<PAGE>
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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 MARCH 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-12040
------------------------
SUN HEALTHCARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 85-0410612
(State of Incorporation) (I.R.S. Employer Identification No.)
101 SUN LANE, NE
ALBUQUERQUE, NEW MEXICO 87109
(505) 821-3355
(Address and telephone number of Registrant)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
Yes X No
As of May 12, 1997, there were 49,134,318 shares of the Registrant's $.01
par value Common Stock outstanding, net of treasury shares.
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<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
INDEX
FORM 10-Q--FOR THE QUARTER ENDED MARCH 31, 1997
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBERS
-----------
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996......................................................... 3
Consolidated Statements of Earnings
For the three months ended March 31, 1997 and 1996........................................... 4
Consolidated Statements of Cash Flows
For the three months ended March 31, 1997 and 1996........................................... 5
Notes to Consolidated Financial Statements................................................... 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 11-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 23
Item 6. Exhibits and Reports on Form 8-K............................................................. 23
Signatures.............................................................................................. 24
</TABLE>
2
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 24,866 $ 14,880
Restricted cash..................................................................... 1,660 2,236
Accounts receivable, net of allowance for doubtful accounts of $17,220 and $16,877
in 1997 and 1996, respectively.................................................... 312,024 282,268
Other receivables................................................................... 24,501 33,430
Prepaids and other assets........................................................... 23,177 17,618
Deferred tax asset.................................................................. 8,175 12,716
----------- ------------
Total current assets.............................................................. 394,403 363,148
----------- ------------
Property and equipment, net........................................................... 542,349 305,720
Goodwill, net......................................................................... 493,635 432,505
Other assets, net..................................................................... 98,423 115,056
Deferred tax asset.................................................................... 8,272 12,997
----------- ------------
Total assets...................................................................... $ 1,537,082 $1,229,426
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 35,161 $ 28,982
Accounts payable.................................................................... 46,636 39,180
Accrued compensation and benefits................................................... 42,730 32,612
Workers' compensation accrual....................................................... 8,614 7,863
Payable to APTA shareholders........................................................ -- 23,545
Other accrued liabilities........................................................... 33,594 19,384
Income taxes payable................................................................ 1,607 --
----------- ------------
Total current liabilities......................................................... 168,342 151,566
----------- ------------
Long-term debt, net of current portion................................................ 754,253 483,453
Other long-term liabilities........................................................... 14,644 14,813
Deferred income taxes................................................................. 11,938 4,760
----------- ------------
Total liabilities................................................................. 949,177 654,592
----------- ------------
Minority interest..................................................................... 2,572 2,697
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, 51,160,333 and
51,142,729 shares issued and outstanding at March 31, 1997 and December 31, 1996,
respectively...................................................................... 512 511
Additional paid-in capital.......................................................... 614,482 611,434
Retained earnings................................................................... 38,250 22,313
Cumulative translation adjustment................................................... 427 3,718
----------- ------------
653,671 637,976
----------- ------------
Less:
Common stock held in treasury, at cost, 2,030,116 shares at March 31, 1997 and at
December 31, 1996................................................................. 25,069 25,069
Grantor stock trust, at market, 3,008,958 and 3,019,993 shares at March 31, 1997 and
at December 31, 1996, respectively................................................ 43,269 40,770
----------- ------------
Total stockholders' equity........................................................ 585,333 572,137
----------- ------------
Total liabilities and stockholders' equity........................................ $ 1,537,082 $ 1,229,426
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Total net revenues........................................................................ $ 398,636 $ 320,291
---------- ----------
Costs and expenses:
Operating............................................................................... 327,903 264,629
Corporate general and administrative.................................................... 18,447 14,200
Provision for losses on accounts receivable............................................. 3,194 1,220
Depreciation and amortization........................................................... 11,641 8,251
Interest, net........................................................................... 11,324 6,426
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Total costs and expenses.............................................................. 372,509 294,726
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Earnings before income taxes.............................................................. 26,127 25,565
Income taxes.............................................................................. 10,190 10,226
---------- ----------
Net earnings............................................................................ $ 15,937 $ 15,339
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---------- ----------
Net earnings per common and common equivalent share:
Primary................................................................................. $ 0.34 $ 0.32
---------- ----------
---------- ----------
Fully Diluted........................................................................... $ 0.33 $ 0.31
---------- ----------
---------- ----------
Weighted average number of common and common equivalent shares outstanding:
Primary................................................................................. 46,638 47,786
---------- ----------
---------- ----------
Fully Diluted........................................................................... 51,372 52,531
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</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................................................ $ 15,937 $ 15,339
Adjustments to reconcile net earnings to net cash provided by (used for) operating
activities--
Depreciation and amortization......................................................... 11,641 8,251
Provision for losses on accounts receivable........................................... 3,194 1,220
Other, net............................................................................ (272) 37
Changes in operating assets and liabilities:
Accounts receivable................................................................. (25,105) (21,021)
Other current assets................................................................ 6,730 472
Other current liabilities........................................................... 18,924 (5,532)
Income taxes payable................................................................ 9,988 9,338
---------- ----------
Net cash provided by operating activities........................................... 41,037 8,104
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net............................................................... (13,113) (5,443)
Acquisitions, net of cash acquired...................................................... (166,832) (23,603)
Proceeds from sale and leaseback of property and equipment.............................. 32,138 --
Other assets expenditures............................................................... (28,875) (2,541)
---------- ----------
Net cash used for investing activities.............................................. (176,682) (31,587)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings............................................................... 148,420 44,440
Long-term debt repayments............................................................... (1,630) (2,060)
Net proceeds from issuance of common stock.............................................. 342 328
Purchases of treasury stock............................................................. -- (25,069)
Other financing activities.............................................................. (120) (100)
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Net cash provided by financing activities........................................... 147,012 17,539
---------- ----------
Effect of exchange rate on cash and cash equivalents...................................... (1,381) (62)
---------- ----------
Net increase (decrease) in cash and cash equivalents...................................... 9,986 (6,006)
Cash and cash equivalents at beginning of period.......................................... 14,880 23,102
---------- ----------
Cash and cash equivalents at end of period................................................ $ 24,866 $ 17,096
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest net of $535 and $1,277 capitalized during the three months ending March 31,
1997 and 1996, respectively......................................................... $ 13,492 $ 8,434
---------- ----------
---------- ----------
Income taxes.......................................................................... $ 202 $ 888
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SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company's acquisitions during the three months ended March 31, 1997 and 1996,
involved the following:
Fair value of assets acquired....................................................... $ 253,572 $ 27,009
Liabilities assumed................................................................. (105,742) (3,406)
Cash payments made to former APTA shareholders...................................... 19,192 --
Fair value of stock and warrants issued............................................. (190) --
---------- ----------
Cash payments made, net of cash received from others................................ $ 166,832 $ 23,603
---------- ----------
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</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management of Sun Healthcare Group, Inc. (the "Company" or
"Sun"), the accompanying interim consolidated financial statements present
fairly the Company's financial position at March 31, 1997 and December 31, 1996,
the consolidated results of its operations for the three month periods ended
March 31, 1997 and 1996, and the consolidated statements of cash flows for the
three month periods ended March 31, 1997 and 1996. 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, 1996, which are included in the Company's Annual
Report on Form 10-K as amended on Form 10-K/A-1 for the year ended December 31,
1996. The results of operations presented in the accompanying financial
statements are not necessarily representative of operations for an entire year.
2. ACQUISITIONS
On February 18, 1997, the Company signed definitive agreements with each of
Retirement Care Associates, Inc. ("Retirement Care") and Contour Medical, Inc.
("Contour"), under which the Company agreed to acquire Retirement Care and its
approximately 65% owned subsidiary, Contour. The agreements call for the Company
to issue 0.6625 shares of common stock in exchange for each outstanding share of
Retirement Care common stock (subject to adjustment as provided in the
agreement) and for the Company to pay $8.50 per share in cash, stock or a
combination of cash and stock (at the election of the Company) for the remaining
35% of Contour not presently owned by Retirement Care. The acquisition of
Retirement Care is expected to be accounted for as a pooling of interests and
the acquisition of Contour is expected to be accounted for as a purchase. Costs
to be incurred in connection with these transactions are expected to be
significant and will be charged against earnings of the combined company. These
charges will reflect the acquisition and integration of RCA, including
elimination of redundant corporate functions, severance costs related to
headcount reductions, the write-off of certain intangibles and property and
equipment, and transaction and other costs. These transactions are expected to
close in the second half of 1997.
On January 30, 1997, a wholly owned subsidiary of the Company acquired all
of the capital stock not previously owned by the Company of Ashbourne PLC
("Ashbourne"), which as of the date of acquisition provided healthcare services
to patients through 49 nursing facilities in the United Kingdom. Pursuant to the
acquisition, the Company paid approximately L67,300,000 ($110,100,000) for the
70.8% of Ashbourne not previously owned by the Company. The acquisition was
accounted for as a purchase and the results of operations have been included in
the Company's financial statements from the date of acquisition on January 30,
1997. The fair value of assets acquired, including goodwill of approximately
$28,300,000, was approximately $244,100,000 and liabilities assumed totaled
approximately $94,400,000. The allocation of the purchase price is preliminary
and will be finalized upon the completion of asset valuations. In addition, the
Company is still evaluating certain obligations of Ashbourne prior to the merger
and further adjustments may result. The effect of the acquisition of the portion
of Ashbourne not previously owned is immaterial to the results of the Company
and, therefore, pro forma information is not provided.
On December 15, 1996 a wholly owned subsidiary of the Company acquired all
of the capital stock of APTA Healthcare PLC ("APTA"), which, as of the date of
acquisitions, provided healthcare services to
6
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
patients through 32 nursing facilities in the United Kingdom. During the three
months ended March 31, 1997, the Company paid cash totaling approximately
L11,200,000 ($19,200,000) to former stockholders of APTA and issued notes with a
maturity not to exceed five years, totaling L2,500,000 ($4,000,000) as of March
31, 1997 to the remaining stockholders of APTA who elected not to receive cash
as consideration.
In addition, during the three months ended March 31, 1997, the Company
acquired ownership of or leasehold rights to or the management of 7 long-term
care facilities in the United Kingdom and 13 long-term care facilities in the
United States. During the three months ended March 31, 1997, the Company also
acquired one outpatient rehabilitation clinic in Canada, seven pharmacies in the
United States and five pharmacies in the United Kingdom. The pro forma impact of
the effects of these acquisitions is immaterial.
3. PROPERTY AND EQUIPMENT
During the three months ended March 31, 1997, the Company sold four of its
long-term and subacute care facilities in the United States for approximately
$19,000,000 in cash and approximately $5,600,000 in assumption of debt and
leased them back under fourteen year leases. Also, during the three months ended
March 31, 1997, the Company, through its United Kingdom subsidiary, sold four of
its long-term care facilities for approximately $13,100,000 and leased them back
under twelve year leases. These transactions produced no material gain or loss.
4. COMMITMENTS
(a) CONSTRUCTION COMMITMENTS
As of March 31, 1997, the Company had capital commitments of approximately
$10,400,000 including various contracts related to improvements to existing
facilities in the United States and capital commitments of approximately
L13,700,000 ($22,400,000 as of March 31, 1997) including various contracts
related to the development, construction and completion of nine new long-term
care facilities in the United Kingdom.
(b) FINANCING COMMITMENTS
The Company has agreed to lend $47,000,000 through a revolving subordinated
credit agreement ("Revolving Credit Agreement") to a developer of assisted
living facilities for the development, construction and operation of assisted
living facilities. The Company intends to finance its $47,000,000 obligation
from borrowings under its revolving credit facility and working capital. The
Company's obligation to make advances under the Revolving Credit Agreement are
subject to certain conditions including availability of mortgage financing for
50% of the cost of each project and approval of each project by the Company. At
March 31, 1997, eight assisted living facilities were under development which
would require funding by the Company totaling approximately $40,800,000, of
which $16,636,000 had been advanced. The developer is in the process of
obtaining mortgage financing. The Company's advances under the Revolving Credit
Agreement will be subordinate to the mortgage financing. If mortgage financing
is not obtained, the Company will be obligated to fund 100% of these eight
projects for approximately $86,700,000. A subsidiary of the Company's has an
option to purchase each assisted living facility after it becomes operational.
7
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK INCENTIVE PLANS
(a) 1997 STOCK INCENTIVE PLAN
In the first quarter of 1997, the Board of Directors adopted the 1997 Stock
Incentive Plan (the "Plan"). Awards made under the Plan may be in the form of
stock options, stock appreciation rights, stock awards, performance share
awards, or other stock-based awards. The Plan is intended to replace the
Company's existing stock option plans for executives, and awards currently
outstanding under those plans were not affected. The Plan reserves 4,500,000
shares for awards. In the first quarter of 1997, the Company awarded an
aggregate of 776,000 shares of restricted stock to nine senior executives, which
will be expensed over the vesting period. Approximately 105,000 of the
restricted shares vested immediately. The remaining restricted stock awards vest
ratably over the remaining four to five years. These restricted stock awards are
subject to a substantial risk of forfeiture and are subject to defeasance if the
Plan is not approved by the Company's stockholders.
(b) 1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
In April 1997, the Board of Directors adopted the 1997 Non-Employee
Directors' Stock Plan (the "Director Plan"). Awards made under the Director Plan
may be in the form of stock options or stock awards. The Director Plan is
intended to replace the Company's existing stock option plans for non-employee
directors, and awards currently outstanding under those plans were not affected.
The Directors Plan reserves 400,000 shares for awards. There have been no grants
awarded as of May 14, 1997.
6. 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 plus the
effect of incremental shares of common stock contingently issuable upon exercise
of 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, 1996. Net
earnings is adjusted for the interest on the debentures, net of 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.
7. OTHER EVENTS
(a) GOVERNMENT INVESTIGATION
The Company is the subject of a pending Federal investigation by the United
States Department of Health and Human Services' Office of Inspector General
("OIG") and the United States Department of Justice. At this time, the Company
understands that the investigation includes a review of whether the Company's
rehabilitation therapy subsidiary properly provided and/or billed for concurrent
therapy services and whether it provided unnecessary or unordered services to
residents of skilled nursing facilities. The Company understands that the
investigation also includes a review of whether its long-term care subsidiary
properly disclosed its relationship with the Company's rehabilitation therapy
subsidiary and properly sought reimbursement for services provided by that
subsidiary.
The Company is unable to determine at this time when the investigation will
be concluded or what its precise scope might be. If there have been improper
practices or the investigation is broader in scope than the Company currently
understands it to be, depending on the nature and extent of such impropriety,
the
8
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OTHER EVENTS (CONTINUED)
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. Based on its current understanding of the investigation,
however, the Company does not believe that the outcome of the investigation will
have a material adverse effect on the Company's financial condition or results
of operations.
(b) LITIGATION
On June 30, 1995, two civil class 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 purchased
shares of the Company's common stock between October 26, 1994 and June 27, 1995,
or who 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. The Complaint alleges that defendants misrepresented or failed to
disclose material facts about the United States Department of Health and Human
Services' Office of Inspector General ("OIG") investigation and about the
Company's operations and financial results, which plaintiffs contend
artificially inflated the price of the Company's securities.
In October 1996, the Company reached an agreement in principle to settle
these class action lawsuits for $24,000,000 which the Company funded in the
fourth quarter of 1996. On May 5, 1997, the Court entered an order approving the
settlement and dismissing the litigation. In March 1997, the Company received
$9,000,000 from its director and officer liability insurance carrier for its
claim submitted in connection with the settlement.
On or about January 23, 1996, two former stockholders of SunCare filed a
lawsuit (the "SunCare Litigation" formerly defined as 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 investigation by the OIG 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 a registration rights agreement pursuant to which Sun
agreed to register the shares of the Company's common stock issued to such
former stockholders of SunCare in the acquisition. Plaintiffs purport to seek
recission, unspecified compensatory damages, punitive damages and other relief.
By Order dated October 11, 1996, the court granted in part and denied in part
defendants' motion to dismiss. The Company believes it has meritorious defenses
to the SunCare Litigation. There can be no assurance that the SunCare Litigation
will not have an impact on the Company's accounting for the merger.
The Company believes the SunCare Litigation will not have a material adverse
impact on its financial condition or results of operations, although the
unfavorable resolution of the SunCare Litigation in any reporting period could
have a material adverse impact on the Company's results of operations for that
period.
9
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SUMMARIZED FINANCIAL INFORMATION
The Company acquired Mediplex on June 23, 1994 and became a co-obligor with
Mediplex with respect to the 6 1/2% Convertible Subordinated Debentures and the
11 3/4% Senior Subordinated Notes subsequent to the acquisition. Summarized
financial information of Mediplex is provided below (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Current assets......................................................................... $ 94,233 $ 103,269
Noncurrent assets...................................................................... 419,392 429,555
Current liabilities.................................................................... 28,571 10,410
Noncurrent liabilities................................................................. 76,591 83,370
Due to parent.......................................................................... 140,076 163,940
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net revenues.............................................................................. $ 121,359 $ 116,814
Costs and expenses........................................................................ 116,128 108,926
---------- ----------
Earnings before intercompany charges and income taxes..................................... 5,231 7,888
Intercompany charges (1).................................................................. 16,355 11,780
---------- ----------
Earnings (loss) before income taxes....................................................... (11,124) (3,892)
Income taxes (benefit).................................................................... (4,407) (847)
---------- ----------
Net earnings (loss)....................................................................... $ (6,717) $ (3,045)
---------- ----------
---------- ----------
</TABLE>
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(1) Through various intercompany agreements entered into by Sun and Mediplex,
Sun provides management services, licenses the use of its trademarks and
acts on behalf of Mediplex to make financing available for its operations.
Sun charged Mediplex for management services totaling $7,568,000 and
$6,946,000 for the three months ended March 31, 1997 and 1996, respectively.
Royalty fees charged to Mediplex for the three months ended March 31, 1997
and 1996 for the use of Sun trademarks were $1,739,000 and $1,603,000,
respectively. Intercompany interest charged to Mediplex for the three months
ended March 31, 1997 and 1996 for advances from Sun was $7,048,000 and
$3,231,000, respectively.
9. SUBSEQUENT EVENTS
In May 1997, the Company announced its intent to sell and divest itself of
its outpatient rehabilitation clinics in the United States, as well as Columbia
Health Care Inc., the Company's Canadian outpatient rehabilitation therapy
subsidiary. The sale of these operations is expected to close during the second
half of 1997 and to result in no material gain or loss.
In April 1997, the Company acquired the operations of thirteen long-term
care facilities which had previously been managed by the Company since the third
quarter of 1996, for a purchase price of $12,572,000 including the assumption of
certain lease obligations and of $10,722,000 in debt. In addition, the Company
has loaned approximately $14,800,000 to the former operators of these
facilities.
10
<PAGE>
ITEM 2.
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company, through its direct and indirect subsidiaries (hereinafter
collectively referred to as "the Company"), is a provider of long-term, subacute
and related specialty healthcare services, including rehabilitation and
respiratory therapy services and pharmaceutical services. Long-term care and
subacute care services and outpatient therapy services are provided through
affiliated facilities. Therapy services and pharmaceutical services are provided
in both affiliated and nonaffiliated facilities located in the United States.
The Company also provides long-term care and pharmaceutical services in the
United Kingdom.
The Company's strategy is to increase profitability through the provision of
ancillary services such as rehabilitation and respiratory therapy services and
pharmaceutical services to both affiliated and nonaffiliated facilities. These
services have significantly higher margins than the margins associated with
routine services provided to residents of facilities. The Company's earnings
growth has historically resulted from its acquisition of long-term and subacute
care facilities ("facilities"), use of its long-term care and subacute care
operations as a base for expansion of ancillary services, provision of ancillary
services to nonaffiliated facilities and expansion of ancillary services through
acquisitions.
The Company's results of operations for the three months ended March 31,
1997 and 1996 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 pharmaceutical service operations.
At March 31, 1997, the Company operated 173 facilities with 20,707 licensed
beds in the United States and 131 facilities with 7,531 licensed beds in the
United Kingdom.
In February 1997, the Company agreed to acquire Retirement Care Associates,
Inc. ("Retirement Care"), an operator of skilled nursing facilities and assisted
living centers, and its approximately 65% owned subsidiary, Contour Medical,
Inc. ("Contour"), a national provider of medical/surgical supplies. In addition,
the Company agreed to acquire the remaining 35% of Contour not presently owned
by Retirement Care. The acquisition of Retirement Care is expected to be
accounted for as a pooling of interest and the acquisition of Contour is
expected to be accounted for as a purchase. These transactions are expected to
close in the second half of 1997.
At March 31, 1996, the Company operated 132 facilities with 16,063 licensed
beds in the United States and 32 facilities with 1,635 licensed beds in the
United Kingdom. Between March 31, 1996 and March 31, 1997, the Company acquired
43 facilities in the United States and 94 facilities in the United Kingdom,
resulting in a total increase of 4,952 and 5,597 licensed beds in the United
States and United Kingdom, respectively. This increase reflects the Company's
acquisition of the 70.8% of Ashbourne PLC ("Ashbourne") not previously owned by
the Company on January 30, 1997. The results of operations of Ashbourne have
been included in the results of operations from the date of acquisition. At the
date of acquisition, Ashbourne operated 49 nursing and residential support
facilities with 3,613 licensed beds in the United Kingdom. This increase also
reflects the Company's acquisition of APTA Healthcare PLC ("APTA") in December
1996, an operator of 32 nursing and residential support facilities with 1,264
licensed beds in the United Kingdom. In addition, between March 31, 1996 and
March 31, 1997 the Company developed and opened one and five facilities with a
total of 154 and 299 licensed beds in the United States and United Kingdom,
respectively.
The Company's therapy service operations include the provision of physical,
occupational and speech therapy, the provision of respiratory care, and the
distribution of related equipment and supplies. As of March 31, 1997, the
Company provided its therapy services to 789 nonaffiliated facilities, an
increase of 125 facilities from the 664 nonaffiliated facilities serviced at
March 31, 1996.
11
<PAGE>
The Company's temporary therapy staffing service operations had 22 and 19
division offices at March 31, 1997 and 1996, respectively. During the three
months ended March 31, 1997, the Company provided a total of 671,000 temporary
therapy staffing hours to nonaffiliates, an increase of 126,000 hours from the
545,000 nonaffiliated temporary therapy staffing hours provided during the three
months ended March 31, 1996.
The Company's pharmaceutical service operations include the provision of
pharmaceuticals and the distribution of related supplies. As of March 31, 1997,
the Company operated twenty regional pharmacies, four in-house long-term care
pharmacies, one supply distribution center and one pharmaceutical billing and
consulting center. As of March 31, 1996, the Company operated thirteen regional
pharmacies, one in-house long-term care pharmacy, and one pharmaceutical billing
and consulting center.
The Company's foreign operations, in addition to the nursing home facilities
in the United Kingdom, include the provision of outpatient therapy services in
Canada through the Company's acquisition of Columbia Health Care Inc.
("Columbia") in 1995 and pharmaceutical services in the United Kingdom. In May
1997, the Company announced its intention to sell and divest itself of its
outpatient therapy service operations in Canada, as well as the United States.
The sale of these operations is expected to close during the second half of
1997. The Company also operates eleven pharmacies and one supply distribution
center in the United Kingdom.
The following table sets forth certain operating data for the Company as of
the dates indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Long-term and Subacute Care Facility Operations:
Long-term and subacute care facilities:
Domestic operations (including managed facilities)......................................... 173 132
Foreign operations......................................................................... 131 32
--------- ---------
Total.................................................................................... 304 164
--------- ---------
--------- ---------
Licensed beds:
Domestic operations (including managed facilities)......................................... 20,707 16,063
Foreign operations......................................................................... 7,531 1,635
--------- ---------
Total.................................................................................... 28,238 17,698
--------- ---------
--------- ---------
Therapy Service Operations:
Nonaffiliated facilities served.............................................................. 789 664
Affiliated facilities served................................................................. 163 128
--------- ---------
Total.................................................................................... 952 792
--------- ---------
--------- ---------
Temporary Therapy Staffing Service Operations:
Hours billed to nonaffiliates (in thousands)............................................... 671 545
--------- ---------
--------- ---------
Pharmaceutical Operations:
Nonaffiliated facilities served............................................................ 364 276
Affiliated facilities served............................................................... 118 106
--------- ---------
Total.................................................................................... 482 382
--------- ---------
--------- ---------
</TABLE>
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the amount and percentages of certain
elements of total net revenues for the periods presented (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------------
1997 1996
------------------------- -------------------------
<S> <C> <C> <C> <C>
Long-term and subacute care services................................. $ 239,289 60% $ 205,528 64%
Therapy services to nonaffiliates.................................... 65,424 16 52,648 16
Foreign operations................................................... 37,773 10 11,634 4
Temporary therapy staffing services to nonaffiliates................. 32,945 8 26,037 8
Pharmaceutical services to nonaffiliates............................. 20,721 5 16,117 5
Ambulatory surgery................................................... -- 6,868 2
Management fees and other............................................ 2,484 1 1,459 1
---------- --- ---------- ---
Total net revenues................................................. $ 398,636 100% $ 320,291 100%
---------- --- ---------- ---
---------- --- ---------- ---
</TABLE>
Revenues for long-term and subacute care services include revenues billed to
patients for therapy and pharmaceutical services provided by the Company's
affiliated operations. Revenues for therapy services provided to affiliated
facilities were $34,020,000 and $26,666,000 for the three months ended March 31,
1997 and 1996, respectively. Revenues for pharmaceutical services provided to
affiliated facilities were $5,973,000 and $4,817,000 for the three months ended
March 31, 1997 and 1996, 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 ENDED
MARCH 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Total net revenues............................................................................. 100% 100%
--- ---
Costs and expenses:
Operating.................................................................................... 82.3 82.6
Corporate general and administrative......................................................... 4.6 4.4
Provision for losses on accounts receivable.................................................. 0.8 0.4
Depreciation and amortization................................................................ 2.9 2.6
Interest, net................................................................................ 2.8 2.0
--- ---
Total costs and expenses................................................................... 93.4 92.0
--- ---
Earnings before income taxes................................................................... 6.6 8.0
Income taxes................................................................................... 2.6 3.2
--- ---
Net earnings................................................................................... 4.0% 4.8%
--- ---
--- ---
</TABLE>
The results of the Company's ambulatory surgery operations are immaterial to
the Company's consolidated results and, therefore, this discussion excludes the
Company's ambulatory surgery operations. The Company sold its ambulatory surgery
subsidiary in the second quarter of 1996.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Total net revenues for the three months ended March 31, 1997 increased 24%
from $320,291,000 for the three months ended March 31, 1996 to $398,636,000.
Net revenues from long-term and subacute care services, which includes
revenues generated from therapy and pharmaceutical services provided at the
Company's facilities, increased from $205,528,000 for the three months ended
March 31, 1996 to $239,289,000 for the three months ended March 31, 1997, a
13
<PAGE>
16% increase. Approximately $24,186,000 or 72% of this increase results from 31
facilities acquired or opened since December 31, 1995. The remaining net revenue
increase of $15,583,000, after considering a decrease in net revenues of
approximately $6,008,000 relating to three facilities sold during 1996, is
primarily attributable to an increase in revenue per patient day since December
31, 1995 on a same facility basis for the 128 facilities in operation all of
fiscal year 1996 and the three months ended March 31, 1997. The increase in
revenue per patient day was a result of payor rate increases and the expansion
of the Company's subacute services.
Net revenues from therapy services to nonaffiliated facilities increased 24%
from $52,648,000 for the three months ended March 31, 1996, to $65,424,000 for
the three months ended March 31, 1997 primarily as a result of an increase in
the number of nonaffiliated facilities served from 664 facilities at March 31,
1996 to 789 facilities at March 31, 1997.
Net revenues from foreign operations increased 225% from $11,634,000 for the
three months ended March 31, 1996 to $37,773,000 for the three months ended
March 31, 1997. Approximately $22,184,000 or 85% of this increase was the result
of increased net revenues from the long-term care operations in the United
Kingdom. The increase relating to the nursing home operations in the United
Kingdom was primarily the result of the Company's acquisitions of Ashbourne on
January 30, 1997 and APTA during December 1996, which combined, added
approximately $18,089,000 of net revenues during the three months ended March
31, 1997.
Net revenues from temporary therapy staffing services to nonaffiliated
facilities increased 27% from $26,037,000 for the three months ended March 31,
1996 to $32,945,000 for the three months ended March 31, 1997 primarily as a
result of an increase in service hours billed to nonaffiliates from 545,000
hours in the three months ended March 31, 1996 to 671,000 hours in the three
months ended March 31, 1997. The increase in service hours billed was primarily
attributable to new offices established through acquisitions.
Net revenues from pharmaceutical services to nonaffiliated facilities
increased 29% from $16,117,000 for the three months ended March 31, 1996 to
$20,721,000 for the three months ended March 31, 1997. The growth in net
revenues was primarily a result of the increase in the number of nonaffiliated
facilities served from 276 at March 31, 1996 to 364 at March 31, 1997. The
increase in nonaffiliated facilities served was the result of the opening and
acquisition of eight regional pharmacies since December 31, 1995 and the
increase in the number of nonaffiliated facilities served by pharmacies open
prior to January 1, 1996.
Operating expenses, which includes rent expense of $27,648,000 and
$21,473,000 for the three months ended March 31, 1997 and 1996, respectively,
increased 24% from $264,629,000 for the three months ended March 31, 1996 to
$327,903,000 for the three months ended March 31, 1997. The increase resulted
primarily from the net increase of 62 leased or owned facilities during the year
ended December 31, 1996 and an additional 69 leased or owned facilities during
the three months ended March 31, 1997 and the growth in therapy and temporary
therapy staffing services. Operating expenses as a percentage of net revenues
decreased from 82.6% for the three months ended March 31, 1996 to 82.3% for the
three months ended March 31, 1997. The decrease of operating expenses as a
percentage of net revenues was primarily due to the acquisitions of Ashbourne
and APTA whose facility leases are primarily capital leases and therefore
include interest and depreciation expense instead of rent expense. In addition,
the decrease is offset by 14 newly opened facilities in the United Kingdom
opened during the previous twelve months, which, during the start-up period,
have experienced lower operating margins as the Company implements its operating
strategies.
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, increased 30% from $14,200,000 for the
three months ended March 31, 1996 to $18,447,000 for the three months ended
March 31, 1997. As a percentage of net revenues, corporate general and
administrative expenses increased from 4.4% for the three months ended March 31,
1996 to 4.6% for the three months ended March 31, 1997. 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
14
<PAGE>
implementation of new business strategies. The increase was also due to
expansion of the Company's corporate infrastructure to support the operations of
fourteen facilities in California for which the Company entered into a
management agreement during the third quarter of 1996. The Company acquired the
operations of thirteen of these facilities during the second quarter of 1997.
The provision for losses on accounts receivable increased 162% from
$1,220,000 for the three months ended March 31, 1996 to $3,194,000 for the three
months ended March 31, 1997. As a percentage of net revenues, provision for
losses on accounts receivable increased from 0.4% for the three months ended
March 31, 1996 to 0.8% for the three months ended March 31, 1997. In the second
half of 1996, the Company increased its accounts receivable reserve in response
to a slowdown in collections from nonaffiliated facilities for therapy services
due to delays in payment by the nonaffiliated facilities' Medicare fiscal
intermediaries (see "Liquidity and Capital Resources").
Depreciation and amortization increased 41% from $8,251,000 for the three
months ended March 31, 1996 to $11,641,000 for the three months ended March 31,
1997. As a percentage of net revenues, depreciation and amortization expense
increased from 2.6% for the three months ended March 31, 1996 to 2.9% for the
three months ended March 31, 1997, respectively. The increase is primarily due
to the assets acquired by the Company, including goodwill, of Ashbourne acquired
during the first quarter of 1997 and APTA acquired during the fourth quarter of
1996.
Net interest expense increased 76% from $6,426,000 for the three months
ended March 31, 1996 to $11,324,000 for the three months ended March 31, 1997.
The increase was primarily due to interest expense related to capital leases
assumed by the Company during the Company's acquisitions of Ashbourne and APTA.
The increase was also related to borrowings associated with the acquisitions of
Ashbourne and APTA, the repurchase of 2,030,116 shares of the Company's
outstanding common stock during the first quarter of 1996 and the purchase of a
9.9% interest in OmniCell Technologies, Inc. ("OmniCell") during the second
quarter of 1996. Each of these acquisitions was financed by borrowings under the
Company's revolving credit facility. As a percentage of net revenues, interest
expense increased from 2.0% for the three months ended March 31, 1996 to 2.8%
for the three months ended March 31, 1997.
The Company's effective tax rate was 39% for the three months ended March
31, 1997 and was 40% for the three months ended March 31, 1996. The decrease in
the effective tax rate was due to a lower tax rate in the United Kingdom and a
more favorable mix of state income in the United States than in the prior year.
Net earnings were $15,937,000 for the three months ended March 31, 1997 as
compared to net earnings of $15,339,000 for the three months ended March 31,
1996. As a percentage of net revenues, net earnings were 4.0% for the three
months ended March 31, 1997, as compared to 4.8% for the three months ended
March 31, 1996. The decrease was primarily due to the increased costs and lower
margins from the Company's nursing home operations in the United Kingdom.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had working capital of $226,061,000,
including cash and cash equivalents of $24,866,000, as compared to working
capital of $211,582,000, including cash and cash equivalents of $14,880,000 at
December 31, 1996. For the three months ended March 31, 1997, net cash provided
by operations was $41,037,000 compared to net cash provided by operations for
the three months ended March 31, 1996 of $8,104,000. The net cash provided by
operations for the three months ended March 31, 1997 reflects the Company's
growth in net earnings, reduced Federal and state tax payments due to
realization of certain deferred tax assets, receipt of $9,000,000 from the
Company's director and officer liability insurance carrier, and timing of
payment of certain obligations of the Company. This was offset by the net cash
used for operations to fund an increase in accounts receivable (as discussed
below).
15
<PAGE>
The Company's accounts receivable have increased since January 1, 1997.
Accounts receivable increased in part because of the growth in the therapy and
pharmaceutical services businesses since January 1, 1997; however, accounts
receivable for rehabilitation services to nonaffiliates have increased by
$12,008,000 since December 31, 1996 to $90,841,000 at March 31, 1997, and
continue to increase disproportionately to the growth in net revenues of that
line of business. Collections of therapy services receivables from nonaffiliated
facilities have slowed because payment is primarily dependent upon such
facilities' receipt of payment from fiscal intermediaries which, in some
instances, have been delayed because fiscal intermediaries are conducting
reviews of such facilities' therapy claims. As a result, the Company has
increased its provision for losses on accounts receivable and incurred
additional borrowing costs (see "Results of Operations").
Other significant operating uses of cash for the three months ended March
31, 1997 were payments of $14,027,000 for interest and net payments totaling
$202,000 for income taxes.
In October 1996, the Company reached an agreement in principle to settle
certain class action lawsuits for $24,000,000 which the Company funded in the
fourth quarter of 1996. On May 5, 1997, the Court entered an order approving the
settlement and dismissing the litigation. In March 1997, the Company received
$9,000,000 from its director and officer liability insurance carrier for its
claim submitted in connection with the settlement. In addition, the Company
accrued additional charges and expenses of $4,250,000 in 1996 and $5,505,000 in
1995 related to monitoring and responding to the continuing OIG investigation
and responding to the shareholder litigation matters. The charges do not contain
any estimated amounts for settlement of the OIG investigation or remaining
shareholder litigation matters (see "Effects from Changes in Reimbursement" and
"Litigation"). As of March 31, 1997, an accrual of $4,200,000 related to the
previously recorded charges and expenses remained.
The Company incurred $13,113,000 and $5,443,000 in capital expenditures
during the three months ended March 31, 1997 and 1996, respectively.
Substantially all such expenditures during the three months ended March 31, 1997
were for the continued development and construction of one facility in the
United States and eight new facilities in the United Kingdom, and routine
capital expenditures. These expansions were financed through borrowings under
the Company's revolving credit facility. The Company had capital expenditure
commitments, as of March 31, 1997, under various contracts, including
approximately $10,400,000 in the United States and L13,700,000 ($22,400,000 as
of March 31, 1997) in the United Kingdom. These include contractual commitments
to improve existing facilities and to develop, construct and complete nine
facilities in the United Kingdom.
The Company paid $166,832,000 and $23,603,000 for acquisitions during the
three months ended March 31, 1997 and 1996, respectively. This includes
$110,100,000 and $11,200,000 of cash paid by the Company during the three months
ended March 31, 1997 to former stockholders of Ashbourne and APTA, respectively.
In addition, the Company issued L2,500,000 ($4,000,000 as of March 31, 1997) of
notes, with a maturity not to exceed five years, to former stockholders of APTA
who elected not to receive cash as consideration. In addition, during the three
months ended March 31, 1997, the Company acquired the operations of nine
long-term care and assisted living facilities for $12,000,000 plus the
assumption of all the facilities' leases. In connection with this acquisition,
the Company agreed to provide financing of $5,800,000 to the owner of the nine
facilities for expansion of certain of the facilities. Both acquisitions were
funded by borrowings under the Company's revolving credit facility. During the
three months ended March 31, 1997, the Company also acquired the ownership of,
the leasehold rights to, or the management of 56 long-term care facilities in
the United Kingdom, including 49 long-term care facilities acquired in the
acquisition of Ashbourne, and 13 long-term care facilities in the United States.
During the three months ended March 31, 1997, the Company also acquired or
opened seven pharmacies in the United States, five pharmacies in the United
Kingdom, and one outpatient rehabilitation clinic in Canada.
In April 1997, the Company acquired the operations of thirteen long-term
care facilities which had previously been managed by the Company since the third
quarter of 1996 for a purchase price of
16
<PAGE>
$12,572,000, including the assumption of certain obligations and of $10,722,000
in long-term debt. In addition, the Company has loaned approximately $14,800,000
to the former operators of these facilities.
On February 18, 1997, the Company signed definitive agreements with each of
Retirement Care and Contour, under which the Company agreed to acquire
Retirement Care and its approximately 65% owned subsidiary, Contour. The
agreements call for the Company to issue 0.6625 shares of common stock in
exchange for each outstanding share of Retirement Care common stock (subject to
adjustment as provided in the agreement) and for the Company to pay $8.50 per
share in cash, stock or a combination of cash and stock (at the election of the
Company) for the remaining 35% of Contour not presently owned by Retirement
Care. Costs to be incurred in connection with these transactions are expected to
be significant and will be charged against the earnings of the combined company.
These charges will reflect the acquisition and integration of RCA, including
elimination of redundant corporate functions, severance costs related to
headcount reductions, the write-off of certain intangibles and property and
equipment, and transaction and other costs. The acquisition of Retirement Care
is expected to be accounted for as a pooling of interests and the acquisition of
Contour is expected to be accounted for as a purchase.
The Company conducts business outside of the United States, in the United
Kingdom and in Canada. The foreign operations account for 10% and 4% of the
Company's total net revenues during the three months ended March 31, 1997 and
the year ended December 31, 1996, respectively, and 20% of the Company's
consolidated total assets as of March 31, 1997. The Company's financial
condition and results of operations are subject to foreign exchange risk.
Because of the Company's foreign growth strategies, the Company does not expect
to repatriate funds invested overseas and, therefore, foreign currency
transaction exposure is not normally hedged. Exceptional planned foreign
currency cash flow requirements, such as acquisitions overseas, are hedged
selectively to prevent fluctuations in the anticipated foreign currency value.
Changes in the net worth of the Company's foreign subsidiaries arising from
currency fluctuations are accumulated in the translation adjustments component
of stockholders' equity.
During the three months ended March 31, 1997, the Company sold four of its
long-term and subacute care facilities in the United States for approximately
$19,000,000 in cash and approximately $5,600,000 in assumption of debt and
leased them back under fourteen year leases. Also, during the three months ended
March 31, 1997, the Company, through its United Kingdom subsidiary, sold four of
its long-term care facilities for approximately $13,100,000 and leased them back
under twelve year leases.
The Company has agreed to lend $47,000,000, through a revolving subordinated
credit agreement ("Revolving Credit Agreement") to a developer of assisted
living facilities for the development, construction and operation of assisted
living facilities. The Company intends to finance its $47,000,000 obligation
from borrowings under its revolving credit facility and working capital. The
Company's obligation to make advances under the Revolving Credit Agreement are
subject to certain conditions including availability of mortgage financing for
50% of the cost of each project and approval of each project by the Company. At
March 31, 1997, eight assisted living facilities were under development which
would require funding by the Company totaling approximately $40,800,000, of
which $16,636,000 had been advanced. The developer is in the process of
obtaining mortgage financing. The Company's advances under the Revolving Credit
Agreement will be subordinate to the mortgage financing. If mortgage financing
is not obtained, the Company will be obligated to fund 100% of these eight
projects for approximately $86,700,000. A subsidiary of the Company has an
option to purchase each assisted living facility after it becomes operational.
At March 31, 1997, the Company had, on a consolidated basis, $789,414,000 of
outstanding indebtedness, including $420,900,000 of indebtedness under its
$490,000,000 revolving credit facility (the "Credit Facility"). The Company also
had $24,642,000 of outstanding standby letters of credit under the Credit
Facility as of March 31, 1997.
The Company's ongoing capital requirements relate to the costs associated
with its facilities under construction, routine capital expenditures, advances
under the Revolving Credit Agreement, potential acquisitions and implementation
of growth strategies.
17
<PAGE>
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, facilities under construction, routine capital expenditures,
advances under the Revolving Credit Agreement, current debt service obligations
and to fund 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 the Credit Facility, (ii) the use of operating leases and common
stock in the future as a means of acquiring facilities and new operations, (iii)
the availability of leaseback financing through real estate investment trusts
and other financing sources and (iv) the sale of securities in the public or
private capital markets. However, there can be no assurance that the Company may
not require additional sources of financing in the next twelve months,
particularly in order to fulfill existing construction commitments or to pursue
acquisitions requiring significant cash consideration. Even if the Company does
not have an immediate need for additional financing, it may seek to access the
public or private capital markets if it believes that conditions are favorable.
However, the Company's access to the public or private markets may be adversely
affected by the status of the OIG investigation. In addition, such acquisitions
or additional financing may require approval of 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 financial condition and
results of operations 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 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
determinations based on its prior settlement experience and its understanding of
the applicable reimbursement rules and regulations. The majority of third-party
payor balances are settled two to three years following the provision of
services. The Company has experienced differences between the net amounts
accrued and subsequent settlements, which differences are recorded in operations
at the time of settlement. The Company's results of operations would be
materially and adversely effected if the amount actually received from
third-party payors in any reporting period differs materially from the amounts
accrued in prior periods. The Company's financial condition and results of
operations 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.
The Company's growth strategy relies heavily on the acquisition of long-term
and subacute care facilities. Regardless of the legal form of the acquisition,
the Medicare and Medicaid Programs often require that the Company assume certain
obligations relating to the reimbursement paid to the former operators of the
facilities. For example, the Company may be responsible for any final cost
report settlements or findings in the examination process which result in the
recoupment from the Company of reimbursement previously paid to the former owner
if the former owner is unable to meet its repayment obligations.
The Company has learned that a fiscal intermediary and a Medicaid agency in
one of the states in which the Company operates may be examining cost reports
filed by a predecessor operator of several facilities acquired in the Mediplex
acquisition. If, as a result of any such examination, it is concluded that
overpayments to the predecessor operator were made, the Company, as the current
operator of such
18
<PAGE>
facilities, may be held financially responsible for any such overpayments.
However, at this time the Company is unable to predict the outcome of any such
examination.
Various cost containment measures adopted by governmental and private pay
sources have begun to restrict the scope and amount of reimbursable healthcare
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 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 financial condition and results
of operations, including the possible impairment of certain assets.
In 1993, the Health Care Financing Administration ("HCFA") issued a
directive to fiscal intermediaries that administer the Medicare reimbursement
policies to review costs incurred by providers of occupational therapy and
speech therapy provided by contract suppliers such as the Company's
rehabilitation therapy subsidiary. Although HCFA has published salary
equivalency guidelines for contract physical therapy and respiratory therapy,
guidelines for occupational therapy and speech therapy have not yet been
published in final form. Reimbursement for such services is currently evaluated
under Medicare's reasonable cost principles. On March 28, 1997, HCFA proposed
salary equivalency guidelines for speech and occupational therapy. In addition,
HCFA proposed revised salary equivalency guidelines for physical and respiratory
therapies. Implementation of the proposed guidelines by HCFA could directly or
indirectly limit the reimbursement the Company and its customers receive for
certain therapy services on a prospective basis. If the proposals are adopted as
proposed, any resulting limitation on reimbursements could have a material
adverse effect on the Company's financial condition and results of operations.
Additionally, if the proposed guidelines are adopted, it could have an adverse
effect on the cash flow of the facilities to whom the Company provides services;
thereby potentially adversely affecting the collectibility of amounts owed to
the Company.
In 1995, and periodically since then, HCFA has provided information to
intermediaries for their use in determining reasonable costs for occupational
and speech therapy. The information set forth in such directives, although not
intended to impose limits on reasonable costs for speech therapy and
occupational therapy, suggests that fiscal intermediaries should carefully
review costs which appear to be in excess of what a "prudent buyer" would pay
for those services. While the effect of these directives is still uncertain,
they are a factor considered by such intermediaries in evaluating the
reasonableness of amounts paid by providers for the services of the Company's
rehabilitation therapy subsidiary. If salary equivalency guidelines such as the
ones discussed above are implemented, these directives will become obsolete
because Medicare will not pay any amount in excess of that permitted under the
salary equivalency guidelines for cost reporting periods beginning thereafter.
In addition, some intermediaries also require facilities to justify the cost of
contract therapists versus employed therapists as an aspect of the "prudent
buyer" analysis. Accordingly, the "prudent buyer" analyses could result in lower
reimbursement rates and a corresponding decrease in net revenues of the Company.
With respect to rehabilitation therapy services provided to affiliated
facilities, a retroactive adjustment of Medicare reimbursement could be made 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 rates resulting from
implementation of this directive or a reduction in reimbursement as a result of
a
19
<PAGE>
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, the Company's costs for providing these
services, and customers' ability to pay for prior and continuing 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 pharmaceutical services that it
provides to Company-operated facilities. These related party regulations require
that, among other things, a substantial part of the rehabilitation and
respiratory therapy services or 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 related party 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 instances where this
issue has been litigated by others, the final determination of the appropriate
threshold to satisfy the "substantial portion" requirement have varied.
The Company's net revenues from rehabilitation therapy services provided to
nonaffiliated facilities represented 66%, 66% and 64% of total rehabilitation
services net revenues for the three months ended March 31, 1997 and the years
ended December 31, 1996 and 1995, respectively. Respiratory therapy services
provided to nonaffiliated facilities represented 62%, 55% and 64% of total
respiratory therapy services net revenues for the three months ended March 31,
1997 and the year ended December 31, 1996 and the period from the date of
acquisition of SunCare on May 5, 1995 to December 31, 1995, respectively. The
Company's respiratory therapy operations did not provide services to affiliated
facilities prior to the acquisition of SunCare on May 5, 1995. Net revenues from
pharmaceutical services billed to nonaffiliated facilities represented 78% of
total pharmaceutical services revenues for the three months ended March 31,
1997, and the years ended December 31, 1996 and 1995. The Company believes that
it satisfies the requirements of these regulations regarding nonaffiliated
business. Consequently, it has claimed and received reimbursement under Medicare
for rehabilitation and respiratory therapy and pharmaceutical services provided
to patients in its own facilities at a higher rate than if it did not satisfy
these requirements. If the Company were deemed to not have satisfied these
regulations, the reimbursement that the Company receives for rehabilitation and
respiratory therapy and pharmaceutical services provided to its own facilities
would be significantly reduced, as a result of which Sun's financial condition
and results of operations would be materially and adversely affected. If, upon
audit by Federal or state reimbursement agencies, such agencies find that these
regulations have not been satisfied, and if, after appeal, such findings are
sustained, the Company could be required to refund some or all of the difference
between its cost of providing these services and the higher amount actually
received. While the Company believes that it has satisfied and will continue to
satisfy these regulations, there can be no assurance that its position would
prevail if contested by relevant reimbursement agencies. The foregoing
statements with respect to the Company's ability to satisfy these regulations
are forward looking and could be affected by a number of factors, including the
interpretation of Medicare regulations by Federal or state 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 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
20
<PAGE>
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. In addition, if the Company is ever found to have
engaged in improper practices, it could be subjected to civil, adminstrative, or
criminal fines, penalties or restitutionary relief.
In January 1995, the Company learned that it was the subject of a pending
Federal investigation. The investigating agencies are the United States
Department of Health and Human Services' Office of Inspector General and the
United States Department of Justice. The government is still in the process of
collecting information. The Company has cooperated and continues to cooperate
with the investigation.
At this time, the Company understands that the investigation includes a
review of whether the Company's rehabilitation therapy subsidiary properly
provided and/or billed for concurrent therapy services and whether it provided
unnecessary or unordered services to residents of skilled nursing facilities.
The Company understands that the investigation also includes a review of whether
its long-term care subsidiary properly disclosed its relationship with the
Company's rehabilitation therapy subsidiary and properly sought reimbursement
for services provided by that subsidiary.
The Company is unable to determine at this time when the investigation will
be concluded or what its precise scope might be. If there have been improper
practices or the investigation is broader in scope that the Company currently
understands it to be, 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
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 inpatient facilities. Based on its current understanding
of the investigation, however, the Company does not believe that the outcome of
the investigation will have a material adverse effect on the Company's financial
condition or results of operations. The foregoing statements with respect to the
outcome of the investigation are forward looking and could be affected by a
number of factors, including the actual scope of the investigation, the
government's factual findings and the interpretation of Federal statutes and
regulations by the government and federal courts.
In 1996, the Connecticut Attorney General's office and the Connecticut
Department of Social Services ("DSS") began investigating and initiated a
hearing as to whether Medicaid cost reports for 1993 and 1994 submitted to the
DSS by the Company's long-term care subsidiary contained false and misleading
fiscal information. Based on its current understanding of the investigation, the
Company believes the investigation will not have a material adverse effect on
the Company's financial condition or results of operations. The foregoing
statement with regard to the outcome of this investigation is forward looking
and could be affected by a number of factors, including factual findings and
interpretation of applicable laws and regulations by the Attorney General and
the DSS and whether any such factual findings could serve as a basis for
proceedings by other regulatory authorities.
21
<PAGE>
LITIGATION
On June 30, 1995, two civil class 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 purchased
shares of the Company's common stock between October 26, 1994 and June 27, 1995,
or who 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. The Complaint alleges that defendants misrepresented or failed to
disclose material facts about the United States Department of Health and Human
Services' Office of Inspector General ("OIG") investigation and about the
Company's operations and financial results, which plaintiffs contend artifically
inflated the price of the Company's securities.
In October 1996, the Company reached an agreement in principle to settle
these class action lawsuits for $24,000,000 which the Company funded in the
fourth quarter of 1996. On May 5, 1997, the Court entered an order approving the
settlement and dismissing the litigation. In March 1997, the Company received
$9,000,000 from its director and officer liability insurance carrier for its
claim submitted in connection with the settlement.
On or about January 23, 1996, two former stockholders of SunCare filed a
lawsuit (the "SunCare Litigation" previously defined as 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 investigation by the OIG 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 a registration rights agreement pursuant to which the
Company agreed to register the shares of the Company's common stock issued to
such former stockholders of SunCare in the acquisition. Plaintiffs purport to
seek recission, unspecified compensatory damages, punitive damages and other
relief. By Order dated October 11, 1996, the court granted in part and denied in
part defendants' motion to dismiss. The Company believes it has meritorious
defenses to the SunCare Litigation. There can be no assurance that the SunCare
Litigation will not have an impact on the Company's accounting for the merger.
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. Brickell Partners filed a new
complaint, alleging the same claims, on August 19, 1996. Defendants have moved
to dismiss the new complaint. The Company believes it has meritorious defenses
to the new complaint.
The Company believes the SunCare Litigation and the derivative action will
not have a material adverse impact on its financial condition or results of
operations, 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 SunCare Litigation and the derivative action 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 outcome of the OIG investigation and all
factors that could affect that outcome.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is found in Management's Discussion
and Analysis of Financial Condition and Results of Operations and is hereby
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
(10.1) Sun 1997 Stock Incentive Plan
(10.2) Sun 1997 Non-Employee Directors' Stock Plan
(10.3) Lease Agreement for Casa Loma Convalescent Center dated as of February 24, 1997,
by and between Idaho Associates, LLC ("Lessor") and Sunrise Healthcare
Corporation ("Lessee").
(11.1) Computation of Earnings per Share
(27) Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Report dated January 30, 1997, filed February 14, 1997 and filed as amended
on April 14, 1997 reporting the acquisition of Ashbourne PLC.
Report dated February 17, 1997 and filed February 24, 1997 reporting the
Company's signing of definitive agreements with Retirement Care Associates, Inc.
("Retirement Care") and Contour Medical, Inc. ("Contour") under which the
Company agreed to purchase Retirement Care and its 65% owned subsidiary Contour.
Report dated May 5, 1995 and filed March 28, 1997 which included the
financial statements of Golden Care, Inc.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN HEALTHCARE GROUP, INC.
Date: May 14, 1997 By: /s/ ROBERT D. WOLTIL*
------------------------------------------
Robert D. Woltil
PRINCIPAL FINANCIAL OFFICER
*Signing on the behalf of the Registrant and as principal financial officer.
24
<PAGE>
EXHIBIT 10.1
SUN HEALTHCARE GROUP, INC.
1997 STOCK INCENTIVE PLAN
1. PURPOSE. The purposes of the Sun Healthcare Group, Inc. 1997 Stock
Incentive Plan (the "PLAN") are to attract, retain and motivate officers and
other key employees and consultants of Sun Healthcare Group, Inc. (the
"COMPANY"), to compensate them for their contributions to the growth and profits
of the Company and to encourage ownership by them of stock of the Company. The
Plan is being adopted as a replacement to the 1996 Combined Incentive and
Nonqualified Stock Option Plan, under which no additional options shall be
granted as of the Effective Date (as defined herein).
2. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as follows:
"ADMINISTRATOR" means the individual or individuals to whom the
Committee delegates authority under the Plan in accordance with Section
3(d).
"AFFILIATE" and "ASSOCIATE" have the respective meanings ascribed to
such terms in Rule 12b-2 promulgated under the Exchange Act.
"AWARD" means an award made pursuant to the terms of the Plan to an
Eligible Individual in the form of Stock Options, Stock Appreciation Rights,
Stock Awards, Performance Share Awards, Section 162(m) Awards or other
awards determined by the Committee.
"AWARD AGREEMENT" means a written agreement or certificate granting an
Award. An Award Agreement shall be executed by an officer on behalf of the
Company and shall contain such terms and conditions as the Committee deems
appropriate and that are not inconsistent with the terms of the Plan. The
Committee may in its discretion require that an Award Agreement be executed
by the Participant to whom the relevant Award is made.
"BENEFICIAL OWNER" has the meaning ascribed to such term in Rule 13d-3
promulgated under the Exchange Act.
"BOARD" means the Board of Directors of the Company.
A "CHANGE IN CONTROL" of the Company shall be deemed to have occurred
when:
(a) any "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities and Exchange Act of 1934, as amended (the
"1934 ACT")), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company (an "ACQUIRING PERSON"), is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
1934 Act), directly or indirectly, of more than 33 1/3% of the then
outstanding voting stock of the Company;
(b) the shareholders of the Company and a majority of the
non-employee directors of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 66 2/3% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation;
(c) the shareholders of the Company approve a plan of reorganization
(other than a reorganization or liquidation under the United States
Bankruptcy Code or complete liquidation of the Company) or an agreement
for the sale or disposition by the Company of all or substantially all of
the Company's assets;
(d) during any period of two consecutive years (beginning on or after
the Effective Date), individuals who at the beginning of such period
constitute the Board and any new director (other than a director who is a
representative or nominee of an Acquiring Person) whose election by the
Board or nomination for election by the Company's shareholders was
approved by a vote of at
<PAGE>
least a majority of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination
for election was previously so approved, no longer constitute a majority
of the Board;
PROVIDED, HOWEVER, that a Change in Control shall not be deemed to have
occurred in the event of
(i) a sale or conveyance in which the Company continues as a holding
company of an entity or entities that conduct the business or businesses
formerly conducted by the Company; or
(ii) any transaction undertaken for the purpose of reincorporating
the Company under the laws of another jurisdiction, if such transaction
does not materially affect the beneficial ownership of the Company's
capital stock.
"CODE" means the Internal Revenue Code of 1986, as amended, and the
applicable rulings and regulations thereunder.
"COMBINED VOTING POWER" means the combined voting power of the Company's
or other relevant entity's then outstanding voting securities.
"COMMITTEE" means the Compensation Committee of the Board, any successor
committee thereto or any other committee appointed by the Board to
administer the Plan.
"COMMON STOCK" means the Common Stock, par value $.01 per share, of the
Company.
"ELIGIBLE INDIVIDUALS" means the individuals described in Section 6 who
are eligible for Awards under the Plan.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the applicable rulings and regulations thereunder.
"FAIR MARKET VALUE" means, in the event the Common Stock is traded on a
recognized securities exchange or quoted by the National Association of
Securities Dealers Automated Quotations on National Market Issues, an amount
equal to the average of the high and low prices of the Common Stock on such
exchange or such quotation on the date set for valuation or, if no sales of
Common Stock were made on said exchange or so quoted on that date, the
average of the high and low prices of the Common Stock on the next preceding
day on which sales were made on such exchange or quotations; or, if the
Common Stock is not so traded or quoted, that value determined, in its sole
discretion, by the Committee.
"INCENTIVE STOCK OPTION" means a Stock Option which is an "incentive
stock option" within the meaning of Section 422 of the Code and designated
by the Committee as an Incentive Stock Option in an Award Agreement.
"NONQUALIFIED STOCK OPTION" means a Stock Option which is not an
Incentive Stock Option.
"PARENT" means any corporation which is a "parent corporation" within
the meaning of Section 424(e) of the Code with respect to the relevant
entity.
"PARTICIPANT" means an Eligible Individual to whom an Award has been
granted under the Plan.
"PERFORMANCE PERIOD" means a fiscal year of the Company or such other
period that may be specified by the Committee in connection with the grant
of a Section 162(m) Award.
"PERFORMANCE SHARE AWARD" means a conditional Award of shares of Common
Stock granted to an Eligible Individual pursuant to Section 11 hereof.
"PERSON" means any person, entity or "group" within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act.
2
<PAGE>
"SECTION 162(m) PARTICIPANT" means, for a given fiscal year of the
Company, any Participant designated by the Committee by not later than 90
days following the start of such year as a Participant (or such other time
as may be required or permitted by Section 162(m) of the Code) whose
compensation for such fiscal year may be subject to the limit on deductible
compensation imposed by Section 162(m) of the Code.
"STOCK APPRECIATION RIGHT" means an Award to receive all or some portion
of the appreciation on shares of Common Stock granted to an Eligible
Individual pursuant to Section 9 hereof.
"STOCK AWARD" means an Award of shares of Common Stock granted to an
Eligible Individual pursuant to Section 10 hereof.
"STOCK OPTION" means an Award to purchase shares of Common Stock granted
to an Eligible Individual pursuant to Section 8 hereof.
"SUBSIDIARY" means (i) any corporation which is a "subsidiary
corporation" within the meaning of Section 424(f) of the Code with respect
to the Company or (ii) any other corporation or other entity in which the
Company, directly or indirectly, has an equity or similar interest and which
the Committee designates as a Subsidiary for the purposes of the Plan.
"SUBSTITUTE AWARD" means an Award granted upon assumption of, or in
substitution for, outstanding awards previously granted by a company or
other entity in connection with a corporate transaction, such as a merger,
combination, consolidation or acquisition of property or stock.
3. ADMINISTRATION OF THE PLAN.
(a) POWER AND AUTHORITY OF THE COMMITTEE. The Plan shall be
administered by the Committee, which shall have full power and authority,
subject to the express provisions hereof, (i) to select Participants from
the Eligible Individuals, (ii) to make Awards in accordance with the Plan,
(iii) to determine the number of Shares subject to each Award or the cash
amount payable in connection with an Award, (iv) to determine the terms and
conditions of each Award, including, without limitation, those related to
vesting, forfeiture, payment and exercisability, and the effect, if any, of
a Participant's termination of employment with the Company or, subject to
Section 16 hereof, of a Change in Control on the outstanding Awards granted
to such Participant, and including the authority to amend the terms and
conditions of an Award after the granting thereof to a Participant in a
manner that is not, without the consent of the Participant, prejudicial to
the rights of such Participant in such Award, (v) to specify and approve the
provisions of the Award Agreements delivered to Participants in connection
with their Awards, (vi) to construe and interpret any Award Agreement
delivered under the Plan, (vii) to prescribe, amend and rescind rules and
procedures relating to the Plan, (viii) to vary the terms of Awards to take
account of tax, securities law and other regulatory requirements of foreign
jurisdictions, (ix) subject to the provisions of the Plan and subject to
such additional limitations and restrictions as the Committee may impose, to
delegate to one or more officers of the Company some or all of its authority
under the Plan, and (x) to make all other determinations and to formulate
such procedures as may be necessary or advisable for the administration of
the Plan.
(b) PLAN CONSTRUCTION AND INTERPRETATION. The Committee shall have
full power and authority, subject to the express provisions hereof, to
construe and interpret the Plan.
(c) DETERMINATIONS OF COMMITTEE FINAL AND BINDING. All determinations
by the Committee in carrying out and administering the Plan and in
construing and interpreting the Plan shall be final, binding and conclusive
for all purposes and upon all persons interested herein.
(d) DELEGATION OF AUTHORITY. The Committee may, but need not, from
time to time delegate some or all of its authority under the Plan to an
Administrator consisting of one or more members of the Committee or of one
or more officers of the Company; PROVIDED, HOWEVER, that the Committee may
not delegate its authority (i) to make Awards to Eligible Individuals (A)
who are subject on the date
3
<PAGE>
of the award to the reporting rules under Section 16(a) of the Exchange Act,
(B) who are Section 162(m) Participants or (C) who are officers of the
Company who are delegated authority by the Committee hereunder, or (ii)
under Sections 3(b) and 17 of the Plan. Any delegation hereunder shall be
subject to the restrictions and limits that the Committee specifies at the
time of such delegation or thereafter. Nothing in the Plan shall be
construed as obligating the Committee to delegate authority to an
Administrator, and the Committee may at any time rescind the authority
delegated to an Administrator appointed hereunder or appoint a new
Administrator. At all times, the Administrator appointed under this Section
3(d) shall serve in such capacity at the pleasure of the Committee. Any
action undertaken by the Administrator in accordance with the Committee's
delegation of authority shall have the same force and effect as if
undertaken directly by the Committee, and any reference in the Plan to the
Committee shall, to the extent consistent with the terms and limitations of
such delegation, be deemed to include a reference to the Administrator.
(e) LIABILITY OF COMMITTEE. No member of the Committee shall be liable
for anything whatsoever in connection with the administration of the Plan
except such person's own willful misconduct. Under no circumstances shall
any member of the Committee be liable for any act or omission of any other
member of the Committee. In the performance of its functions with respect to
the Plan, the Committee shall be entitled to rely upon information and
advice furnished by the Company's officers, the Company's accountants, the
Company's counsel and any other party the Committee deems necessary, and no
member of the Committee shall be liable for any action taken or not taken in
reliance upon any such advice.
4. DURATION OF PLAN. The Plan shall remain in effect until terminated by
the Board of Directors and thereafter until all Awards granted under the Plan
are satisfied by the issuance of shares of Common Stock or the payment of cash
or are terminated under the terms of the Plan or under the Award Agreement
entered into in connection with the grant thereof. Notwithstanding the
foregoing, no Awards may be granted under the Plan after the tenth anniversary
of the Effective Date (as defined in Section 18(k)).
5. SHARES OF STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided
in Section 15(b) hereof, the number of shares of Common Stock that may be issued
under the Plan pursuant to Awards shall not exceed, in the aggregate, 4,500,000
shares (the "SECTION 5 LIMIT"), of which the number of shares of Common Stock
that may be issued under the Plan pursuant to Incentive Stock Options may not
exceed, in the aggregate, 500,000 shares. Such shares may be either authorized
but unissued shares, treasury shares or any combination thereof. For purposes of
determining the number of shares that remain available for issuance under the
Plan, the following rules shall apply:
(a) the number of Shares subject to outstanding Awards shall be charged
against the Section 5 Limit; and
(b) the Section 5 Limit shall be increased by:
(i) the number of shares subject to an Award (or portion thereof)
which lapses, expires or is otherwise terminated without the issuance of
such shares or is settled by the delivery of consideration other than
shares,
(ii) the number of shares tendered to pay the exercise price of a
Stock Option or other Award, and
(iii) the number of shares withheld from any Award to satisfy a
Participant's tax withholding obligations or, if applicable, to pay the
exercise price of a Stock Option or other Award.
In addition, any shares underlying Substitute Awards shall not be counted
against the Section 5 Limit set forth in the first sentence of this Section 5.
4
<PAGE>
6. ELIGIBLE INDIVIDUALS.
(a) ELIGIBILITY CRITERIA. Awards may be granted by the Committee to
individuals ("ELIGIBLE INDIVIDUALS") who are officers or other key employees
or consultants of the Company or a Subsidiary with the potential to
contribute to the future success of the Company or its Subsidiaries. Members
of the Committee will not be eligible to receive Awards under the Plan. An
individual's status as an Administrator will not affect his or her
eligibility to participate in the Plan.
(b) MAXIMUM NUMBER OF SHARES PER ELIGIBLE INDIVIDUAL. In accordance
with the requirements under Section 162(m) of the Code, no Eligible
Individual shall receive grants of Awards with respect to an aggregate of
more than 400,000 shares of Common Stock in respect of any fiscal year of
the Company. For purposes of the preceding sentence, any Award that is made
as bonus compensation, or is made in lieu of compensation that otherwise
would be payable to an Eligible Individual, shall be considered made in
respect of the fiscal year to which such bonus or other compensation relates
or otherwise was earned.
7. AWARDS GENERALLY. Awards under the Plan may consist of Stock Options,
Stock Appreciation Rights, Stock Awards, Performance Share Awards, Section
162(m) Awards or other awards determined by the Committee. The terms and
provisions of an Award shall be set forth in a written Award Agreement approved
by the Committee and delivered or made available to the Participant as soon as
practicable following the date of the award. The vesting, exercisability,
payment and other restrictions applicable to an Award (which may include,
without limitation, restrictions on transferability or provision for mandatory
resale to the Company) shall be determined by the Committee and set forth in the
applicable Award Agreement. Notwithstanding the foregoing, the Committee may
accelerate (i) the vesting or payment of any Award, (ii) the lapse of
restrictions on any Award or (iii) the date on which any Option or Stock
Appreciation Right first becomes exercisable. The date of a Participant's
termination of employment for any reason shall be determined in the sole
discretion of the Committee. The Committee shall also have full authority to
determine and specify in the applicable Award Agreement the effect, if any, that
a Participant's termination of employment for any reason will have on the
vesting, exercisability, payment or lapse of restrictions applicable to an
outstanding Award.
8. STOCK OPTIONS.
(a) TERMS OF STOCK OPTIONS GENERALLY. Subject to the terms of the Plan
and the applicable Award Agreement, each Stock Option shall entitle the
Participant to whom such Stock Option was granted to purchase the number of
shares of Common Stock specified in the applicable Award Agreement and shall
be subject to the terms and conditions established by the Committee in
connection with the Award and specified in the applicable Award Agreement.
Upon satisfaction of the conditions to exercisability specified in the
applicable Award Agreement, a Participant shall be entitled to exercise the
Stock Option in whole or in part and to receive, upon satisfaction or
payment of the exercise price or an irrevocable notice of exercise in the
manner contemplated by Section 8(d) below, the number of shares of Common
Stock in respect of which the Stock Option shall have been exercised. Stock
Options may be either Nonqualified Stock Options or Incentive Stock Options.
(b) EXERCISE PRICE. The exercise price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee at the
time of grant and set forth in the Award Agreement, PROVIDED, that the
exercise price per share shall be no less than 100% of the Fair Market Value
per share on the date of grant. Notwithstanding the foregoing, the exercise
price per share of a Stock Option that is a Substitute Award may be less
than the Fair Market Value per share on the date of award, PROVIDED that the
excess of:
(i) the aggregate Fair Market Value (as of the date such Substitute
Award is granted) of the shares subject to the Substitute Award, over
(ii) the aggregate exercise price thereof,
5
<PAGE>
does not exceed the excess of:
(iii) the aggregate fair market value (as of the time immediately
preceding the transaction giving rise to the Substitute Award, such fair
market value to be determined by the Committee) of the shares of the
predecessor entity that were subject to the award assumed or substituted
for by the Company, over
(iv) the aggregate exercise price of such shares.
(c) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee and set forth in the Award Agreement; PROVIDED, HOWEVER, that a
Stock Option shall not be exercisable after the expiration of ten (10) years
after the date the Stock Option is granted.
(d) METHOD OF EXERCISE. Subject to the provisions of the applicable
Award Agreement, the exercise price of a Stock Option may be paid in cash or
previously owned shares or a combination thereof and, if the applicable
Award Agreement so provides, in whole or in part through the withholding of
shares subject to the Stock Option with a value equal to the exercise price.
In accordance with the rules and procedures established by the Committee for
this purpose, the Stock Option may also be exercised through a "cashless
exercise" procedure approved by the Committee involving a broker or dealer
approved by the Committee, that affords Participants the opportunity to sell
immediately some or all of the shares underlying the exercised portion of
the Stock Option in order to generate sufficient cash to pay the Stock
Option exercise price and/or to satisfy withholding tax obligations related
to the Stock Option.
9. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights shall be subject
to the terms and conditions established by the Committee in connection with the
Award thereof and specified in the applicable Award Agreement. Upon satisfaction
of the conditions to the payment specified in the applicable Award Agreement,
each Stock Appreciation Right shall entitle a Participant to an amount, if any,
equal to the Fair Market Value of a share of Common Stock on the date of
exercise over the Stock Appreciation Right exercise price specified in the
applicable Award Agreement. At the discretion of the Committee, payments to a
Participant upon exercise of a Stock Appreciation Right may be made in Shares,
cash or a combination thereof. A Stock Appreciation Right may be granted alone
or in addition to other Awards, or in tandem with a Stock Option. If granted in
tandem with a Stock Option, a Stock Appreciation Right shall cover the same
number of shares of Common Stock as covered by the Stock Option (or such lesser
number of shares as the Committee may determine) and shall be exercisable only
at such time or times and to the extent the related Stock Option shall be
exercisable, and shall have the same term and exercise price as the related
Stock Option. Upon exercise of a Stock Appreciation Right granted in tandem with
a Stock Option, the related Stock Option shall be cancelled automatically to the
extent of the number of shares covered by such exercise; conversely, if the
related Stock option is exercised as to some or all of the shares covered by the
tandem grant, the tandem Stock Appreciation Right shall be cancelled
automatically to the extent of the number of shares covered by the Stock Option
exercise.
10. STOCK AWARDS. Stock Awards shall consist of one or more shares of
Common Stock granted or offered for sale to an Eligible Individual, and shall be
subject to the terms and conditions established by the Committee in connection
with the Award and specified in the applicable Award Agreement. The shares of
Common Stock subject to a Stock Award may, among other things, be subject to
vesting requirements or restrictions on transferability.
11. PERFORMANCE SHARE AWARDS. Performance Share Awards shall be evidenced
by an Award Agreement in such form and containing such terms and conditions as
the Committee deems appropriate and which are not inconsistent with the terms of
the Plan. Each Award Agreement shall set forth the number of shares of Common
Stock to be earned by a Participant upon satisfaction of certain specified
performance criteria and subject to such other terms and conditions as the
Committee deems appropriate. Payment in settlement of a Performance Share Award
shall be made as soon as practicable following the conclusion of
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the applicable performance period, or at such other time as the Committee shall
determine, in shares of Common Stock, in an equivalent amount of cash or in a
combination of Common Stock and cash, as the Committee shall determine.
12. OTHER AWARDS. The Committee shall have the authority to specify the
terms and provisions of other forms of equity-based or equity-related Awards not
described above which the Committee determines to be consistent with the purpose
of the Plan and the interests of the Company, which Awards may provide for cash
payments based in whole or in part on the value or future value of Common Stock,
for the acquisition or future acquisition of Common Stock, or any combination
thereof. Other Awards shall also include cash payments (including the cash
payment of dividend equivalents) under the Plan which may be based on one or
more criteria determined by the Committee which are unrelated to the value of
Common Stock and which may be granted in tandem with, or independent of, other
Awards under the Plan.
13. SECTION 162(m) AWARDS.
(a) TERMS OF SECTION 162(m) AWARDS GENERALLY. In addition to any other
Awards under the Plan, the Company may make Awards that are intended to
qualify as "qualified performance-based compensation" for purposes of
Section 162(m) of the Code ("SECTION 162(m) AWARDS"). Section 162(m) Awards
may consist of Stock Options, Stock Appreciation Rights, Stock Awards,
Performance Share Awards or Other Awards the vesting, exercisability and/or
payment of which is conditioned upon the attainment for the applicable
Performance Period of specified performance targets related to designated
performance goals for such period selected by the Committee from among the
performance goals specified in Section 13(b) below. Section 162(m) Awards
will be made in accordance with the procedures specified in applicable
Treasury regulations for compensation intended to be "qualified
performance-based compensation."
(b) PERFORMANCE GOALS. For purposes of this Section 13, performance
goals shall be limited to one or more of the following: (i) net revenue,
(ii) net earnings, (iii) operating earnings or income, (iv) absolute and/or
relative return on equity or assets, (v) earnings per share, (vi) cash flow,
(vii) pretax profits, (viii) earnings growth, (ix) revenue growth, (x) book
value per share, (xi) stock price and (xii) performance relative to peer
companies, each of which may be established on a corporate-wide basis or
established with respect to one or more operating units, divisions, acquired
businesses, minority investments, partnerships or joint ventures.
(c) OTHER PERFORMANCE-BASED COMPENSATION. The Committee's decision to
make, or not to make, Section 162(m) Awards within the meaning of this
Section 13 shall not in any way prejudice the qualification of any other
Awards as performance-based compensation under Section 162(m). In
particular, Awards of Stock Options may, pursuant to applicable regulations
promulgated under Section 162(m), be qualified as performance-based
compensation for Section 162(m) purposes without regard to this Section 13.
14. NON-TRANSFERABILITY. No Award granted under the Plan or any rights or
interests therein shall be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of except by will or by the laws of descent and
distribution or pursuant to a "qualified domestic relations order" ("QDRO") as
defined in the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations thereunder; PROVIDED, HOWEVER,
that the Committee may, subject to such terms and conditions as the Committee
shall specify, permit the transfer of an Award to a Participant's family members
or to one or more trusts established in whole or in part for the benefit of one
or more of such family members; and PROVIDED FURTHER, that the restrictions in
this sentence shall not apply to the shares received in connection with an Award
after the date that the restrictions on transferability of such shares set forth
in the applicable Award Agreement have lapsed. During the lifetime of a
Participant, a Stock Option or Stock Appreciation Right shall be exercisable
only by, and payments in settlement of Awards shall be payable only to, the
Participant or, if applicable, the "alternate payee" under a QDRO or the family
member or
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trust to whom such Stock Option, Stock Appreciation Right or other Award has
been transferred in accordance with the previous sentence.
15. RECAPITALIZATION OR REORGANIZATION.
(a) AUTHORITY OF THE COMPANY AND SHAREHOLDERS. The existence of the
Plan, the Award Agreements and the Awards granted hereunder shall not affect
or restrict in any way the right or power of the Company or the shareholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of stock or
of options, warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks whose rights are superior to or affect
the Common Stock or the rights thereof or which are convertible into or
exchangeable for Common Stock, or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
(b) CHANGE IN CAPITALIZATION. Notwithstanding any provision of the
Plan or any Award Agreement, in the event of any change in the outstanding
Common Stock by reason of a stock dividend, recapitalization,
reorganization, merger, consolidation, stock split, combination or exchange
of shares or any other significant corporate event affecting the Common
Stock, the Committee, in its discretion, may make (i) such proportionate
adjustments as it considers appropriate (in the form determined by the
Committee in its sole discretion) to prevent diminution or enlargement of
the rights of Participants under the Plan with respect to the aggregate
number of shares of Common Stock for which Awards in respect thereof may be
granted under the Plan, the number of shares of Common Stock covered by each
outstanding Award, and the exercise or Award prices in respect thereof
and/or (ii) such other adjustments as it deems appropriate. The Committee's
determination as to what, if any, adjustments shall be made shall be final
and binding on the Company and all Participants.
16. CHANGE IN CONTROL. In the event of a Change in Control and except as
the Committee (as constituted immediately prior to such Change in Control) may
otherwise determine in its sole discretion, (i) all Stock Options or Stock
Appreciation Rights then outstanding shall become fully exercisable as of the
date of the Change in Control, whether or not then exercisable, (ii) all
restrictions and conditions of all Stock Awards then outstanding shall lapse as
of the date of the Change in Control, (iii) all Performance Share Awards shall
be deemed to have been fully earned as of the date of the Change in Control, and
(iv) in the case of a Change in Control involving a merger of, or consolidation
involving, the Company in which the Company is (A) not the surviving corporation
(the "SURVIVING ENTITY") or (B) becomes a wholly owned subsidiary of the
Surviving Entity or any Parent thereof, each outstanding Stock Option granted
under the Plan and not exercised (a "PREDECESSOR OPTION") will be converted into
an option (a "SUBSTITUTE OPTION") to acquire common stock of the Surviving
Entity or its Parent, which Substitute Option will have substantially the same
terms and conditions as the Predecessor Option, with appropriate adjustments as
to the number and kind of shares and exercise prices.
17. AMENDMENT OF THE PLAN. The Board or Committee may at any time and from
time to time terminate, modify, suspend or amend the Plan in whole or in part;
PROVIDED, HOWEVER, that no such termination, modification, suspension or
amendment shall be effective without shareholder approval if such approval is
required to comply with any applicable law or stock exchange rule; and PROVIDED
FURTHER, that the Board or Committee may not, without shareholder approval,
increase the maximum number of shares issuable under the Plan. No termination,
modification, suspension or amendment of the Plan shall, without the consent of
a Participant to whom any Awards shall previously have been granted, adversely
affect his or her rights under such Awards. Notwithstanding any provision herein
to the contrary, the Board or Committee shall have broad authority to amend the
Plan or any Stock Option to take into account changes in applicable tax laws,
securities laws, accounting rules and other applicable state and federal laws.
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18. MISCELLANEOUS.
(a) TAX WITHHOLDING. No later than the date as of which an amount
first becomes includable in the gross income of the Participant for
applicable income tax purposes with respect to any award under the Plan, the
Participant shall pay to the Company or make arrangements satisfactory to
the Committee regarding the payment of any federal, state or local taxes of
any kind required by law to be withheld with respect to such amount. Unless
otherwise determined by the Committee, in accordance with rules and
procedures established by the Committee, the minimum required withholding
obligations may be settled with Common Stock, including Common Stock that is
part of the award that gives rise to the withholding requirement. The
obligation of the Company under the Plan shall be conditioned upon such
payment or arrangements and the Company shall, to the extent permitted by
law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the Participant.
(b) LOANS. On such terms and conditions as shall be approved by the
Committee, the Company may directly or indirectly lend money to a
Participant to accomplish the purposes of the Plan, including to assist such
Participant to acquire or carry shares of Common Stock acquired upon the
exercise of Stock Options granted hereunder, and the Committee may also
separately lend money to any Participant to pay taxes with respect to any of
the transactions contemplated by the Plan.
(c) NO RIGHT TO GRANTS OR EMPLOYMENT. No Eligible Individual or
Participant shall have any claim or right to receive grants of Awards under
the Plan. Nothing in the Plan or in any Award or Award Agreement shall
confer upon any employee of the Company or any Subsidiary any right to
continued employment with the Company or any Subsidiary, as the case may be,
or interfere in any way with the right of the Company or a Subsidiary to
terminate the employment of any of its employees at any time, with or
without cause.
(d) UNFUNDED PLAN. The Plan is intended to constitute an unfunded plan
for incentive compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of
the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created
under the Plan to deliver Common Stock or payments in lieu thereof with
respect to awards hereunder.
(e) OTHER EMPLOYEE BENEFIT PLANS. Payments received by a Participant
under any Award made pursuant to the provisions of the Plan shall not be
included in, nor have any effect on, the determination of benefits under any
other employee benefit plan or similar arrangement provided by the Company.
(f) SECURITIES LAW RESTRICTIONS. The Committee may require each
Eligible Individual purchasing or acquiring shares of Common Stock pursuant
to a Stock Option or other Award under the Plan to represent to and agree
with the Company in writing that such Eligible Individual is acquiring the
shares for investment and not with a view to the distribution thereof. All
certificates for shares of Common Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any exchange upon
which the Common Stock is then listed, and any applicable federal or state
securities law, and the Committee may cause a legend or legends to be put on
any such certificates to make appropriate reference to such restrictions. No
shares of Common Stock shall be issued hereunder unless the Company shall
have determined that such issuance is in compliance with, or pursuant to an
exemption from, all applicable federal and state securities laws.
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(g) COMPLIANCE WITH RULE 16b-3.
(i) The Plan is intended to comply with Rule 16b-3 under the
Exchange Act or its successors under the Exchange Act and the Committee
shall interpret and administer the provisions of the Plan or any Award
Agreement in a manner consistent therewith. To the extent any provision
of the Plan or Award Agreement or any action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Committee. Moreover, in the event the Plan or
an Award Agreement does not include a provision required by Rule 16b-3 to
be stated therein, such provision (other than one relating to eligibility
requirements, or the price and amount of Awards) shall be deemed
automatically to be incorporated by reference into the Plan or such Award
Agreement insofar as Participants subject to Section 16 of the Exchange
Act are concerned.
(ii) Notwithstanding anything contained in the Plan or any Award
Agreement to the contrary, if the consummation of any transaction under
the Plan would result in the possible imposition of liability on a
Participant pursuant to Section 16(b) of the Exchange Act, the Committee
shall have the right, in its sole discretion, but shall not be obligated,
to defer such transaction to the extent necessary to avoid such
liability.
(h) AWARD AGREEMENT. In the event of any conflict or inconsistency
between the Plan and any Award Agreement, the Plan shall govern, and the
Award Agreement shall be interpreted to minimize or eliminate any such
conflict or inconsistency.
(i) EXPENSES. The costs and expenses of administering the Plan shall
be borne by the Company.
(j) APPLICABLE LAW. Except as to matters of federal law, the Plan and
all actions taken thereunder shall be governed by and construed in
accordance with the laws of the State of New Mexico without giving effect to
conflicts of law principles.
(k) EFFECTIVE DATE. The Plan shall be effective as of the date (the
"EFFECTIVE DATE") of its approval by the shareholders of the Company. Awards
granted under the Plan prior to such shareholder approval shall be and are
made subject to defeasance by the failure of shareholders to approve the
Plan.
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EXHIBIT 10.2
SUN HEALTHCARE GROUP, INC.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
1. DEFINITIONS.
"ANNUAL MEETING" means an annual meeting of the Company's stockholders.
"ANNUAL RETAINER" means any annual fee payable to a Non-Employee Director
for service on the Board and any other fee payable to a Non-Employee Director
for acting as chairperson of any committee of the Board.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to administer the
Plan, which shall be composed exclusively of members of the Board who are not
Non-Employee Directors.
"COMMON STOCK" means the Common Stock of the Company, par value $.01 per
share.
"COMPANY" means Sun Healthcare Group, Inc., a Delaware corporation, or any
successor to substantially all of its business.
"DISABILITY" means eligibility for disability benefits under the terms of
the Company's long-term disability plan in effect at the time the Non-Employee
Director becomes disabled.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" means, in the event the Common Stock is traded on a
recognized securities exchange or quoted by the National Association of
Securities Dealers Automated Quotations on National Market Issues, an amount
equal to the average of the high and low prices of the Common Stock on such
exchange or such quotation on the date set for valuation or, if no sales of
Common Stock were made on said exchange or so quoted on that date, the average
of the high and low prices of the Common Stock on the next preceding day on
which sales were made on such exchange or quotations; or, if the Common Stock is
not so traded or quoted, that value determined, in its sole discretion, by the
Committee.
"NON-EMPLOYEE DIRECTOR" means a member of the Board who is not an employee
of the Company or any of its Subsidiaries.
"OPTION" means an option to purchase shares of Common Stock awarded to a
Non-Employee Director pursuant to the Plan, which option shall not be intended
to qualify, and shall not be treated, as an "incentive stock option" within the
meaning of Section 422 of the Code.
"PERSON" means any person, entity, or "group" within the meaning of Section
13(d)(3) or Section 14(d)(2) of the Exchange Act.
"PLAN" means the Sun Healthcare Group, Inc. 1997 Non-Employee Directors'
Stock Plan.
"RESTRICTED GRANT SHARES" means shares of Common Stock granted to a
Non-Employee Director, which shares are subject to such restrictions on transfer
or other incidents of ownership for such periods of time, and are subject to
such terms and conditions as are set forth in Section 5 below.
"RESTRICTED SHARES" means Restricted Grant Shares and Restricted Retainer
Shares.
"RESTRICTED RETAINER SHARES" means shares of Common Stock which a
Non-Employee Director elects to receive in lieu of part of his or her Annual
Retainer, which shares are subject to such restrictions on transfer or other
incidents of ownership for such periods of time, and are subject to such terms
and conditions as are set forth in Section 5 below.
<PAGE>
"RETIREMENT" means a Non-Employee Director ceasing to be a member of the
Board as a result of retirement from the Board in accordance with the retirement
policy then applicable to Board members.
"SUBSIDIARY" means (i) any corporation which is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code with respect to the Company or
(ii) any other corporation or other entity in which the Company, directly or
indirectly, has an equity or similar interest and which the Committee designates
as a Subsidiary for the purposes of the Plan.
2. PURPOSES. The purposes of the Plan are to retain the services of
qualified individuals who are not employees of the Company to serve as members
of the Board and to secure for the Company the benefits of the incentives
inherent in increased Common Stock ownership by such individuals by awarding
such individuals Restricted Shares and Options to purchase shares of Common
Stock.
3. ADMINISTRATION.
(a) AUTHORITY. The Committee will be responsible for administering the
Plan. The Committee will have authority to adopt such rules as it may deem
appropriate to carry out the purposes of the Plan, and shall have authority
to interpret and construe the provisions of the Plan and any agreements and
notices under the Plan and to make determinations pursuant to any Plan
provision. Each interpretation, determination or other action made or taken
by the Committee pursuant to the Plan shall be final and binding on all
Persons. No member of the Committee shall be liable for any action or
determination made in good faith, and the members of the Committee shall be
entitled to indemnification and reimbursement in the manner provided in the
Company's Restated Certificate of Incorporation as it may be amended from
time to time.
(b) DELEGATION. The Committee may designate a committee composed of
one or more members of the Board to carry out its responsibilities under
such conditions as it may set.
4. SHARES AVAILABLE. Subject to the provisions of Section 7 of the Plan,
the maximum number of shares of Common Stock which may be issued under the Plan
shall not exceed 400,000 shares (the "SECTION 4 LIMIT"). Either authorized and
unissued shares of Common Stock or treasury shares may be delivered pursuant to
the Plan. For purposes of determining the number of shares that remain available
for issuance under the Plan, the following rules shall apply:
(a) the number of shares subject to awards granted under the Plan shall
be charged against the Section 4 Limit; and
(b) the Section 4 Limit shall be increased by:
(i) the number of shares subject to an Option which lapses, expires
or is otherwise terminated without the issuance of such shares,
(ii) the number of shares tendered to pay the exercise price of an
Option, and
(iii) the number of shares withheld to satisfy any tax withholding
obligations of a Non-Employee Director with respect to any shares or
other payments hereunder.
5. RESTRICTED SHARES.
(a) RESTRICTED RETAINER SHARE AWARDS. With respect to each Annual
Meeting commencing with the Annual Meeting coincident with or first
succeeding the Effective Date, each Non-Employee Director who will remain in
office after the date of such Annual Meeting may elect, no later than the
date of such Annual Meeting, to receive a specified percentage of his or her
Annual Retainer in the form of Restricted Retainer Shares; PROVIDED,
HOWEVER, that such percentage may not exceed 50%. In the event that such an
annual election is made, the Non-Employee Director will receive a number of
Restricted Retainer Shares determined by dividing (i) by (ii), and rounding
up the result to the next whole share, where (i) is the product of (x) the
percentage of the Annual Retainer which the Non-
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Employee Director elects to receive in the form of Restricted Retainer
Shares and (y) 110%, and (ii) is the Fair Market Value as of the date of
such Annual Meeting.
(b) RESTRICTED GRANT SHARE AWARDS.
(i) At the Annual Meeting coincident with or first succeeding a
Non-Employee Director's election to the Board (other than reelection for
a successive term), each Non-Employee Director (including any
Non-Employee Director reelected after a period during which he did not
serve on the Board) shall receive an award of 5,000 Restricted Grant
Shares.
(ii) At each Annual Meeting, other than Annual Meeting coincident
with or first succeeding a Non-Employee Director's initial election to
the Board (or reelection after a period during which he or she did not
serve on the Board), each Non-Employee Director who will remain in office
after the date of such Annual Meeting shall receive an additional award
of 2,000 Restricted Grant Shares (or such lesser number determined by
multiplying 2,000 by a fraction, the numerator of which is the number of
full or partial months since the immediately preceding Annual Meeting
during which such individual served on the Board in the capacity of a
Non-Employee Director, and the denominator of which is the number of full
or partial months since the immediately preceding Annual Meeting).
(c) TERMS OF RESTRICTED SHARES.
(i) VESTING SCHEDULE OF RESTRICTED RETAINER SHARES. Each award of
Restricted Retainer Shares granted as of an Annual Meeting shall vest and
become nonforfeitable on a quarterly basis commencing with the first day
of the calendar quarter coincident with or first succeeding the date of
such Annual Meeting.
(ii) VESTING SCHEDULE OF RESTRICTED GRANT SHARES. Each award of
Restricted Grant Shares granted as of an Annual Meeting shall vest and
become nonforfeitable in equal installments as of each of the first three
Annual Meetings following the date of grant
(iii) LAPSE OF RESTRICTIONS; FORFEITURE. Notwithstanding anything
herein to the contrary, if a Non-Employee Director ceases to be a member
of the Board by reason of death, Disability, Retirement or in the event
of his or her involuntary termination of service on the Board other than
for cause, all Restricted Shares issued to such Non-Employee Director
shall immediately vest in full and become nonforfeitable. If a
Non-Employee Director ceases to be a member of the Board for any other
reason, any Restricted Shares that have not vested as of the date of such
termination of service shall immediately be forfeited and all further
rights of such Non-Employee Director to or with respect to such
Restricted Shares shall terminate without any obligation on the part of
the Company.
(iv) SHARE CERTIFICATES; RIGHTS AND PRIVILEGES. At the time
Restricted Shares are granted to a Non-Employee Director, share
certificates representing the appropriate number of Restricted Shares
shall be registered in the name of the Non-Employee Director but, prior
to vesting, shall be held in the custody of the Company for the account
of such Non-Employee Director. The certificates shall bear a legend
restricting their transferability as provided in Section 5(c)(v) below.
The Non-Employee Director shall have all the rights and privileges of a
stockholder as to the Restricted Shares, including the right to receive
dividends and the right to vote such Restricted Shares, subject to the
restrictions set forth in Section 5(c)(v) below, unless and until such
Restricted Shares are forfeited pursuant to Section 5(c)(ii) above.
(v) RESTRICTIONS ON TRANSFER. Prior to vesting, the Restricted
Shares granted hereunder may not be sold, transferred, assigned, pledged
or otherwise encumbered or disposed of.
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6. OPTIONS. In addition to the awards of Restricted Shares described above
in Section 5, each Non-Employee Director shall also receive awards of Options
under the Plan as follows:
(a) OPTION GRANTS.
(i) INITIAL AWARD. At the Annual Meeting coincident with or first
succeeding a Non-Employee Director's election to the Board (other than
reelection for a successive term), such Non-Employee Director (including
any Non-Employee Director reelected after a period during which he or she
did not serve on the Board) shall receive an award consisting of an
Option to purchase 10,000 shares of Common Stock. Such Option shall have
a per share exercise price equal to the Fair Market Value of the Common
Stock on the date of award and shall be subject to the vesting schedule
provided for in Section 6(b) and the other terms and conditions provided
for herein.
(ii) ANNUAL AWARDS. At each Annual Meeting, other than the Annual
Meeting coincident with or first succeeding a Non-Employee Director's
initial election to the Board (or reelection after a period during which
he or she did not serve on the Board), each Non-Employee Director who
will remain on the Board following the date of such Annual Meeting shall
receive as of such date an award consisting of an Option to purchase
4,000 shares of Common Stock (or such lesser number determined by
multiplying 4,000 by a fraction, the numerator of which is the number of
full or partial months since the immediately preceding Annual Meeting
during which such individual served on the Board in the capacity of a
Non-Employee Director, and the denominator of which is the number of full
or partial months since the immediately preceding Annual Meeting). Such
Option shall have a per share exercise price equal to the Fair Market
Value of the Common Stock on the date of award and shall be subject to
the vesting schedule provided for in Section 6(b) and the other terms and
conditions provided for herein.
(b) VESTING SCHEDULE AND TERM OF OPTIONS. Options awarded pursuant to
the Plan shall vest and become exercisable in equal installments as of each
of the first three Annual Meetings following the date of grant; PROVIDED,
HOWEVER, that an Option shall become fully vested and exercisable upon a
Non-Employee ceasing to be a member of the Board as a result of death,
Disability or Retirement, or in the event of his or her involuntary
termination of service on the Board other than for cause. An Option shall
expire on the date of the Annual Meeting held in the tenth calendar year
following the date of grant.
(c) EXERCISE OF OPTIONS FOLLOWING TERMINATION OF SERVICE.
(i) EXERCISE FOLLOWING TERMINATION OF SERVICE DUE TO DEATH,
DISABILITY OR RETIREMENT. If a Non-Employee Director's ceases to be a
member of the Board by reason of death, Disability, Retirement or in the
event of his involuntary termination of service on the Board other than
for cause, all Options awarded to such Non-Employee Director may be
exercised by such Non-Employee Director, or by his or her estate,
personal representative or beneficiary, as the case may be, at any time
within three years after the date of termination of service, subject to
earlier termination as provided in Section 6(b) above.
(ii) EXERCISE FOLLOWING OTHER TERMINATIONS OF SERVICE. If a
Non-Employee Director ceases to be a member of the Board for any reason
other than as set forth above in subsection (i) hereof, then (A) the
Non-Employee Director shall have the right, subject to the terms and
conditions hereof, to exercise the Option, to the extent it has vested as
of the date of such termination of service, at any time within six months
after the date of such termination, subject to earlier termination as
provided in Section 6(b) above, and (B) the unvested portion of any
Options awarded to the Non-Employee Director shall be forfeited as of the
date of termination of service.
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(d) TIME AND MANNER OF EXERCISE OF OPTIONS.
(i) NOTICE OF EXERCISE. Subject to the other terms and conditions
hereof, a Non-Employee Director may exercise any Options, to the extent
such Options are vested, by giving written notice of exercise to the
Company; PROVIDED, HOWEVER, that in no event shall an Option be
exercisable for a fractional share. The date of exercise of an Option
shall be the later of (i) the date on which the Company receives such
written notice or (ii) the date on which the conditions provided in
Section 6(d)(ii) are satisfied.
(ii) PAYMENT. Prior to the issuance of a certificate pursuant to
Section 6(d)(v) hereof evidencing the shares of Common Stock in respect
of which all or a portion of an Option shall have been exercised, a
Non-Employee Director shall have paid to the Company the exercise price
of the Option for all such shares purchased pursuant to the exercise of
such Option. Payment may be made by personal check, bank draft or postal
or express money order (such modes of payment are collectively referred
to as "cash") payable to the order of the Company in U.S. dollars or in
shares of Common Stock already owned by the Non-Employee Director valued
at their Fair Market Value as of the last business day preceding the date
of exercise, or in any combination of cash or such shares as the
Committee in its sole discretion may approve. Payment of the exercise
price in shares of Common Stock shall be made by delivering to the
Company the share certificate(s) representing the required number of
shares, with the Non-Employee Director signing his or her name on the
back, or by attaching executed stock powers (the signature of the
Non-Employee Director must be guaranteed in either case).
(iii) STOCKHOLDER RIGHTS. A Non-Employee Director shall have no
rights as a stockholder with respect to any shares of Common Stock
issuable upon exercise of an Option until a certificate evidencing such
shares shall have been issued to the Non-Employee Director pursuant to
Section 6(d)(v), and no adjustment shall be made for dividends or
distributions or other rights in respect of any share for which the
record date is prior to the date upon which the Non-Employee Director
shall become the holder of record thereof.
(iv) LIMITATION ON EXERCISE. No Option shall be exercisable unless
the Common Stock subject thereto has been registered under the Securities
Act and qualified under applicable state "blue sky" laws in connection
with the offer and sale thereof, or the Company has determined that an
exemption from registration under the Securities Act and from
qualification under such state "blue sky" laws is available.
(v) ISSUANCE OF SHARES. Subject to the foregoing conditions, as
soon as is reasonably practicable after its receipt of a proper notice of
exercise and payment of the exercise price of the Option for the number
of shares with respect to which the Option is exercised, the Company
shall deliver to the Non-Employee Director (or following the Non-Employee
Director's death, such other Person entitled to exercise the Option), at
the principal office of the Company or at such other location as may be
acceptable to the Company and the Non-Employee Director (or such other
Person), one or more stock certificates for the appropriate number of
shares of Common Stock issued in connection with such exercise. Such
shares shall be fully paid and nonassessable and shall be issued in the
name of the Non-Employee Director (or such other Person).
(e) RESTRICTIONS ON TRANSFER. An Option may not be transferred,
pledged, assigned, or otherwise disposed of, except by will or by the laws
of descent and distribution or pursuant to a qualified domestic relations
order as defined in the Code or Title I of ERISA ("QDRO"); PROVIDED,
HOWEVER, that the Committee may, subject to such terms and conditions as the
Committee shall specify, permit the transfer of an Option to a Non-Employee
Director's family members or to one or more trusts established in whole or
in part for the benefit of one or more of such family members. The Option
shall be exercisable, during the Non-Employee Director's lifetime, only by
the Non-Employee Director or by the Person to whom the Option has been
transferred in accordance with the previous
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sentence. No assignment or transfer of the Option, or of the rights
represented thereby, whether voluntary or involuntary, by operation of law
or otherwise, except by will or the laws of descent and distribution or
pursuant to a QDRO, shall vest in the assignee or transferee any interest or
right in the Option, but immediately upon any attempt to assign or transfer
the Option the same shall terminate and be of no force or effect.
7. RECAPITALIZATION OR REORGANIZATION.
(a) AUTHORITY OF THE COMPANY AND SHAREHOLDERS. The existence of the
Plan shall not affect or restrict in any way the right or power of the
Company or the shareholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the
Company's capital structure or its business, any merger or consolidation of
the Company, any issue of stock or of options, warrants or rights to
purchase stock or of bonds, debentures, preferred or prior preference stocks
whose rights are superior to or affect the Common Stock or the rights
thereof or which are convertible into or exchangeable for Common Stock, or
the dissolution or liquidation of the Company, or any sale or transfer of
all or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
(b) CHANGE IN CAPITALIZATION. Notwithstanding any other provision of
the Plan, in the event of any change in the outstanding Common Stock by
reason of a stock dividend, recapitalization, reorganization, merger,
consolidation, stock split, combination or exchange of shares or any other
significant corporate event affecting the Common Stock, the Committee, in
its discretion, may make (i) such proportionate adjustments as it considers
appropriate (in the form determined by the Committee in its sole discretion)
to prevent diminution or enlargement of the rights of Non-Employee Directors
under the Plan with respect to the aggregate number of shares of Common
Stock authorized to be awarded under the Plan, the number of shares of
Common Stock covered by each outstanding Option and the exercise prices in
respect thereof, the number of shares of Common Stock covered by future
Option awards and/or (ii) such other adjustments as it deems appropriate.
The Committee's determination as to what, if any, adjustments shall be made
shall be final and binding on the Company and all Non-Employee Directors.
8. TERMINATION AND AMENDMENT OF THE PLAN.
(a) TERMINATION. The Plan shall terminate as of the tenth anniversary
of the Effective Date.
(b) GENERAL POWER OF BOARD. Notwithstanding anything herein to the
contrary, the Board or the Committee may at any time and from time to time
terminate, modify, suspend or amend the Plan in whole or in part; PROVIDED,
HOWEVER, that no such termination, modification, suspension or amendment
shall be effective without shareholder approval if such approval is required
to comply with any applicable law or stock exchange rule; and PROVIDED
FURTHER, that the Board may not, without shareholder approval, increase the
maximum number of shares issuable under the Plan except as provided in
Section 7(b) above.
(c) WHEN NON-EMPLOYEE DIRECTORS' CONSENTS REQUIRED. The Committee may
not alter, amend, suspend, or terminate the Plan without the consent of any
Non-Employee Director to the extent that such action would adversely affect
his or her rights with respect to Restricted Shares or Options that have
previously been granted.
9. MISCELLANEOUS.
(a) TAX WITHHOLDING. No later than the date as of which an amount
first becomes includable in the gross income of the Non-Employee Director
for applicable income tax purposes with respect to any award under the Plan,
the Non-Employee Director shall pay to the Company or make arrangements
satisfactory to the Committee regarding the payment of any federal, state or
local taxes of any kind required by law to be withheld with respect to such
amount. Unless otherwise determined by the
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Committee, in accordance with rules and procedures established by the
Committee, the minimum required withholding obligations may be settled with
Common Stock, including Common Stock that is part of the award that gives
rise to the withholding requirement. The obligation of the Company under the
Plan shall be conditioned upon such payment or arrangements and the Company
shall, to the extent permitted by law, have the right to deduct any such
taxes from any payment of any kind otherwise due to the Non-Employee
Director.
(b) NO RIGHT TO REELECTION. Nothing in the Plan shall be deemed to
create any obligation on the part of the Board to nominate any of its
members for reelection by the Company's stockholders, nor confer upon any
Non-Employee Director the right to remain a member of the Board for any
period of time, or at any particular rate of compensation.
(c) SECURITIES LAW RESTRICTIONS. The Committee may require each
Non-Employee Director purchasing or acquiring shares of Common Stock
pursuant to the Plan to agree with the Company in writing that such
Non-Employee Director is acquiring the shares for investment and not with a
view to the distribution thereof. All certificates for shares of Common
Stock delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Securities and Exchange
Commission or any exchange upon which the Common Stock is then listed, and
any applicable federal or state securities laws, and the Committee may cause
a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions. No shares of Common Stock shall be issued
hereunder unless the Company shall have determined that such issuance is in
compliance with, or pursuant to an exemption from, all applicable federal
and state securities laws.
(d) COMPLIANCE WITH RULE 16b-3.
(i) The Plan is intended to comply with the requirements of Rule
16b-3 under the Exchange Act or its successors under the Exchange Act and
the Committee shall interpret and administer the provisions of the Plan
in a manner consistent therewith. To the extent any provision of the Plan
or any action by the Committee fails to so comply, it shall be deemed
null and void, to the extent permitted by law and deemed advisable by the
Committee. Moreover, in the event the Plan does not include a provision
required by Rule 16b-3 to be stated therein, such provision (other than
one relating to eligibility requirements, or the price and amount of
Options) shall be deemed automatically to be incorporated by reference
into the Plan.
(ii) Notwithstanding anything contained in the Plan to the contrary,
if the consummation of any transaction under the Plan would result in the
possible imposition of liability on a Non-Employee Director pursuant to
Section 16(b) of the Exchange Act, the Committee shall have the right, in
its sole discretion, but shall not be obligated, to defer such
transaction to the extent necessary to avoid such liability.
(e) EXPENSES. The costs and expenses of administering the Plan shall
be borne by the Company.
(f) APPLICABLE LAW. Except as to matters of federal law, the Plan and
all actions taken thereunder shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to
conflicts of law principles.
(g) EFFECTIVE DATE. Subject to the approval of the Plan by the
Company's shareholders, the Plan shall be effective as of the date of the
1997 Annual Meeting (the "EFFECTIVE DATE"). Upon the effectiveness of the
Plan, the Company's 1995 Non-Employee Directors' Stock Option Plan shall be
terminated.
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EXHIBIT 10.3
LEASE AGREEMENT
THIS LEASE AGREEMENT made and entered into as of February 24, 1997, by and
between IDAHO ASSOCIATES, L.L.C., an Illinois limited liability company
(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, Lessee is currently negotiating a contract (the "Contract") with
Care Management, inc., an Idaho corporation ("Seller") to purchase a certain
tract of land located in the State of Idaho and more particularly described in
EXHIBIT A attached hereto and made a part hereof, which tract of land is
improved with a one hundred three (103) bed nursing home facility commonly known
as Casa Loma Convalescent Center located at 1019 third Avenue South, Payette,
Idaho (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");
WHEREAS, upon satisfaction of certain conditions precedent, the right to
purchase the Demised Premises will be assigned by Lessee to Lessor pursuant to
an Assignment of Purchase and Sale Agreement (the "Assignment"); and
WHEREAS, pursuant to the Contract, Lessee is negotiating to purchase, and
will, pursuant to the Assignment, assign to Lessor the rights 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, contemporaneously with the purchase and sale of the Demised
Premises and the Personal Property, Lessor desires to lease the Demised Premises
and Personal Property to Lessee and Lessee desires to lease the Demised Premises
and Personal Property from Lessor; and
WHEREAS, on November 30 ,1996, Lessor entered into Leases with Lessee for
the sixty-four (64) bed nursing home facility commonly known as Payette Lakes
Care Center located at 201 Floyd Street, McCall, Idaho, the one hundred
twenty-seven (127) bed nursing home facility commonly known as Valley
Rehabilitation and Living Center located at 1014 Burrell Avenue, Lewiston,
Idaho, and the forty (40) bed nursing home facility commonly known as Magic
Valley Manor located at 210 North Idaho Street, Wendell, Idaho (collectively,
hereinafter referred to as the "Other Leases"); and
WHEREAS, Lessee hereby acknowledges and agrees that Lessor, as consideration
and inducement for entering into this Lease, requires that this Lease provide
that a default under the Other Leases shall constitute a default under this
Lease and that without such a "cross default" provision Lessor would not execute
this Lease; 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.
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ARTICLE I--DEFINITIONS
1.1 The terms defined in this Article, for all purposes this Lease and all
agreements supplemental hereto, have the meaning herein specified.
(a) "Demised Premises" shall mean the real estate described in EXHIBIT A
and all improvements located thereon.
(b) "Personal Property" shall mean all furniture, fixtures 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 are purchased by Lessee other than as replacements for
Personal Property.
(c) "Leased Property" shall mean the Demised Premises and the Personal
Property.
(d) "Lease Year" for the first Lease Year shall be the period from the
Commencement Date hereinafter defined through November 30, 1997 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 Idaho and such other
governmental authorities having jurisdiction thereof and having no less than one
hundred three (103) beds and for any other purpose authorized by Lessor in
writing and for no other purpose.
ARTICLE III--TERM OF LEASE
3.1 Except as expressly provided below, the term of this Lease shall
commence on the Commencement Date (hereinafter defined) and expire on November
30, 2006, unless sooner terminated or extended as hereinafter provided (the
"Initial Term"). The "COMMENCEMENT DATE" shall mean the date the last of the
following has occurred:
(i) Lessee has received a commitment from Commonwealth Land Title
Insurance Company for issuance of a leasehold owner's title policy in the
amount of Two Million Five Hundred Thousand and No/100 Dollars
($2,500,000.00) free of all liens and encumbrances other than (a) standard
exceptions, (b) non-delinquent taxes and assessments, (c) easements,
restriction and rights of way that will not adversely affect Lessee's
operation of the Demised Premises as a nursing home in accordance with
Article II, above;
(ii) Lessee obtains all appropriate state or other governmental licenses
and certifications required to operate the Demised Premises, including,
without limitation, as a Medicare and Medicaid certified skilled nursing
home; and
(iii) Lessee shall have been given possession of the Demised Premises.
Once the Commencement Date has been established, the parties shall sign a
Commencement Date memorandum setting forth that date.
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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. Furthermore, Lessee's option granted pursuant to
this Section 3.2 may be exercised only if Lessee also contemporaneously
exercises its options to extend pursuant to Section 3.2 of each of the Other
Leases.
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. Furthermore, Lessee's option granted pursuant to this
Section 3.3 may be exercised only if Lessee also contemporaneously exercises its
options to extend pursuant to Section 3.3 of each of the Other Leases.
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
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 3, the term default shall mean an "Event of Default"
as defined in Article 19 of this Lease.
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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, monthly Rent of $21,875.00;
(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 annualized monthly Rent of $262,500 multiplied by 1.5 times the
increase, if any, in the Cost of Living Index (as hereinafter defined) in
effect on September 1st of the current Lease Year over the Cost of Living
Index in effect on September 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,
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 Idaho Associates, L.L.C., Two North LaSalle Street, Suite
1901, Chicago, Illinois 60602.
The Rent set forth in this Article 4 is based, in part, upon the debt
service of the permanent first mortgage financing on the Demised Premises
("Initial Financing"). 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
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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 interest payments and other costs owed by Lessor relating to
any Mortgage (defined below) and Landlord's general overhead and administrative
expenses (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 before or after the Term of this Lease, shall be
adjusted pro rata between Lessor and Lessee and each party shall be responsible
for its pro rata share of any such Taxes and Assessments.
6.3 Nothing herein contained shall require Lessee to pay income taxes
assessed against Lessor, or capital levy, franchise, business license, 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
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such Taxes and Assessments, unless such payment would operate as a bar to such
contest or interfere materially with the prosecution thereof, in which event,
Lessee may postpone or defer such payment only if:
(1) Neither the Demised Premises nor any part thereof would by reason of
such postponement or deferment be in danger of being forfeited or lost; and
(2) Lessee shall have deposited with Lessor, to be held in trust, cash
or 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, or, if required by
the taxing authority, an amount deposited in trust with the taxing authority
during the pendency of any contest in lieu of any additional charge against
the Demised Premises until resolution of the contest.
Unless Lessor agrees otherwise, the cash so deposited with Lessor 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 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 Taxes and Assessments 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.
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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 Idaho 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
three (103) 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 three (103) 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, not to be unreasonably withheld. Such insurance
shall, at all times, be maintained in an amount equal to the full replacement
cost of the Demised Premises and the Personal Property or in such lesser 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 Lessee,
shall be determined by an appraiser, engineer, architect or contractor
reasonably selected by Lessor. Upon request by Lessee, Lessor will provide
Lessee with information in its possession which is reasonably necessary to
establish the value of the Demised Premises. 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 (in accordance with Article 26 herein), 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
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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. Notwithstanding the
foregoing, Lessee shall not be required to add coverage for damage to the
Demised Premises resulting from earthquake or flood as covered losses unless the
Demised Premises is classified as an earthquake or flood prone area by an
authority having jurisdiction over the Demised Premises and such authority
recommends such insurance.
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");
(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.
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.
In lieu of the foregoing but subject to the terms and conditions of this
Article 9, Lessee may, at its option, obtain and maintain a blanket insurance
policy in an amount sufficient to provide all or part of the coverage described
in this Article 9.
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.
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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 and the provisions of any subordination, nondisturbance and attornment
agreement which may be in effect for such 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 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 three
(103) 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 there is not an Event of Default by Lessee under this 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 Mortgage with respect thereto.
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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 and in accordance with any subordination, nondisturbance and attornment
agreement which may be in effect for such Mortgage; provided, however, that in
the event of a Casualty occurring during the last six (6) months of the Term or
a Casualty resulting 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 final plans and specifications (including by Mortgagee and
any governmental or quasi-governmental agency or entity exercising
jurisdiction), issuance of a building permit and any other necessary permits and
licenses for commencement of construction, 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 periodically during construction, but not more than once every thirty
(30) days after 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. Except as required by law, Lessee further
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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 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 three (103) 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 three
(103) 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 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
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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 either (i) deposit with Lessor of such security as may be
reasonably demanded by Lessor to protect against such lien, or (ii) post a
release bond in form and amount as required by applicable law and as otherwise
satisfactory to Lessor. 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
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.
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 and
to the extent consistent with any subordination, nondisturbance and attornment
agreement then in effect for such 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
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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 and any amount for relocation
and loss of business as long as such separate award does not diminish the award.
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 fifty-one
(51) 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 11A 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 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
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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 by which a third party's paramount
fee ownership of the Demised Premises requires 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 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 following written notice to Lessee;
(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
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such failure or violation shall not be cured within thirty (30) days after
notice thereof by Lessor to Lessee;
(3) The removal by any local, state or federal agency having
jurisdiction over the operation of the nursing home located on the Demised
Premises of fifty percent (50%) or more of the patients located in the
nursing home;
(4) The failure of Lessee to comply, or the violation by Lessee of, any
of the terms, conditions or provisions of any Mortgage relating to the
Demised Premises 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;
(5) The voluntary transfer by Lessee of ten percent (10%) or more of the
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;
(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 three (103) licensed beds,
or (ii) decertify the nursing home operated in the Demised Premises from
participation in the Medicare or 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;
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(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 either of the Other Leases.
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 ninety (90) 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.
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 written notice to Lessee of such election, 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" or similar name) used by Lessee in connection with the
operation of the nursing home located on the Demised Premises. This Lease shall
be deemed and construed as an assignment for purposes of vesting in Lessor, all
right, title and interest in and to: (i) all licenses, certifications, permits
and authorizations obtained in connection with the operation of the nursing home
located on the Demised Premises; and (ii) the name and telephone number used in
connection with the operation of the nursing home located on the Demised
Premises (other than the name "Sunrise Healthcare" or similar name). Lessee
hereby agrees to take such other action and execute such other
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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 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.
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
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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 or other tangible property of any kind belonging to Lessee and located
in or about 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 or other tangible personal property (subject to
the terms of Article 11 herein) of any kind belonging to Lessee and located in
or about 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.
Notwithstanding anything to the contrary contained in this Section 24.1, in
the event all or substantially all of the Demised Premises is sublet, assigned
or transferred or a controlling number of the outstanding shares in Lessee is
sold, assigned or otherwise transferred (other than to Andrew L. Turner or a
wholly owned subsidiary of Lessee or of Lessee's parent corporation Sun
Healthcare Group, Inc.) with the prior written consent of Lessor in accordance
with Section 18.1 of this Lease, this Lease shall at such time constitute a
security agreement under the Uniform Commercial Code granting Lessor a security
interest in any accounts receivable of Lessee's successor related to the Demised
Premises, and at such time, Lessee's successor shall execute a security
agreement and financing statements for filing under the Uniform Commercial Code
reflecting a security interest in said accounts receivable.
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 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.
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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"),
provided that, for other than Existing Mortgages (as defined below), Lessee
receives a subordination, nondisturbance and attornment agreement in a
commercially reasonable form satisfactory to such 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 Lessee receives a subordination,
nondisturbance and attornment agreement, in a commercially reasonable form
satisfactory to such Mortgagee. Furthermore, in connection with any mortgage
loan pertaining to the Demised Premises existing as of the date of this Lease
(an "Existing Mortgage"), Lessor agrees to use all commercially reasonable
efforts to deliver to Lessee a nondisturbance agreement from the current
Mortgagee in a form reasonably satisfactory to such Mortgagee on the
Commencement Date or as soon as possible thereafter. 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, provided that Lessee concurrently receives a nondisturbance
agreement in commercially reasonable form satisfactory to such Mortgagee. 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 Subject to the terms of any subordination, nondisturbance and
attornment agreement which may be in effect, and anything in this Lease
contained to the contrary notwithstanding, Lessee shall at all times and in all
respects fully, timely and faithfully comply with and observe each and all of
the conditions, covenants, and provisions required on the part of the Lessor 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, 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
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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 (except for
any payments resulting from Lessor's failure to comply with the terms of the
Mortgage), 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 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 Idaho; 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 limited liability company duly organized and validly
existing under the laws of the State of Illinois; and
(b) Lessor has full power and authority to enter into this Lease and to
carry out the transactions contemplated herein.
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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 One Hundred Nine Thousand
Three Hundred Seventy-Five and No/100 Dollars ($109,375.00), 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 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;
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(c) all licenses, permits, accreditations, and certificates of occupancy
issued by any federal, state, municipal or quasi-governmental authority for
the use, maintenance or operation of the Demised Premises, running to or in
favor of Lessee, to the extent assignable by Lessee;
(d) all documents, charts, personnel records, property manuals,
resident/patient records and lists maintained with respect to the Demised
Premises (subject to the resident's rights to access to his/her medical
records as provided by law and confidentiality requirements), books,
records, files and other business records attributable to the business or
operations of the Demised Premises to the extent assignable by Lessee;
(e) all existing agreements with residents and any guarantors thereof of
the Demised Premises, to the extent assignable by Lessee (excluding the
right to any payments for periods prior to the Closing Date) 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 similar
name, or any Sunrise policy or procedure manuals, forms or systems, or other
confidential or proprietary information.
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 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
22
<PAGE>
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 31 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 or other confidential or proprietary information. 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.
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 21 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.
23
<PAGE>
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.
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 33.7(b) below, Lessor shall in no way be liable therefor. After the
Closing Date, Lessor and Lessee shall each have the right to review
supporting books, records and documentation that are in the possession of
the other relating to Medicaid or Medicare payments.
(b) If, following the Closing Date, Lessor receives payment from any
state or federal agency or third-party 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
24
<PAGE>
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 the parties
under this paragraph are without prejudice to any other remedies not
inconsistent herewith which the parties may have pursuant to the terms of this
Lease, provided 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 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 one hundred
fifty percent (150%) 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
25
<PAGE>
States registered/certified mail, return receipt requested or (d) prepaid
telecopy, telegram, telex or fax, addressed to the other party hereto at the
address set forth below:
If to Lessor: Idaho Associates, L.L.C.
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 and the costs thereof shall be borne by the party
requesting recordation of the Memorandum.
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.
34.13 This Lease contains the entire agreement between the parties and any
executory agreement hereafter made shall be ineffective to change, modify or
discharge it in whole or in part unless such executory agreement is in writing
and signed by the party against whom enforcement of the change, modification or
discharge is sought. This Lease cannot be changed orally or terminated orally.
26
<PAGE>
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 Idaho.
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:
IDAHO ASSOCIATES, L.L.C., SUNRISE HEALTHCARE CORPORATION,
an Illinois limited liability company a New Mexico corporation
By: By:
-------------------------------- --------------------------------
Its: Its:
-------------------------------- --------------------------------
27
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
Land in the City and County of Payette, Idaho, as follows:
In W. F. MASTERS PLAT OF PAYETTE, as per Plat in Book 1, Page 18, Plat
Records, Payette County, Idaho:
In Block 13: Lots 1, 4, 5 and 6.
28
<PAGE>
EXHIBIT B
To be completed within thirty (30) days of Commencement Date
29
<PAGE>
EXHIBIT 11.1
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
PRIMARY:
Shares outstanding at beginning of period................................................... 46,093 47,916
Weighted average shares issued pursuant to:
Acquisition agreements.................................................................... -- 48
Employee benefit plans.................................................................... 26 33
Weighted average shares repurchased....................................................... -- (711)
Dilutive effect of outstanding stock options................................................ 520 500
--------- ---------
Weighted average number of common and common equivalent shares outstanding.................. 46,639 47,786
--------- ---------
--------- ---------
Net earnings................................................................................ $ 15,937 $ 15,339
--------- ---------
--------- ---------
Net earnings per common and common equivalent share......................................... $ 0.34 $ 0.32
--------- ---------
--------- ---------
FULLY DILUTED:
Weighted average number of common and common equivalent shares used in primary
calculation............................................................................... 46,639 47,786
Additional dilutive effect of stock options................................................. 21 31
Assumed conversion of dilutive convertible debentures....................................... 4,713 4,714
--------- ---------
Fully diluted weighted average number of common and common equivalent shares outstanding.... 51,373 52,531
--------- ---------
--------- ---------
Net earnings used in primary calculation.................................................... $ 15,937 $ 15,339
Adjustment for reduced interest expense, net of interest expense related to additional
borrowings to fund the cash portion ofthe merger consideration assumed paid on conversion
of dilutive convertible debentures and net of related income tax benefits................. 854 854
--------- ---------
Net earnings................................................................................ $ 16,791 $ 16,193
--------- ---------
--------- ---------
Fully diluted net earnings per common and common equivalent share........................... $ 0.33 $ 0.31
--------- ---------
--------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SUN
HEALTHCARE GROUP, INC MARCH 31, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 24,866
<SECURITIES> 0
<RECEIVABLES> 312,024
<ALLOWANCES> 17,220
<INVENTORY> 0
<CURRENT-ASSETS> 394,403
<PP&E> 542,349
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,537,082
<CURRENT-LIABILITIES> 168,342
<BONDS> 754,253
0
0
<COMMON> 512
<OTHER-SE> 584,821
<TOTAL-LIABILITY-AND-EQUITY> 1,537,082
<SALES> 0
<TOTAL-REVENUES> 398,636
<CGS> 0
<TOTAL-COSTS> 327,903
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,194
<INTEREST-EXPENSE> 11,324
<INCOME-PRETAX> 26,127
<INCOME-TAX> 10,190
<INCOME-CONTINUING> 15,937
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,937
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.33
</TABLE>
