under
the terms of this Lease, or the failure on the part of Lessor to object to any
such action taken by Lessee without Lessor's consent, shall not be deemed a
waiver by Lessor of its rights to require such consent for any further similar
act by Lessee, and Lessee hereby expressly covenants and warrants that as to all
matters requiring Lessor's consent under the terms of this Lease, Lessee shall
secure such consent for each and every happening of the event requiring such
consent, and shall not claim any waiver on the part of Lessor of the requirement
to secure such consent.
34.4 Lessee represents that it did not deal with any broker in connection
with this Lease, and hereby indemnifies Lessor against the claims or demands of
any broker claimed through a relationship with Lessee.
34.5 If an action shall be brought to recover any rental under this Lease,
or for or on account of any breach of or to enforce or interpret any of the
terms, covenants or conditions of this Lease, or for the recovery of possession
of the Demised Premises, the prevailing party shall be entitled to recover from
the other party, as part of prevailing party's costs, reasonable attorney's
fees, the amount of which shall be fixed by the court and shall be made a part
of any judgment rendered.
34.6 Should Lessee hold possession hereunder after the expiration of the
term of this Lease with the consent of Lessor, Lessee shall become a tenant on a
month-to-month basis upon all the terms, covenants and conditions herein
specified, excepting however that Lessee shall pay Lessor a monthly rental, for
the
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period of such month-to-month tenancy, in an amount equal to twice the last
rental specified.
34.7 All notices, demands or requests which may or are required to be
given by either party to the other shall be in writing and shall be sent by
United States certified mail, return receipt requested, addressed to the other
party hereto at the address set forth below:
If to Lessor:
Skyview Associates
c/o Harvey Angell
55 W. Monroe, #1690
Chicago, IL 60603
with copies to:
Albert Milstein
Winston & Strawn
One First National Plaza, Suite 5000
Chicago, Illinois 60603
If to Lessee:
Don Bybee
P.O. Box 3548
Salem, Oregon 97302
A. Keith Holloway
National Heritage, Inc.
2465 Overland Road, Suite D
Boise, Idaho 83705
or if written notification of a change of address has been sent, to such other
party and/or to such other address as may be designated in that written
notification.
34.8 Upon demand by either party, Lessor and Lessee agree to execute and
deliver a short form lease in recordable form so that the same may be recorded
by either party.
34.9 Each party agrees that any time, and from time to time, upon not less
than ten (10) days prior written request from the other party, to execute,
acknowledge and deliver to the other party a statement in writing, certifying
that this Lease is unmodified and in full force and effect (or if there have
been modifications, that the same is in full force and effect as
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modified, and stating the modifications), the dates to which the rent has been
paid, the amount of the Additional Rent held by Lessor, and whether the Lease is
then in default or whether any events have occurred which, with the giving of
notice or the passage of time, or both, could constitute a default hereunder, it
being intended that any such statement delivered pursuant to this paragraph may
be relied upon by any prospective assignee, mortgagee or purchaser of the fee
interest in the Demised Premises or of this Lease.
34.10 All of the provisions of this Lease shall be deemed and construed to
be "conditions" and "covenants" as though the words specifically expressing or
importing covenants and conditions were used in each separate provision hereof.
34.11 Any reference herein to the termination of this Lease shall be
deemed to include any termination thereof by expiration, or pursuant to Articles
referring to earlier termination.
34.12 The headings and titles in this Lease are inserted only as a matter
of convenience and for reference and in no way define, limit or describe the
scope or intent of this Lease, nor in any way affect this Lease.
34.13 This Lease contains the entire agreement between the parties and any
executory agreement hereafter made shall be ineffective to change, modify or
discharge it in whole or in part unless such executory agreement is in writing
and signed by the party against whom enforcement of the change, modification or
discharge is sought. This Lease cannot be changed orally or terminated orally.
34.14 Except as otherwise herein expressly provided, the covenants,
conditions and agreements in this Lease shall bind and inure to the benefit of
the Lessor and Lessee and their respective successors and assigns.
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34.15 All nouns and pronouns and any variations thereof shall be deemed to
refer to the masculine, feminine, neuter, singular or plural as the identity of
the person or persons, firm or firms, corporation or corporations, entity or
entities or any other thing or things may require.
34.16 If any term or provision of this Lease shall to any extent be held
invalid or unenforceable, the remaining terms and provisions of this Lease shall
not be affected thereby, but each term and provision shall be valid and be
enforced to the fullest extent permitted by Law.
34.17 Lessee agrees at any time and from time to time upon not less than
ten (10) days' prior notice by Lessor or any mortgagee to execute, acknowledge
and deliver to Lessor or such mortgagee, as the case may be, a statement in
writing certifying that this Lease is unmodified and in full force and effect
(or if there have been modifications, that the same is in full force and effect
as modified and stating the modifications) and the dates to which the net
rental, Taxes and Assessments and other charges have been paid in advance, if
any, and stating whether or not to the best knowledge of the signer of such
certificate Lessee or Lessor is in default in performance of any covenant,
agreement or condition contained in this Lease and, if so, specifying each such
default of which the signer may have knowledge.
34.18 In the event of any conveyance or other divestiture of title to the
Leased Property the grantor or the person who is divested of title shall be
entirely freed and relieved of all covenants and obligations thereafter accruing
hereunder, and the grantee or the person who otherwise succeeds to title shall
be deemed to have assumed the covenants and obligations of Lessor thereafter
accruing hereunder and shall then be the Lessor under this Lease.
Notwithstanding anything to the contrary provided in this Lease, if Lessor or
any successor in interest of Lessor shall
-38-
<PAGE>
be an individual, partnership, corporation, trust, tenant in common or
mortgagee, there shall be absolutely no personal or corporate liability on the
part of such Lessor or any individual or member of Lessor or any stockholder,
director, officer, employee, partner or trustee of Lessor with respect to the
terms, covenants or conditions of this Lease, and Lessee shall look solely to
the interest of Lessor in the Leased Property for the satisfaction of each and
every remedy which Lessee may have for the breach of this Lease; such
exculpation from personal or corporate liability to be absolute and without any
exception, whatsoever.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be signed
by persons authorized so to do on behalf of each of them respectively the day
and year just above written.
LESSOR:
SKYVIEW ASSOCIATES
By: /s/ Harvey Angell
----------------------------------------
General Partner
LESSEE:
/s/ Don Bybee
-------------------------------------------
Don Bybee
/s/ Keith Holloway
-------------------------------------------
A. Keith Holloway
<PAGE>
EXHIBIT 10.3
FIRST AMENDMENT TO LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "Amendment") is made and
entered into as of the 1st day of January, 1996 by and between SKYVIEW
ASSOCIATES, an Illinois limited partnership ("Lessor"), and SUNRISE HEALTHCARE
CORPORATION, a New Mexico corporation ("Lessee").
W I T N E S S E T H:
WHEREAS, Lessor and Don Bybee and A. Keith Holloway (collectively, the
"Original Lessee") entered into that certain Lease Agreement dated August 1,
1987 (the "Lease"), pursuant to which Lessor leased to Original Lessee and
Original Lessee leased from Lessor a nursing home facility (the "Facility")
located in Twin Falls, Idaho and located on the land more particularly described
on Exhibit "A" to the Lease;
WHEREAS, all capitalized terms which are used but which are not defined in
this Amendment shall have the meanings ascribed to such terms in the Lease;
WHEREAS, pursuant to that certain West Magic Assignment and Assumption
Agreement dated effective as of January 1, 1996 (the "Assignment Agreement"),
Original Lessee has assigned all of its right, title and interest in, to and
under the Lease to Lessee and Lessee has assumed all of Original Lessee's duties
and obligations under the Lease, and pursuant to the terms of the Lease, the
Assignment Agreement and the transactions contemplated thereby require the
written consent of Lessor;
WHEREAS, as a condition to giving its consent to the Assignment Agreement
and the transactions contemplated thereby, Lessor has required that Lessor and
Lessee enter into this Amendment, amending certain terms ands provisions of the
Lease, all as more particularly set forth hereinbelow;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Lessor and Lessee hereby agree as follows:
1. AMENDMENTS TO LEASE.
A. ADDITIONAL PROVISIONS REGARDING LICENSING. The following is hereby
added to the end of Article VIII of the Lease as Section 8.4:
<PAGE>
" 8.4 Lessee covenants that at all times during the term of this Lease the
nursing home license for the Demised Premises shall permit at least 178 licensed
beds in the Demised Premises, and upon termination of this Lease for any reason,
Lessee shall return the Demised Premises to Lessor with licenses in full force
and good standing permitting at least 178 licensed beds in the Demised
Premises."
B. INSURANCE PROVISIONS. Article IX of the Lease is hereby deleted in its
entirety, and the following is substituted in its place:
" 9.1 Lessee shall, at its sole cost and expense, during the full term of
this Lease, maintain property insurance provided by a Causes of Loss Special
Form or similar form. Such insurance shall include an endorsement for increased
cost of construction. Such insurance shall be obtained from a responsible
company or companies approved by Lessor, which approval will not be unreasonably
withheld. Such insurance shall, at all times, be maintained in an amount equal
to the full replacement cost of the Demised Premises and the Personal Property
(without any co-insurance clause, if possible) or in such other amount as may be
required by Lessor and any mortgagee of the Demised Premises but at all times,
in an amount sufficient to prevent Lessor and Lessee from becoming co-insurers
under applicable provisions of the insurance policies. As used herein, the term
"full replacement cost" shall mean coverage for the actual; replacement cost of
the Demised Premises and the Personal Property which, if not agreed upon by
Lessor and Lessee, shall be determined by an appraiser, engineer, architect or
contractor reasonably acceptable to Lessor and Lessee. Such insurance shall at
all times be payable to Lessor and Lessee as their interests may appear, and
shall contain a loss-payable clause to the holder of any mortgage to which this
Lease shall be subject and subordinate, as said mortgagee's interest may appear.
All such policies of insurance shall provide that:
(a) They are carried in favor of Lessor, Lessee and any mortgagee, as
their respective interests may appear, and any loss shall be payable as therein
provided, notwithstanding any act or negligence of Lessor or Lessee, which might
otherwise result in forfeiture of insurance; and
(b) A standard mortgagee clause in favor of any mortgagee, and shall
contain, if obtainable, a waiver of the insurer's right of subrogation against
funds paid under the standard mortgagee endorsement which are to be used to pay
the cost of any repairing, rebuilding, restoring or replacing.
2
<PAGE>
9.2 Lessee shall also, at Lessee's sole cost and expense, cause to be issued
and shall maintain during the entire term of this Lease:
(a) Commercial general liability insurance, including the Lessor as an
additional insured, insuring against claims for bodily injury or property damage
occurring upon, in or about the Demised Premises. Such insurance to have limits
of not less than $1,000,000.00 each occurrence and $2,000,000.00 general
aggregate and an excess or umbrella liability policy of not less than
$5,000,000.00 each occurrence and $5,000,000.00 aggregate; and
(b) Hospital Professional Liability insurance in the amount of
$1,000,000.00 each occurrence and $2,000,000.00 aggregate.
Lessor may, from time to time, reasonably require Lessee to change the amount or
type of insurance or to add or substitute additional coverages required to be
maintained by Lessee hereunder.
9.3 All policies of insurance shall provide that they shall not be
canceled, terminated, reduced or materially modified without at least twenty
(20) days prior written notice to Lessor and any such mortgagee.
9.4 An original certificate of insurance for all insurance policies
required by this Article shall be delivered to Lessor at least five (5) days
prior to the Commencement Date.
9.5 Lessee shall at all times keep in effect business interruption
insurance with a loss of rents endorsement naming Lessor as an insured in an
amount at least sufficient to cover:
(a) The aggregate of the cost of all Taxes and Assessments due during the
period of the business interruption at the Facility (the "Business Interruption
Period");
(b) The cost of all insurance premiums for insurance required to be
carried by Lessee for the Business Interruption Period; and
(c) The aggregate of the amount of the fixed monthly rental for the
Business Interruption Period.
In lieu of the foregoing, Lessee may, at its option, obtain and maintain a
blanket insurance policy in an amount sufficient to provide the coverage
described in this Section 9.5.
3
<PAGE>
All proceeds of any business interruption insurance shall be applied,
first, to the payment of any and all fixed rental payments for the Business
Interruption Period; second, to the payment of any Taxes and Assessments and
insurance deposits required however for the Business Interruption Period; and,
thereafter, after all necessary repairing, rebuilding, restoring or replacing
has been completed as required by the pertinent Articles of this Lease and the
pertinent sections of any mortgage, any remaining balance of such proceeds shall
be paid over to Lessee."
C. ENVIRONMENTAL COMPLIANCE. The following is hereby added to the end of
Article XIII of the Lease as Section 13.5:
" 13.5 Lessee shall not generate, dispose of, release, use, handle, possess
or store any hazardous substances upon the Demised Premises except in accordance
with applicable laws, rules and regulations. Lessee shall at its sole cost and
expense promptly remove or clean up any hazardous substances introduced onto the
Demised Premises by Lessee or with its permission or at its sufferance. Such
removal or cleanup shall be in compliance with all applicable laws and
regulations. Lessee hereby agrees to indemnify and hold Lessor harmless and
agrees to defend Lessor from all losses, damages, claims, liabilities and fines,
including costs and reasonable attorneys' fees, of any nature whatsoever in
connection with the actual or alleged presence upon the Demised Premises of any
hazardous substances introduced by Lessee or with its permission or at its
sufferance."
D. TERMINATION OF OPTION TO PURCHASE. Article XXXII of the Lease is
hereby deleted in its entirety.
E. TRANSFER OF OPERATIONS. The following is hereby added to the Lease as
Article XXXV:
ARTICLE XXXV - TRANSFER OF OPERATIONS UPON TERMINATION OF LEASE
" 35.1 The date on which this Lease either terminates pursuant to its terms
or is terminated by either party whether pursuant to a right granted to it
hereunder or otherwise shall be referred to as the "Closing Date" in this
Article. On the Closing Date, this Lease shall be deemed and construed as an
absolute assignment for purposes of vesting in Lessor all of Lessee's right,
title and interest in and to the following intangible property which is now or
hereafter used in connection with the operation of the Demised Premises (the
"Intangibles") and an assumption by Lessor of Lessee's obligations under the
Intangibles:
4
<PAGE>
(a) service contracts for the benefit of the Leased Property to which
Lessee is a party, and which can be terminated without penalty by Lessee within
thirty (30) or fewer days' notice;
(b) any provider agreements with Medicare, Medicaid or any other third-
party payor programs (excluding the right to any reimbursement for periods on or
prior to the Closing Date) entered in connections with the Demised Premises to
the extent assignable by Lessee;
(c) all licenses, permits, accreditations, and certificates of occupancy
issued by any federal, state, municipal or quasi-governmental authority for the
use, maintenance or operation of the Demised Premises, running to or in favor of
Lessee, to the extent assignable by Lessee;
(d) all documents, charts, personnel records, property manuals,
resident/patient records and lists maintained with respect to the Demised
Premises (subject to the resident's rights to access to his/her medical records
as provided by law and confidentiality requirements), books, records, files and
other business records attributable to the business or operations of the Demised
Premises to the extent assignable by Lessee;
(e) all existing agreements with residents and any guarantors thereof of
the Demised Premises, to the extent assignable by Lessee (excluding the right to
any payments for periods prior to the Closing Date);
(f) all assignable guaranties and warranties in favor of Lessee with
respect to the Demised Premises and/or the Personal Property;
(g) all other assignable intangible property not enumerated herein which
is now or hereafter used in connection with the operation of the Demised
Premises as a long-term care facility; and
(h) the business of the Lessee as conducted at the Demised Premises as a
going concern, including but not limited to the name of the business conducted
thereon and all telephone numbers presently in use therein, but specifically
excluding the name "Sunrise Healthcare" or any Sunrise policy or procedure
manuals, forms or systems.
35.2 Lessee shall be responsible for, and pay all accrued expenses with
respect to the Demised Premises and Personal Property accruing before 12:00 a.m.
on the Closing Date and shall be entitled to all revenues from the Demised
Premises for the period through 12:00 a.m. on the Closing
5
<PAGE>
Date. Lessor shall be responsible for and pay all accrued expenses with respect
to the Demised Premises accruing on or after 12:01 a.m. on the day after the
Closing Date and shall be entitled to receive and retain all revenues from the
Demised Premises accruing on or after the Closing Date. Within fifteen (15)
business days after the Closing Date, the following adjustments and prorations
shall be determined as of the Closing Date and the party to whom payment is owed
shall receive said payment within said fifteen (15) day period:
(a) Real estate taxes, ad valorem taxes, school taxes, assessments and
personal property, intangible and use taxes, if any. If the actual ad valorem
taxes are not available for the tax year in which the Closing Date occurs, the
proration of such taxes shall be estimated at the Closing Date based upon
reasonable information available to the parties, including information disclosed
by the local tax office or other public information, and an adjustment shall be
made when actual figures are published or otherwise become available.
(b) Lessee will terminate the employment of all employees on the Closing
Date. The obligation for wages and the obligation, if any, to pay to employees
of the Demised Premises accrued vacation and sick leave pay or employee
severance pay or other accrued benefits which may be payable as the result of
any termination of any employee on or prior to the Closing Date for the period
prior to the Closing Date shall remain the Lessee's obligation after the
Closing Date.
(c) Lessor shall receive a credit equal to any advance payments received
by Lessee from patients of the Demised Premises to the extent attributable to
periods following the Closing Date.
(d) The present insurance coverage on the Demised Premises shall be
terminated as of the Closing Date.
(e) All other income from, and expenses of, the Demised Premises (other
than mortgage interest, principal and trustee fees which shall be the
responsibility of Lessor), including but not limited to public utility charges
and deposits, maintenance charges and service charges shall be prorated between
Lessee and Lessor as of the Closing Date. Lessee shall, if possible, obtain
final utility meter readings as of the Closing Date. To the extent that
information for any such proration is not available on the Closing Date, Lessee
and Lessor shall effect such proration within ninety (90) days after the Closing
Date or as soon thereafter as such information becomes available.
6
<PAGE>
(f) Lessee shall receive a credit equal to (i) any sums held in escrow by
Lessor or the holder of any mortgage for taxes or insurance premiums; and (ii)
any other sums being held by Lessor for the benefit of Lessee provided that any
such sums are not needed to pay costs and expenses which relate to the period
prior to the Closing Date, in accordance with the applicable provisions of this
Lease.
(g) Subject to the terms of Article XXXI hereof, Lessee shall receive a
credit for any security deposit made pursuant to this Lease.
(h) Lessor shall receive a credit for any amounts due from Lessee pursuant
to the terms of this Lease, including payments due to third party vendors, which
are paid by Lessor on behalf of Lessee.
35.3 All necessary arrangements shall be made to provide possession of the
Demised Premises to Lessor on the Closing Date, at which time of possession
Lessee shall, to the extent permitted by law, deliver to Lessor all medical
records, patient records, and other personal information concerning all patients
residing at the Demised Premises as of the Closing Date and other relevant
records used or developed in connection with the business conducted at the
Demised Premises other than Lessee's corporate business records, manuals, forms
and systems documentation. Such transfer and delivery shall be in accordance
with all applicable laws, rules and regulations concerning the transfer of
medical records and other types of patient records.
35.4 Within fifteen (15) days following the Closing Date, Lessee shall
provide Lessor with an accounting of all funds belonging to patients at the
Demised Premises which are held by Lessee in a custodial capacity. Such
accounting shall set forth the names of the patients for whom such funds are
held, the amounts held on behalf of each such patient and the Lessee's warranty
that, to the actual current knowledge of Lessee, the accounting is true, correct
and complete. Additionally, Lessee, in accordance with all applicable rules and
regulations, shall make all necessary arrangements to transfer such funds to a
bank account designated by Lessor, and Lessor shall in writing acknowledge
receipt of and expressly assume all the Lessee's financial and custodial
obligations with respect thereto. Notwithstanding the foregoing, Lessee will
indemnify and hold Lessor harmless from all liabilities, claims and demands,
including reasonable attorney's fees, in the event the amount of funds, if any,
transferred to Lessor's bank account as provided above, did not represent the
full amount of the funds then or thereafter shown to have been delivered
7
<PAGE>
to Lessee as custodian that remain undisbursed for the benefit of the patient
for whom such funds were deposited, or with respect to any matters relating to
patient funds which accrued during the term of this lease.
35.5 All cash, checks and cash equivalents at the Demised Premises and
deposits in bank accounts (other than patient trust accounts) relating to the
Demised Premises on the Closing Date shall remain Lessee's property after the
Closing Date. All accounts receivable, loans receivable and other receivables
of Lessee, whether derived from operation of the Demised Premises or otherwise,
shall remain the property of Lessee after the Closing Date. Lessee shall retain
full responsibility for the collection thereof. Lessor shall assume
responsibility for the billing and collection of payment on account of services
rendered by it on and after the Closing Date. In order to facilitate Lessee's
collection efforts, Lessee agrees to deliver to Lessor, within a reasonable time
after the Closing Date, a schedule identifying all of those private pay balances
owing for the month prior to the Closing Date and Lessor agrees to apply any
payments received which are specifically designated as being applicable to
services rendered prior to the Closing Date to reduce the pre-Closing Date
balances of said patients by promptly remitting said payments to Lessee. In the
event payments specifically indicate that they relate to services rendered post-
Closing, such payments shall be retained by Lessor. In the event no designation
is made, such payments shall be applied one-half to Lessee's accounts receivable
and one-half to Lessor's accounts receivable. Lessor shall cooperate with
Lessee in Lessee's collection of its preclosing accounts receivable. Lessor
shall have no liability for uncollectible receivables and shall not be obligated
to bear any expense as a result of such activities on behalf of Lessee. Subject
to the provisions of Article 24 hereof, Lessor shall remit to Lessee or its
assignee those portions of any payments received by Lessor which are
specifically designated as repayment or reimbursement received by Lessor arising
out of costs reports filed for the cost reporting periods ending on or prior to
the Closing Date.
35.6 With respect to residents in the Demised Premises on the Closing Date,
Lessor and Lessee agree as follows:
(a) With respect to Medicare and Medicaid residents, Lessor and Lessee
agree that payment for in-house residents covered by Medicare or Medicaid on the
Closing Date will, under current regulations, be paid by Medicare or Medicaid
directly to Lessee for services rendered at the Demised Premises prior to the
Closing Date allocated on the per diem basis. Said payments shall be the sole
responsibility of
8
<PAGE>
Lessee and, except as provided in Section 35.6(b) below, Lessor shall in no way
be liable therefor. After the Closing Date, Lessor and Lessee shall each have
the right to review supporting books, records and documentation that are in the
possession of the other relating to Medicaid or Medicare payments.
(b) If, following the Closing Date, Lessor receives payment from any state
or federal agency or third-party provider which represents reimbursement with
respect to services provided at the Demised Premises prior to the Closing Date,
Lessor agrees that it shall remit such payments to Lessee. Payments by Lessor
to Lessee shall be accompanied by a copy of the appropriate remittance advice.
35.7 In addition to the obligations required to be performed hereunder by
Lessee and Lessor at the Closing Date, Lessee and Lessor agree to perform such
other acts, and to execute, acknowledge, and/or deliver subsequent to the
Closing Date such other instruments, documents and materials, as the other may
reasonably request in order to effectuate the consummation of the transaction
contemplated herein. The obligations hereunder shall survive termination or
expiration of the Lease.
35.8 Lessee and Lessee, each, for itself, its successors and assigns hereby
indemnifies and agrees to defend and hold the other and its successors and
assigns harmless from any and all claims, demands, obligations, losses,
liabilities, damages, recoveries and deficiencies (including interest, penalties
and reasonable attorney's fees, costs and expenses) (hereinafter collectively
the "Claims") which any of them may suffer as a result of the breach by the
other party in the performance of any of its commitments, covenants or
obligations under this Article 35. Lessee does further agree to indemnify,
defend and hold harmless Lessor from any such Claims or with respect to any
suits, arbitration proceedings, administrative actions or investigations which
relate to the use by Lessee of the Demised Premises prior to the Closing Date or
any liability which may arise from operation by Lessee of the Demised Premises
as a nursing home prior to the Closing Date. Lessor does further agree to
indemnify, defend and hold harmless Lessee from any such Claims or with respect
to any suits, arbitration proceedings, administrative actions or investigations
which relate to the ownership of the Demised Premises by Lessor or the use of
the Demised Premises by Lessor or the operation by Lessor of the nursing home
located thereon after the Closing Date. The rights of Lessor under this
paragraph are without prejudice to any other remedies not inconsistent herewith
which Lessor may have against Lessee pursuant to the terms of this Lease and
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<PAGE>
the rights of Lessee hereunder are subject to Section 22.1 hereof.
35.9 Anything to the contrary contained in this Article 35 notwithstanding,
in the event the termination of this Lease is due to a default by Lessee, none
of the provisions of this Article 35 shall in any way limit, reduce, restrict or
modify the rights granted to Lessor pursuant to Articles 21, 23 and 24 of this
Lease. If the termination of this Lease is a result of an Event of Default,
then to the extent any monies are due to Lessee pursuant to this Article 35,
such sums shall be applied by Lessor to any damages suffered by Lessor as a
result of Lessee's Event of Default."
3. PERSONAL PROPERTY INVENTORY. Lessor and Lessee acknowledge and agree
that attached to this Amendment as Exhibit "B" is a list of all furniture,
fixtures, equipment, supplies and other tangible personal property located on
the Demised Premises as of the date of this Amendment, and constitutes the
"Personal Property" under the Lease.
4. CONTROLLING LANGUAGE. Insofar as the specific terms and provisions of
this Amendment purport to amend or modify or are in conflict with the specific
terms, provisions and exhibits of the Lease, the terms and provisions of this
Amendment shall govern and control; in all other respects, the terms, provisions
and exhibits of the Lease shall remain unmodified and in full force and effect.
5. LESSEE'S AUTHORITY. Lessee represents to Lessor that: (i) Lessee is a
corporation duly organized, validly existing and in good standing in the state
of its incorporation and is in good standing in the State of Idaho; (ii) Lessee
has full right and power to enter into and perform its obligations under this
Amendment and has taken all requisite action to authorize the execution,
delivery and performance of this Amendment, and this Amendment is a legally
valid and binding obligation of Lessee.
6. INCORPORATION INTO LEASE. Lessor and Lessee hereby agree that (a)
this Amendment is incorporated into and made a part of the Lease, (b) any and
all references to the Lease hereafter shall include this Amendment, and (c) the
Lease and all terms, conditions and provisions of the Lease are in full force
and effect as of the date hereof, except as modified and amended by this
Amendment.
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<PAGE>
7. COUNTERPARTS. This Amendment may be executed in counterparts, and all
said counterparts when taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, Lessor and Lessee have executed and delivered this
Amendment as of the date first written above.
LESSOR:
SKYVIEW ASSOCIATES, an Illinois
limited partnership
By:
-------------------------------
Name: Zev Karkomi
Title: General Partner
By:
-------------------------------
Name: Harvey Angell
Title: General Partner
SUNRISE HEALTHCARE CORPORATION, a
New Mexico corporation
By: /s/ William C. Warrick
-------------------------------
Name: William C. Warrick
Title: Vice President
11
<PAGE>
EXHIBIT 10.4
UNCONDITIONAL GUARANTY OF LEASE
THIS UNCONDITIONAL GUARANTY OF LEASE (this "Guaranty") dated as of
this 1st day of January, 1996, is given by SUN HEALTHCARE GROUP, INC., a
Delaware corporation ("Guarantor") to Skyview Associates, an Illinois limited
partnership ("Lessor").
I
Recitals
1.1 DESCRIPTION OF ORIGINAL LEASE. Lessor and Don Bybee and A. Keith
Holloway (collectively, the "Original Lessee") entered into that certain Lease
Agreement dated August 1, 1987 (the "Original Lease"), pursuant to which Lessor
leased to Original Lessee and Original Lessee leased from Lessor a nursing home
facility (the "Facility") located in Twin Falls, Idaho and located on the land
more particularly described on Exhibit "A" to the Lease.
1.2 DESCRIPTION OF ASSIGNMENT OF LEASE. Pursuant to that certain West
Magic Assignment and Assumption Agreement dated effective as of January 1, 1996
(the "Assignment Agreement"), Original Lessee assigned all of its right, title
and interest in, to and under the Original Lease to Sunrise Healthcare
Corporation, a New Mexico corporation ("Lessee"), and Lessee assumed all of
Original Lessee's duties and obligations under the Original Lease, and pursuant
to the terms of the Original Lease, the Assignment Agreement and the
transactions contemplated thereby require the written consent of Lessor. As a
condition to giving its consent to the Assignment Agreement and the transactions
contemplated thereby, Lessor has required that Guarantor execute and deliver
this Guaranty.
1.3 AMENDMENT OF ORIGINAL LEASE. Concurrently with the execution and
delivery of this Guaranty, Lessor and Lessee have entered into that certain
First Amendment to Lease Agreement dated of even date herewith (the "First
Amendment") in which Lessor and Lessee agree to amend certain provisions of the
Original Lease, all as more particularly set forth in the First Amendment. The
Original Lease, as amended by the First Amendment, is referred to herein as the
"Lease". This Guaranty is made in order to induce Lessor to consent to the
Assignment Agreement and the transactions contemplated thereby.
II
THE GUARANTY
2.1 GUARANTY. Guarantor hereby absolutely and unconditionally guarantees:
<PAGE>
(a) The prompt payment of each installment of fixed annual rent and
Additional Rent (as defined in the Lease) when and as the same become due under
the terms of the Lease;
(b) The prompt payment of all other sums payable by Lessee to Lessor
or any other person under the terms of the Lease, including, without limitation,
tax and any other deposits required under the terms of the Lease and damages due
to default by Lessee under the Lease; and
(c) The full and timely performance of each and every other
obligation of Lessee under the Lease;
for which Guarantor shall be jointly and severally liable with Lessee (the items
described in clauses (a), (b) and (c) above are hereinafter referred to as the
"Guarantor's Obligations").
2.2 Guarantor absolutely and unconditionally covenants and agrees that, in
the event that Lessee is unable to, or does not, pay, perform, or satisfy any of
the obligations or liabilities of Lessee under the Lease (the "Lessee's
Liabilities") in a full and timely manner, for any reason, including, without
limitation, the liquidation, dissolution, receivership, insolvency, bankruptcy,
assignment for the benefit of creditors, reorganization, arrangement,
composition, or readjustment of, or other similar proceedings affecting, the
status, composition, identity, existence, assets or obligations of Lessee, or
the disaffirmance or termination of any of the Lessee's Liabilities in or as a
result of any such proceedings, Guarantor shall pay, perform or satisfy the
Lessee's Liabilities and that no such occurrence shall in any way reduce or
affect the Guarantor's Obligations hereunder. Upon the occurrence of a default
in the prompt payment, timely performance and satisfaction in full of Lessee's
Liabilities, all of the Guarantor's Obligations shall, at the election of
Lessor, become immediately due and payable, provided, however, that nothing
herein shall be construed as granting Lessor any greater rights or remedies
against Guarantor as a result of a breach by Lessee of its obligations under the
Lease than Lessor has against Lessee as a result thereof under the terms of the
Lease.
2.3 Guarantor shall be directly and primarily liable, jointly and
severally with Lessee, for all of the foregoing. Lessor's rights under this
Guaranty shall be exercisable by action against Guarantor or joined with any
action against Lessee. Lessor need not proceed against Lessee as security for
Lessee's Liabilities or exhaust its remedies against Lessee or exercise any of
the other remedies available to Lessor under the Lease, prior to, concurrently
with or after proceeding against Guarantor to collect the full amount of the
Guarantor's Obligations hereunder. In the event that the Lessor may have
collected all or any part of Lessee's Liabilities and a claim for repayment of
all or any part thereof is made against Lessor, the liability of Guarantor
hereunder as to the amount so collected but subject to such claim shall not be
discharged or affected.
2
<PAGE>
III
OTHER PROVISIONS
3.1 ACTIONS BY LESSOR NOT TO AFFECT LIABILITY. The liability of Guarantor
hereunder shall not be affected by:
(a) The renewal, extension, modification or termination of the Lease
by lapse of time or otherwise (all of which are hereby authorized by
Guarantor) or a release or limitation of the liability of Lessee or
Lessee's estate under the Lease in any bankruptcy or insolvency proceeding;
(b) Any extension in the time for making any payment due under the
Lease or acceptance of partial payment or performance from Lessee;
(c) The acceptance or release by Lessor of any additional security
for the performance of Lessee's obligations under the Lease;
(d) The failure during any period of time whatsoever of Lessor to
attempt to collect any amount due under the Lease from Lessee or to
exercise any remedy available under such Lease or any other security
instrument given as security for performance of the same, in the event of a
default in the performance by Lessee of the terms of the Lease;
(e) Lessor's consent to any assignment or successive assignments of
the Lease, or any subletting or successive subletting of the Demised
Premises (as defined in the Lease);
(f) Any assignment or successive assignments of Lessor's interest
under the Lease (whether absolute or as collateral);
(g) Lessor's consent to any changed, expanded or different use of any
or all of the Demised Premises;
(h) The assertion by Lessor against Lessee of any rights or remedies
reserved or granted to Lessor under the Lease, including the commencement
by Lessor of any proceedings against Lessee; or
(i) Any dealings, transactions or other matter occurring between
Lessor and Lessee;
whether or not Guarantor shall have knowledge or have been notified of or agreed
to any of the foregoing.
3.2 WAIVERS. Guarantor hereby expressly waives:
(a) Notice of acceptance of this Guaranty;
(b) Presentment, demand, notice of dishonor, protest and notice of
protest, and all other notices whatsoever,
3
<PAGE>
including, without limitation, notice of any event or matter described in
Section 3.1 hereof;
(c) Any and all claims or defenses based upon lack of diligence in:
(i) collection of any amount the payment of which is
guaranteed hereby;
(ii) protection of any collateral or other security for the
Lease;
(iii) realization upon any other security given for the Lease;
or
(iv) the discharge, liquidation or reorganization of Lessee in
bankruptcy or the rejection of the Lease by Lessee or a
trustee in bankruptcy.
(d) Any and all defenses of suretyship;
3.3 NATURE OF REMEDIES. No delay or ommission on the part of Lessor in
the exercise of any right or remedy hereunder shall operate as a waiver thereof.
All remedies of Lessor hereunder shall be in addition to, and exercisable
consecutively or concurrently in any combination with, any and all remedies
available to Lessor by operation of law or under the Lease, and Lessor may
exercise its remedies hereunder without the necessity of any notice to Lessee or
Guarantor of nonpayment, nonobservance, nonperformance or other default by
Lessee under the Lease.
3.4 COSTS OF COLLECTION. Notwithstanding any provision of this Guaranty
to the contrary, in the event of the enforcement of this Guaranty by Lessor,
Lessor shall be entitled to collect from Guarantor, Lessor's costs of
collection, including, without limitation, reasonable attorneys' fees.
3.5 MECHANIC'S LIENS OR OTHER LIENS. Notwithstanding any provision of
this Guaranty to the contrary, in the event that any mechanic's liens, laborer's
and/or materialman's claims (collectively, the "Mechanic's Liens") are filed
against the Leased Property (as defined in the Lease), or any part thereof, and
not paid or discharged by Lessee in accordance with the terms of the Lease,
Lessor shall be entitled pursuant to this Guaranty to collect from Guarantor
from and after the expiration or earlier termination of the Lease, the total
aggregate amount of such unpaid or undischarged Mechanic's Liens.
3.6 NO SUBROGATION. Guarantor shall not be subrogated to any of the
rights of Lessor under the Lease, or in or to the Demised Premises or to any
other rights of Lessor by reason of any of the provisions of this Guaranty or by
reason of the performance by Guarantor or any of its obligations hereunder and
Guarantor shall
4
<PAGE>
look solely to Lessee for recoupment of any costs or expenses incurred by
Guarantor in performing its obligations hereunder.
3.7 ASSIGNMENT. This Guaranty shall not be assignable by Guarantor but
shall be binding upon the successors to and legal representatives of Guarantor.
This Guaranty shall be assignable by Lessor and shall inure to the benefit of
its successors and assigns.
3.8 GOVERNING LAW; CONSENT TO JURISDICTION. This Guaranty shall be
governed by, and construed in accordance with, the laws of the State of
Illinois. To induce Lessor to accept this Guaranty, Guarantor irrevocably
agrees that, subject to Lessor's sole and absolute election, ALL ACTIONS OR
PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO
THIS GUARANTY, SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF
CHICAGO, STATE OF ILLINOIS. GUARANTOR HEREBY CONSENTS AND SUBMITS TO THE
JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID CITY AND
STATE AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL
DIRECTED TO GUARANTOR AT THE ADDRESS STATED ON THE SIGNATURE PAGE HEREOF AND
SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF.
3.9 SEVERABILITY. If any term, restriction or covenant of this Guaranty
is deemed illegal or unenforceable, all other terms, restrictions and
circumstances subject hereto shall remain unaffected to the extent permitted by
law; and if any application of any term, restriction or covenant to any person
or circumstances is deemed illegal, the application of such term, restriction or
covenant to other persons and circumstances shall remain unaffected to the
extent permitted by law.
IN WITNESS WHEREOF, the undersigned has executed this Guaranty as of the
day and year first above written.
SUN HEALTHCARE GROUP, INC., a
Delaware corporation
By: /S/ WILLIAM C. WARRICK
---------------------------------------
Name: William C. Warrick
Title: Corporate Vice President
Address:
5131 Masthead N.E.
Albuquerque, NM 87109
5
<PAGE>
Exhibit 11.1
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
---------- ----------
(In thousands, except
share data)
<S> <C> <C>
PRIMARY:
Shares outstanding at beginning of period 47,916 45,021
Weighted average shares issued pursuant to:
Acquisition agreements 48 324
Employee benefit plans 33 35
Conversion of 6-1/2% Convertible
Subordinated Debentures due 2003 -- 1,337
Weighted average shares repurchased (711) --
Dilutive effect of outstanding stock options 500 1,236
---------- ----------
Weighted average number of common and
common equivalent shares outstanding 47,786 47,953
---------- ----------
---------- ----------
Net earnings before extraordinary loss on
early extinguishment of debt (1) $15,339 $10,541
Extraordinary loss -- (3,413)
---------- ----------
Net earnings (1) $15,339 $7,128
---------- ----------
---------- ----------
Net earnings before extraordinary loss per common
and common equivalent share (1) $0.32 $0.22
Extraordinary loss -- (0.07)
---------- ----------
Net earnings per common and common
equivalent share (1) $0.32 $0.15
---------- ----------
---------- ----------
</TABLE>
(Continued on next page)
<PAGE>
Exhibit 11.1
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
---------- ----------
(In thousands, except
share data)
<S> <C> <C>
FULLY DILUTED:
Weighted average number of common and common
equivalent shares used in primary calculation 47,786 47,953
Additional dilutive effect of stock options 31 --
Assumed conversion of dilutive convertible
debentures 4,714 4,985
------- ------
Fully diluted weighted average number of common
and common equivalent shares outstanding 52,531 52,938
------- ------
------- ------
Net earnings before extraordinary loss used in
primary calculation (1) $15,339 $10,541
Adjustment for reduced interest expense,
net of interest expense related to additional
borrowings to fund cash portion of merger
consideration assumed paid on conversion of
dilutive convertible debentures and net of
related income tax benefits 854 798
------- ------
Adjusted net earnings before extraordinary loss
used in fully diluted calculation 16,193 11,339
Extraordinary loss -- (3,413)
------- ------
Net earnings (1) $16,193 $7,926
------- ------
------- ------
Fully diluted net earnings before
extraordinary loss per common and common
equivalent share (1) $0.31 $0.21
Extraordinary loss -- (0.06)
------- ------
Fully diluted net earnings per common and
common equivalent share (1) $0.31 $0.15
------- ------
------- ------
</TABLE>
(1)For financial reporting purposes, a pro forma provision for income taxes has
been reflected in the computation of earnings per share to present taxes on the
results of operations of Golden Care for the period from January 1, 1995 to
March 31, 1995, as if Golden Care had not elected S corporation status and was
subject to and liable for Federal and state income taxes prior to the
termination of its S corporation status. Golden Care terminated its S
corporation status for Federal and state income tax purposes upon merging with
the Company on May 5, 1995.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SUN
HEALTHCARE GROUP, INC. MARCH 31, 1996 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 17,096
<SECURITIES> 0
<RECEIVABLES> 266,752
<ALLOWANCES> (10,000)
<INVENTORY> 0
<CURRENT-ASSETS> 341,880
<PP&E> 226,627
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,069,921
<CURRENT-LIABILITIES> 100,370
<BONDS> 0
0
0
<COMMON> 511
<OTHER-SE> 559,041
<TOTAL-LIABILITY-AND-EQUITY> 1,069,921
<SALES> 0
<TOTAL-REVENUES> 320,291
<CGS> 0
<TOTAL-COSTS> 264,629
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,220
<INTEREST-EXPENSE> 6,426
<INCOME-PRETAX> 25,565
<INCOME-TAX> 10,226
<INCOME-CONTINUING> 15,339
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,339
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>
