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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 JUNE 30, 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)
<TABLE>
<S> <C>
DELAWARE 85-0410612
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
101 Sun Lane, NE
Albuquerque, New Mexico 87109
(505) 821-3355
(Address and telephone number of Registrant)
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.
<TABLE>
<S> <C>
Yes /X/ No / /
</TABLE>
As of August 9, 1996, there were 49,075,573 shares of the Registrant's $.01
par value Common Stock outstanding, net of treasury shares.
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
INDEX
FORM 10-Q -- FOR THE QUARTER ENDED JUNE 30, 1996
------------------------
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------------
<S> <C> <C>
Item 1. Consolidated Financial Statements:
3
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
4
Consolidated Statements of Earnings
For the three and six months ended June 30, 1996 and 1995
6
Consolidated Statements of Cash Flows
For the six months ended June 30, 1996 and 1995
7
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
<CAPTION>
PART II. OTHER INFORMATION
<S> <C> <C>
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
(IN THOUSANDS,
EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents.......................................................... $ 9,415 $ 23,102
Restricted cash.................................................................... 2,315 1,914
Accounts receivable, net of allowance for doubtful accounts of $9,759 as of June
30, 1996, and $11,035 as of December 31, 1995..................................... 268,577 236,797
Other receivables.................................................................. 9,912 29,976
Prepaids and other assets.......................................................... 17,420 18,300
Deferred tax asset................................................................. 17,682 27,098
------------ ------------
Total current assets............................................................. 325,321 337,187
------------ ------------
Property and equipment, net.......................................................... 231,420 201,132
Restricted cash...................................................................... -- 8,132
Goodwill, net........................................................................ 410,039 421,660
Other assets, net.................................................................... 103,786 62,856
Deferred tax asset................................................................... 6,457 8,902
------------ ------------
Total assets....................................................................... $ 1,077,023 $1,039,869
------------ ------------
------------ ------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt.................................................. $ 14,831 $ 10,417
Accounts payable................................................................... 22,068 33,000
Accrued compensation and benefits.................................................. 35,080 23,742
Workers' compensation accrual...................................................... 5,832 6,339
Other accrued liabilities.......................................................... 23,513 26,542
------------ ------------
Total current liabilities........................................................ 101,324 100,040
------------ ------------
Long-term debt, net of current portion............................................... 379,724 348,460
Other long-term liabilities.......................................................... 15,629 17,052
------------ ------------
Total liabilities................................................................ 496,677 465,552
------------ ------------
Minority interest.................................................................... 2,687 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, 51,094,475 and
47,916,367 shares issued at June 30, 1996, and December 31, 1995, respectively.... 511 479
Additional paid-in capital......................................................... 613,052 568,054
Retained earnings.................................................................. 32,481 777
Cumulative translation adjustment.................................................. 26 (268)
------------ ------------
646,070 569,042
------------ ------------
Less:
Common stock held in treasury, at cost
2,030,116 shares as of June 30, 1996............................................ 25,069 --
Employee benefit trust, at market
3,041,522 shares as of June 30, 1996............................................ 43,342 --
------------ ------------
Total stockholders' equity....................................................... 577,659 569,042
------------ ------------
Total liabilities and stockholders' equity....................................... $ 1,077,023 $1,039,869
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
1996 1995
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Total net revenues.............................................................. $ 325,452 $ 278,980
----------- -----------
Costs and expenses:
Operating..................................................................... 267,233 228,217
Corporate general and administrative.......................................... 14,978 12,369
Provision for losses on accounts receivable................................... 1,243 939
Depreciation and amortization................................................. 8,237 6,471
Interest, net................................................................. 6,485 5,878
Merger expenses............................................................... -- 5,800
----------- -----------
Total costs and expenses.................................................... 298,176 259,674
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Earnings before income taxes.................................................... 27,276 19,306
Income taxes.................................................................... 10,910 10,565
----------- -----------
Net earnings.................................................................. $ 16,366 $ 8,741
----------- -----------
----------- -----------
Pro forma data:
Historical earnings before income taxes....................................... $ 19,306
Pro forma income taxes........................................................ 10,510
-----------
Pro forma net earnings........................................................ $ 8,796
-----------
-----------
Net earnings per common and common equivalent share:
Primary....................................................................... $ 0.35 $ 0.18
----------- -----------
----------- -----------
Fully diluted................................................................. $ 0.34 $ 0.18
----------- -----------
----------- -----------
Weighted average number of common and common equivalent shares outstanding:
Primary....................................................................... 46,618 47,977
----------- -----------
----------- -----------
Fully diluted................................................................. 51,332 52,691
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Total net revenues...................................................................... $ 645,744 $ 535,714
----------- -----------
Costs and expenses:
Operating............................................................................. 531,862 437,586
Corporate general and administrative.................................................. 29,177 24,916
Provision for losses on accounts receivable........................................... 2,463 2,277
Depreciation and amortization......................................................... 16,489 12,945
Interest, net......................................................................... 12,911 9,615
Merger expenses....................................................................... -- 5,800
Conversion expense.................................................................... -- 3,256
----------- -----------
Total costs and expenses............................................................ 592,902 496,395
----------- -----------
Earnings before income taxes and extraordinary loss..................................... 52,842 39,319
Income taxes............................................................................ 21,137 19,752
----------- -----------
Net earnings before extraordinary loss................................................ 31,705 19,567
Extraordinary loss from early extinguishment of debt, net of income tax benefit of
$2,372................................................................................. -- (3,413)
----------- -----------
Net earnings.......................................................................... $ 31,705 $ 16,154
----------- -----------
----------- -----------
Pro forma data:
Historical earnings before income taxes and extraordinary loss........................ $ 39,319
Pro forma income taxes................................................................ 19,982
-----------
Pro forma net earnings before extraordinary loss...................................... 19,337
Extraordinary loss.................................................................... (3,413)
-----------
Pro forma net earnings................................................................ $ 15,924
-----------
-----------
Net earnings per common and common equivalent share:
Primary
Net earnings before extraordinary loss.............................................. $ 0.67 $ 0.40
Extraordinary loss.................................................................. -- (0.07)
----------- -----------
Net earnings........................................................................ $ 0.67 $ 0.33
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----------- -----------
Fully diluted
Net earnings before extraordinary loss.............................................. $ 0.64 $ 0.39
Extraordinary loss.................................................................. -- (0.06)
----------- -----------
Net earnings........................................................................ $ 0.64 $ 0.33
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----------- -----------
Weighted average number of common and common equivalent shares outstanding:
Primary............................................................................... 47,187 48,005
----------- -----------
----------- -----------
Fully diluted......................................................................... 51,954 52,841
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</TABLE>
See accompanying notes to consolidated financial statements.
5
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................................................. $ 31,705 $ 16,154
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.......................................................... 16,489 12,945
Provision for losses on accounts receivable............................................ 2,463 2,277
Other, net............................................................................. (1,091) (759)
Changes in operating assets and liabilities:
Accounts receivable.................................................................. (36,329) (49,749)
Other current assets................................................................. 256 (1,589)
Other current liabilities............................................................ (3,018) (14,650)
Income taxes payable................................................................. 28,055 9,308
--------- ---------
Net cash provided by (used for) operating activities................................. 38,530 (17,022)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net................................................................ (19,954) (44,642)
Acquisitions, net of cash acquired....................................................... (34,302) (10,341)
Purchases of minority interest in Ashbourne PLC.......................................... (9,631) (25,874)
Purchase of minority interest in OmniCell Technologies, Inc.............................. (25,332) --
Net proceeds from sale of SunSurgery Corporation......................................... 24,827 --
Proceeds from sale and lease back of property and equipment.............................. 9,809 --
Cash flows from assets held for sale..................................................... -- (4,643)
Other assets expenditures................................................................ (9,065) (9,474)
--------- ---------
Net cash used for investing activities................................................. (63,648) (94,974)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings................................................................ 39,567 150,800
Long-term debt repayments................................................................ (3,602) (2,318)
Repurchase of 11 3/4% Senior Subordinated Notes due 2002................................. -- (89,370)
Conversion of 6 1/2% Convertible Subordinated Debentures due 2003........................ -- (16,859)
Proceeds from issuance of common stock................................................... 718 601
Purchases of treasury stock.............................................................. (25,069) --
Other financing activities............................................................... (98) (707)
Distribution of prior S corporation earnings............................................. -- (333)
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Net cash provided by financing activities.............................................. 11,516 41,814
--------- ---------
Effect of exchange rate on cash and cash equivalents....................................... (85) --
--------- ---------
Net decrease in cash and cash equivalents.................................................. (13,687) (70,182)
Cash and cash equivalents at beginning of period........................................... 23,102 78,738
--------- ---------
Cash and cash equivalents at end of period................................................. $ 9,415 $ 8,556
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS):
Cash paid (received) during period for:
Interest, net of $407 and $2,024 capitalized in the six months ending June 30, 1996 and
1995, respectively.................................................................... $ 13,866 $ 13,502
--------- ---------
--------- ---------
Income taxes........................................................................... $ (6,918) $ 8,071
--------- ---------
--------- ---------
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 5).
The Company's acquisitions during the six months ended June 30, 1996 and 1995, involved
the following (in thousands):
Value of assets acquired................................................................. $ 40,274 $ 22,733
Liabilities assumed...................................................................... (5,011) (3,644)
Value of stock issued.................................................................... (961) (8,748)
--------- ---------
Cash payments made, net of cash received from others..................................... $ 34,302 $ 10,341
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<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 June 30, 1996 and December 31, 1995,
and the results of its operations and its cash flows for the three and six month
periods ended June 30, 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 Amended Annual Report on
Form 10-K/A-1 for the year ended December 31, 1995. In the Form 10-K/A-1, the
Company restated its financial statements for the years ending December 31, 1994
and 1995 in order to assign a portion of certain accounts receivable write-offs
that were reported in the fourth quarter of 1995 to the fourth quarter of 1994.
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 June 30,
1995 financial statements include the accounts and operations of Golden Care for
all periods prior to the merger.
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 June 30, 1995 financial statements include the
accounts and operations of CareerStaff for all periods prior to the merger.
7
<PAGE>
Separate results of the combining entities for periods prior to the
combinations are as follows except as described in Note (a) below (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1995
------------- -------------
<S> <C> <C>
Net revenues:
Sun............................................................................... $ 251,845 $ 485,538
CareerStaff....................................................................... 24,963 45,116
Golden Care....................................................................... 2,544 5,675
Less intercompany revenues........................................................ (372) (615)
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$ 278,980 $ 535,714
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------------- -------------
Net earnings:
Sun............................................................................... $ 7,580 $ 13,261
CareerStaff....................................................................... 1,294 2,319
Golden Care....................................................................... (133) 574
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$ 8,741 $ 16,154
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Pro forma net earnings (See Note 8):
Sun............................................................................... $ 7,580 $ 13,261
CareerStaff....................................................................... 1,294 2,319
Golden Care....................................................................... (78) 344
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$ 8,796 $ 15,924
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------------- -------------
</TABLE>
- ------------------------
(a) Sun results for the three and six months ended June 30, 1995 include the
results of CareerStaff and Golden Care and the elimination of the
intercompany revenues for the period following the consummation of each of
the mergers.
During the six months ended June 30, 1996, the Company acquired ownership of
or leasehold rights to six long-term care facilities in the United Kingdom and
eleven long-term care facilities in the United States, net of three long-term
care facilities whose leasehold rights were sold in the second quarter of 1996.
As of December 31, 1995, six of these facilities were under the control of the
Company pursuant to operating leases. During the six months ended June 30, 1996,
the Company also acquired nine outpatient rehabilitation clinics in Canada and a
pharmacy in the United Kingdom.
3. SALE OF SUNSURGERY
In June 1996, the Company completed the sale of all of the outstanding stock
of SunSurgery Corporation, its ambulatory surgery subsidiary, for approximately
$27,900,000 in cash and the assumption of $5,600,000 in debt by the buyer. As of
the date of the sale, SunSurgery had approximately $3,100,000 in cash which was
retained by the buyer. The sale resulted in no material gain or loss to the
Company.
4. COMMITMENTS
As of June 30, 1996 the Company had capital commitments of approximately
$14,600,000 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 7,900,000 British pounds
($12,200,000 as of June 30, 1996) including various contracts related to the
development and construction of eight new long-term care facilities in the
United Kingdom.
5. 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
8
<PAGE>
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.
6. 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") for approximately $37,700,000. The Trust will be used to fund future
obligations under certain 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 number 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 of approximately $31,000
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 June 30, 1996, 8,478 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 June 30, 1996, options to purchase 148,000 shares were
outstanding under the Plan.
7. 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.
8. 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 and six
months ended June 30, 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.
9
<PAGE>
9. 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 with 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 January 1, 1995. 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.
10. 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.
(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. The CareerStaff Litigation was voluntarily dismissed without
prejudice on May 8, 1996.
10
<PAGE>
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. Relief sought is
unspecified.
On or about January 23, 1996, two former stockholders of Golden Care 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 former Golden Care
stockholders. There can be no assurance that the Golden Care Litigation will not
have an impact on the Company accounting for the merger. Relief sought is
unspecified.
On September 8, 1995, a derivative action was filed in the United States
District Court for the District of New Mexico, captioned BRICKELL PARTNERS V.
TURNER, ET AL. The complaint was not served on any defendant. On June 19, 1996,
an amended complaint 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 was
filed and subsequently served on the defendants. On August 5, 1996, the District
Court dismissed this action without prejudice for failure to serve the
defendants within the required time period.
The Company has filed motions to dismiss the securities class actions and
the Golden Care Litigation. In the event that any claims survive such motions,
the Company believes that it has meritorious defenses to the complaints. The
Company believes the securities class actions and the Golden Care Litigation
will not have a material adverse impact on its results of operations or
financial condition, although the unfavorable resolution of any of these actions
in any reporting period could have a material adverse impact on the Company's
results of operations for that period.
11
<PAGE>
11. 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>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Current assets........................................................................ $ 117,488 $ 130,794
Noncurrent assets..................................................................... 434,928 461,592
Current liabilities................................................................... 30,911 34,823
Noncurrent liabilities................................................................ 85,456 91,150
Due to parent......................................................................... 144,510 168,222
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Net revenues................................................ $116,357 $111,721 $233,171 $213,352
Costs and expenses.......................................... 105,280 101,271 213,175 198,896
-------- -------- -------- --------
Earnings before intercompany charges, income taxes and
extraordinary loss......................................... 11,077 10,450 19,996 14,456
Intercompany charges (1).................................... 13,115 4,092 25,926 8,052
-------- -------- -------- --------
Earnings (loss) before income taxes and extraordinary
loss....................................................... (2,038) 6,358 (5,930) 6,404
Income taxes (benefit)...................................... (135) 2,545 (983) 4,113
-------- -------- -------- --------
Net earnings (loss) before extraordinary loss............. (1,903) 3,813 (4,947) 2,291
Extraordinary loss, net of income tax benefit............... -- -- -- (3,413)
-------- -------- -------- --------
Net earnings (loss)......................................... $ (1,903) $ 3,813 $ (4,947) $ (1,122)
-------- -------- -------- --------
-------- -------- -------- --------
</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 $8,146,000 and
$4,092,000 for the three months ended June 30, 1996 and 1995, respectively,
and $16,123,000 and $8,052,000 for the six months ended June 30, 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 and six months ended
June 30, 1996, for the use of Sun trademarks were $1,639,000 and $3,242,000,
respectively. Intercompany interest charged to Mediplex for the three and
six months ended June 30, 1996, for advances from Sun was $3,330,000 and
$6,561,000, respectively. Prior to September 30, 1995, Sun did not charge
Mediplex for the licensing agreements and the financing agreements.
12
<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 and six months ended June
30, 1996, as compared to the results of operations for the three and six months
ended June 30, 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 and six
months ended June 30, 1995, reflect the combined operations.
At June 30, 1995, the Company had 142 long-term and subacute care facilities
with 15,397 licensed beds, including 22 long-term care facilities with 1,072
registered beds operated by Exceler Health Care PLC in the United Kingdom.
Between June 30, 1995, and June 30, 1996, the Company acquired or developed 30
long-term and subacute care facilities with 2,933 licensed beds and sold the
operating lease rights to three long-term care facilities with 462 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 June 30, 1996, the Company
provided its therapy services to 673 nonaffiliated facilities, an increase of
108 facilities from the 565 nonaffiliated facilities serviced at June 30, 1995.
At June 30, 1996 and 1995, the Company's temporary therapy staffing
operations had 20 and 17 division offices, respectively.
Between June 30, 1995, and June 30, 1996, the Company acquired an
institutional regional pharmacy in South Carolina and developed two
institutional regional pharmacies in Massachusetts and Texas.
13
<PAGE>
The following table sets forth certain operating data for the Company as of
the dates indicated:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1995
----------- ---------
<S> <C> <C>
Long-term and Subacute Care Facility Operations
Long-term and subacute care facilities:
Domestic operations.................................................................. 133 120
Foreign operations................................................................... 36 22
----------- ---------
Total.............................................................................. 169 142
----------- ---------
----------- ---------
Licensed beds:
Domestic operations.................................................................. 16,066 14,325
Foreign operations................................................................... 1,802 1,072
----------- ---------
Total.............................................................................. 17,868 15,397
----------- ---------
----------- ---------
Therapy Service Operations:
Nonaffiliated facilities served........................................................ 673 565
Affiliated facilities served........................................................... 128 116
----------- ---------
Total.............................................................................. 801 681
----------- ---------
----------- ---------
Temporary Therapy Staffing Service Operations
Hours billed to nonaffiliates:
Three months ended June 30,............................................................ 590,504 509,132
Six months ended June 30,.............................................................. 1,135,486 923,271
Institutional Pharmaceutical Operations:
Nonaffiliated facilities served........................................................ 290 218
Affiliated facilities served........................................................... 104 104
----------- ---------
Total.............................................................................. 394 322
----------- ---------
----------- ---------
</TABLE>
14
<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 JUNE 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C> <C> <C>
Long-term and subacute care services........................ $206,257 63% $186,810 67%
Therapy services to nonaffiliates........................... 53,652 16 40,788 15
Temporary therapy staffing services to nonaffiliates........ 28,398 9 24,591 9
Institutional pharmaceutical services to nonaffiliates...... 16,375 5 11,830 4
Foreign operations.......................................... 14,209 4 6,390 2
Ambulatory surgery.......................................... 4,989 2 7,197 3
Management fees and other................................... 1,572 1 1,374 --
-------- --- -------- ---
Total net revenues...................................... $325,452 100% $278,980 100%
-------- --- -------- ---
-------- --- -------- ---
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C> <C> <C>
Long-term and subacute care services........................ $411,786 64% $362,407 68%
Therapy services to nonaffiliates........................... 106,300 16 79,252 15
Temporary therapy staffing services to nonaffiliates........ 54,435 8 44,501 8
Institutional pharmaceutical services to nonaffiliates...... 32,492 5 22,630 4
Foreign operations.......................................... 25,843 4 11,231 2
Ambulatory surgery.......................................... 11,857 2 12,997 2
Management fees and other................................... 3,031 1 2,696 1
-------- --- -------- ---
Total net revenues...................................... $645,744 100% $535,714 100%
-------- --- -------- ---
-------- --- -------- ---
</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 $27,866,000 and $22,391,000 for
the three months ended June 30, 1996 and 1995, respectively, and $54,532,000 and
$42,508,000 for the six months ended June 30, 1996 and 1995, respectively.
Revenues provided to affiliated facilities for institutional pharmaceutical
services were $4,753,000 and $3,419,000 for the three months ended June 30, 1996
and 1995, respectively, and $9,570,000 and $5,933,000 for the six months ended
June 30, 1996 and 1995, respectively.
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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total net revenues.............................................................. 100% 100% 100% 100%
--- --- --- ---
Costs and expenses:
Operating..................................................................... 82.1 81.8 82.3 81.7
Corporate general and administrative.......................................... 4.6 4.4 4.5 4.7
Provision for losses on accounts receivable................................... 0.4 0.3 0.4 0.4
Depreciation and amortization................................................. 2.5 2.4 2.6 2.4
Interest, net................................................................. 2.0 2.1 2.0 1.8
Merger expenses............................................................... -- 2.1 -- 1.1
Conversion expense............................................................ -- -- -- 0.6
--- --- --- ---
Total costs and expenses.................................................... 91.6 93.1 91.8 92.7
--- --- --- ---
Earnings before income taxes and extraordinary loss........................... 8.4 6.9 8.2 7.3
Income taxes (1).............................................................. 3.4 3.7 3.3 3.7
--- --- --- ---
Net earnings before extraordinary loss........................................ 5.0 3.2 4.9 3.6
Extraordinary loss............................................................ -- -- -- 0.6
--- --- --- ---
Net earnings.................................................................. 5.0% 3.2% 4.9% 3.0%
--- --- --- ---
--- --- --- ---
</TABLE>
- ------------------------
(1) Income taxes for the three and six months ended June 30, 1995, reflects pro
forma taxes of Golden Care prior to its election to be taxed as a C
Corporation, which occurred in May 1995.
15
<PAGE>
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 sold its ambulatory
surgery subsidiary in the second quarter of 1996.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Total net revenues for the three months ended June 30, 1996, increased 17%
from $278,980,000 for the three months ended June 30, 1995 to $325,452,000.
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 10% from $186,810,000 for the
three months ended June 30, 1995, to $206,257,000 for the three months ended
June 30, 1996. Approximately $18,098,000 of this increase resulted from 16
facilities acquired or opened since June 30, 1995 and two facilities opened
during the three months ended June 30, 1995. Net revenue increases of $6,679,000
were primarily attributable to an increase in revenue per patient day since June
30, 1995, on a same facility basis for the 118 facilities in operation all of
the three months ended June 30, 1996 and 1995. The increase in revenue per
patient day was a result of overall rate increases and the expansion of subacute
services since June 30, 1995. The increase was offset by a $5,330,000 reduction
in net revenues due to the disposition of three facilities in the second quarter
of 1996.
Net revenues from therapy services increased 32% from $40,788,000 for the
three months ended June 30, 1995, to $53,652,000 for the three months ended June
30, 1996, primarily as a result of an increase in the number of nonaffiliated
facilities served from 565 facilities at June 30, 1995, to 673 facilities at
June 30, 1996.
Net revenues from temporary therapy staffing services increased 15% from
$24,591,000 for the three months ended June 30, 1995, to $28,398,000 for the
three months ended June 30, 1996, primarily as a result of an increase in
service hours billed to nonaffiliates from 509,132 hours in 1995 to 590,504
hours in 1996. The increase in service hours billed was attributable primarily
to the expansion of services at division offices open for over a year.
Net revenues from institutional pharmaceutical services increased 38% from
$11,830,000 for the three months ended June 30, 1995, to $16,375,000 for the
three months ended June 30, 1996. The growth in net revenues was primarily the
result of the opening or acquisition of three regional pharmacies since June 30,
1995. The growth in net revenues was also a result of the increase in the number
of nonaffiliated facilities served from 218 at June 30, 1995, to 290 at June 30,
1996.
Operating expenses, which includes rent expense of $21,821,000 and
$17,721,000 for the three months ended June 30, 1996 and 1995, respectively,
increased 17% from $228,217,000 for the three months ended June 30, 1995 to
$267,233,000 for the three months ended June 30, 1996. The increase resulted
primarily from the net increase of 27 facilities and the growth in therapy and
temporary therapy staffing services. Operating expenses as a percentage of net
revenues increased from 81.8% for the three months ended June 30, 1995, to 82.1%
for the three months ended June 30, 1996. This increase was primarily
attributable to increased operating costs without a corresponding increase in
billing rates due to competitive pressures. The increase can also be attributed
to acquisitions since April 1, 1995, which during the integration period have
experienced lower operating margins as the Company implements its operating
strategies. In addition, a decline in occupancy rates in the long-term and
subacute care facilities open all of the three months ended June 30, 1996 and
1995, from 92.6% to 92.1%, contributed to the increase.
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, increased 21% from $12,369,000 for the
three months ended June 30, 1995, to $14,978,000 for the three months ended June
30, 1996. As a percentage of net revenues, corporate general and administrative
expenses increased from 4.4% for the three months ended June 30, 1995,
16
<PAGE>
to 4.6% for the three months ended June 30, 1996. The increase was primarily due
to an increase in costs relating to the expansion of the Company's corporate
infrastructure to support the developing foreign operations and implementation
of new business strategies.
Depreciation and amortization increased 27% from $6,471,000 for the three
months ended June 30, 1995, to $8,237,000 for the three months ended June 30,
1996. As a percentage of net revenues, depreciation and amortization expense
remained relatively constant at 2.5% and 2.4% for the three months ended June
30, 1996 and 1995, respectively.
Net interest expense increased 10% from $5,878,000 for the three months
ended June 30, 1995, to $6,485,000 for the three months ended June 30, 1996. As
a percentage of net revenues, interest expense remained relatively constant at
2.0% and 2.1% for the three months ended June 30, 1996 and 1995, respectively.
The Company's effective tax rate was 40% for the three months ended June 30,
1996, as compared to the pro forma effective tax rate of 41% for the three
months ended June 30, 1995, after excluding the nondeductible portion of the
merger expenses and the deferred income tax charge relating to the conversion of
Golden Care from a S corporation to a C corporation upon merging with the
Company. The pro forma provision for income taxes for the three months ended
June 30, 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.
The decrease in the effective tax rate was due to the reduced impact of the
nondeductible portion of goodwill recorded in connection with the Mediplex
merger and a more favorable mix in the state income than the prior year.
Net earnings increased 86% from pro forma net earnings of $8,796,000 for the
three months ended June 30, 1995, to $16,366,000 for the three months ended June
30, 1996. Net earnings increased 10% from pro forma net earnings before the
merger expenses and the deferred income tax charge relating to Golden Care's
conversion from a S corporation to a C corporation for income tax purposes of
$14,812,000 for the three months ended June 30, 1995, to $16,366,000 for the
three months ended June 30, 1996. As a percentage of net revenues, net earnings
were 5.0% for the three months ended June 30, 1996, as compared to 5.3% for the
three months ended June 30, 1995, excluding the merger expenses and the deferred
income tax charge relating to Golden Care's conversion from a S corporation to a
C corporation for income tax purposes. The decline in net earnings as a
percentage of net revenues was primarily due to decreased operating margins as
discussed above.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Total net revenues for the six months ended June 30, 1996, increased 21%
from $535,714,000 for the six months ended June 30, 1995 to $645,744,000.
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 14% from $362,407,000 for the
six months ended June 30, 1995, to $411,786,000 for the six months ended June
30, 1996. Approximately $41,639,000 of this increase resulted from 16 facilities
acquired or opened since June 30, 1995 and five facilities opened during the six
months ended June 30, 1995. Net revenue increases of $13,227,000 were primarily
due to an increase in revenue per patient day since June 30, 1995, on a same
facility basis for the 115 facilities in operation all of the six months ended
June 30, 1996 and 1995. The increase in revenue per patient day was a result of
overall rate increases and the expansion of subacute services since June 30,
1995. The increase was offset by a $5,487,000 reduction in net revenues due to
the disposition of three facilities in the second quarter of 1996.
Net revenues from therapy services increased 34% from $79,252,000 for the
six months ended June 30, 1995, to $106,300,000 for the six months ended June
30, 1996, primarily as a result of an increase in the number of nonaffiliated
facilities served from 565 facilities at June 30, 1995, to 673 facilities at
June 30, 1996.
17
<PAGE>
Net revenues from temporary therapy staffing services increased 22% from
$44,501,000 for the six months ended June 30, 1995, to $54,435,000 for the six
months ended June 30, 1996, primarily as a result of an increase in service
hours billed to nonaffiliates from 923,271 hours in 1995 to 1,135,486 hours in
1996. The increase in service hours billed was 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 44% from
$22,630,000 for the six months ended June 30, 1995, to $32,492,000 for the six
months ended June 30, 1996. The growth in net revenues was primarily the result
of the opening or acquisition of four regional pharmacies during 1996 and 1995.
The growth in net revenues was also a result of the increase in the number of
nonaffiliated facilities served from 218 at June 30, 1995, to 290 at June 30,
1996.
Operating expenses, which includes rent expense of $43,294,000 and
$35,063,000 for the six months ended June 30, 1996 and 1995, respectively,
increased 22% from $437,586,000 for the six months ended June 30, 1995 to
$531,862,000 for the six months ended June 30, 1996. The increase resulted
primarily from the net increase of 27 facilities and the growth in therapy and
temporary therapy staffing services. Operating expenses as a percentage of net
revenues increased from 81.7% for the six months ended June 30, 1995, to 82.3%
for the six months ended June 30, 1996. This increase was primarily attributable
to increased operating costs without a corresponding increase in billing rates
due to competitive pressures. The increase can also be attributed to
acquisitions since January 1, 1995, which during the integration period have
experienced lower operating margins as the Company implements its operating
strategies. In addition, a decline in occupancy rates in the long-term and
subacute care facilities open all of the six months ended June 30, 1996 and
1995, from 92.6% to 92.4%, contributed to the increase.
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, increased 17% from $24,916,000 for the
six months ended June 30, 1995, to $29,177,000 for the six months ended June 30,
1996. As a percentage of net revenues, corporate general and administrative
expenses decreased from 4.7% for the six months ended June 30, 1995, to 4.5% for
the six months ended June 30, 1996. The decrease was primarily due to increases
in net revenues without a proportionate increase in corporate general and
administrative expenses. The decrease was offset by the expansion of the
Company's corporate infrastructure to support the developing foreign operations
and implementation of new business strategies.
Depreciation and amortization increased 27% from $12,945,000 for the six
months ended June 30, 1995, to $16,489,000 for the six months ended June 30,
1996. As a percentage of net revenues, depreciation and amortization expense
increased from 2.4% for the six months ended June 30, 1995 to 2.6% for the six
months ended June 30, 1996. This increase was primarily due to the addition of
two new corporate office buildings in 1996.
Net interest expense increased 34% from $9,615,000 for the six months ended
June 30, 1995, to $12,911,000 for the six months ended June 30, 1996. As a
percentage of net revenues, interest expense increased from 1.8% for the six
months ended June 30, 1995, to 2.0% for the six months ended June 30, 1996. The
increase was primarily due to increased borrowings under the Company's credit
facility most of which was used to fund acquisitions, including purchases of
minority interests in Ashbourne PLC and OmniCell Technologies, Inc., capital
expenditures and the repurchase of 2,030,116 shares of the Company's common
stock at a cost, including commissions, of $25,069,000.
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 six months ended June 30,
1996, as compared to the pro forma effective tax rate of 41% for the six months
ended June 30, 1995, after excluding the
18
<PAGE>
nondeductible conversion fee, the nondeductible portion of the merger expenses
and the deferred tax charge relating to the conversion of Golden Care from a S
corporation to a C corporation upon merging with the Company. The pro forma
provision for income taxes for the six months ended June 30, 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. The decrease in effective
tax rate was due to the reduced impact of the nondeductible portion of goodwill
recorded in connection with the Mediplex merger and a more favorable mix in the
state income than the prior year.
Net earnings increased 99% from pro forma net earnings of $15,924,000 for
the six months ended June 30, 1995, to $31,705,000 for the six months ended June
30, 1996. Net earnings increased 11% from pro forma net earnings before the
extraordinary loss for early extinguishment of debt, the conversion fee, the
merger expenses, and the deferred income tax charge relating to Golden Care's
conversion from a S corporation to a C corporation for income tax purposes of
$28,609,000 for the six months ended June 30, 1995, to $31,705,000 for the six
months ended June 30, 1996. As a percentage of net revenues, net earnings were
4.9% for the six months ended June 30, 1996, as compared to 5.3% for the six
months ended June 30, 1995, before the extraordinary loss for early
extinguishment of debt, the conversion fee, the merger expenses and the deferred
income tax charge relating to Golden Care's conversion from a S corporation to a
C corporation for income tax purposes. The decline in net earnings as a
percentage of net revenues was primarily due to decreased operating margins as
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital of $223,997,000, including
cash and cash equivalents of $9,415,000, as compared to working capital of
$237,147,000, including cash and cash equivalents of $23,102,000, at December
31, 1995. For the six months ended June 30, 1996, net cash provided by
operations was $38,530,000 compared to net cash used for operations for the six
months ended June 30, 1995, of $17,022,000. The net cash provided by operations
for the six months ended June 30, 1996 as compared to the six months ended June
30, 1995 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 Medicare interim payments received by the Company's long-term care
facilities were lower than the reimbursement due for services provided and
because of the growth in the therapy and institutional pharmaceutical services
businesses since December 1995. In addition, collections of therapy services
receivables from nonaffiliated facilities have slowed because payment is
dependent primarily upon the customer's receipt of payment from fiscal
intermediaries which, in some instances, have been delayed because fiscal
intermediaries are conducting reviews of the customer's therapy claims. Other
significant operating uses of cash for the six months ended June 30, 1996, were
payments of $14,273,000 for interest. In the six months ended June 30, 1996, the
Company received a net income tax refund of $6,918,000.
From time to time, the Company submits to its fiscal intermediaries various
requests for additional reimbursement of costs based on exceptions to the
Medicare established routine cost limitations for reimbursement ("RCLs"). These
exceptions are permitted under the Medicare regulations to reimburse providers
for the costs of treating higher acuity patients than are routinely seen in a
long-term care facility. Included in net revenues are amounts related to
exceptions to the RCL's of $3,086,000 and $2,490,000 for the three months ended
June 30, 1996 and 1995, respectively. The Company recorded revenue of $6,541,000
and $3,233,00 for exceptions to the RCLs in the six months ended June 30, 1996
and 1995, respectively. These amounts represent management's estimate of amounts
that will ultimately be approved and paid by its fiscal intermediaries. Accounts
receivable include requests for exceptions to the RCLs of $17,170,000 and
$11,115,000 as of June 30, 1996 and December 31, 1995. As of June 30, 1996, the
Company has submitted 36 exception requests and has received approval on 26
exception requests. Amounts realizable are subject to final settlement of the
respective cost reports.
19
<PAGE>
The Company incurred $19,954,000 and $44,642,000 in capital expenditures for
the six months ended June 30, 1996 and 1995, respectively. Substantially all
such expenditures during the six months ended June 30, 1996, were for the
continued development and construction of eight new facilities in the United
Kingdom, one new facility in the United States, 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 June 30, 1996, of approximately $14,600,000 in the United
States and approximately 7,900,000 British pounds ($12,200,000 as of June 30,
1996) in the United Kingdom. These include contractual commitments to improve
existing facilities and to develop and construct one and eight facilities in the
United States and United Kingdom, respectively.
The Company paid $34,302,000 and $10,341,000 for acquisitions during the six
months ended June 30, 1996 and 1995, respectively. The Company also paid
$9,631,000 and $25,874,000 for the acquisition of minority interest investments
in Ashbourne PLC in the six months ended June 30, 1996 and 1995, respectively,
and paid $25,332,000 for the acquisition of a minority interest investment in
OmniCell Technologies, Inc. during the six months ended June 30, 1996. During
the six months ended June 30, 1996, the Company acquired the ownership or the
leasehold rights to six long-term care facilities in the United Kingdom and
eleven long-term care facilities in the United States. In addition, the Company
sold the leasehold rights to three long-term care facilities in the second
quarter of 1996. As of December 31, 1995, six of these facilities were under the
control of the Company pursuant to operating leases. The Company also acquired
nine outpatient rehabilitation clinics in Canada and a pharmacy in the United
Kingdom.
In June 1996, the Company completed the sale of all of the outstanding stock
of SunSurgery Corporation, its ambulatory surgery subsidiary, for approximately
$27,900,000 in cash and the assumption of $5,600,000 in debt by the buyer. As of
the date of the sale, SunSurgery had approximately $3,100,000 in cash which was
retained by the buyer.
In 1995, the Company accrued $3,905,000 for costs to defend itself against
various shareholder litigation suits and to respond to the investigation of the
Company's rehabilitation therapy subsidiary by the United States Department of
Health and Human Services' Office of the Inspector General (the "OIG"). In the
six months ended June 30, 1996, the Company charged $1,877,000 against this
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 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.
20
<PAGE>
The Company's ongoing capital requirements relate to the costs associated
with its facilities under construction, routine capital expenditures, potential
acquisitions and implementation of new business strategies.
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 as described
below. 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 may be 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 reimbursement
amounts are settled. Net revenues realizable under third party payor agreements
are subject to change due to examination and retroactive adjustment by payors
during the settlement process. Payors may disallow in whole or and in part
requests for reimbursement based on determinations that certain costs are not
reimbursable or reasonable or because additional supporting documentation is
necessary. The Company recognizes revenues from third party payors and accrues
estimated settlement amounts in the period in which the related services are
provided. The Company estimates these settlement balances by making subjective
determinations based on its prior settlement experience. Differences between the
net amounts accrued and subsequent settlements are recorded in operations at the
time of settlement. The majority of third party payor balances are settled two
to three years following the provision of services. The Company's results of
operations and financial condition may also be affected by the timing of
reimbursement payments and rate adjustments from third party payors. The Company
has from time to time experienced delays in receiving reimbursement from
intermediaries.
Various cost containment measures 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 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
21
<PAGE>
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.
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. In these
instances where this issue has been litigated by others, the final determination
of the appropriate threshold to satisfy the "substantial portion" requirement
have varied.
Net revenues from rehabilitation therapy services provided to nonaffiliated
facilities represented 66% and 64% of total rehabilitation services net revenues
for the six months ended June 30, 1996, and the twelve months ended December 31,
1995, respectively. Respiratory therapy services provided to nonaffiliated
facilities represented 57% and 64% of total respiratory therapy services net
revenues for the six months ended June 30, 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 six months ended June 30, 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
22
<PAGE>
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
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.
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,
23
<PAGE>
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,
which has resulted in higher than required therapist staffing levels and has
affected the private pay enrollment in certain in-patient 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. The CareerStaff Litigation was
voluntarily dismissed without prejudice on May 8, 1996.
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. Relief
sought is unspecified.
On or about January 23, 1996, two former stockholders of Golden Care 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 former Golden Care stockholders. There can be no assurance that the Golden
Care Litigation will not have an impact on the Company's accounting for the
merger. Relief sought is unspecified.
On September 8, 1995, a derivative action was filed in the United States
District Court for the District of New Mexico, captioned BRICKELL PARTNERS V.
TURNER, ET AL. The complaint was not served on
24
<PAGE>
any defendant. On June 19, 1996, an amended complaint 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 was filed and subsequently served on the
defendants. On August 5, 1996, the District Court dismissed this action without
prejudice for failure to serve the defendants within the required time period.
The Company has filed motions to dismiss the securities class actions and
the Golden Care Litigation. In the event that any claims survive such motions,
the Company believes that it has meritorious defenses to the complaints. The
Company believes the shareholder actions and the Golden Care Litigation will not
have a material adverse impact on its results of operations or financial
condition, although the unfavorable resolution of any of these actions in any
reporting period could have a material adverse impact on the Company's results
of operations for that period. The foregoing 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Registrant's Annual Meeting of Stockholders was held on June 11, 1996.
(b) Zev Karkomi, Lois E. Silverman and Mark G. Wimer were reelected to three
year terms on the Board of Directors which will expire at the Annual Meeting
of Stockholders in 1999.
(c) The other matters voted at the meeting and the results were as follows:
(1) Approval of the Sun Healthcare Group, Inc. 1995 Non-Employee Directors'
Stock Option Plan.
<TABLE>
<CAPTION>
For Against Abstain Non-Vote
- ------------- ----------- --------- -----------
<S> <C> <C> <C>
30,141,233 1,135,773 324,696 8,876,191
</TABLE>
(2) Approval of the Sun Healthcare Group, Inc. 1996 Combined Incentive and
Nonqualified Stock Option Plan.
<TABLE>
<CAPTION>
For Against Abstain Non-Vote
- ------------- ----------- --------- -----------
<S> <C> <C> <C>
24,154,866 7,117,336 331,852 8,873,839
</TABLE>
(3) Ratification of the selection of Arthur Andersen, LLP as independent
public accountants to audit the accounts of the Company and its
subsidiaries for 1996.
<TABLE>
<CAPTION>
For Against Abstain
- ------------- --------- -----------
<S> <C> <C>
38,451,222 103,565 1,923,106
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
(10.1) Lease Agreement dated July 1, 1996 between Oak/Jones, Inc. and Sunrise
Healthcare Corporation for Oaks Health & Rehabilitation Center.
(10.2) Lease Agreement dated July 1, 1996 between Oak/Jones, Inc. and Sunrise
Healthcare Corporation for Jones Health & Rehabilitation Center.
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
(11.1) Computation of Earnings per Share.
(27.1) Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Report dated June 30, 1996, reporting the acquisition of H.T.A. of New York,
Inc. and H.T.A. of New Jersey, Inc., 3270262 Canada, Inc., and Aqua
Rehabilitation, Inc. and the purchase of additional minority interests in
Ashbourne PLC.
26
<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.
By: /s/ ROBERT D. WOLTIL*
-----------------------------------
Robert D. Woltil
SENIOR VICE-PRESIDENT OF
FINANCIAL SERVICES AND
CHIEF FINANCIAL OFFICER
Date: August 12, 1996
- ------------------------
* Signing on the behalf of the Registrant and as principal financial officer.
27
<PAGE>
EXHIBIT 10.1
LEASE AGREEMENT
THIS LEASE AGREEMENT made and entered into as of June _______, 1996, by and
between OAK/JONES, INC., an Illinois corporation (hereinafter referred to as
"Lessor"), and SUNRISE HEALTHCARE CORPORATION, a New Mexico Corporation
("Lessee").
W I T N E S S E T H:
WHEREAS, Lessor is the contract purchaser of a certain tract of land
located in the State of Texas and more particularly described in EXHIBIT A
attached hereto and made a part hereof, which tract of land is improved with a
one hundred twelve (112) bed nursing facility commonly known as OAKS HEALTH &
REHABILITATION CENTER located at 510 North Third Street, Orange, Texas 77630
(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 collectively referred to as the
"Demised Premises"); and
WHEREAS, Lessor has also agreed 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, pursuant to such contract, Lessor has also agreed to purchase a
certain nursing home facility commonly known as Jones Health & Rehabilitation
Center located at 300 Cardinal Drive, Orange, Texas 77630 (the "Jones
Facility"), and the furnishings, furniture, equipment and fixtures to be used in
or about the Jones Facility (the "Jones Personal Property"); and
WHEREAS, concurrently with the execution and delivery of this Lease, Lessor
and Lessee will enter into a certain Lease Agreement (the "Jones Lease")
pursuant to which Lessor leases to Lessee and Lessee rents from Lessor, the
Jones Facility and the Jones Personal Property; and
WHEREAS, Sun Healthcare Group, Inc., a Delaware corporation (the
"Guarantor") will execute and deliver to Lessor that certain Unconditional
Guaranty of Lease (the "Lease Guaranty") dated of even date herewith,
guarantying the performance of all of the obligations of Lessee under this
Lease; 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.
ARTICLE I - DEFINITIONS
1.1 The terms defined in this Article, for all purposes this Lease and
all agreements
<PAGE>
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 and
equipment located on the Demised Premises (including, without limitation,
those items set forth on EXHIBIT B attached hereto and made a part hereof),
other than such furniture, fixtures, equipment and supplies that persons
other than the Lessor may own or that the Lessee may lease from persons
other than the Lessor, or that the Lessee may place on the Demised Premises
other than as replacements for personal property unless such personal
property is required for the operation of the nursing home located on the
Demised Premises, in which case it shall be part of the Personal Property
and be owned by the Lessor.
(c) "Leased Property" shall mean the Demised Premises and the
Personal Property.
(d) "Lease Year" shall mean a twelve (12) month period
commencing on the Commencement Date as hereafter defined, and on each
anniversary of the Commencement Date thereafter, except that if the
Commencement Date is other than the first day of a calendar month, then the
first Lease Year shall be the period from the Commencement Date through the
date twelve (12) months after the last day of the calendar month in which
the Commencement Date occurs, and each subsequent Lease Year shall be the
period of twelve (12) months following the last day of the prior Lease
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, 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/or intermediate care
nursing home, in full compliance with all the rules and regulations and minimum
standards applicable thereto, as prescribed by the State of Texas and such other
governmental authorities having jurisdiction thereof and having no less than one
hundred twelve (112) beds and for any other purpose authorized by Lessor in
writing and for no other purpose.
-2-
<PAGE>
ARTICLE III - TERM OF LEASE
3.1 Except as expressly provided below, the term of this Lease shall be
for a period of ten (10) years commencing on July 1, 1996, (said date is
hereafter referred to as the "Commencement Date"), and expiring on June 30, 2006
unless sooner terminated or extended as hereinafter provided (the "Initial
Term").
3.2 Lessee shall have and is hereby granted the right and option to
extend the Initial Term of this Lease for an extended term (the "First Extended
Term") of five (5) Lease Years upon and subject to all the terms, provisions
and conditions hereof, except that Rent, as hereinafter defined, payable with
respect to each Lease Year of the First Extended Term shall be the amount set
forth in SECTION 4.1. The first Lease Year of the First Extended Term shall
commence upon the day next following the expiration of the Initial Term.
The option granted pursuant to this Section 3.2 may be exercised
only if Lessee is not in default under this Lease at the time of exercise and at
the time of expiration of the Initial Term, and, further, only if there is not
at either time an event or occurrence which with the passage of time or giving
of notice, or both, would constitute a default hereunder, and said option shall
be exercised by Lessee giving to Lessor written notice of Lessee's election so
to do not less than twelve (12) full calendar months prior to the date of
expiration of the Initial Term.
3.3 Provided Lessee shall have exercised the option contained in
Section 3.2 above, Lessee shall and Lessee is hereby granted the right and
option to extend this Lease for an additional Extended Term (the "Second
Extended Term") of five (5) Lease Years upon and subject to all the terms,
provisions and conditions hereof, except that Rent, as hereinafter defined,
payable with respect to each Lease Year of the Second Extended Term shall be the
amount set forth in Section 4.1 hereof. The first Lease Year of the Second
Extended Term shall commence on the day next following the expiration of the
First Extended Term.
The option granted pursuant to this Section 3.3 may be exercised
only if Lessee is not in default under the Lease at the time of exercise and at
the time of the expiration of the First Extended Term, and, further, only if
there is not then an event or occurrence which with the passage of time or
giving of notice, or both, would constitute a default hereunder, and said option
shall be exercised by Lessee giving to Lessor written notice of Lessee's
election so to do not less than twelve (12) full calendar months prior to the
expiration of the First Extended Term.
Notwithstanding the foregoing, Lessor acknowledges and agrees that
the Rent for the First Extended Term and the Second Extended Term may not be
known by Lessor at the time that Lessee is required to exercise its respective
renewal options. Accordingly, in the event Lessor has not advised Lessee of the
First Extended Term Rent at least thirteen (13) months prior to the date of the
expiration of the Initial Term or the Second Extended Term Rent at least
thirteen (13) months prior to the expiration of the First Extended Term, Lessee
shall have the right to exercise the renewal right provided for herein subject
to the right to rescind the same on written notice to Lessor delivered within
thirty (30) days after Lessor advises Lessee in writing as to the First Extended
Term Rent or the Second Extended Term Rent, as the case may be (the "Rent
Notice"), which Rent Notice shall be delivered by Lessor to Lessee as soon as
practicable after the debt service for the First Extended Term or the Second
-3-
<PAGE>
Extended Term, as the case may be, has been determined but in no event less than
one hundred and eighty (180) days prior to the commencement of the First
Extended Term or the Second Extended Term, as the case may be.
The Initial Term, as it may be extended by the First Extended Term
and the Second Extended Term, is hereinafter collectively known as the "Term".
As used in this Article III, the term default shall mean an "Event
of Default" as defined in Article XIX of this Lease.
ARTICLE IV - RENT
4.1 Throughout the Term of this Lease, Lessee shall pay to Lessor, or
as Lessor shall direct, as fixed annual rental ("Rent") 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 first Lease Year, an annual Rent of
$349,440.00, payable in equal monthly installments of $29,120.00;
(ii) For the second Lease Year and each subsequent Lease
Year (of the Initial Term or any Extended Lease Term) an amount
equal to the prior Lease Year's Rent multiplied by 1.5 times the
increase, if any, in the Cost of Living Index (as hereinafter
defined) in effect on April 1st of the current Lease Year over the
Cost of Living Index in effect on April 1st of the preceding Lease
Year; provided, however, that in no event will the increase in Rent
from one Lease Year to the next be greater than two and one-half
percent (2.5%) of the sum of the prior Lease Year's Rent nor shall
such Rent decrease from the prior Lease Year; and
(iii) The Cost of Living Index is defined as the Consumer
Price Index for All Urban Consumers, U.S. City Average (1982-1984 =
100), published by the BLS, or such other renamed index. If the
BLS changes the publication frequency of the Cost of Living Index
so that a Cost of Living Index is not available to make a cost-of-
living adjustment as specified herein, the cost-of-living
adjustment shall be based on the percentage difference between the
Cost of Living Index for the closest preceding month for which a
Cost of Living Index is available and Cost of Living Index for the
comparison month is required by this Lease. If the BLS changes the
base reference period for the Cost of Living Index from 1982-84 =
100, the cost-of-living adjustment shall be determined with the use
of such conversion formula or table as may be published by the BLS.
If the BLS otherwise substantially revises, or ceases publication
of the Cost of Living Index, then a substitute index for
determining cost-of-living adjustments,
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issued by the BLS or by a reliable governmental or other
nonpartisan publication, shall be reasonably selected by Lessor and
Lessee.
In the event the Commencement Date shall be other than the first
day of the month, Lessee shall pay to Lessor a pro 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 (1st) 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 Lessor and shall be sent c/o Oak/Jones, Inc., Two North LaSalle Street, Suite
1901, Chicago, Illinois 60602.
The Rent set forth in this ARTICLE IV is based, in part, upon the
debt service of the permanent first mortgage financing which Lessor shall obtain
concurrent with Lessor's acquisition of the Demised Premises as more fully set
forth in ARTICLE 35 ("Initial Financing"). Notwithstanding anything to the
contrary set forth in this ARTICLE 35, in the event that the debt service
payable on Lessor's mortgage financing in effect on the date that the First
Extended Term commences is more or less that the debt service on the Initial
Financing, the Rent due during the First Extended Term shall be adjusted
according to the following formula: The annual Rent due during the first year
of the First Extended Term shall be increased or decreased in an amount equal to
the difference between (i) the annual debt service on the indebtedness secured
by the first mortgage encumbering the Demised Premises in effect on the first
day of the First Extended Term, and (ii) the annual debt service on the
indebtedness secured by the first mortgage encumbering the Demised Premises in
effect on the day of the Initial Financing; provided, however, that the amount
of principal to be used in making the calculations shall not exceed the original
principal amount of the loan encumbering the Demised Premises concurrent with
Lessor's acquisition of the Demised Premises. The subsequent annual increases
as provided in ARTICLE 4.1 above for the remainder of the First Extended Term
shall be calculated on the Annual Rent payable during the first year of the
First Extended Term as so adjusted.
In the event that the debt service payable on Lessor's mortgage
financing in effect on the date that the Second Extended Term commences is more
or less than the debt service on Lessor's mortgage financing in effect on the
date the First Extended Term commences, the Rent due during the Second Extended
Term shall be adjusted according to the following formula: the annual Rent due
during the first year of the Second Extended Term shall be increased or
decreased in an amount equal to the difference between (i) the annual debt
service on the indebtedness secured by the first mortgage encumbering the
Demised Premises in effect on the first day of the Second Extended Term, and
(ii) the annual debt service on the indebtedness secured by the first mortgage
encumbering the Demised Premises on the date that the First Extended Term
commences; provided, however, that the amount of principal to be used in making
the calculation shall not exceed the original principal amount of the loan
encumbering the Demised Premises concurrent with Lessor's acquisition of the
Demised Premises. The subsequent annual increases as provided in ARTICLE 4.1
above for the remainder of the Second Extended Term shall be calculated on the
annual rent payable during the first year of the Second Extended Term as so
adjusted.
4.2 This Lease is and shall be deemed and construed to be a "pure net"
or "triple-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
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interest payments and other costs owed by Lessor relating to any Mortgage
(defined below) (collectively, "Additional Rent"). Lessee does hereby indemnify
the Lessor against any and all such costs, expenses and obligations.
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 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 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.
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:
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(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 other security satisfactory to Lessor in an
amount equal to not less than the amount of such Taxes and
Assessments which at such time shall be actually due and payable,
and such additional amounts reasonably required by Lessor and any
Mortgagee (as hereinbelow defined) of Lessor from time to time,
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.
Unless Lessor agrees otherwise, 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 any Mortgagee has
sustained 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 proceedings, together with any costs, fees, interest,
penalties or 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 Taxes
and Assessments 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, whether 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 or otherwise, then Lessee shall be responsible for the payment of such
tax.
ARTICLE VII - TAX DEPOSITS
7.1 Lessee shall be required to make deposits for annual Taxes and
Assessments and, will make monthly deposits with Lessor, of an amount equal to
one twelfth (1/12) of the annual Taxes and
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Assessments or such greater amount as may be required by any mortgagee. Said
deposits shall be due and payable on the first 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 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 when due, then Lessee shall on demand pay Lessor
the amount necessary to make up the deficiency, and if appropriate, Lessee shall
receive a credit against the next monthly tax escrow payment coming due in an
amount equal to said deficiency payment.
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 Medicare and Medicaid certified 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,
certifications and provider agreements issued by the State of Texas and any
other applicable state or federal governmental agencies, permitting the
operation on the Demised Premises of a Medicare and Medicaid certified skilled
and/or intermediate care nursing home facility with no less than one hundred
twelve (112) licensed, and Medicaid certified beds.
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 Except as otherwise specifically provided in this Lease, upon
termination of this Lease for any reason, Lessee will return to Lessor the
Demised Premises qualified and sufficient for licensing and certification by all
governmental agencies having jurisdiction over the Demised Premises as a
Medicare and Medicaid certified skilled and/or intermediate care nursing home
having no less than one hundred twelve (112) licensed, and Medicaid certified
beds with licenses, certifications, and provider agreements in full force and
good standing. All the Demised Premises, with the improvements located thereon,
and all the Personal Property shall be surrendered in good order, condition and
repair, ordinary wear and tear excepted.
ARTICLE IX - INSURANCE
9.1 Lessee shall, at its sole cost and expense, during the 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. 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 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 requiring replacement from time to
time which, if not agreed upon by Lessor and
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Lessee, shall be determined by an appraiser, engineer, architect or contractor
reasonably selected by Lessor. 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 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
(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.
9.2 Lessee shall also, at Lessee's sole cost and expense, cause to be
issued and shall maintain during the 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 each occurrence and
$3,000,000 general aggregate and an excess or umbrella liability policy of
not less than $5,000,000 each occurrence and $5,000,000 aggregate; and
(b) Hospital Professional Liability insurance in the amount of
$1,000,000 each occurrence and $3,000,000 aggregate.
Lessor may, from time to time, or any Mortgagee may 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 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 at any time and from time to time within ten (10)
days after Lessor's request therefore, Lessee shall deliver to Lessor copies of
all insurance policies then being carried by Lessee pursuant to this Article 9.
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");
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(b) The cost of all insurance premiums for insurance required to
be carried by Lessee, with respect to the Demised Premises, 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.
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 to be deposited 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 the Lessee.
ARTICLE X - LESSOR'S RIGHT TO PERFORM
10.1 Should Lessee fail to perform any of its covenants herein agreed to
be performed, subject to applicable cure periods, if any, set forth in Section
19.1 herein with respect to any such failure to perform, Lessor may elect, but
shall not be required, to 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 a rate which is the lesser of fifteen percent
(15%) per annum or the maximum rate permitted by law 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.
10.3 Lessee hereby acknowledges and agrees that any Mortgagee shall have
the right but not the obligation to perform any covenants and pay any amounts
which Lessee has failed to so perform or pay as required under the terms of this
Lease but only to the extent such Mortgagee is entitled under the terms of its
Mortgage.
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
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in suitable state of repair at least comparable to that which existed
immediately prior to the Commencement Date (ordinary wear and tear excepted,
subject to Lessee's obligation to repair and replace the same in accordance with
the terms of this Lease), 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 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 Medicare and
Medicaid certified skilled and/or intermediate care nursing home having no less
than one hundred twelve (112) licensed, and Medicaid certified beds.
11.2 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 of such items. Lessee may place additional property on the Demised
Premises (not required for the replacement of the Personal Property) and such
additional property shall be and remain the property of Lessee. Lessee shall
remove such additional property upon termination or expiration of this Lease
provided that Lessee shall make such necessary repairs or replacements as may be
required in order to return the Demised Premises to the condition which existed
prior to the removal of the additional property.
11.3 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 shall be at least
equal in usefulness and quality as 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. Notwithstanding the foregoing, Lessee
shall have the right to place leased Personal Property on the Demised Premises
provided that the payments due under such leases do not exceed $4,000 per year.
In the event Lessee desires to place leased personal property on the Demised
Premises having annual payments in excess of the amount provided for herein,
Lessee shall advise Lessor in writing and Lessor shall use its reasonable best
efforts to seek the approval of the Mortgagee or an amendment of the Facility
Mortgage with respect thereto.
ARTICLE XIA - DAMAGE AND DESTRUCTION
11A.1 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 its
condition immediately prior to such Casualty, in accordance with all of the
terms, covenants and conditions and other requirements of this Lease and any
applicable mortgage; provided, however, that in the event of a Casualty
occurring during the last six (6) months of the Term or a Casualty resulting
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from an earthquake, flood, nuclear accident or war which is not covered by
insurance maintained by Lessee and which renders the Demised Premises unsuitable
for use as a nursing home, in the reasonable opinion of Lessor and Lessee, then
Lessee shall have the right to terminate this Lease upon forty-five (45) days
written notice to Lessor. If applicable, the Demised Premises and the Personal
Property shall be so replaced, repaired and restored as to be of at least equal
value and substantially the same character as prior to such Casualty. If the
estimated cost of any such restoring, replacing or repairing is Fifty Thousand
Dollars and no/100 ($50,000.00) 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, if reasonably required by Lessor,
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 or the personal property or any portion thereof.
11A.2 Within thirty (30) days after a casualty or within thirty (30) days
after approval of the plans and specifications whichever is later, Lessee shall
commence to restore the Demised Premises and Lessee shall complete the same
within 180 days thereafter, provided, however, that in the case of damage or
destruction which cannot with due diligence be repaired within said 180 day
period, Lessee shall have an additional period of time, not to exceed 180
additional days, to complete the reconstruction, provided Lessee is proceeding
promptly and with due diligence to complete the restoration. Lessee may utilize
all insurance proceeds available for any such repair or restoration, subject to
the terms of Section 11A.3 hereof and any required approval of any Mortgagee.
Lessee's obligation to make Rent payments and to pay all other charges required
by this Lease shall not be abated during the period of the repair or
restoration.
11A.3 No sums shall be disbursed by Lessor toward such repairing,
rebuilding, restoring or replacing unless it shall be first made to appear to
the reasonable satisfaction of Lessor that either (i) the amount received from
such insurance proceeds is sufficient to complete such work or (ii) if there is
an amount required in excess of the amount received from such insurance
proceeds, either said excess amount has been expended by Lessee or that Lessee
has deposited such excess funds with Lessor or has satisfied Lessor that it has
such funds available to it so that, in either case, 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 by Lessor or any Mortgagee.
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, which
consent shall not be unreasonably withheld. Lessee further agrees that it will
not make, authorize or permit to be made any changes or alterations in or to the
Demised Premises without first obtaining Lessor's written consent thereto, which
consent shall not be unreasonably withheld. All alterations, improvements and
additions to the Demised Premises shall be
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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. Nothing herein shall
be deemed or construed to require Lessee to obtain Lessor's consent to
non-structural changes or alterations such as painting, the replacement of
wallcoverings or the replacement of floor coverings.
ARTICLE XIII - COMPLIANCE WITH LAWS
AND ORDINANCES/ENVIRONMENTAL COMPLIANCE
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 Medicare and Medicaid
certified skilled and/or intermediate care nursing home having no less than one
hundred twelve (112) licensed, and Medicaid certified beds, which may be
applicable to the Personal Property 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, which are under
Lessee's control, 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 Medicare and Medicaid
certified skilled and/or intermediate care nursing home having no less than one
hundred twelve (112) licensed, and Medicaid certified beds, and the Demised
Premises shall be qualified to participate in the Medicare and Medicaid
reimbursement programs.
13.4 Upon request, Lessee will deliver or mail to Lessor wherever Rent
is then paid, in form required for notices, copies of all exit interviews,
inspection reports and surveys, administrative proceedings and/or court actions
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, permit, provider agreement or certification relating
to the Demised Premises or the nursing home operated thereon.
13.5 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 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
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affecting the Demised Premises or the nursing home operated thereon would
continue in full force and effect during the period of such contest.
13.6 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.
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, except as provided for in
Section 11.3 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 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 a rate which is the
lesser of fifteen percent (15%) per annum or the maximum rate 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 any Facility Mortgagee's
interest in the Demised Premises.
ARTICLE XV - INSPECTION OF PREMISES BY LESSOR
15.1 At any time, during reasonable business hours and upon reasonable
notice, Lessor and/or its authorized representatives shall have the right to
enter and inspect the Demised Premises and Personal Property.
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15.2 Lessor agrees that the person or persons entering and inspecting
the Demised Premises and Personal Property will cause as little inconvenience to
the Lessee and to the residents of the Facility as may reasonably be possible
under the circumstances.
15.3 Lessee hereby acknowledges and agrees that any Mortgagee shall have
the right but not the obligation to enter and inspect the Demised Premises to
the extent such Mortgagee is entitled to do so under the terms of its Mortgage.
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
Demised Premises shall be taken, the net proceeds of any condemnation award,
settlement or compromise for the Demised Premises taken shall belong to Lessor;
provided, however, Lessee shall have the right to pursue a separate award for
the value of Lessee's interest in the Demised Premises as long as such separate
award does not diminish the award, settlement or compromise paid to Lessor; and
provided, further, that Lessee shall be solely entitled to any amount awarded
for the value of Lessee's property located on the Demised Premises in accordance
with Section 11.1. 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 reasonable judgment of Lessor and Lessee,
subject further to the rights of Lessor's Mortgagee.
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 to 55 or
less, 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 Article XIA hereof. 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 be reduced
to such amount as Lessor and Lessee agree is fair and equitable taking into
consideration the number of operational beds remaining after such taking as
compared to the number of operational beds on the Commencement Date.
ARTICLE XVII - RENT ABSOLUTE
17.1 The Personal Property and the Demised Premises are let and leased
subject to the rights, if any of patients currently residing in the Demised
Premises and the state of the title thereof as of the
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date the Lessor acquires title from its 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 to, any of the matters set forth in the
preceding 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.
Notwithstanding the foregoing, Lessor represents that it has no actual
knowledge of anything related to the foregoing which would cause the
Demised Premises to be materially inadequate for its permitted use
hereunder.
(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 its 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 this Lease shall be
terminated.
(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.
Except as otherwise expressly provided in this Lease, 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
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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, for any claim which Lessee has or might have against Lessor; or (iv)
any other occurrence whatsoever, whether similar or dissimilar to the foregoing.
However, nothing shall preclude Lessee from bringing a separate action and
Lessee is not waiving other rights and remedies not waived herein.
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
controlling number of the outstanding shares in Lessee, other than to Andrew L.
Turner or an entity controlled by Andrew L. Turner or a wholly owned subsidiary
of Lessee or of Lessee's parent corporation Sun Healthcare Group, Inc. without
the prior written consent of the Lessor, which consent shall not be unreasonably
withheld. 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. Lessor acknowledges and agrees that the sale of equity or debt
securities in Lessee or Lessee's parent corporation shall in no event constitute
an assignment or transfer of this Lease or of an interest hereunder provided
Lessee remains a wholly owed subsidiary of Sun Healthcare Group, Inc.
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 Rent, 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 other covenants, terms, conditions or
provisions of this Lease (other than as set forth in Sections
19.1(3) and 19.1(4), if such failure or violation shall not be
cured within thirty (30) days after notice thereof by Lessor to
Lessee, subject, however, to the provisions of Section 19.2 hereof;
(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;
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(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 of which Lessee has been
made aware and with which Lessee has agreed to comply 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, subject, however, to the provisions of
Section 19.2 hereof;
(5) The voluntary transfer by Lessee of 10 or more
patients located in the Demised Premises if such transfer is not
for reasons relating to the health and well being of the patients
that were transferred or such other reasons as may be permitted by
state or federal law, such as nonpayment of stay or the welfare of
other residents of the Facility;
(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 ninety (90) 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 ninety (90) days after the institution of said proceedings;
(10) The sale of the interest of Lessee in the Demised
Premises or any portion thereof under execution or other legal
process;
(11) The failure of Lessee to give notice to Lessor not
less 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;
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(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 ten (10) days prior to the expiration of any time permitted
by such authority for such cure or abatement;
(13) 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, having no less than one
hundred twelve (112) licensed beds, or (ii) decertify the nursing
home operated in the Demised Premises from participation in the
Medicaid reimbursement program, which is not either appealed by
Lessee and stayed while Lessee's appeal thereof is pending, or
revoked or rescinded by the applicable governmental authority;
(14) The abandonment of the Demised Premises by Lessee,
other than as a result of the damage or destruction or taking
thereof;
(15) The failure of the Guarantor to perform, or the
violation by the Guarantor of, any of the covenants set forth in
the Lease Guaranty; or
(16) An "Event of Default" occurs under the Jones Lease.
19.2 Except for default by Lessee in the payment of Rent or any
additional payment required 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 the Demised
Premises, as a nursing facility 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, except that in no event
shall Lessee have more than sixty (60) additional days to remedy any such
situation in the manner set forth herein, or such longer period of time granted
by any governmental agency having jurisdiction over the Facility.
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ARTICLE XX - (INTENTIONALLY OMITTED)
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 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's election 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 to be assigned to Lessor, to the extent permitted by law. Lessor shall
also have the right to continue to utilize the telephone number and name (other
than the name "Sunrise Healthcare") 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, to the extent permitted by law.
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 21.2
of this Article provided, without such entry and possession terminating this
Lease or releasing Lessee, in whole 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 required to be paid by Lessee up to the time of such
termination of the right of
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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 desirable by Lessor, and
Lessee shall, upon demand, pay the reasonable cost thereof, together with
Lessor's reasonable 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,
alterations, additions, redecorating and Lessor's expenses, Lessee shall pay to
the Lessor the amount of each monthly 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 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
damages, the amount thereof found to be due by a court of competent
jurisdiction, which amount thus found may be equal to:
(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;
(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; over
(ii) the present value, discounted at the rate of 10% per
annum of the then fair rental value of the Demised Premises and the
Personal Property.
If any statute or rule governing a proceeding in which such 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.
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ARTICLE XXII - LIABILITY OF LESSOR
22.1 It is expressly agreed by the parties that in no case shall Lessor,
any shareholders, officers, directors, managers, members, agents or employees of
Lessor be liable under any express or implied covenant, agreement or provisions
of this Lease, for any damages whatsoever to Lessee beyond Lessor's interest in
the Demised Premises.
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 or 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 on every
right and interest of Lessee in and to this Lease, and on any furnishings,
equipment, fixtures, accounts receivable or other property of any kind belonging
to Lessee and located at or related to the Demised Premises. 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 but
shall only be exercised by Lessor after the occurrence of an Event of Default
which is not cured within any applicable cure period. This Lease shall
constitute a security agreement under the Uniform Commercial Code granting
Lessor a security interest in any furnishings, equipment, fixtures, accounts
receivable or other personal property of any kind belonging to Lessee and
located at or related to the Demised Premises. If required by Lessor, Lessee
shall execute financing statements for filing under the Uniform Commercial Code
reflecting the security interest granted under this section. Upon Lessee's
written request, Lessor shall subordinate its lien under this Section 24.1,
solely as to accounts receivable, to a lien granted by Lessee to a third party
lender securing a loan made by such lender to Lessee to provide working capital
for the operation of the Leased Property as a nursing home in accordance with
this Lease.
ARTICLE XXV - INDEMNIFICATION
25.1 To the extent insurance proceeds do not cover same, Lessee. agrees
to protect, indemnify, defend and save harmless the Lessor from and against any
and all claims, demands and
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causes of action of any nature whatsoever for injury to or death of persons or
loss of or damage to property, occurring during the Term on the Demised Premises
or, to the extent the same are under Lessee's control, any adjoining sidewalks,
streets or ways, or in any manner growing out of or connected with the use and
occupation of the Demised Premises by Lessee, its officers, agents, employees or
invitees, or Lessee's maintenance of the condition thereof, or the use of any
existing or future sewer system, or the use of any adjoining sidewalks, streets
or ways which are under Lessee's control 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 and all mortgages or
deeds of trust now or hereafter in force and affecting the Demised Premises (or
any portion thereof) and/or the Personal Property, and to all renewals,
modifications, consolidations, replacements and extensions thereof (any such
Mortgage or deed of trust, as it may be renewed, modified, consolidated,
replaced or extended is hereinafter referred to as a "Mortgage", and the holder
or beneficiary of a Mortgage is hereinafter referred to as a "Mortgagee".
Lessee agrees to execute, acknowledge and deliver upon demand such further
instruments subordinating this Lease to any such Mortgage, or other liens or
encumbrances as shall be desired by Lessor; provided, that Lessor shall use all
due diligence to deliver to Lessee a nondisturbance agreement from any such
Mortgagee, in form reasonably satisfactory to such Mortgagee. Lessee further
agrees that promptly after receipt of a request from any Mortgagee made at any
time prior to foreclosure of its Mortgage, Lessee shall execute, acknowledge and
deliver to such Mortgagee any instrument as such Mortgagee may reasonably
request whereby Lessee agrees to subordinate and attorn to such Mortgagee, at
such Mortgagee's election, after the foreclosure of its Mortgage or its
acceptance of a deed in lieu of foreclosure. Lessee agrees further that any
Mortgagee shall have the right to subordinate its Mortgage and its rights
thereunder to this Lease, except that such Mortgagee shall be entitled to
expressly exclude from such subordination the Mortgagee's rights, if any, to
insurance proceeds and eminent domain awards in the event of a loss or casualty
or eminent domain taking of the Demised Premises or any portion thereof. If
such Mortgagee executes and records an instrument which purports to effect a
partial or complete subordination of its Mortgage to this Lease, any rights of
such Mortgagee to insurance proceeds or eminent domain awards which are
expressly excluded from such subordination shall remain superior to the rights
of Lessee.
ARTICLE XXVII - LESSEE'S FAITHFUL COMPLIANCE WITH MORTGAGES
27.1 Anything in this Lease contained to the contrary notwithstanding,
concurrent with the Conversion Date (as defined in Article 35), 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 and of which Lessee has received notice 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,
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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 such mortgage, it being the intention hereof that Lessee shall so comply
with and observe each and all of such covenants, conditions and provisions of
any such Mortgage affecting the Demised Premises so that it 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 or to perform any obligation imposed on Lessor thereunder which is not
delegable by Lessor by the terms thereof. Lessee further covenants and agrees
that Lessee shall give any Mortgagee notice of any Lessor default under this
Lease, and if Lessor fails to cure such default, such Mortgagee shall have an
additional reasonable time to cure any such default on Lessor's behalf.
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, and not
otherwise paid by Lessee to Lessor pursuant to Section 7.1, shall be paid by the
Lessee or as directed by 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 which results in the estate of the Lessor thereunder
being 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 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, together with interest thereon from the date of payment
by Lessee at a rate which is the lesser of fifteen percent (15%) per
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annum or the maximum rate permitted by law, 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 is a corporation organized and validly existing
under the laws of the State of New Mexico, and is authorized to transact
business in the State of Texas; and
(b) Lessee has full corporate right and power to enter into, or
perform its obligations under this Lease and has taken all requisite
corporate action to authorize the execution, delivery and performance of
this Lease.
30.2 Lessor represents, warrants and covenants to Lessee as follows:
(a) Lessor is a corporation duly organized and validly existing
under the laws of the State of Illinois; and
(b) Subject to the conditions set forth in Section 34.1, Lessor
has full power and authority to enter into this Lease and to carry out the
transactions contemplated herein.
ARTICLE XXXI - SECURITY DEPOSIT
31.1 As additional security for the faithful and prompt performance of
its obligations hereunder, Lessee shall concurrently with the execution of this
Lease pay to Lessor, as a security deposit the sum of Fifty Eight Thousand Two
Hundred Forty and 00/100 Dollars ($58,240.00), payable on the first day of the
Term. 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 said deposit in full by promptly paying to Lessor the amount so
applied. Lessor shall not pay any interest on said deposit, except as required
by law. If Lessee has not defaulted hereunder and Lessor has not applied said
deposit to cure a default, then said deposit, or such applicable portion
thereof, shall be paid to Lessee within thirty (30) days after the termination
of this Lease. Said deposit shall not be deemed an advance payment of Rent or a
measure of Lessor's damages for any default hereunder by Lessee.
ARTICLE XXXII - FINANCIAL STATEMENTS
32.1 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
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operated thereon for such annual fiscal period which shall be prepared by or on
behalf of Lessee, and which shall contain a balance sheet and detailed income
and expense statement (collectively called "Financial Statements"), and copies
of all Medicaid and Medicare cost reports as filed with the governmental
authority, as of the end of the fiscal year. In addition, Lessee shall furnish
Lessor, within 10 days following filing, a copy of its or its parent
corporation's federal income tax return if it does not file separate returns for
the preceding year. Each such statement shall be certified as being true and
correct by an officer of Lessee.
32.2 Within thirty (30) days after each calendar quarter, Lessee shall
furnish to Lessor copies of all Financial Statements for the Demised Premises
prepared by Lessee for the preceding calendar quarter.
32.3 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 XXXIII -
TRANSFER OF OPERATIONS UPON TERMINATION OF LEASE
33.1 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 or Lessor's designee 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 other Intangibles from and after the Closing
Date; provided that from and after the Closing Date, Lessee shall indemnify,
defend and hold harmless Lessor against any claims, losses, costs or damages,
including reasonable attorneys' fees incurred or arising by reason of Lessee's
obligations under the Intangibles prior to the Closing Date:
(a) service contracts for the benefit of the Demised Premises
to which Lessee is a party, and which can be terminated without penalty
within sixty (60) or fewer days' notice or which Lessor requests be
assigned to Lessor or its designee pursuant to this Article 33;
(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 connection 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,
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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)
any and all patient trust fund accounts;
(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) At Lessors option, 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.
33.2 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 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 on the Closing Date 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
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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 and there shall be no proration
of insurance premiums.
(e) All other income from, and expenses of, the Demised
Premises (other than Mortgage interest and principal), 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.
(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.
(i) Lessee shall be and will remain responsible for any
employee's severance pay and accrued benefits which may be payable as a
result of any termination of an employee's employment on or prior to the
Closing Date.
33.3 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.
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33.4 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 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 accrue during the Term of this Lease.
33.5 For the period commencing upon an Event of Default hereunder and
Lessor's election to terminate this Lease as provided in ARTICLE XXI and ending
on the date Lessor or its designee obtains all appropriate state or other
governmental licenses and certifications required to operate the Demised
Premises as a Medicare and Medicaid certified nursing home, Lessee shall enter
into a management agreement with Lessor or Lessor's designee whereby Lessor or
its designee shall have the right to operate the Demised Premises, on a triple
net basis, and shall be entitled to all revenues of the Demised Premises during
such period, and to use any and all licenses, certifications and provider
agreements issued to Lessee by any federal, state or other governmental
authority for such operation of the Demised Premises, if permitted by such
governmental authorities.
33.6 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 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 pre-Closing 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 cost reports filed for the cost reporting periods ending prior to the
Closing Date.
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33.7 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 Lessee and, except as
provided in Section 33.6(b) below, Lessor shall in no way be liable
therefore. 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 payor 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.
33.8 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.
33.9 Lessee and Lessor 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 33. 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 or any amounts recaptured under
Title XIX based upon applicable Medicare/Medicaid Recapture Regulations. 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 the rights of Lessee hereunder are subject to Section 22.1
hereof.
33.10 Anything to the contrary contained in this Article 33
notwithstanding, in the event the termination of this Lease is due to a default
by Lessee, none of the provisions of this Article 33 shall in any way limit,
reduce, restrict or modify the rights granted to Lessor pursuant to Articles 21,
23, and
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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 33, such sums shall be applied by Lessor to any damages suffered by
Lessor as a result of Lessee's Event of Default.
ARTICLE XXXIV - MISCELLANEOUS
34.1 Lessee, upon paying the fixed Rent, Additional Rent including Taxes
and Assessments and all other charges herein provided, and upon 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 hindrance 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 Rent, shall be deemed Additional Rent, so that in the event of a
default of payment when due, the 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 and Lessor each represent to the other party that it did not
deal with any broker in connection with this Lease, and hereby indemnifies the
other party against the claims or demands of any broker claimed through a
relationship with it.
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 the 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 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 period of such month-to-month tenancy, in an amount equal to twice the last
rental specified.
34.7 Any notice, or demand required to be given by either party to the
other shall be in writing and shall be sent by (a) personal delivery, (b)
expedited delivery service with proof of delivery, (c) United States
registered/certified mail, return receipt requested or (d) prepaid telecopy,
telegram,
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telex or fax, addressed to the other party hereto at the address set forth
below:
If to Lessor: Oak/Jones, Inc.
c/o Karell Capital Ventures, Inc.
Suite 1901
Two North LaSalle Street
Chicago, Illinois 60602
Attention: Mr. Craig Bernfield
Telephone: (312) 855-0930
Fax No.: (312) 855-1684
If to Lessee: Sunrise Healthcare Corporation
101 Sun Lane N.E.
Albuquerque, New Mexico 87109
Attention: Mr. Andrew Turner
Telephone: (505) 821-3355
Fax No.: (505) 822-0747
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. Any such notice or demand shall be deemed to have been given
either at the time of personal delivery or in the case of service by mail, as of
the date of first attempted delivery at the address and in the manner provided
herein, or in the case of telecopy, telegram or telex, upon receipt.
34.8 Upon demand by either party, Lessor and Lessee agree to execute and
deliver a Memorandum of Lease in recordable form so that the same may be
recorded by either party.
34.9 Each party agrees 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 modified, and
stating the modifications), the dates to which Rent has been paid, the amount of
the Security Deposit 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.
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34.13 This Lease and the Letter Agreement dated June 7, 1996, from Lessor
to Lessee, 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.
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
enforceable to the fullest extent permitted by law.
34.17 In the event of any conveyance or other divestiture of title to the
Demised Premises, 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 the grantor or the
person who is divested of title 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 be an
individual, partnership, corporation, trust, tenant in common or Mortgagee,
there shall be absolutely no personal liability on the part of 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 Demised
Premises for the satisfaction of each and every remedy which Lessee may have for
the breach of this Lease; such exculpation from personal liability to be
absolute and without any exception, whatsoever.
34.18 The failure of either party to insist on strict performance of any
of the covenants, agreements, terms, and conditions of this Lease or to exercise
any option conferred herein in any one or more instances shall not be construed
to be a waiver or relinquishment of any such covenant, agreement, term,
condition or option and the same shall be and remain in full force and effect.
34.19 This Lease may be executed in counterparts, each of which shall be
deemed to be an original but all of which taken together shall constitute but
one and the same instrument.
34.20 This Lease shall be governed by and construed in accordance with
the laws of the State of Texas.
34.21 Notwithstanding anything contained herein to the contrary, the
covenants, agreements, obligations, liabilities, terms and provisions of the
Original Lease, which, pursuant to the Original Lease, expressly survive the
expiration or termination of the Original Lease, shall survive the termination
of the Original Lease pursuant hereto and are hereby incorporated herein by
reference.
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ARTICLE XXXV - LESSOR'S PURCHASE OF LEASED PROPERTY
35.1 Lessor and Lessee acknowledge and agree that this Lease shall be
deemed to be a Sublease until Lessor completes its acquisition of title to the
Demised Premises, and accordingly, until such time as the Lease dated June 30,
1986, by and between Continue, Inc. and H.H. Holding Co., Inc. (the "Underlying
Lease"), who assigned its interest as lessee to Lessor, is terminated, whether
by Lessor's acquisition of the Demised Premises or otherwise, except as
expressly provided below, Lessee shall at all times and in all respects fully,
timely and faithfully comply and observe each and all of the conditions,
covenants, and provisions required on the part of Lessor under the Underlying
Lease. Notwithstanding anything contained in this ARTICLE XXXV to the
contrary, Lessee shall have no liability or obligation to: (i) pay Lessor's
rental obligations under the Underlying Lease, (ii) pay the "Deposit" under
Section 3.4 of the Underlying Lease, (iii) return and deliver the Personal
Property in the condition required by Section 6.3 of the Underling Lease, or
(iv) discharge or contest any lien, charge or encumbrance in accordance with
Section 7 of the Underlying Lease to the extent any such lien, charge or
encumbrance arises out of events which occurred or work performed prior to the
date on which Lessee began operating the Demised Premises. Nothing contained in
the immediately preceding sentence shall release, limit or otherwise affect
Lessee's obligations under the other Articles of this Lease, including, without
limitation, ARTICLE XI hereof and ARTICLE XIV hereof.
Upon termination of the Underlying Lease, whether by Lessor's
acquisition of the Demised Premises or otherwise (the "Conversion Date"), which
date shall be evidenced in writing and acknowledged by each of the parties
hereto, this Sublease shall automatically convert to and be deemed to be a Lease
without further action by either party.
(Signature Page to Follow)
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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: LESSEE:
OAK/JONES, INC., SUNRISE HEALTHCARE CORPORATION,
an Illinois corporation a New Mexico corporation
By: ________________________________ By:_____________________________
Its: _______________________________ Its:____________________________
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EXHIBIT B
To be completed within thirty (30) days of Commencement Date
<PAGE>
EXHIBIT 10.2
LEASE AGREEMENT
THIS LEASE AGREEMENT made and entered into as of June ___________, 1996, by
and between OAK/JONES, INC., an Illinois corporation (hereinafter referred to as
"Lessor"), and SUNRISE HEALTHCARE CORPORATION, a New Mexico Corporation
("Lessee").
W I T N E S S E T H:
WHEREAS, Lessor is the contract purchaser of a certain tract of land
located in the State of Texas and more particularly described in EXHIBIT A
attached hereto and made a part hereof, which tract of land is improved with a
one hundred eleven (111) bed nursing facility commonly known as JONES HEALTH &
REHABILITATION CENTER located at 300 Cardinal Drive, Orange, Texas 77630 (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 collectively referred to as the "Demised
Premises"); and
WHEREAS, Lessor has also agreed 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, pursuant to such contract, Lessor has also agreed to purchase a
certain nursing home facility commonly known as Oaks Health & Rehabilitation
Center located at 510 North Third Street, Orange, Texas 77630 (the "Oaks
Facility"), and the furnishings, furniture, equipment and fixtures to be used in
or about the Oaks Facility (the "Oaks Personal Property"); and
WHEREAS, concurrently with the execution and delivery of this Lease, Lessor
and Lessee will enter into a certain Lease Agreement (the "Oaks Lease") pursuant
to which Lessor leases to Lessee and Lessee rents from Lessor, the Oaks Facility
and the Oaks Personal Property; and
WHEREAS, Sun Healthcare Group, Inc., a Delaware corporation (the
"Guarantor") will execute and deliver to Lessor that certain Unconditional
Guaranty of Lease (the "Lease Guaranty") dated of even date herewith,
guarantying the performance of all of the obligations of Lessee under this
Lease; 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.
ARTICLE I - DEFINITIONS
1.1 The terms defined in this Article, for all purposes this Lease and all
agreements
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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 and
equipment located on the Demised Premises (including, without limitation,
those items set forth on EXHIBIT B attached hereto and made a part hereof),
other than such furniture, fixtures, equipment and supplies that persons
other than the Lessor may own or that the Lessee may lease from persons
other than the Lessor, or that the Lessee may place on the Demised Premises
other than as replacements for personal property unless such personal
property is required for the operation of the nursing home located on the
Demised Premises, in which case it shall be part of the Personal Property
and be owned by the Lessor.
(c) "Leased Property" shall mean the Demised Premises and the
Personal Property.
(d) "Lease Year" shall mean a twelve (12) month period commencing on
the Commencement Date as hereafter defined, and on each anniversary of the
Commencement Date thereafter, except that if the Commencement Date is other
than the first day of a calendar month, then the first Lease Year shall be
the period from the Commencement Date through the date twelve (12) months
after the last day of the calendar month in which the Commencement Date
occurs, and each subsequent Lease Year shall be the period of twelve (12)
months following the last day of the prior Lease 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, 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/or intermediate care
nursing home, in full compliance with all the rules and regulations and minimum
standards applicable thereto, as prescribed by the State of Texas and such other
governmental authorities having jurisdiction thereof and having no less than one
hundred eleven (111) beds and for any other purpose authorized by Lessor in
writing and for no other purpose.
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ARTICLE III - TERM OF LEASE
3.1 Except as expressly provided below, the term of this Lease shall be
for a period of ten (10) years commencing on July 1, 1996, (said date is
hereafter referred to as the "Commencement Date"), and expiring on June 30, 2006
unless sooner terminated or extended as hereinafter provided (the "Initial
Term").
3.2 Lessee shall have and is hereby granted the right and option to extend
the Initial Term of this Lease for an extended term (the "First Extended Term")
of five (5) Lease Years upon and subject to all the terms, provisions and
conditions hereof, except that Rent, as hereinafter defined, payable with
respect to each Lease Year of the First Extended Term shall be the amount set
forth in SECTION 4.1. The first Lease Year of the First Extended Term shall
commence upon the day next following the expiration of the Initial Term.
The option granted pursuant to this Section 3.2 may be exercised only
if Lessee is not in default under this Lease at the time of exercise and at the
time of expiration of the Initial Term, and, further, only if there is not at
either time an event or occurrence which with the passage of time or giving of
notice, or both, would constitute a default hereunder, and said option shall be
exercised by Lessee giving to Lessor written notice of Lessee's election so to
do not less than twelve (12) full calendar months prior to the date of
expiration of the Initial Term.
3.3 Provided Lessee shall have exercised the option contained in Section
3.2 above, Lessee shall and Lessee is hereby granted the right and option to
extend this Lease for an additional Extended Term (the "Second Extended Term")
of five (5) Lease Years upon and subject to all the terms, provisions and
conditions hereof, except that Rent, as hereinafter defined, payable with
respect to each Lease Year of the Second Extended Term shall be the amount set
forth in Section 4.1 hereof. The first Lease Year of the Second Extended Term
shall commence on the day next following the expiration of the First Extended
Term.
The option granted pursuant to this Section 3.3 may be exercised only
if Lessee is not in default under the Lease at the time of exercise and at the
time of the expiration of the First Extended Term, and, further, only if there
is not then an event or occurrence which with the passage of time or giving of
notice, or both, would constitute a default hereunder, and said option shall be
exercised by Lessee giving to Lessor written notice of Lessee's election so to
do not less than twelve (12) full calendar months prior to the expiration of the
First Extended Term.
Notwithstanding the foregoing, Lessor acknowledges and agrees that the
Rent for the First Extended Term and the Second Extended Term may not be known
by Lessor at the time that Lessee is required to exercise its respective renewal
options. Accordingly, in the event Lessor has not advised Lessee of the First
Extended Term Rent at least thirteen (13) months prior to the date of the
expiration of the Initial Term or the Second Extended Term Rent at least
thirteen (13) months prior to the expiration of the First Extended Term, Lessee
shall have the right to exercise the renewal right provided for herein subject
to the right to rescind the same on written notice to Lessor delivered within
thirty (30) days after Lessor advises Lessee in writing as to the First Extended
Term Rent or the Second Extended Term Rent, as the case may be (the "Rent
Notice"), which Rent Notice shall be delivered by Lessor to Lessee as soon as
practicable after the debt service for the First Extended Term or the Second
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Extended Term, as the case may be, has been determined but in no event less than
one hundred and eighty (180) days prior to the commencement of the First
Extended Term or the Second Extended Term, as the case may be.
The Initial Term, as it may be extended by the First Extended Term and
the Second Extended Term, is hereinafter collectively known as the "Term".
As used in this Article III, the term default shall mean an "Event of
Default" as defined in Article XIX of this Lease.
ARTICLE IV - RENT
4.1 Throughout the Term of this Lease, Lessee shall pay to Lessor, or as
Lessor shall direct, as fixed annual rental ("Rent") 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 first Lease Year, an annual Rent of
$346,320.00, payable in equal monthly installments of $28,860.00;
(ii) For the second Lease Year and each subsequent Lease
Year (of the Initial Term or any Extended Lease Term) an amount equal
to the prior Lease Year's Rent multiplied by 1.5 times the increase,
if any, in the Cost of Living Index (as hereinafter defined) in effect
on April 1st of the current Lease Year over the Cost of Living Index
in effect on April 1st of the preceding Lease Year; provided, however,
that in no event will the increase in Rent from one Lease Year to the
next be greater than two and one-half percent (2.5%) of the sum of the
prior Lease Year's Rent nor shall such Rent decrease from the prior
Lease Year; and
(iii) The Cost of Living Index is defined as the Consumer
Price Index for All Urban Consumers, U.S. City Average (1982-1984 =
100), published by the BLS, or such other renamed index. If the BLS
changes the publication frequency of the Cost of Living Index so that
a Cost of Living Index is not available to make a cost-of-living
adjustment as specified herein, the cost-of-living adjustment shall be
based on the percentage difference between the Cost of Living Index
for the closest preceding month for which a Cost of Living Index is
available and Cost of Living Index for the comparison month is
required by this Lease. If the BLS changes the base reference period
for the Cost of Living Index from 1982-84 = 100, the cost-of-living
adjustment shall be determined with the use of such conversion formula
or table as may be published by the BLS. If the BLS otherwise
substantially revises, or ceases publication of the Cost of Living
Index, then a substitute index for determining cost-of-living
adjustments,
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issued by the BLS or by a reliable governmental or other nonpartisan
publication, shall be reasonably selected by Lessor and Lessee.
In the event the Commencement Date shall be other than the first day
of the month, Lessee shall pay to Lessor a pro 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 (1st) 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 Lessor
and shall be sent c/o Oak/Jones, Inc., Two North LaSalle Street, Suite 1901,
Chicago, Illinois 60602.
The Rent set forth in this ARTICLE IV is based, in part, upon the debt
service of the permanent first mortgage financing which Lessor shall obtain
concurrent with Lessor's acquisition of the Demised Premises as more fully set
forth in ARTICLE 35 ("Initial Financing"). Notwithstanding anything to the
contrary set forth in this ARTICLE 35, in the event that the debt service
payable on Lessor's mortgage financing in effect on the date that the First
Extended Term commences is more or less that the debt service on the Initial
Financing, the Rent due during the First Extended Term shall be adjusted
according to the following formula: The annual Rent due during the first year
of the First Extended Term shall be increased or decreased in an amount equal to
the difference between (i) the annual debt service on the indebtedness secured
by the first mortgage encumbering the Demised Premises in effect on the first
day of the First Extended Term, and (ii) the annual debt service on the
indebtedness secured by the first mortgage encumbering the Demised Premises in
effect on the day of the Initial Financing; provided, however, that the amount
of principal to be used in making the calculations shall not exceed the original
principal amount of the loan encumbering the Demised Premises concurrent with
Lessor's acquisition of the Demised Premises. The subsequent annual increases
as provided in ARTICLE 4.1 above for the remainder of the First Extended Term
shall be calculated on the Annual Rent payable during the first year of the
First Extended Term as so adjusted.
In the event that the debt service payable on Lessor's mortgage
financing in effect on the date that the Second Extended Term commences is more
or less than the debt service on Lessor's mortgage financing in effect on the
date the First Extended Term commences, the Rent due during the Second Extended
Term shall be adjusted according to the following formula: the annual Rent due
during the first year of the Second Extended Term shall be increased or
decreased in an amount equal to the difference between (i) the annual debt
service on the indebtedness secured by the first mortgage encumbering the
Demised Premises in effect on the first day of the Second Extended Term, and
(ii) the annual debt service on the indebtedness secured by the first mortgage
encumbering the Demised Premises on the date that the First Extended Term
commences; provided, however, that the amount of principal to be used in making
the calculation shall not exceed the original principal amount of the loan
encumbering the Demised Premises concurrent with Lessor's acquisition of the
Demised Premises. The subsequent annual increases as provided in ARTICLE 4.1
above for the remainder of the Second Extended Term shall be calculated on the
annual rent payable during the first year of the Second Extended Term as so
adjusted.
4.2 This Lease is and shall be deemed and construed to be a "pure net" or
"triple-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
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interest payments and other costs owed by Lessor relating to any Mortgage
(defined below) (collectively, "Additional Rent"). Lessee does hereby indemnify
the Lessor against any and all such costs, expenses and obligations.
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 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 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.
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:
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(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 other security satisfactory to Lessor in an amount
equal to not less than the amount of such Taxes and Assessments which
at such time shall be actually due and payable, and such additional
amounts reasonably required by Lessor and any Mortgagee (as
hereinbelow defined) of Lessor from time to time, 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.
Unless Lessor agrees otherwise, 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 any Mortgagee has sustained
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 proceedings, together with any costs, fees, interest,
penalties or 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 Taxes and
Assessments 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, whether 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 or otherwise, then Lessee shall be responsible for the payment of such
tax.
ARTICLE VII - TAX DEPOSITS
7.1 Lessee shall be required to make deposits for annual Taxes and
Assessments and, will make monthly deposits with Lessor, of an amount equal to
one twelfth (1/12) of the annual Taxes and
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Assessments or such greater amount as may be required by any mortgagee. Said
deposits shall be due and payable on the first 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 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 when due, then Lessee shall on demand pay Lessor
the amount necessary to make up the deficiency, and if appropriate, Lessee shall
receive a credit against the next monthly tax escrow payment coming due in an
amount equal to said deficiency payment.
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 Medicare and Medicaid certified 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,
certifications and provider agreements issued by the State of Texas and any
other applicable state or federal governmental agencies, permitting the
operation on the Demised Premises of a Medicare and Medicaid certified skilled
and/or intermediate care nursing home facility with no less than one hundred
eleven (111) licensed, and Medicaid certified beds.
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 Except as otherwise specifically provided in this Lease, upon
termination of this Lease for any reason, Lessee will return to Lessor the
Demised Premises qualified and sufficient for licensing and certification by all
governmental agencies having jurisdiction over the Demised Premises as a
Medicare and Medicaid certified skilled and/or intermediate care nursing home
having no less than one hundred eleven (111) licensed, and Medicaid certified
beds with licenses, certifications, and provider agreements in full force and
good standing. All the Demised Premises, with the improvements located thereon,
and all the Personal Property shall be surrendered in good order, condition and
repair, ordinary wear and tear excepted.
ARTICLE IX - INSURANCE
9.1 Lessee shall, at its sole cost and expense, during the 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. 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 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 requiring replacement from time to time which, if not
agreed upon by Lessor and
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Lessee, shall be determined by an appraiser, engineer, architect or contractor
reasonably selected by Lessor. 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 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
(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.
9.2 Lessee shall also, at Lessee's sole cost and expense, cause to be
issued and shall maintain during the 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 each occurrence and
$3,000,000 general aggregate and an excess or umbrella liability policy of
not less than $5,000,000 each occurrence and $5,000,000 aggregate; and
(b) Hospital Professional Liability insurance in the amount of
$1,000,000 each occurrence and $3,000,000 aggregate.
Lessor may, from time to time, or any Mortgagee may 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 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 at any time and from time to time within ten (10)
days after Lessor's request therefore, Lessee shall deliver to Lessor copies of
all insurance policies then being carried by Lessee pursuant to this Article 9.
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");
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(b) The cost of all insurance premiums for insurance required to be
carried by Lessee, with respect to the Demised Premises, 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.
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 to be deposited 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 the Lessee.
ARTICLE X - LESSOR'S RIGHT TO PERFORM
10.1 Should Lessee fail to perform any of its covenants herein agreed
to be performed, subject to applicable cure periods, if any, set forth in
Section 19.1 herein with respect to any such failure to perform, Lessor may
elect, but shall not be required, to 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 a rate which is the lesser
of fifteen percent (15%) per annum or the maximum rate permitted by law 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.
10.3 Lessee hereby acknowledges and agrees that any Mortgagee shall
have the right but not the obligation to perform any covenants and pay any
amounts which Lessee has failed to so perform or pay as required under the terms
of this Lease but only to the extent such Mortgagee is entitled under the terms
of its Mortgage.
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
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in suitable state of repair at least comparable to that which existed
immediately prior to the Commencement Date (ordinary wear and tear excepted,
subject to Lessee's obligation to repair and replace the same in accordance with
the terms of this Lease), 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 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 Medicare and
Medicaid certified skilled and/or intermediate care nursing home having no less
than one hundred eleven (111) licensed, and Medicaid certified beds.
11.2 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 of such items. Lessee may place additional property on the Demised
Premises (not required for the replacement of the Personal Property) and such
additional property shall be and remain the property of Lessee. Lessee shall
remove such additional property upon termination or expiration of this Lease
provided that Lessee shall make such necessary repairs or replacements as may be
required in order to return the Demised Premises to the condition which existed
prior to the removal of the additional property.
11.3 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 shall be at least
equal in usefulness and quality as 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. Notwithstanding the foregoing, Lessee
shall have the right to place leased Personal Property on the Demised Premises
provided that the payments due under such leases do not exceed $4,000 per year.
In the event Lessee desires to place leased personal property on the Demised
Premises having annual payments in excess of the amount provided for herein,
Lessee shall advise Lessor in writing and Lessor shall use its reasonable best
efforts to seek the approval of the Mortgagee or an amendment of the Facility
Mortgage with respect thereto.
ARTICLE XIA - DAMAGE AND DESTRUCTION
11A.1 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 its
condition immediately prior to such Casualty, in accordance with all of the
terms, covenants and conditions and other requirements of this Lease and any
applicable mortgage; provided, however, that in the event of a Casualty
occurring during the last six (6) months of the Term or a Casualty resulting
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from an earthquake, flood, nuclear accident or war which is not covered by
insurance maintained by Lessee and which renders the Demised Premises unsuitable
for use as a nursing home, in the reasonable opinion of Lessor and Lessee, then
Lessee shall have the right to terminate this Lease upon forty-five (45) days
written notice to Lessor. If applicable, the Demised Premises and the Personal
Property shall be so replaced, repaired and restored as to be of at least equal
value and substantially the same character as prior to such Casualty. If the
estimated cost of any such restoring, replacing or repairing is Fifty Thousand
Dollars and no/100 ($50,000.00) 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, if reasonably required by Lessor,
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 or the personal property or any portion thereof.
11A.2 Within thirty (30) days after a casualty or within thirty (30)
days after approval of the plans and specifications whichever is later, Lessee
shall commence to restore the Demised Premises and Lessee shall complete the
same within 180 days thereafter, provided, however, that in the case of damage
or destruction which cannot with due diligence be repaired within said 180 day
period, Lessee shall have an additional period of time, not to exceed 180
additional days, to complete the reconstruction, provided Lessee is proceeding
promptly and with due diligence to complete the restoration. Lessee may utilize
all insurance proceeds available for any such repair or restoration, subject to
the terms of Section 11A.3 hereof and any required approval of any Mortgagee.
Lessee's obligation to make Rent payments and to pay all other charges required
by this Lease shall not be abated during the period of the repair or
restoration.
11A.3 No sums shall be disbursed by Lessor toward such repairing,
rebuilding, restoring or replacing unless it shall be first made to appear to
the reasonable satisfaction of Lessor that either (i) the amount received from
such insurance proceeds is sufficient to complete such work or (ii) if there is
an amount required in excess of the amount received from such insurance
proceeds, either said excess amount has been expended by Lessee or that Lessee
has deposited such excess funds with Lessor or has satisfied Lessor that it has
such funds available to it so that, in either case, 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 by Lessor or any Mortgagee.
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, which
consent shall not be unreasonably withheld. Lessee further agrees that it will
not make, authorize or permit to be made any changes or alterations in or to the
Demised Premises without first obtaining Lessor's written consent thereto, which
consent shall not be unreasonably withheld. All alterations, improvements and
additions to the Demised Premises shall be
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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. Nothing herein shall
be deemed or construed to require Lessee to obtain Lessor's consent to non-
structural changes or alterations such as painting, the replacement of
wallcoverings or the replacement of floor coverings.
ARTICLE XIII - COMPLIANCE WITH LAWS
AND ORDINANCES/ENVIRONMENTAL COMPLIANCE
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 Medicare and Medicaid
certified skilled and/or intermediate care nursing home having no less than one
hundred eleven (111) licensed, and Medicaid certified beds, which may be
applicable to the Personal Property 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, which are under
Lessee's control, 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 Medicare and Medicaid
certified skilled and/or intermediate care nursing home having no less than one
hundred eleven (111) licensed, and Medicaid certified beds, and the Demised
Premises shall be qualified to participate in the Medicare and Medicaid
reimbursement programs.
13.4 Upon request, Lessee will deliver or mail to Lessor wherever Rent
is then paid, in form required for notices, copies of all exit interviews,
inspection reports and surveys, administrative proceedings and/or court actions
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, permit, provider agreement or certification relating
to the Demised Premises or the nursing home operated thereon.
13.5 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 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
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affecting the Demised Premises or the nursing home operated thereon would
continue in full force and effect during the period of such contest.
13.6 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.
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, except as provided for in
Section 11.3 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 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 a rate which is the
lesser of fifteen percent (15%) per annum or the maximum rate 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 any Facility Mortgagee's
interest in the Demised Premises.
ARTICLE XV - INSPECTION OF PREMISES BY LESSOR
15.1 At any time, during reasonable business hours and upon reasonable
notice, Lessor and/or its authorized representatives shall have the right to
enter and inspect the Demised Premises and Personal Property.
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15.2 Lessor agrees that the person or persons entering and inspecting
the Demised Premises and Personal Property will cause as little inconvenience to
the Lessee and to the residents of the Facility as may reasonably be possible
under the circumstances.
15.3 Lessee hereby acknowledges and agrees that any Mortgagee shall
have the right but not the obligation to enter and inspect the Demised Premises
to the extent such Mortgagee is entitled to do so under the terms of its
Mortgage.
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
Demised Premises shall be taken, the net proceeds of any condemnation award,
settlement or compromise for the Demised Premises taken shall belong to Lessor;
provided, however, Lessee shall have the right to pursue a separate award for
the value of Lessee's interest in the Demised Premises as long as such separate
award does not diminish the award, settlement or compromise paid to Lessor; and
provided, further, that Lessee shall be solely entitled to any amount awarded
for the value of Lessee's property located on the Demised Premises in accordance
with Section 11.1. 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 reasonable judgment of Lessor and Lessee,
subject further to the rights of Lessor's Mortgagee.
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 to 55 or
less, 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 Article XIA hereof. 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 be reduced
to such amount as Lessor and Lessee agree is fair and equitable taking into
consideration the number of operational beds remaining after such taking as
compared to the number of operational beds on the Commencement Date.
ARTICLE XVII - RENT ABSOLUTE
17.1 The Personal Property and the Demised Premises are let and leased
subject to the rights, if any of patients currently residing in the Demised
Premises and the state of the title thereof as of the
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date the Lessor acquires title from its 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 to, any of the matters set forth in the
preceding 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.
Notwithstanding the foregoing, Lessor represents that it has no actual
knowledge of anything related to the foregoing which would cause the
Demised Premises to be materially inadequate for its permitted use
hereunder.
(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 its 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 this Lease shall be
terminated.
(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.
Except as otherwise expressly provided in this Lease, 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
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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, for any claim which Lessee has or might have against Lessor; or (iv)
any other occurrence whatsoever, whether similar or dissimilar to the foregoing.
However, nothing shall preclude Lessee from bringing a separate action and
Lessee is not waiving other rights and remedies not waived herein.
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
controlling number of the outstanding shares in Lessee, other than to Andrew L.
Turner or an entity controlled by Andrew L. Turner or a wholly owned subsidiary
of Lessee or of Lessee's parent corporation Sun Healthcare Group, Inc. without
the prior written consent of the Lessor, which consent shall not be unreasonably
withheld. 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. Lessor acknowledges and agrees that the sale of equity or debt
securities in Lessee or Lessee's parent corporation shall in no event constitute
an assignment or transfer of this Lease or of an interest hereunder provided
Lessee remains a wholly owed subsidiary of Sun Healthcare Group, Inc.
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 Rent, 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 other covenants, terms, conditions or provisions of
this Lease (other than as set forth in Sections 19.1(3) and 19.1(4),
if such failure or violation shall not be cured within thirty (30)
days after notice thereof by Lessor to Lessee, subject, however, to
the provisions of Section 19.2 hereof;
(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;
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(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 of which Lessee has been made aware
and with which Lessee has agreed to comply 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, subject, however, to the provisions of Section 19.2
hereof;
(5) The voluntary transfer by Lessee of 10 or more patients
located in the Demised Premises if such transfer is not for reasons
relating to the health and well being of the patients that were
transferred or such other reasons as may be permitted by state or
federal law, such as nonpayment of stay or the welfare of other
residents of the Facility;
(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 ninety (90) 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
ninety (90) days after the institution of said proceedings;
(10) The sale of the interest of Lessee in the Demised Premises
or any portion thereof under execution or other legal process;
(11) The failure of Lessee to give notice to Lessor not less 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;
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(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 ten (10) days
prior to the expiration of any time permitted by such authority for
such cure or abatement;
(13) 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, having no less than one hundred
eleven (111) licensed beds, or (ii) decertify the nursing home
operated in the Demised Premises from participation in the Medicaid
reimbursement program, which is not either appealed by Lessee and
stayed while Lessee's appeal thereof is pending, or revoked or
rescinded by the applicable governmental authority;
(14) The abandonment of the Demised Premises by Lessee, other
than as a result of the damage or destruction or taking thereof;
(15) The failure of the Guarantor to perform, or the violation by
the Guarantor of, any of the covenants set forth in the Lease
Guaranty; or
(16) An "Event of Default" occurs under the Oaks Lease.
19.2 Except for default by Lessee in the payment of Rent or any
additional payment required 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 the Demised
Premises, as a nursing facility 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, except that in no event
shall Lessee have more than sixty (60) additional days to remedy any such
situation in the manner set forth herein, or such longer period of time granted
by any governmental agency having jurisdiction over the Facility.
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ARTICLE XX - (INTENTIONALLY OMITTED)
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 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's election 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 to be assigned to Lessor, to the extent permitted by law. Lessor shall
also have the right to continue to utilize the telephone number and name (other
than the name "Sunrise Healthcare") 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, to the extent permitted by law.
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 21.2
of this Article provided, without such entry and possession terminating this
Lease or releasing Lessee, in whole 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 required to be paid by Lessee up to the time of such
termination of the right of
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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 desirable by Lessor, and
Lessee shall, upon demand, pay the reasonable cost thereof, together with
Lessor's reasonable 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,
alterations, additions, redecorating and Lessor's expenses, Lessee shall pay to
the Lessor the amount of each monthly 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 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
damages, the amount thereof found to be due by a court of competent
jurisdiction, which amount thus found may be equal to:
(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;
(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; over
(ii) the present value, discounted at the rate of 10% per annum
of the then fair rental value of the Demised Premises and the Personal
Property.
If any statute or rule governing a proceeding in which such 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.
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ARTICLE XXII - LIABILITY OF LESSOR
22.1 It is expressly agreed by the parties that in no case shall
Lessor, any shareholders, officers, directors, managers, members, agents or
employees of Lessor be liable under any express or implied covenant, agreement
or provisions of this Lease, for any damages whatsoever to Lessee beyond
Lessor's interest in the Demised Premises.
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 or 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 on every
right and interest of Lessee in and to this Lease, and on any furnishings,
equipment, fixtures, accounts receivable or other property of any kind belonging
to Lessee and located at or related to the Demised Premises. 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 but
shall only be exercised by Lessor after the occurrence of an Event of Default
which is not cured within any applicable cure period. This Lease shall
constitute a security agreement under the Uniform Commercial Code granting
Lessor a security interest in any furnishings, equipment, fixtures, accounts
receivable or other personal property of any kind belonging to Lessee and
located at or related to the Demised Premises. If required by Lessor, Lessee
shall execute financing statements for filing under the Uniform Commercial Code
reflecting the security interest granted under this section. Upon Lessee's
written request, Lessor shall subordinate its lien under this Section 24.1,
solely as to accounts receivable, to a lien granted by Lessee to a third party
lender securing a loan made by such lender to Lessee to provide working capital
for the operation of the Leased Property as a nursing home in accordance with
this Lease.
ARTICLE XXV - INDEMNIFICATION
25.1 To the extent insurance proceeds do not cover same, Lessee.
agrees to protect, indemnify, defend and save harmless the Lessor from and
against any and all claims, demands and
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causes of action of any nature whatsoever for injury to or death of persons or
loss of or damage to property, occurring during the Term on the Demised Premises
or, to the extent the same are under Lessee's control, any adjoining sidewalks,
streets or ways, or in any manner growing out of or connected with the use and
occupation of the Demised Premises by Lessee, its officers, agents, employees or
invitees, or Lessee's maintenance of the condition thereof, or the use of any
existing or future sewer system, or the use of any adjoining sidewalks, streets
or ways which are under Lessee's control 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 and all mortgages or
deeds of trust now or hereafter in force and affecting the Demised Premises (or
any portion thereof) and/or the Personal Property, and to all renewals,
modifications, consolidations, replacements and extensions thereof (any such
Mortgage or deed of trust, as it may be renewed, modified, consolidated,
replaced or extended is hereinafter referred to as a "Mortgage", and the holder
or beneficiary of a Mortgage is hereinafter referred to as a "Mortgagee".
Lessee agrees to execute, acknowledge and deliver upon demand such further
instruments subordinating this Lease to any such Mortgage, or other liens or
encumbrances as shall be desired by Lessor; provided, that Lessor shall use all
due diligence to deliver to Lessee a nondisturbance agreement from any such
Mortgagee, in form reasonably satisfactory to such Mortgagee. Lessee further
agrees that promptly after receipt of a request from any Mortgagee made at any
time prior to foreclosure of its Mortgage, Lessee shall execute, acknowledge and
deliver to such Mortgagee any instrument as such Mortgagee may reasonably
request whereby Lessee agrees to subordinate and attorn to such Mortgagee, at
such Mortgagee's election, after the foreclosure of its Mortgage or its
acceptance of a deed in lieu of foreclosure. Lessee agrees further that any
Mortgagee shall have the right to subordinate its Mortgage and its rights
thereunder to this Lease, except that such Mortgagee shall be entitled to
expressly exclude from such subordination the Mortgagee's rights, if any, to
insurance proceeds and eminent domain awards in the event of a loss or casualty
or eminent domain taking of the Demised Premises or any portion thereof. If
such Mortgagee executes and records an instrument which purports to effect a
partial or complete subordination of its Mortgage to this Lease, any rights of
such Mortgagee to insurance proceeds or eminent domain awards which are
expressly excluded from such subordination shall remain superior to the rights
of Lessee.
ARTICLE XXVII - LESSEE'S FAITHFUL COMPLIANCE WITH MORTGAGES
27.1 Anything in this Lease contained to the contrary notwithstanding,
concurrent with the Conversion Date (as defined in Article 35), 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 and of which Lessee has received notice 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,
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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 such mortgage, it being the intention hereof that Lessee shall so comply
with and observe each and all of such covenants, conditions and provisions of
any such Mortgage affecting the Demised Premises so that it 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 or to perform any obligation imposed on Lessor thereunder which is not
delegable by Lessor by the terms thereof. Lessee further covenants and agrees
that Lessee shall give any Mortgagee notice of any Lessor default under this
Lease, and if Lessor fails to cure such default, such Mortgagee shall have an
additional reasonable time to cure any such default on Lessor's behalf.
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, and not
otherwise paid by Lessee to Lessor pursuant to Section 7.1, shall be paid by the
Lessee or as directed by 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 which results in the estate of the Lessor thereunder
being 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 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, together with interest thereon from the date of payment
by Lessee at a rate which is the lesser of fifteen percent (15%) per
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annum or the maximum rate permitted by law, 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 is a corporation organized and validly existing under the
laws of the State of New Mexico, and is authorized to transact business in
the State of Texas; and
(b) Lessee has full corporate right and power to enter into, or
perform its obligations under this Lease and has taken all requisite
corporate action to authorize the execution, delivery and performance of
this Lease.
30.2 Lessor represents, warrants and covenants to Lessee as follows:
(a) Lessor is a corporation duly organized and validly existing under
the laws of the State of Illinois; and
(b) Subject to the conditions set forth in Section 34.1, Lessor has
full power and authority to enter into this Lease and to carry out the
transactions contemplated herein.
ARTICLE XXXI - SECURITY DEPOSIT
31.1 As additional security for the faithful and prompt performance of
its obligations hereunder, Lessee shall concurrently with the execution of this
Lease pay to Lessor, as a security deposit the sum of Fifty Seven Thousand Seven
Hundred Twenty and 00/100 Dollars ($57,720.00), payable on the first day of the
Term. 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 said deposit in full by promptly paying to Lessor the amount so
applied. Lessor shall not pay any interest on said deposit, except as required
by law. If Lessee has not defaulted hereunder and Lessor has not applied said
deposit to cure a default, then said deposit, or such applicable portion
thereof, shall be paid to Lessee within thirty (30) days after the termination
of this Lease. Said deposit shall not be deemed an advance payment of Rent or a
measure of Lessor's damages for any default hereunder by Lessee.
ARTICLE XXXII - FINANCIAL STATEMENTS
32.1 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
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operated thereon for such annual fiscal period which shall be prepared by or on
behalf of Lessee, and which shall contain a balance sheet and detailed income
and expense statement (collectively called "Financial Statements"), and copies
of all Medicaid and Medicare cost reports as filed with the governmental
authority, as of the end of the fiscal year. In addition, Lessee shall furnish
Lessor, within 10 days following filing, a copy of its or its parent
corporation's federal income tax return if it does not file separate returns for
the preceding year. Each such statement shall be certified as being true and
correct by an officer of Lessee.
32.2 Within thirty (30) days after each calendar quarter, Lessee shall
furnish to Lessor copies of all Financial Statements for the Demised Premises
prepared by Lessee for the preceding calendar quarter.
32.3 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 XXXIII -
TRANSFER OF OPERATIONS UPON TERMINATION OF LEASE
33.1 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 or Lessor's designee 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 other Intangibles from and after the Closing
Date; provided that from and after the Closing Date, Lessee shall indemnify,
defend and hold harmless Lessor against any claims, losses, costs or damages,
including reasonable attorneys' fees incurred or arising by reason of Lessee's
obligations under the Intangibles prior to the Closing Date:
(a) service contracts for the benefit of the Demised Premises to
which Lessee is a party, and which can be terminated without penalty
within sixty (60) or fewer days' notice or which Lessor requests be
assigned to Lessor or its designee pursuant to this Article 33;
(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 connection 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,
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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) any and all
patient trust fund accounts;
(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) At Lessors option, 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.
33.2 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 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 on the Closing Date 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
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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 and there shall be no proration of
insurance premiums.
(e) All other income from, and expenses of, the Demised Premises
(other than Mortgage interest and principal), 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.
(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.
(i) Lessee shall be and will remain responsible for any employee's
severance pay and accrued benefits which may be payable as a result of any
termination of an employee's employment on or prior to the Closing Date.
33.3 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.
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33.4 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 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 accrue during the Term of this Lease.
33.5 For the period commencing upon an Event of Default hereunder and
Lessor's election to terminate this Lease as provided in ARTICLE XXI and ending
on the date Lessor or its designee obtains all appropriate state or other
governmental licenses and certifications required to operate the Demised
Premises as a Medicare and Medicaid certified nursing home, Lessee shall enter
into a management agreement with Lessor or Lessor's designee whereby Lessor or
its designee shall have the right to operate the Demised Premises, on a triple
net basis, and shall be entitled to all revenues of the Demised Premises during
such period, and to use any and all licenses, certifications and provider
agreements issued to Lessee by any federal, state or other governmental
authority for such operation of the Demised Premises, if permitted by such
governmental authorities.
33.6 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 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 pre-Closing 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 cost reports filed for the cost reporting periods ending prior to the
Closing Date.
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33.7 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 Lessee and, except as
provided in Section 33.6(b) below, Lessor shall in no way be liable
therefore. 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 payor 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.
33.8 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.
33.9 Lessee and Lessor 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 33. 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 or any amounts recaptured under
Title XIX based upon applicable Medicare/Medicaid Recapture Regulations. 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 the rights of Lessee hereunder are subject to Section 22.1
hereof.
33.10 Anything to the contrary contained in this Article 33
notwithstanding, in the event the termination of this Lease is due to a default
by Lessee, none of the provisions of this Article 33 shall in any way limit,
reduce, restrict or modify the rights granted to Lessor pursuant to Articles 21,
23, and
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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 33, such sums shall be applied by Lessor to any damages suffered by
Lessor as a result of Lessee's Event of Default.
ARTICLE XXXIV - MISCELLANEOUS
34.1 Lessee, upon paying the fixed Rent, Additional Rent including
Taxes and Assessments and all other charges herein provided, and upon 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 hindrance 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 Rent, shall be deemed Additional Rent, so that in the event of a
default of payment when due, the 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 and Lessor each represent to the other party that it did
not deal with any broker in connection with this Lease, and hereby indemnifies
the other party against the claims or demands of any broker claimed through a
relationship with it.
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 the 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 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 period of such month-to-month tenancy, in an amount equal to twice the last
rental specified.
34.7 Any notice, or demand required to be given by either party to the
other shall be in writing and shall be sent by (a) personal delivery, (b)
expedited delivery service with proof of delivery, (c) United States
registered/certified mail, return receipt requested or (d) prepaid telecopy,
telegram,
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telex or fax, addressed to the other party hereto at the address set forth
below:
If to Lessor: Oak/Jones, Inc.
c/o Karell Capital Ventures, Inc.
Suite 1901
Two North LaSalle Street
Chicago, Illinois 60602
Attention: Mr. Craig Bernfield
Telephone: (312) 855-0930
Fax No.: (312) 855-1684
If to Lessee: Sunrise Healthcare Corporation
101 Sun Lane N.E.
Albuquerque, New Mexico 87109
Attention: Mr. Andrew Turner
Telephone: (505) 821-3355
Fax No.: (505) 822-0747
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. Any such notice or demand shall be deemed to have been given
either at the time of personal delivery or in the case of service by mail, as of
the date of first attempted delivery at the address and in the manner provided
herein, or in the case of telecopy, telegram or telex, upon receipt.
34.8 Upon demand by either party, Lessor and Lessee agree to execute
and deliver a Memorandum of Lease in recordable form so that the same may be
recorded by either party.
34.9 Each party agrees 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 modified, and
stating the modifications), the dates to which Rent has been paid, the amount of
the Security Deposit 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.
-32-
<PAGE>
34.13 This Lease and the Letter Agreement dated June 7, 1996, from
Lessor to Lessee, 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.
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
enforceable to the fullest extent permitted by law.
34.17 In the event of any conveyance or other divestiture of title to
the Demised Premises, 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 the
grantor or the person who is divested of title 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 be an individual, partnership, corporation, trust, tenant in common
or Mortgagee, there shall be absolutely no personal liability on the part of 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
Demised Premises for the satisfaction of each and every remedy which Lessee may
have for the breach of this Lease; such exculpation from personal liability to
be absolute and without any exception, whatsoever.
34.18 The failure of either party to insist on strict performance of
any of the covenants, agreements, terms, and conditions of this Lease or to
exercise any option conferred herein in any one or more instances shall not be
construed to be a waiver or relinquishment of any such covenant, agreement,
term, condition or option and the same shall be and remain in full force and
effect.
34.19 This Lease may be executed in counterparts, each of which shall
be deemed to be an original but all of which taken together shall constitute but
one and the same instrument.
34.20 This Lease shall be governed by and construed in accordance with
the laws of the State of Texas.
34.21 Notwithstanding anything contained herein to the contrary, the
covenants, agreements, obligations, liabilities, terms and provisions of the
Original Lease, which, pursuant to the Original Lease, expressly survive the
expiration or termination of the Original Lease, shall survive the termination
of the Original Lease pursuant hereto and are hereby incorporated herein by
reference.
-33-
<PAGE>
ARTICLE XXXV - LESSOR'S PURCHASE OF LEASED PROPERTY
35.1 Lessor and Lessee acknowledge and agree that this Lease shall be
deemed to be a Sublease until Lessor completes its acquisition of title to the
Demised Premises, and accordingly, until such time as the Lease dated June 30,
1986, by and between Continue, Inc. and H.H. Holding Co., Inc. (the "Underlying
Lease"), who assigned its interest as lessee to Lessor, is terminated, whether
by Lessor's acquisition of the Demised Premises or otherwise, except as
expressly provided below, Lessee shall at all times and in all respects fully,
timely and faithfully comply and observe each and all of the conditions,
covenants, and provisions required on the part of Lessor under the Underlying
Lease. Notwithstanding anything contained in this ARTICLE XXXV to the contrary,
Lessee shall have no liability or obligation to: (i) pay Lessor's rental
obligations under the Underlying Lease, (ii) pay the "Deposit" under Section 3.4
of the Underlying Lease, (iii) return and deliver the Personal Property in the
condition required by Section 6.3 of the Underling Lease, or (iv) discharge or
contest any lien, charge or encumbrance in accordance with Section 7 of the
Underlying Lease to the extent any such lien, charge or encumbrance arises out
of events which occurred or work performed prior to the date on which Lessee
began operating the Demised Premises. Nothing contained in the immediately
preceding sentence shall release, limit or otherwise affect Lessee's obligations
under the other Articles of this Lease, including, without limitation, ARTICLE
XI hereof and ARTICLE XIV hereof.
Upon termination of the Underlying Lease, whether by Lessor's
acquisition of the Demised Premises or otherwise (the "Conversion Date"), which
date shall be evidenced in writing and acknowledged by each of the parties
hereto, this Sublease shall automatically convert to and be deemed to be a Lease
without further action by either party.
(Signature Page to Follow)
-34-
<PAGE>
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: LESSEE:
OAK/JONES, INC., SUNRISE HEALTHCARE CORPORATION,
an Illinois corporation a New Mexico corporation
By:________________________________ By:__________________________________
Its:_______________________________ Its:_________________________________
-35-
<PAGE>
EXHIBIT B
To be completed within thirty (30) days of Commencement Date
A - 1
<PAGE>
EXHIBIT 11.1
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRIMARY:
Shares outstanding at beginning of period.............................. 45,987 47,096 47,916 45,021
Weighted average shares issued pursuant to:
Acquisition agreements............................................... -- -- 59 341
Employee benefit plans............................................... 32 10 38 93
Conversion of 6 1/2% Convertible Subordinated Debentures due 2003.... -- -- -- 1,461
Weighted average shares repurchased.................................. -- -- (1,371) --
Dilutive effect of outstanding stock options........................... 599 871 545 1,089
--------- --------- --------- ---------
Weighted average number of common and common equivalent shares
outstanding........................................................... 46,618 47,977 47,187 48,005
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings before extraordinary loss on early extinguishment of debt
(1)................................................................... $ 16,366 $ 8,796 $ 31,705 $ 19,337
Extraordinary loss..................................................... -- -- -- 3,413
--------- --------- --------- ---------
Net earnings (1)....................................................... $ 16,366 $ 8,796 $ 31,705 $ 15,924
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings before extraordinary loss per common and common equivalent
share (1)............................................................. $ 0.35 $ 0.18 $ 0.67 $ 0.40
Extraordinary loss..................................................... -- -- -- 0.07
--------- --------- --------- ---------
Net earnings per common and common equivalent share (1)................ $ 0.35 $ 0.18 $ 0.67 $ 0.33
--------- --------- --------- ---------
--------- --------- --------- ---------
FULLY DILUTED:
Weighted average number of common and common equivalent shares used in
primary calculation................................................... 46,618 47,977 47,187 48,005
Additional dilutive effect of stock options............................ -- -- 53 --
Assumed conversion of dilutive convertible debentures.................. 4,714 4,714 4,714 4,836
--------- --------- --------- ---------
Fully diluted weighted average number of common and common equivalent
shares outstanding.................................................... 51,332 52,691 51,954 52,841
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings before extraordinary loss used in primary
calculation (1)....................................................... $ 16,366 $ 8,796 $ 31,705 $ 19,337
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..................... 854 836 1,710 1,635
--------- --------- --------- ---------
Adjusted net earnings before extraordinary loss used in fully diluted
calculation........................................................... 17,220 9,632 33,415 20,972
Extraordinary loss..................................................... -- -- -- 3,413
--------- --------- --------- ---------
Net earnings (1)....................................................... $ 17,220 $ 9,632 $ 33,415 $ 17,559
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted net earnings before extraordinary loss per common and
common equivalent share (1)........................................... $ 0.34 $ 0.18 $ 0.64 $ 0.39
Extraordinary loss on early extinguishment of debt..................... -- -- -- 0.06
--------- --------- --------- ---------
Fully diluted net earnings per common and common equivalent share
(1)................................................................... $ 0.34 $ 0.18 $ 0.64 $ 0.33
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 for Golden Care for the period from April 1, 1995
to May 5, 1995 and the period from January 1, 1995 to May 5, 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. June 30, 1996 Form 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,415
<SECURITIES> 0
<RECEIVABLES> 268,577
<ALLOWANCES> 9,759
<INVENTORY> 0
<CURRENT-ASSETS> 325,321
<PP&E> 231,420
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,077,023
<CURRENT-LIABILITIES> 101,324
<BONDS> 0
0
0
<COMMON> 511
<OTHER-SE> 577,148
<TOTAL-LIABILITY-AND-EQUITY> 1,077,023
<SALES> 0
<TOTAL-REVENUES> 645,744
<CGS> 0
<TOTAL-COSTS> 531,862
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,463
<INTEREST-EXPENSE> 12,911
<INCOME-PRETAX> 52,842
<INCOME-TAX> 21,137
<INCOME-CONTINUING> 31,705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,705
<EPS-PRIMARY> .67
<EPS-DILUTED> .64
</TABLE>
