-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DXiZVZuuD82UsyPdJkEHMwSu3/ThFgiqoGkStqVK81Eifucm+Rr1EcjEYEVLEFDn 7T9Hf/EfGeW2cM30BpuK0A== 0000892569-97-000889.txt : 19970401 0000892569-97-000889.hdr.sgml : 19970401 ACCESSION NUMBER: 0000892569-97-000889 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTIMUMCARE CORP /DE/ CENTRAL INDEX KEY: 0000820474 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 330218003 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-17401 FILM NUMBER: 97570160 BUSINESS ADDRESS: STREET 1: 30011 IVY GLENN DR STE 219 CITY: LAGUNA NIGUEL STATE: CA ZIP: 92677 BUSINESS PHONE: 7144951100 MAIL ADDRESS: STREET 1: 30011 IVY GLENN DR STREET 2: SUITE 210 CITY: LAGUNA MIGUEL STATE: CA ZIP: 92677 10-K405 1 FORM 10-K FOR PERIOD ENDED DECEMBER 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) for the fiscal year ended December 31, 1996 or [X] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from __________ to __________ Commission file number 0-17401 OPTIMUMCARE CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-0218003 - --------------------------------------- -------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30011 Ivy Glenn Drive, Suite 219 Laguna Niguel, California 92677 - ---------------------------------------- -------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 495-1100 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered - ------------------------------------ --------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for, such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- 2 The aggregate market value of the voting stock held by non-affiliates of the Company on February 18, 1997 (5,677,673 shares of Common Stock) was $11,710,201 based on the bid price of the Company's voting stock on February 18, 1997.* The number of shares outstanding of each of the Company's classes of Common Stock, as of February 18, 1997 was: Common Stock, - 6,811,218 shares $.001 par value Documents Incorporated by Reference None. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- * This value is not intended to make any representation as to value or worth of the Company's shares of Common Stock. The number of shares held by non-affiliates of the Company has been calculated by subtracting shares held by controlling persons of the Company from the number of issued and outstanding shares of the Company. 3 PART I ITEM 1 - BUSINESS (a) General Development of Business OptimumCare Corporation (the "Company") was incorporated in California on November 25, 1986 and was reincorporated in Delaware on June 29, 1987. In mid-1987, the Company commenced the development and marketing of health care facility-based programs ("Programs") to be managed by the Company for the treatment of depression and certain other mental health disorders ("PsychPrograms"), as well as programs for alcohol and drug abuse ("Treatment Programs"). After the Company obtains a contract for the establishment of one or more Programs at a host health care facility, the Company recruits and trains the staff needed to operate its programs. Typically, the host health care facility provides a specified number of beds for the Program, as well as all other support services required for the operation of the Program, including nursing, dietary, housekeeping, billing and other administrative functions. The Company recruits and trains the staff to operate the Program. The Company's staffing of a Program will usually include a medical director, a program director, a psychologist, a chief therapist and one or more counselors or social workers. Contracts are individually negotiated with the host health care facility and usually approximate 20 to 60 beds. Generally, the Company and the host health care facility negotiate a per patient management fee which depends on the scope of services provided by the Company, number of beds, rates charged and reimbursements received by the facility, and in some instances, a fixed monthly administrative fee and reimbursement of certain direct program costs. The health care facility charges the patient on a daily basis in accordance with a fee schedule of prescribed rates, except where the insurer provides for payment which is limited to a maximum number of days per patient. The health care facility pays the Company a fixed management fee per patient which averages $190 per patient inpatient day or in some cases, a reimbursement of direct costs plus a per patient per day incentive fee and a percentage of overhead fee, and a fixed management fee per visit which averages $120 per visit or in some cases, a percentage of collected revenues for partial hospitalization contracts. Certain contracts contain provisions which deny portions or all of the management fee should patient days be ultimately appealed and denied by the patient payor. As of February 18, 1997, the Company has twelve (12) Programs that are hosted by four (4) hospitals and one community mental health center: Five PsychPrograms through Huntington InterCommunity Hospital, D/B/A Humana Hospital Huntington Beach, Huntington Beach, California, two PsychPrograms at St. Francis Medical Center, Lynwood, California, two PsychPrograms through Sherman Oaks Hospital and Health Center, Sherman Oaks, California, two PsychPrograms at Mission Community Hospital, San Fernando, California and one PsychProgram at Friendship Community Mental Health Center, Phoenix, Arizona. 1 4 On February 13, 1997 OptimumCare formed a strategic alliance with Galaxy Health Care (Galaxy) of Miami, Florida to develop community mental health centers (CMHC's) in the southwest, southeast, and northeast regions of the country over a three year period. CMHC's are community based, free-standing mental health treatment facilities which provide broad based outpatient psychiatric and psychological care for patients with mental illness and substance abuse problems. The alliance will join together CMHC's, psychiatric providers, regional hospitals and primary care physicians in various regions of the country. The treatment centers will be structured on a state-by-state, multi-state integrated network model for provision of community based mental health treatment services for Medicare patients and which also meet the needs of managed care in both the public and private sectors. Galaxy Health Care has developed a multi-site network of wholly owned CMHC's operated under the name "Treatment Resources" and provides home care through its Psych Home Care, Inc. subsidiary. Galaxy also provides management and administrative services to healthcare providers through its Management Services Organization (MSO). As of February 18, 1997, the Company has entered into a 90 day consulting agreement with Galaxy for the operation of a partial hospitalization PsychProgram in Margate, Florida. On April 19, 1996 the Company completed the acquisition of a 70% interest in certain contracts of Professional Care Source, Inc. through the formation of OptimumCare Source, LLC (the LLC). OptimumCare Source, LLC provides management and other behavioral health services to skilled nursing and other similar bed & board facilities. As of February 18, 1997 the LLC has 16 contracts with the following facilities: Alcott Rehabilitation Hospital, Los Angeles, California; Anaheim Healthcare Center, Anaheim, California; Citrus Nursing Center, Fontana, California; Citrus Villa Retirement Center, Fontana, California; Corbell's Marine Manor, Gardena, California; Del Mar Convalescent Hospital, Rosemead, California; Extended Care of Riverside, Riverside, California; Fountain Care Center, Orange, California; Garden Park Care Center, Garden Grove, California; Laurel Convalescent Hospital, Fontana, California; Monterey Park Convalescent Hospital, Monterey Park, California; North Valley Nursing Center, Tujunga, California; Paramount Convalescent Hospital, Paramount, California; Park Regency Retirement Center, La Habra, California; Sun Mar Nursing Center, Anaheim, California; and Sunset Manor Convalescent Hospital, El Monte, California. (b) Financial Information About Industry Segments The Company competes in one industry segment which is the development, marketing and operation of Programs. (c) Narrative Description of the Business (i) and (ii) Products OptimumCare's PsychPrograms ("PsychProgram") The PsychProgram is a medically-supervised psychiatric care program for certain types of mental health disorders that is offered on both an inpatient and partial hospitalization basis. The PsychProgram is directed at assisting the patient to return to a normal life. The PsychProgram is designed to treat patients with neuroses and personality disorders; however, the Company's marketing focus is to attract patients who exhibit symptoms of depression. Patients suffering from depressive mental illness manifest, among other things, loss of interest in the world 2 5 generally, loss of activity and capacity to love, sadness, hopelessness, fatigue, boredom, restlessness, loss of belief in personal future, anxiety and feelings of ill-at-ease. At the outset, a patient receives a physical examination and diagnostic testing to eliminate any physical illnesses which may evidence some symptoms of mental disorders. Each PsychProgram also includes individual and group therapy and a full daily regimen of activities including sessions for relaxation, assertiveness training, exercise and men's and women's sexual awareness. The Company estimates that the average stay for a patient in a PsychProgram is 7-10 days. OptimumCare's Partial Hospitalization Program ("Partial Hospitalization") Partial Hospitalization is a relatively new behavioral medicine outpatient product that provides daytime treatment programs that employ an integrated and individualized schedule of recognized psychiatric treatment modalities. Partial Hospitalization is a treatment approach developed as an alternative to inpatient treatment. It includes the major psychiatric evaluation and treatment modalities (both psychosocial and biological), which are usually found in a comprehensive psychiatric inpatient program. It is designed for voluntary patients with serious mental disorders who require intensive and multi-disciplinary treatment which cannot be provided in an outpatient setting. By offering a medically-supervised alternative to inpatient treatment, it provides a more flexible, less costly and less restrictive form of treatment. Partial Hospitalization can be utilized by individuals who are mentally or emotionally impaired, but who are able to be maintained in the community at least part of each day, and present little risk of imminent danger to themselves or others. The Company believes that the benefits of partial hospitalization include: lessening the disruption of social, family, and community ties; allowing the patient to test new skills in a more natural environment than a hospital setting; providing a treatment milieu that fosters independence and self reliance; allowing daily feedback from the home environment thereby closely involving members of the patient's family or supportive environment in the treatment program; and providing flexibility in the number of treatment days per week thus allowing a patient to pursue other activities such as a shortening of the inpatient stay or preventing the need for full hospitalization. Expansion of Products The Company is seeking to expand the scope of psychological services it offers by acquiring entities which offer complimentary mental health services. The Company believes that it can more effectively market its services to managed care payors by increasing the scope of services it provides. The Company completed the acquisition of a 70% interest in certain contracts of Professional Care Source, Inc. in April, 1996. Care Source provides management and other administrative behavioral healthcare services to skilled nursing and other similar bed and board facilities. During 1996 the Company entered into letter of intent to purchase certain assets of Giem, Guerra & Myers, Inc. and a short-term management services agreement with an affiliate of Giem, Guerra & Myers, Inc. Upon further analysis, the Company concluded that the value of these assets to the Company did not justify the consideration proposed to be paid by the Company for these assets. The Company does not intend to acquire the assets of Giem, Guerra & Myers, Inc. As 3 6 such, approximately $96,000 of deferred acquisition costs previously capitalized with respect to this acquisition have been expensed in the fourth quarter of 1996. Staffing The PsychProgram and Partial Hospitalization Programs are staffed by the Company with a medical director, a program manager, and in some cases, a psychologist, a chief therapist, and at least one counselor or social worker. The key staff members are the medical director and the program manager. The medical director is a licensed psychiatrist who is a staff member of the host health care facility and is engaged as an independent contractor charged with the responsibility for overseeing the administration of the Program from a medical/regulatory compliance viewpoint. In addition to the medical director who is responsible for administering the clinical aspects of the contract, the Company often engages co-medical directors in each community in which a Program is located. These co-medical directors are licensed psychiatrists or psychologists. They provide administrative assistance to a Program and represent it at various professional activities in the local community. The co-medical directors are compensated at a fixed monthly rate, depending on the amount of time they commit to supporting the Company's Programs. The Company's employees and contractors at each program are subject to approval and pre-employment screening by the host health care facility. The Company has not experienced any difficulty in locating qualified medical directors from the hospital staff to affiliate with the Company's Programs. The program manager is a full time employee of the Company and usually has completed either a bachelor's or master's degree program in psychology or social work, but is principally a marketing representative of the Company. Program managers are officed at their respective Program's facility. Contract Operations The Company provides a host health care facility with staff recruitment, a two-week pre-opening in-service nurse and hospital employee training program, program management, continuing education, community education, ongoing public relations and program quality assurance. The Company provides these training programs to the host health care facility at no charge. Typically, nursing, dietary, X-ray, laboratory, housekeeping, admissions and billing are the responsibility of the host health care facility. However, the Company has recently begun to assume some of the nursing and dietary aspects of the programs under certain contracts. The expanded scope of services has evolved from the desire of the host hospital to benefit from the Company's growing expertise in those functions. Existing contracts range from a period of one to five years and may be renewed for subsequent terms, of usually one year periods. In some cases, if the Company does not maintain a stipulated minimum average daily census for specified periods, the health care facility may terminate the contract on reasonable notice to the Company. Payment for Services Patients are screened by the host healthcare facility prior to admission. Screening procedures include verification of the existence and extent of insurance coverage. It is the host health care facility's responsibility to bill and collect the fees charged to the patient for all program services. The Company in turn bills the host health facility for the total patient days of service provided at the specified contract rate. Generally, the Company bills the host health care facility fifteen (15) days after the close of the month in which the services were 4 7 rendered. Except in the cases where the contracts provide for specific hold backs for ultimately denied days, the majority of the contracts do not specifically provide that the Company shall bear any risk of non-payment by the host healthcare facility. However, industry practice dictates that the Company acknowledge that a certain percentage of the fees will be uncollected by the host health care facility. Thus, accommodations are expected to be made on a case-by-case basis with each host health care facility (except where there is an express contractual provision which governs this issue) to offset some portion of Program patients' bad debts experienced by the host health care facility. Many of the hospitals the Company contracts with have a large number of Medicare and Medicaid patients. However, the Company has negotiated with these hospitals whereby they are paid either a flat per diem rate or a per diem rate with a hold back for days ultimately denied. Thus, the Company is not directly dependent on Medicare or Medicaid for payment under its contracts. It is unknown, whether in the future other contracts or programs will be dependent on a disproportionate amount of Medicare/Medicaid patients. Pending legislative proposals revising Medicare/Medicaid reimbursement, if enacted, could have a negative effect on the revenues of the hospitals with which the Company contracts. Generally, the Company's agreements with hospitals require the Company and the hospital to renegotiate rates in the event of a significant legislative change which affects the compensation received by the hospital. It is uncertain at this time to what extent the Company's revenues may be impacted by the proposed legislation. In addition, government efforts to eliminate the exemption from Medicare's prospective payment system for long-term care hospitals currently exist. These proposals would affect the cash flow of the facilities the Company intends to contract with through its 70% owned subsidiary, OptimumCare Source, LLC. This could also result in renegotiation of the rates the OptimumCare Source, LLC receives for its services and the timing of payments. During 1996, OptimumCare Source, LLC did not generate significant revenues from the facilities with which it contracts. It is currently uncertain as to what point in time these revenues will become material to the Company. The Company anticipates that additional legislation may be adopted focusing on controlling health care costs and improving access to medical services for persons who are uninsured. Such legislation may also affect the amount which health care providers can charge for services. The Company believes that it is well positioned to respond to these changes and that it is likely that the Company will experience a lesser impact than other companies in the health care industry based on the fact that the Company has already focused its efforts on shortening patient stays and has historically provided a greater percentage of its services to Medicaid patients than have many of its competitors. Marketing The Company's marketing efforts are primarily directed toward increasing the number of management contracts by either the takeover of existing programs operated by others or the establishment of new Partial Hospitalization or PsychPrograms in geographically desirable areas. The Company believes that their ability to secure new contracts is based on its reputation as a quality provider coupled with its history of low length of patient stays resulting in less uncompensated care. 5 8 Sales calls are primarily directed at health care facilities which may be experiencing a low or declining patient census and facilities in geographically desirable areas. After a contract is obtained, the Company prepares a detailed marketing development strategy aimed at attracting patients to the Programs. The program director for each PsychProgram at the host health care facility develops a media press kit for each Program. The program director coordinates all local advertising consistent with the Company's overall marketing plan. Each program director implements a local market development strategy to increase the public awareness of the Program, including the establishment of a media appearance and community speakers bureau which are referred to the broadcast media for further exposure. The co-medical directors direct local continuing professional education and community service programs on an as-needed basis. The host hospital's administrative and medical staffs are also encouraged to participate in community relations activities. Direct marketing to psychiatrists, psychologists and other licensed professionals by the Company is emphasized because these individuals motivate potential patients to seek inpatient treatment for their mental health. The Company's marketing approach to physicians and clinicians emphasizes involvement through one-on-one communication with the professionals who will provide patient referrals. These professionals are invited to the Company-sponsored community relations activities, speaker programs and continuing education seminars. (iii) Raw Materials Inapplicable. (iv) Patents and Trademarks The Company holds a federal service mark, Registration #1628745, for its tradename "OptimumCare". The Company has marketed its programs under the names "OptimumCare PsychProgram" and "OptimumCare Treatment Program". (v) Seasonality The Company has noted a trend that its business appears to be susceptible to some seasonal variation. Census tends to substantially decrease near various holidays, particularly during the fourth quarter. (vi) Working Capital Items The Company expects to experience an initial one-time maximum delay of up to 90 days in receipt of revenues after each Program is opened due to the normal processing time for the billing/payment cycle of the host health care facilities. (vii) Dependence on a Few Customers The Company presently has twelve (12) Programs operating through four (4) hospitals and one community mental health center. If any of these Programs were terminated, or if any of the accounts receivable from these contracts were to become uncollectible, such event could have a material adverse effect on the Company. (viii) Backlog Inapplicable. 6 9 (ix) Government Contracts The Company is not currently a party to any government contract. (x) Competition The Company competes with other health care management companies for contracts with acute care hospitals. Also, the Company's Programs will compete for patients with the programs of other hospitals and other health care facilities. The success of the Company's Programs is also dependent on its ability to establish relationships with sources of patient referrals. The Company's principal competitors include Charter Medical Corporation, Community Psychiatric Centers, Comprehensive Care Corporation, Mental Health Management and Horizon Health Services, all of which have greater financial and other resources and more experience than the Company. In addition, some health maintenance organizations ("HMOs") offer competing programs; however, the HMO-owned hospitals typically do not provide inpatient psychiatric services, nor coverage for these services. Most HMOs also do not provide programs for partial hospitalization or substance abuse, but often provide coverage for these programs, usually at a reduced rate. Other health care facilities offer comparable programs which compete with the Company's Programs in each service area. The Company believes, however, that in general its marketing efforts are primarily effective within a ten (10) mile radius around the host hospital and that patients outside such radius are not directly affected by such advertising unless their personal physician has admitting privileges and recommends the Company's program at that host hospital. The Company believes that the principal competitive factors in obtaining contracts with health care facilities are experience, reputation for quality programs, the availability of program support services and price. The primary competitive factors in attracting referral sources and patients are marketing, reputation, record of success, quality of care and location and scope of services offered by a host health care facility. The Company implements active promotional programs and believes it is competitive in attracting referral sources and patients based on these factors. (xi) Research and Development Inapplicable. (xii) Government Regulation and or Environmental Protection The health care industry is extensively regulated by federal, state and local governments. Regulations which affect the Company relate to controlling the growth of health care facilities, requiring licensure of the host health care facility, requiring certification of the Program at the host facility and controlling reimbursement for health care services. Licensure of facilities and certification of Programs are state requirements, while certification for Medicare is a federal requirement. Compliance with the licensure and certification requirements is monitored by annual on-site inspections by representatives of the licensing agencies. Loss of licensure or Medicare certification by a host facility could result in termination of such contract. Certificate of need ("CON") laws in some states require approval for capital expenditures in excess of certain threshold amounts, expansion of bed capacity or facilities, acquisition of medical equipment or institution of new services. If a CON must be obtained, it may take up to 12 months to do so, and in some instances longer, depending upon the state involved and whether 7 10 the application is contested by a competitor or the state agency. CON's usually are issued for a specified maximum expenditure and require implementation of the proposed improvement within a specified period of time. Certain states, including California, Texas, Utah, Colorado and Arizona, have enacted legislation repealing CON requirements for the construction of new health care facilities, the expansion of existing facilities and the institution of new services. Some states have enacted or have under legislative consideration "sunset" provisions which require the review, modification or deletion of these statutes when no longer needed. The Company is unable to predict whether such legislative proposals will be enacted but believes that the elimination of CON requirements positively impacts its business. The Joint Commission on the Accreditation of Healthcare Organizations ("JCAHO"), at a facility's request, will participate in the periodic surveys which are conducted by state and local health agencies to ensure continuous compliance with all licensing requirements by health care facilities. JCAHO accreditation satisfies certain of the certification requirements for participation in the Medicare and Medicaid programs. A facility found to comply substantially with JCAHO standards receives accreditation. A patient's choice of a treatment facility may be affected by JCAHO accreditation considerations because most third-party payers limit coverage to services provided by an accredited facility. All of the hospitals currently under contract with the Company have received JCAHO accreditation. The laws of various states in which the Company may choose to operate, including California, generally prevent corporations from engaging in the practice of medicine. These laws (e.g., Section 2052 of the California Business and Professions Code), as well as applicable case law, were enacted to protect the public from the rendering of unnecessary medical or other services for treatment of the ill. Although the Company has not obtained a legal opinion, it believes that the establishment and operation of Programs will not cause it to be engaged in the "practice of medicine" as that term is used in such laws and regulations. These laws and regulations are subject to interpretation and, accordingly, the issue is not free from doubt. Since the Company has not sought or obtained any rulings, there can be no assurance that state authorities or courts will not determine that the Company is engaged in the unauthorized practice of medicine. If such a determination is made and is not overturned, the Company would have to terminate its operations in that state. The Company's medical directors are engaged to provide administrative services, including but not limited to planning the clinical program, supervising the clinical staff, establishing standards of professional care, and advising the Company and staff on questions of policy. The co-medical directors conduct public relations activities and assist the Company in marketing. Although the Company has not obtained a legal opinion, it believes that the proposed agreements between the Company and its medical and co-medical directors do not violate any fee-sharing prohibitions. The federal prohibition, as it relates to the Medicare program, is found at 42 U.S.C. 1320a-7b. Such prohibitions are found in Section 650 of the California Business and Professional Code and Section 445 of the California Health and Safety Code, as well as comparable statutes in other states. However, future judicial, legislative or administrative interpretations of these arrangements could prohibit the Company from hiring professionals which could have a materially adverse effect on the Company. Given the recent political mandate for health care reform, it appears likely that health care cost 8 11 containment will occur. The Company is practiced in administrating "managed care type" programs and is familiar with the pressures of improving productivity and reducing costs. (xiii) Employees As of February 18, 1997, the Company employed 120 persons full-time and eighty (80) persons part-time. Those figures do not include physicians and psychiatrists who are medical directors of the Company's Programs and not employees. (d) Financial Information About Foreign and Domestic Operations and Export Sales Inapplicable. ITEM 2 - PROPERTIES The Company maintains its corporate offices in an approximately 2,200-square-foot suite of executive offices in Laguna Niguel, California, under a lease agreement providing for a monthly base rent of $2,880 which expires June 30, 1997. The Company leases an additional satellite corporate office in Playa Del Rey, California under a lease agreement providing for a monthly base rent of $2,000 from November 1, 1996 to October 31, 1997 and $2,100 from November 1, 1997 to October 31, 1998. During October, 1996, the Company began leasing an office in Mission Hills, California to service potential incoming patient inquiries under a lease agreement providing for a monthly base rent of $1,100 which expires October 14, 1999. The Company believes that this office space is adequate for its reasonably foreseeable needs. It is expected that the expiring leases will be renewed on similar terms. The Company has also leased space under seven separate lease agreements for the operation of its outpatient partial hospitalization programs. Three agreements are on a month to month basis. The remaining agreements expire March 31, 1997, May 31, 1997, June 30, 1997 and July 13, 1997 respectively. The lease which expires June 30, 1997 contains five (5) one (1) year options to extend the lease. Aggregate monthly payments total $16,137 of which $13,383 are fully reimbursed through subleases with the Company's host hospitals. It is expected that the expiring leases and subleases will be renewed on similar terms. ITEM 3 - LEGAL PROCEEDINGS Inapplicable. ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Inapplicable. 9 12 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS (a) Market Information The Company's common stock is currently quoted on the over the counter "OTC" electronic bulletin board under the symbol OPMC. High Bid Low Bid -------- ------- 1996: - ----- Fourth Quarter 1 17/32 1 1/16 Third Quarter 1 3/16 19/32 Second Quarter 1 1/16 3/4 First Quarter 1 1/64 23/32 1995: - ----- Fourth Quarter 1 1/16 1 3/32 Third Quarter 1 1/16 3/4 Second Quarter 1 1/16 17/32 First Quarter 23/32 5/8 The listed prices represent inter-dealer quotations, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. The listed prices retroactively reflect the 20% stock dividend issued on October 18, 1996. (b) Holders The approximate number of holders of record each class of the Company's common equity securities as of the close of business on February 18, 1997 is set forth below: Approximate Title of Class Number of Record Holders - -------------- ------------------------ Common Stock, $.001 par value 205 The Company believes that there are approximately 900 beneficial owners of its common stock. (c) Dividends On October 18, 1996, the Company issued a dividend of two-tenths (.2) share for each share of the Company's common stock held by stockholders of record on October 1, 1996. The Board of Directors declared the stock dividend based on the Company's anticipated current year earnings. The Company has accounted for the dividend by transferring from current year earnings and accumulated deficit to common stock and paid-in- capital an amount equal to the fair value of stock distributed as a dividend as of the date the dividend was declared. The Company has never paid or declared cash dividends on its Common Stock. The Company does not anticipate the payment of cash dividends on its common stock in the foreseeable future. The transfer agent for the Company's common stock is American Stock Transfer & Trust Company, New York, New York. 10 13 ITEM 6 - SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Financial Statements and Notes thereto of the Company included elsewhere herein, and such data should be read with "Management's Discussion and Analysis of Financial Condition and Results of Operations." The data at December 31, 1996 and December 31, 1995 and for each of the fiscal years in the three year period ended December 31, 1996 are derived from the Company's Financial Statements for such years audited by Ernst & Young LLP which Financial Statements are included elsewhere herein. A 20% stock dividend was declared by the Board of Directors on August 14, 1996 for stockholders of record on October 1, 1996. The stock dividend was issued on October 18, 1996. Per share amounts for all periods presented have been restated to reflect the stock dividend. STATEMENT OF OPERATIONS INFORMATION YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992 ----------- ---------- ---------- ---------- ----------- NET REVENUES $10,676,237 $6,027,122 $5,596,283 $3,825,613 $2,314,376 NET INCOME 876,716 2,070 465,045 365,189 127,045 NET INCOME PER SHARE OF COMMON STOCK .14 .00 .07 .06 .02 WEIGHTED NUMBER OF SHARES OUTSTANDING 6,425,884 6,414,709 6,218,113 5,939,264 5,886,611
BALANCE SHEET INFORMATION AS OF DECEMBER 31
1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- -------- TOTAL ASSETS $3,953,100 $2,059,537 $1,814,153 $1,299,215 $917,779 CURRENT ASSETS 3,518,003 1,731,290 1,699,801 1,237,885 904,072 CURRENT LIABILITIES 1,244,909 381,531 333,209 269,343 249,701 NET WORKING CAPITAL 2,273,094 1,349,759 1,366,592 968,542 654,371 LONG-TERM OBLIGATIONS 0 166,000 0 0 0
11 14 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe harbor statements under the Private Securities Litigation Reform Act of 1995 The statements in this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-K are forward-looking in time and involve risks and uncertainties, including the risks associated with plans, the effect of changing economic and competitive conditions, government regulation which may affect facilities, licensing, healthcare reform which may affect payment amounts and timing, availability of sufficient working capital, Program development efforts and timing and market acceptance of new Programs which may affect future sales growth and/or costs of operations. (a) Liquidity and Capital Resources FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995. At fiscal year end 1996 and 1995, the Company's working capital was $2,273,094 and 1,349,759 respectively. The increase in working capital resulted from the increase in cash and receivables arising from increased revenues and profits. The nature of the Company's business requires significant working capital to fund operations of its programs as well as to fund corporate expenditures until receivables can be collected. Moreover, because each of the existing contracts represents a significant portion of the Company's business, the cancellation of any one contract or the inability to collect any of the accounts receivable could materially and adversely affect the Company's liquidity. Cash flows from operations were $267,146 and $159,554 for the years ended December 31, 1996 and 1995, respectively. The increase was primarily attributable to the increase in net income due to increased revenues among periods, partially offset by an increase in program accounts receivable and an increase in accounts payable and accrued expenses due to expanded volume in fiscal year 1996. Cash flows used in investing activities were ($129,757) and ($215,196) for the years ended December 31, 1996 and 1995, respectively. The decrease in cash used was primarily attributable to acquisition costs incurred in 1995 in connection with the acquisition of a company which closed in April 1996 and the proposed acquisition of certain other assets, that has been abandoned. The cash flows from financing activities was $805,488 and $189,917 for the years ended December 31, 1996 and 1995, respectively. The increase was primarily due to $480,000 in draws on the Company's line of credit agreement with a bank and $326,000 from the exercise of employee stock options. The credit agreement was modified August 1, 1996, by increasing the maximum amount available under the loan from $500,000 to $750,000 and by changing the note from a non-revolving line of credit to a formula line of credit. The line matures June 1, 1997, and is expected to be extended. As of February 24, 1997, approximately $104,000 is available for future draws on the line of credit agreement. The Company believes that the increase in the exercise of employee stock options occurred due to the registration of one of the Company's stock option plans during 1996 and the announcement of the October 1996 stock dividend. The Company's principal sources of liquidity for the fiscal year 1997 are cash on hand, accounts receivable, the revolving line of credit with a bank and continuing revenues from programs. 12 15 FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994. At fiscal year end 1995 and 1994, the Company's working capital was $1,349,759 and $1,366,592 respectively. The nature of the Company's business requires significant working capital to fund operations of its programs as well as to fund corporate expenditures until receivables can be collected. Moreover, because each of the existing contracts represents a significant portion of the Company's business, the cancellation of any one contract or the inability to collect any of the accounts receivable could materially and adversely affect the Company's liquidity. Cash flows from operations were $159,554 and ($192,153) for the years ended December 31, 1995 and 1994, respectively. The increase was primarily attributable to an increase in revenues partially offset by an increase in program accounts receivable attributable to an increase in program volume. Cash flows used in investing activities were ($215,196) and ($59,848) for the years ended December 31, 1995 and 1994, respectively. The decrease in cash was primarily attributable to deferred acquisition costs incurred in 1995 in connection with the proposed acquisitions of two companies performing complimentary mental health services. The cash flows from financing activities were $189,917 and ($13,973) for the years ended December 31, 1995 and 1994, respectively. The increase was primarily due to draws on the Company's line of credit agreement with a bank. The credit agreement expires May 1, 1996, but is convertible into a one year term loan with an initial due date of May 1, 1997 but with a five (5) year repayment schedule. (b) Results of Operations FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995. The Company operated fifteen (15) programs during the year ended December 31, 1996 and seventeen (17) programs during the year ended December 31, 1995. As of February 18, 1997, the Company currently has twelve (12) operating programs. These are composed of three inpatient and nine partial hospitalization programs. Generally, the size and profit potential of inpatient programs are greater than partial hospitalization programs. Net Revenues were $10,676,237 and $6,027,122 for the years ended December 31, 1996 and 1995, respectively. The increase in revenues in 1996 over 1995 is due to the increase in patient volume among periods and the increase in management fees charged, due to an expanded scope of services the Company now provides to many of its customers. This has occurred particularly at those programs which the Company began managing in late 1995 and early 1996. Cost of services provided were $8,313,317 and $5,022,040 for the years ended December 31, 1996 and 1995, respectively. The increase in the cost of services provided among years is primarily due to the increase in patient volume among years and an expanded scope of services provided in connection with certain contracts such as nursing, dietary, transportation and lease costs. Selling, general and administrative expenses have increased over the prior year due to increased corporate marketing wages and activities, and various professional fees incurred with the Company's contract and business acquisition efforts. The provision for uncollectible accounts decreased from the prior year due to the relicensing of three programs to a new hospital during the latter part of 1995. 13 16 Income taxes have increased over the prior year due to the Company's provision for state income taxes in 1996. The Company has utilized the majority of its federal net operating loss carryforwards to offset 1996 taxable income. Net income was $876,176 and $2,070 for the years ended December 31, 1996 and 1995, respectively. The increase was primarily attributable to revenue growth, generated by increased patient volume, and larger management fees, causing gross profit to rise favorably, and disproportionately, to the increase in the cost of services provided. The Company does not know of any events which are likely to materially change the costs of operating its Programs individually; however, plans to expand the number of operating programs do exist. During February 1997 the Company formed a strategic alliance with Galaxy Health Care of Miami, Florida to develop community mental health centers in the southwest, southeast and northeast regions of the country over a three year period. In addition, the Company has recently begun to provide a larger scope of services to its customers for a greater management fee. During 1996, many of the new programs secured in 1995 began to mature. In addition, the fee structure of programs which existed during 1996 differed from those which existed during 1995. As a result, revenues began to increase significantly and gross profit rose favorably and disproportionately due to the increase in costs for such programs. Conversely, should patient census and the resulting revenue decrease (especially below the minimum break even level) costs will be disproportionately high which would adversely impact the results of operations and the Company's available resources. The Company's revenue is expected to increase in 1997 due to the expansion in the number of operational programs. Marketing plans for expanding the volume of the business by obtaining new contracts for programs and expanding the scope of mental health services offered by the acquisition of complementary businesses currently exist. However, it is uncertain at this time, to what extent the Company's fixed costs will be impacted by this expansion. In addition, the Company has exhausted the majority of its net operating loss carryforwards during 1996. Consequently in 1997, the Company will be required to provide for all federal and state income tax expense at the applicable statutory rates. Due to the Company's dependence on a relatively small customer base presently consisting of only four (4) hospitals and one community mental health center, the loss of any of its customers could have a significant adverse effect on the Company's operations. Hence, there is a special emphasis paragraph in the report of the Company's independent auditors of the financial statements for the fiscal year ended December 31, 1996. FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 The Company operated seventeen (17) programs during the year ended December 31, 1995 and sixteen (16) programs during the year ended December 31, 1994. Net Revenues were $6,027,122 and $5,596,283 for the years ended December 31, 1995 and 1994 respectively. The increase in revenues in 1995 over 1994 is due to the greater number of total operating programs among years and a greater number of inpatient psychiatric programs operating for a greater portion of 1995 versus 1994. The Company typically earns a larger management fee on managing inpatient versus partial hospitalization programs. In addition, the volume of patient days treated through inpatient programs is greater than those treated through partial hospitalization programs. Cost of services provided were $5,022,040 and $4,238,555 for the years ended December 31, 1995 and 1994 respectively. The increase in the cost of services provided among years is primarily due to the increase in program volume among years and an expanded scope of services provided in connection with certain contracts such as nursing, transportation and lease costs. 14 17 Selling, general and administrative expenses have increased over the prior year due to increased corporate marketing wages and activities, and various professional fees incurred with the Company's contract and business acquisition efforts. The provision for uncollectible accounts decreased from the prior year due to the termination of two contracts with one entity which leased facilities from a hospital which filed bankruptcy in June, 1994. Net income was $2,070 and $465,045 for the years ended December 31, 1995 and 1994, respectively. The decrease was primarily attributable to increased cost of services provided and increased sales and marketing efforts. 15 18 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OPTIMUMCARE CORPORATION INDEX TO FINANCIAL STATEMENTS AND SCHEDULES See pages F1 through F11 of this Form 10-K and Item 14. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. 16 19 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) and (b) Identification of Directors and Executive Officers The directors and executive officers of the Company are: NAME AGE POSITION ---- --- -------- Edward A. Johnson 51 President, Principal Financial Officer, Secretary and Chairman of the Board Gary L. Dreher 50 Director Michael S. Callison 58 Director, Vice President of Corporate Development Jon E. Jenett 44 Director Each director serves for a term of one year or until his successor has been elected and qualified. Each executive officer serves at the pleasure of the Board of Directors. Directors do not receive any director's fees or other compensation for their services, as such, but receive reimbursement for their expenses in attending meetings of the Board of Directors. (c) Identification of Certain Significant Employees Inapplicable. (d) Family Relationships Inapplicable. (e) Business Experience Mr. Johnson has been President, Chief Executive Officer and Chairman of the Board of the Company since co-founding the Company in November 1986. During May, 1990, Mr. Johnson assumed the role of Principal Financial Officer following the resignation of the former Chief Financial Officer. From August 1985 through July 1986, he was Executive Vice President of Behavioral Medicine Corporation, a joint venture between The Voluntary Hospital Association of America and Comprehensive Care Corporation. Mr. Johnson's duties principally included the development of psychiatric and substance abuse programs for hospitals throughout the United States. From 1969 until August 1985, Mr. Johnson was employed in various positions with Comprehensive Care Corporation, a significant provider of management programs for psychiatric disorders and substance abuse. Mr. Johnson's most recent position at Comprehensive Care Corporation was the Executive Vice President of Operations. His principal duties were to develop and implement marketing systems for that company's programs. Mr. Johnson received a M.S. degree in Psychology from Colorado State College in 1966 and is licensed in California as a Marriage and Family Counselor. 17 20 Mr. Dreher was elected to the Board of Directors during September, 1993. He received his B.S. degree in Microbiology and Lab Technology from California State University in 1971. For the past five years, he has served as Vice President of International Sales for Apotex Scientific, an international distributor network for Esoteric Diagnostic Tests. From 1984 to 1991, he was Vice President of Sales at Ventrex Laboratories, a manufacturer of Diagnostic Tests for medical and biotechnology markets. Mr. Callison was elected to the Board of Directors during September, 1993. He received his B.A. degree in Economics from the University of Puget Sound, Tacoma, Washington in 1966. In 1994, Mr. Callison was promoted to Vice President of Marketing and Development. From 1990 to 1993, he was a sales and marketing consultant to the Company, assisting in business development and responsible for securing various key management contracts for the Company. From 1984 to 1990, Mr. Callison was a Senior Account Executive for the Hill-Rom Company, responsible for marketing patient care systems to hospitals. Mr. Jenett was elected to the Board of Directors during December, 1995. He received his B.A. degree in Economics from Harvard College in 1974 and his M.B.A. from Stanford Business School in 1978. For the past six years, he has served as the Chief Financial Officer of Mission Electronics Corporation, a wholesale broker of electronic components. From 1981-1990, he was a partner of Investment Group of Santa Barbara, an investment fund specializing in small public an private companies. (f) Involvement in Certain Legal Proceedings Inapplicable. 18 21 ITEM 11 - EXECUTIVE COMPENSATION (a) Cash Compensation The following table sets forth the elements of compensation paid, earned or awarded for the named individuals. All aspects of executive compensation is determined by the Board of Directors. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION -------------------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS --------------------------------------------- ------------------------- ---------------------------- OTHER NAME & ANNUAL RESTRICTED (#) ALL OTHER PRINCIPAL COMPEN- STOCK OPTIONS/ COMPEN- POSITION YEAR SALARY($) BONUS($) SATION($) AWARDS($) SARS PAYOUTS($) SATIONS($) ---------------------------------------------------------------------------------------------------------------------------- EDWARD A. JOHNSON 1996 $144,000 $123,234 200,000 $16,736 (1)(2) PRESIDENT 1995 144,000 40,259 50,000 11,602 (1)(2) 1994 144,000 61,703 0 11,196 (1)(2) MULU G. MICHAEL 1996 $142,167 $ 56,272 175,000 VICE PRESIDENT 1995 103,433 30,833 25,000 OF CLINICAL 1994 67,500 14,072 0 OPERATIONS HELEN TVELIA 1996 $ 55,500 $ 56,733 25,000 PROGRAM 1995 55,500 33,504 25,000 DIRECTOR 1994 55,500 26,894 0
- ----------------------------- # NUMBER OF UNITS $ DOLLAR AMOUNTS (1) CAR ALLOWANCE (2) LIFE INSURANCE PREMIUMS 19 22 (b) Compensation Pursuant to Plans Stock Option Plans 1987 Plan The Company's 1987 Stock Option Plan (the "Plan"), adopted by the Board of Directors on July 28, 1987, and approved by the stockholders on August 28, 1987, provides for the grant to officers, directors, employees and consultants of nonqualified stock options and stock options to employees that qualify as incentive stock options under Section 422A of the Internal Revenue Code of 1986. The Plan terminates on July 28, 1997. The purpose of the Plan is to enable the Company to attract and retain qualified persons as employees, officers and directors and others whose services are required by the Company, and to motivate such persons by providing them with an equity participation in the Company. A maximum of 455,000 shares of the Company's Common Stock were reserved for issuance pursuant to the Plan. Options to purchase 267,500 shares were exercised during fiscal year ended December 31, 1996. There are currently 150,000 shares subject to options outstanding under the Plan. The Plan is administered by the Board of Directors, which has, subject to specified limitations, the full authority to grant options and establish the terms and conditions under which they may be exercised. The exercise price of incentive stock options granted under the Plan is required to be not less than the fair market value of the common stock on the date of grant (110% in the case of a greater than 10% stockholder). The exercise price of nonqualified stock options can be no less than 85% of the fair market value on the date of grant, although the Company does not intend to grant any such stock options at less than fair market value. In the discretion of the Board, the exercise price may be payable in cash, by delivery of a promissory note or in Common Stock of the Company. The options are subject to forfeiture upon termination of employment or other relationship with the Company except by reason of death or disability and are nonassignable. Options may be granted for terms up to 10 years (five years in the case of incentive stock options granted to greater than 10% stockholders). No optionee may be granted incentive stock options such that the fair market value of the options which first become exercisable in any one calendar year exceeds $100,000. Options granted under the Plan to officers, employees or consultants may be exercised only while the optionee is employed or retained by the Company or within six (6) months after termination of the employment or consulting relationship by reason of death or permanent disability, and three months after termination for any other reason. On December 31, 1991, the Board of Directors granted options under this Plan to Edward A. Johnson to purchase 27,500 shares and Michael S. Callison to purchase 25,000 shares. The options were exercised during 1996 at an exercise price of $.21 per share. On August 23, 1993, the Board of Directors granted additional options under this Plan to Michael S. Callison and Gary L. Dreher to each purchase 25,000 shares. The option exercise price is $.30 per share. Options of 25,000 granted to Mr. Callison were exercised during 1996. The 25,000 in options granted to Mr. Dreher vest immediately and expire five years from the date of grant. 1994 Plan On December 20, 1994, the Board of Directors re-adopted the Company's 1994 stock option plan. The plan allows the Company to grant officers, directors, employees and consultants nonqualified stock options. The Plan terminates on March 22, 2004. The purpose of the Plan is to enable the Company to attract and retain qualified persons as employees, officers and directors and others whose services are required by the Company, and to motivate such persons by providing them with an equity participation in the Company. A maximum of 500,000 shares of the Company's 20 23 Common Stock were reserved for issuance pursuant to the Plan. Options to purchase an aggregate of 250,000 shares were granted during fiscal year ended December 31, 1995 including options under the Plan to Jon E. Jenett to purchase 25,000 shares. The option exercise price is $.93 per share. The options have a five year term and vest immediately. Options to purchase 250,000 shares were exercised during fiscal year ended December 31, 1996. There are currently 225,000 shares subject to option outstanding under the Plan. The Plan is administered by the Board of Directors, which has, subject to specified limitations, the full authority to grant options and establish the terms and conditions under which they may be exercised. The exercise price of nonqualified stock options can be no less than 85% of the fair market value on the date of grant, although the Company does not intend to grant any such stock options at less than fair market value. In the discretion of the Board, the exercise price may be payable in cash, by delivery of a promissory note or in Common Stock of the Company. The options are subject to forfeiture upon termination of employment or other relationship with the Company except by reason of death or disability and are nonassignable. Options may be granted for terms up to 10 years. Options granted under the Plan to officers, employees or consultants may be exercised only while the optionee is employed or retained by the Company or within six (6) months after termination of the employment or consulting relationship by reason of death or permanent disability, and three months after termination for any reason. Other Options The Company granted options to purchase 657,000 shares of common stock to various officers, directors, employees and consultants of the Company during 1996. These options are not currently registered under a formal stock option plan. On January 16, 1996, the Board of Directors granted options to Edward A. Johnson to purchase 100,000 shares and granted options to Michael S. Callison, Gary L. Dreher and Jon E. Jenett to each purchase 25,000 shares. The option exercise price is $.901. The options have a five year term and vest immediately. On November 18, 1996, the Board of Directors granted options to Edward A. Johnson to purchase 100,000 shares and granted options to Michael S. Callison, Gary L. Dreher and Jon E. Jenett to each purchase 25,000 shares. The option exercise price is $1.3133. The options have a five year term and vest immediately. During 1996, 222,500 of options previously granted to an officer of the Company were exercised at $.21 per share. 21 24 Options/SAR Grants in Last Fiscal Year The following table sets forth certain information concerning Options/SARs granted during 1996 to the named individuals:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION INDIVIDUAL GRANTS TERM ------------------------------------------------------------------------------------------------------------------------------ % OF TOTAL OPTIONS/SARs GRANTED TO EXERCISE OF GRANT DATE OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($) ($)* ------------------------------------------------------------------------------------------------------------------------------ EDWARD A. JOHNSON 100,000 23 1/2% $.901 1/16/2001 46,000 81,000 61,000 100,000 23 1/2% $1.3133 11/18/2001 64,000 115,000 87,000 MULU G. MICHAEL 100,000 23 1/2% $1.08 6/11/2001 52,000 93,000 71,000 75,000 17 1/2% $1.3133 11/18/2001 48,000 86,250 65,250 HELEN TVELIA 25,000 6% $1.3133 11/18/2001 16,000 28,750 21,750
- ------------------ * Present values were calculated using the Black-Scholes options pricing model which should not be viewed in any way as a forecast of the future performance of the Company's stock. The estimated present value of each stock option is $.61 for the January 16, 1996 grant, $.71 for the June 11, 1996 grant, and $.87 for the November 1996 grant based on the following inputs: 1/16/96 6/11/96 11/18/96 GRANT GRANT GRANT ------- ------- -------- Stock Price (Fair Market Value) at Grant $1.0625 $1.25 $1.53125 Exercise Price $ .901 $1.08 $1.3133 Expected Option Term 5 years 5 years 5 years Risk-Free Interest Rate 6.31% 6.31% 6.31% Stock Price Volatility 53% 53% 53% Dividend Yield 0% 0% 0% The model assumes: (a) an Expected Option Term of 5 years which reflects the actual life of the option; (b) a Risk-Free Interest Rate that represents the interest rate on a U.S. Treasury Note with a maturity date corresponding to that of the Expected Option Term; and (c) Stock Price Volatility is calculated using quarterly stock prices over the period from January 1, 1992 to December 31, 1996. Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values The following table summarizes options and SARs exercised during 1996 and presents the value of unexercised options and SARS held by the named individuals at fiscal year end: 22 25
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY SHARES ACQUIRED ON OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL NAME EXERCISE (#) VALUE REALIZED ($) YEAR-END (#) YEAR-END ($)* ----------------- --------------------- ------------------ ----------------------- ----------------------- EDWARD A. JOHNSON 250,000 253,305 250,000 184,195 MULU G. MICHAEL 200,000** 229,248 200,000 120,753 HELEN TVELIA 75,000 71,520 75,000 53,730
- -------------------- * The difference between fair market value at 3/4/97 and the exercise price. ** 100,000 of options vest over five years, none of which are exercisable at 12/31/96. 23 26 (c) Other Compensation In addition to all other options held by him, the Company has obtained life insurance on the life of Mr. Johnson in the amount of $2,000,000, $1,000,000 for the benefit of the Company and $1,000,000 for the benefit of his estate. (d) Compensation of Directors Directors do not receive compensation for their services although they are entitled to reimbursement for expenses incurred in attending board meetings. Michael S. Callison received $71,000 of wages as Vice President of Marketing and Development in 1996. Mr. Dreher received $12,000 in marketing fees during 1996 for the marketing of the Company's programs to the hospitals during 1996. (e) BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The entire Board of Directors is responsible for determining the Chief Executive Officer's compensation. The Board's philosophy has been to offer a stable base salary plus a monthly bonus based on a percentage of corporate monthly profits before income taxes. The committee's approach to base compensation is to offer competitive salaries in comparison with market practices. However, base salaries have become a relatively smaller element in the total executive officer compensation package as the Company has introduced incentive compensation programs which it believes reinforce strategic performance objectives. STOCK PERFORMANCE GRAPH The following graph sets forth the cumulative total shareholder return (assuming reinvestment of dividends) to Company's stockholders during the five year period ended December 31, 1996 as well as the U.S. NASDAQ stock market index and the S&P Hospital Management Index. The Company does not currently meet the standards required for trading on the NASDAQ exchange, however the Company believes that the securities traded on this exchange most closely resemble its market capitalization. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) and (b) Security Ownership The following table sets forth certain information regarding the ownership of the Company's Common Stock as of February 19, 1997, (i) by each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) by each of the Company's directors and named executive officers; and (iii) by all directors and named executive officers of the Company as a group. Unless otherwise indicated below, the person or persons named have sole voting and dispositive power. 24 27 PERFORMANCE GRAPH OPMC S&P NASDAQ ---- --- ------ DEC 31, 1991 100 100 100 DEC 31, 1992 75 75 116 DEC 31, 1993 228 111 132 DEC 31, 1994 313 118 128 DEC 31, 1995 450 164 179 DEC 31, 1996 550 193 220 25 28 AMOUNT & NATURE OF NAME (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS -------- -------------------- ---------------- EDWARD A. JOHNSON 796,970 (2) 11.3% MICHAEL S. CALLISON 536,000 (3) 7.8% GARY L. DREHER 191,575 (4) 2.8% JON E. JENETT 109,000 (5) 1.6% ALL OFFICERS AND DIRECTORS AS A GROUP (4 PERSONS) 1,633,545 (6) 22.4% - -------------------- (1) The addresses of these persons are as follows: Mr. Johnson - 24 South Stonington Road, South Laguna, CA 92677; Mr. Callison - 21972 Summerwind Lane, Huntington Beach, CA 92646; Mr. Dreher - 6301 Acacia Hill Drive, Yorba Linda, CA 92686; Mr. Jenett - 8 South Vista De La Luna, South Laguna, CA 92677. (2) Includes presently exercisable options to purchase 250,000 shares of Common Stock. (3) Includes presently exercisable options to purchase 50,000 shares of Common Stock. (4) Includes presently exercisable options to purchase 125,000 shares of Common Stock. (5) Includes presently exercisable options to purchase 75,000 shares of Common Stock. (6) Includes presently exercisable options to purchase 500,000 shares of Common Stock. (c) Changes in Control Inapplicable. 26 29 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On August 8, 1995, the Company granted to Mr. Jenett options to purchase 25,000 shares of the Company's common stock at $.93 per share. The options vest immediately and expire five years from the date of grant. On January 16, 1996, the Company granted to Mr. Johnson options to purchase 100,000 shares of the Company's common stock and granted Mr. Callison, Mr. Dreher and Mr. Jenett options to each purchase 25,000 shares of the Company's common stock at $.901 per share. The options vest immediately and expire five years from the date of grant. On November 18, 1996, the Company granted to Mr. Johnson options to purchase 100,000 shares of the Company's common stock and granted Mr. Callison, Mr. Dreher and Mr. Jenett options to each purchase 25,000 shares of the Company's common stock at $1.3133 per share. The options vest immediately and expire five years from the date of grant. (b) Certain Business Relationships Inapplicable. (c) Indebtedness of Management On December 29, 1995, the Company converted a series of short-term advances to Mr. Johnson and a $97,000 note dated December 30, 1994 into a $155,000 promissory note due from Mr. Johnson. The note was originally due December 30, 1996. On December 31, 1996, the Company extended the promissory note to December 31, 1997. The note accrues interest at 4.03%. (d) Transactions With Promoters Inapplicable. 27 30 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) List of Financial Statements Filed as a Part of this Report (Filed Under Item 8 above) Page Number ------ Report of Independent Auditors -- Consolidated Balance Sheets as of December 31, -- 1996 and December 31, 1995 Consolidated Statements of Operations for the years -- ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity for the -- years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the -- year ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements. -- (a) (2) List of Financial Statement Schedules filed as a Part of this Report Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a) (3) List of Exhibits Filed as a Part of This Report 3.1 Certificate of Incorporation incorporated by reference from Form S-18 Registration Statement (Registration No. 0033-16313-LA) filed July 28, 1988, Exhibit 3.1. 3.2 Bylaws incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 3.2. 3.3 Certificate of Amendment of Certificate of Incorporation filed February 29, 1988. Incorporated by reference from Form S-18 Registration Statement (Registration No.33-16313-LA) filed July 28, 1988, Exhibit 3.5. 28 31 3.4 Restated Certificate of Incorporation, filed October 3, 1989. Incorporation by reference from Form 10-K for the year ended December 31, 1989. 10.1 Lease between the Company and Laguna Niguel Office Center dated June 23, 1988 which supersedes lease dated December 15, 1986, incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 10.1. 10.6 Amended and Restated 1987 Stock Option Plan incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 10.6. 10.18 Form of Modification Agreement to Incentive Stock Option Agreement, dated January 20, 1988, incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 10.18. 10.30 Lease amendment between the Company and Laguna Niguel Office Center dated September 24, 1990 which supersedes lease dated June 23, 1988 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 10.30. 10.34 Agreement between Huntington Intercommunity Hospital and the Company dated November 1, 1991 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1991, Exhibit 10.34. 10.38 Agreement between Huntington Intercommunity Hospital and the Company dated October 1, 1992 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1992, Exhibit 10.38. 10.39 Agreement between Brotman Medical Center and the Company dated October 20, 1992 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1992, Exhibit 10.39. (Terminated) 10.43 Lease amendment between the Company and Laguna Niguel Office Center dated May 12, 1993 which supersedes lease dated June 23, 1988 incorporated by reference form Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 10.43. 10.48 Lease agreement between Columbia Healthcare Corporation and the Company dated October 18, 1993 incorporated by reference from Annual Report on Form 10-K for the year ened December 31, 1993, Exhibit 10.48. 10.50 Unanimous written consent dated December 10, 1993 of the Board of Directors amending the Promissory Note between the Company and Edward A. Johnson dated December 10, 1992. Incorporated by reference from Form 10-K for the year ended December 31, 1992. 29 32 10.52 Lease agreement between Whittier Narrows Business Park and the Company dated January 10, 1994 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.52. 10.55 1994 Stock Option Plan incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.55. 10.56 Lease Agreement between Frank T. Howard and the Company dated May 4, 1994 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.56. 10.60 Lease amendment between the Company and Laguna Niguel Office Center dated July 7, 1994 which supersedes lease dated June 23, 1988 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.60. 10.64 Unanimous written consent dated December 30, 1994 of the Board of Directors amending the Promissory Note between the Company and Edward A. Johnson dated December 10, 1993 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.64. 10.66 Agreement between Sherman Oaks Hospital and Health Center dated March 30, 1995, Incorporation by reference from Form 10-K for the year ended December 31, 1995. 10.67 Loan Agreement between the Company and National Bank of Southern California dated March 31, 1995. Incorporation by reference from Form 10-K for the year ended December 31, 1995. (Modified) 10.68 Lease Agreement between the Company and Laguna Niguel Office Center dated June 5, 1995 which supersedes lease dated June 23, 1988. Incorporation by reference from Form 10-K for the year ended December 31, 1995. 10.69 Sublease Agreements between the Company and Huntington Beach and Medical Center dated July 1, 1995. Incorporation by reference from Form 10-K for the year ended December 31, 1995. 10.70 Lease Agreement between the Company and 757 Pacific Partnership dated July 3, 1995. Incorporation by reference from Form 10-K for the year ended December 31, 1995. 10.71 Sublease Agreement between the Company and Huntington Beach Hospital and Medical Center dated July 24, 1995. Incorporation by reference from Form 10-K for the year ended December 31, 1995. 10.72 Lease Agreement between the Company and Columbia Healthcare Corporation dated September 14, 1995 which supersedes lease dated October 18, 1993. Incorporation by reference from Form 10-K for the year ended December 31, 1995. 10.73 Agreement between San Fernando Community Hospital, Inc. dba Mission Community Hospital and the Company dated October 6, 1995. Incorporation by reference from Form 10-K for the year ended December 31, 1995. 30 33 10.77 Operating Agreement for Optimum Care Source, LLC incorporation by reference from March 31, 1996 Form 10-Q Exhibit 10.77. 10.78 Master Joint Venture Agreement between Professional CareSource, Inc. and the Company dated April 19, 1996 incorporation by reference from March 31, 1996 Form 10-Q Exhibit 10.78. 10.79 Employment Agreement between Margaret M. Minnick and Optimum Care Source, LLC incorporation by reference from March 31, 1996 Form 10-Q Exhibit 10.79. 10.80 Employment Agreement between Teri L. Jolin and Optimum Care Source, LLC incorporation by reference from March 31, 1996 Form 10-Q Exhibit 10.80. 10.81 Employment Agreement between Joseph H. Dadourian and Optimum Care Source, LLC incorporation by reference from March 31, 1996 Form 10-Q Exhibit 10.81. 10.82 Registration Agreement between Professional CareSource, Inc. and the Company dated April 24, 1996 incorporation by reference from March 31, 1996 Form 10-Q Exhibit 10.82. 10.83 Non-qualified stock option Agreement between Joseph H. Dadourian and the Company dated April 24, 1996 incorporation by reference from March 31, 1996 Form 10-Q Exhibit 10.83. 10.84 Non-qualified stock option Agreement between Teri L. Jolin and the Company dated April 24, 1996 incorporation by reference from March 31, 1996 Form 10-Q Exhibit 10.84. 10.85 Non-qualified stock option Agreement between Margaret M. Minnick and the Company dated April 24, 1996 incorporation by reference form March 1996 Form 10-Q Exhibit 10.85. 10.86 Agreement between Friendship Community Mental Health Center and the Company dated April 25, 1996 incorporation by reference from March 31, 1996 Form 10-Q Exhibit 10.86. 10.87 Lease Agreement between the Company and Laguna Niguel Office Center dated April 30, 1996 which supersedes lease dated June 23, 1988. 10.88 Lease Agreement between the Company and Jay Arteaga dated September 30, 1996. 10.89 Lease Agreement between the Company and Solomon, Saltzman & Jameson dated October 15, 1996. 10.90 Unanimous Written Consent dated December 31, 1996 of the Board of Directors amending the promissory note between the Company and Edward A. Johnson dated December 29, 1995. 31 34 10.91 Change in terms Agreement between the Company and National Bank of Southern California dated January 28, 1997. 10.92 Staffing Agreement between the Company and Treatment Resources, Inc. dated February 1, 1997. 10.93 Community Mental Health Center Agreements (California and Nevada) between the Company and Treatment Resources, Inc. dated February 1, 1997. 11 Statement re: Computation of per share earnings. 23 Consent of Ernst & Young LLP. (b) Reports on Form 8-K Inapplicable. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OPTIMUMCARE CORPORATION By: /s/ EDWARD A. JOHNSON ------------------------ Edward A. Johnson President Date: March 28, 1997 -------------- /s/ EDWARD A. JOHNSON - ----------------------------- March 28, 1997 Edward A. Johnson, Director /s/ MICHAEL S. CALLISON - ----------------------------- March 28, 1997 Michael S. Callison, Director /s/ GARY L. DREHER - ----------------------------- March 28, 1997 Gary L. Dreher, Director /s/ JON E. JENETT - ----------------------------- March 28, 1997 Jon E. Jenett, Director 32 35 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS OPTIMUMCARE CORPORATION
COL. A COL. B COL. C COL. D COL. E - ----------------------------------------------------------------------------------------------------------- ADDITIONS ------------------------ Charged Balance at Charged to Other Balance Beginning to Costs Accounts Deductions At End Description of Period & Expenses Describe Describe of Period - ----------- --------- ---------- -------- ---------- --------- YEAR ENDED DECEMBER 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $ 0 $ 0 $ 0 $ 0 YEAR ENDED DECEMBER 31, 1995 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts 0 36,030 (36,030) 0 YEAR ENDED DECEMBER 31, 1994 Reserves and allowances from asset accounts: Allowance for uncollectible accounts 0 141,620 (141,620) 0
33 36 OptimumCare Corporation Exhibit 11 - Statement Re: Computation of Per Share Earnings
Year ended December 31 -------------------------------------------------- 1996 1995 1994 -------------------------------------------------- PRIMARY Average shares outstanding 6,237,751 5,892,824 5,871,660 Net effect of dilutive stock options - based on the treasury stock method using average market price 188,133 521,885 346,453 --------- --------- --------- Total 6,425,884 6,414,709 6,218,113 --------- --------- --------- Net income $ 876,716 $ 2,070 $ 465,045 --------- --------- --------- Per share amount $0.14 $0.00 $0.07 --------- --------- --------- FULLY DILUTED Average shares outstanding 6,237,751 5,892,824 5,871,660 --------- --------- --------- Net effect of dilutive stock options - based on the treasury stock method using year-end market price, if higher than average market price 246,169 597,186 346,453 --------- --------- --------- Total 6,483,920 6,490,010 6,218,113 --------- --------- --------- Net income $ 876,716 $ 2,070 $ 465,045 --------- --------- --------- Per share amount $0.14 $0.00 $0.07 ========= ========= =========
A 20% stock dividend was declared by the Board of Directors on August 14, 1996 for shareholders of record on October 1, 1996. The stock dividend was issued on October 18, 1996 and all stock related data in this exhibit reflects the stock dividend for all periods presented. 34 37 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-8833 and 33-78340) pertaining to the 1987 and 1994 Stock Option Plans of OptimumCare Corporation of our report dated March 21, 1997, with respect to the consolidated financial statements and schedule of OptimumCare Corporation included in the Annual Report (Form 10K) for the year ended December 31, 1996. /s/ ERNST & YOUNG LLP ---------------------- Ernst & Young LLP Orange County, California March 27, 1997 38 FINANCIAL STATEMENTS OPTIMUMCARE CORPORATION YEARS ENDED DECEMBER 31, 1996 AND 1995 WITH REPORT OF INDEPENDENT AUDITORS 39 OPTIMUMCARE CORPORATION FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 CONTENTS Page ---- Report of Independent Auditors ........................... 1 Financial Statements Consolidated Balance Sheets .............................. 2 Consolidated Statements of Operations .................... 3 Consolidated Statements of Stockholders' Equity .......... 4 Consolidated Statements of Cash Flows .................... 5 Notes to Consolidated Financial Statements ............... 6 40 [LETTERHEAD OF ERNST & YOUNG] REPORT OF INDEPENDENT AUDITORS The Stockholders and Board of Directors OptimumCare Corporation We have audited the accompanying consolidated balance sheets of OptimumCare Corporation as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 8 to the consolidated financial statements, the Company is dependent upon a small number of contracts, the loss of any of which could have a significant adverse effect on the Company's operations. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OptimumCare Corporation at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Orange County, California March 21, 1997 1 41 OPTIMUMCARE CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31 1996 1995 ---------------------------- ASSETS Current assets: Cash and cash equivalents $1,113,809 $ 170,932 Accounts receivable 2,389,019 1,536,693 Prepaid expenses 15,175 23,665 Total current assets 3,518,003 1,731,290 ---------------------------- Note receivable from officer 155,000 155,000 Furniture and equipment, less accumulated depreciation of $52,135 in 1996 and $34,382 in 1995 73,496 25,617 Deposits and other assets 29,922 7,822 Deferred acquisition costs - 138,753 Intangibles, less accumulated amortization of $27,050 in 1996 and $0 in 1995 175,828 - Tradename, less accumulated amortization of $1,224 in 1996 and $1,020 in 1995 851 1,055 ---------------------------- Total assets $3,953,100 $ 2,059,537 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 227,289 $ 192,743 Accrued expenses 371,808 188,788 Line of credit 645,812 - ---------------------------- Total current liabilities 1,244,909 381,531 Note payable to bank - 166,000 Minority interest (27,207) - Commitments Stockholders' equity: Common stock, $.001 par value: Authorized shares - 20,000,000 6,786,218 shares issued and outstanding in 1996; 4,923,509 shares issued and outstanding in 1995 6,786 4,924 Paid-in-capital 3,272,407 2,927,593 Accumulated deficit (543,795) (1,420,511) ---------------------------- Total stockholders' equity 2,735,398 1,512,006 ---------------------------- Total liabilities and stockholders' equity $3,953,100 $ 2,059,537 ============================
See accompanying notes. 2 42 OPTIMUMCARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 1996 1995 1994 -------------------------------------------- Net revenues $10,676,237 $6,027,122 $5,596,283 Interest income 5,316 8,741 8,487 -------------------------------------------- 10,681,553 6,035,863 5,604,770 Operating expenses: Costs of services provided 8,313,317 5,022,040 4,238,355 Provision for uncollectible accounts - 36,030 141,620 Selling, general and administrative 1,343,961 964,701 741,919 Interest 26,544 10,222 4,065 -------------------------------------------- 9,683,822 6,032,993 5,125,959 -------------------------------------------- Income before income taxes 997,731 2,870 478,811 Income taxes 121,015 800 13,766 -------------------------------------------- Net income $ 876,716 $ 2,070 $ 465,045 ============================================ Net income per share $.14 $.00 $.07 ============================================
See accompanying notes. 3 43 OPTIMUMCARE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NOTE RECEIVABLE COMMON STOCK PAID-IN ACCUMULATED TREASURY FROM SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT OFFICER TOTAL ------------------------------------------------------------------------------------------ Balance at December 31, 1993 4,896,509 $4,897 $2,917,676 $(1,887,626) 8,500 $(5,075) $ - $1,029,872 Note receivable from officer - - - - - - (15,653) (15,653) Exercise of stock options 8,000 8 1,672 - - - - 1,680 Net income - - - 465,045 - - - 465,045 ------------------------------------------------------------------------------------------ Balance at December 31, 1994 4,904,509 4,905 2,919,348 (1,422,581) 8,500 (5,075) (15,653) 1,480,944 Payment of note receivable from officer - - - - - - 15,653 15,653 Exercise of stock options 19,000 19 8,245 - - - - 8,264 Reissue of treasury stock - - - - (8,500) 5,075 - 5,075 Net income - - - 2,070 - - - 2,070 ------------------------------------------------------------------------------------------ Balance at December 31, 1995 4,923,509 4,924 2,927,593 (1,420,511) - - - 1,512,006 Exercise of stock options 740,000 740 324,936 - - - - 325,676 OptimumCare Source contributed capital - - 21,000 - - - - 21,000 Payment of stock dividend 1,122,709 1,122 (1,122) - - - - - Net income - - - 876,716 - - - 876,716 ------------------------------------------------------------------------------------------ Balance at December 31, 1996 6,786,218 $6,786 $3,272,407 $ (543,795) - $ - $ - $2,735,398 ==========================================================================================
See accompanying notes. 4 44 OPTIMUMCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1996 1995 1994 ----------------------------------------- OPERATING ACTIVITIES Net income $ 876,716 $ 2,070 $ 465,045 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 17,753 8,919 6,622 Amortization 27,254 204 204 Provision for uncollectible accounts - 36,030 141,620 Common stock issued as bonuses - 5,075 - Minority interest in net income (27,207) - - Changes in operating assets and liabilities: (Increase) in accounts receivable (852,326) 69,317 (1,022,363) (Increase) decrease in prepaid expenses 7,390 (10,383) 152,853 Increase (decrease) in accounts payable 34,546 40,208 (2,728) Increase in accrued liabilities 183,020 8,114 66,594 ----------------------------------------- Net cash provided by (used in) operating activities 267,146 159,554 (192,153) INVESTING ACTIVITIES Intangible asset from business acquisition (202,878) - - Purchases of equipment (65,632) (18,443) (13,362) Loss on sale of equipment - - 514 Deferred acquisition costs 138,753 (138,753) - Note receivable from officer - (58,000) (47,000) ----------------------------------------- Net cash used in investing activities (129,757) (215,196) (59,848) FINANCING ACTIVITIES Note payable to bank 479,812 166,000 - Note receivable from officer - 15,653 (15,653) Exercise of stock options 325,676 8,264 1,680 ----------------------------------------- Net cash provided by (used in) financing activities 805,488 189,917 (13,973) ----------------------------------------- Net increase (decrease) increase in cash 942,877 134,275 (265,974) Cash and cash equivalents at beginning of year 170,932 36,657 302,631 ----------------------------------------- Cash and cash equivalents at end of year $1,113,809 $ 170,932 $ 36,657 ========================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 25,538 $ 8,720 $ 4,065 Cash paid for income taxes $ 95,133 $ 31,201 $ 22,065
See accompanying notes. 5 45 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION OptimumCare Corporation (the Company) develops, markets and manages hospital-based programs for the treatment of psychiatric disorders on both an inpatient and outpatient basis. The Company's programs are currently being marketed in the United States, principally California, to independent acute general hospitals and other health care facilities. Significant intercompany transactions have been eliminated in consolidation. BUSINESS ACQUISITION On April 19, 1996, the Company completed the acquisition of a 70% interest in certain contracts of Professional CareSource, Inc. through the formation of OptimumCareSource, LLC (the "LLC"). The Company acquired a 70% ownership interest in the LLC and Professional CareSource, Inc. holds a 30% ownership interest in the LLC. The Company considers the LLC to be a 70% owned subsidiary of the Company. The Company paid $11,000 in cash to each of the three principals of Professional CareSource, Inc. and made an initial contribution of $50,000 to the LLC for working capital. The Company is required to purchase all of Professional CareSource, Inc.'s interest in the LLC by April 29, 2001, but may elect to purchase the interest at any time after April 29, 2000 at a specified price, which approximates Professional CareSource's ownership percentage in the LLC multiplied by five (5) times the LLC's net profit after taxes as reflected on its most recent Form 1065 after agreed upon taxes. Three principals of Professional CareSource, Inc. were each given one year employment contracts with the LLC. In connection with the employment agreement, the Company granted nonqualified stock options to purchase 33,000 shares of common stock at $.92 per share, which vest over five years, to each of the principals of Professional CareSource, Inc. Optimum CareSource, LLC, headquartered in Southern California, provides mental health services at long-term care facilities. The purchase method of accounting has been used to record the transaction. No tangible assets of the LLC were acquired and as such the purchase price was allocated to intangibles and amortized over five years. The deferred acquisition costs associated with the purchase are amortized under the straight line method over five years. The Company did not proceed with a proposed business acquisition with Drs. Giem, Guerra and Meyers and expensed $96,000 of direct costs to selling, general and administrative expenses during 1996. 6 46 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less, when purchased to be cash equivalents. FURNITURE AND EQUIPMENT Furniture and equipment is stated at cost. Depreciation is computed by the straight-line method based upon the estimated useful lives of the related assets. INTANGIBLE ASSETS The Company's tradename became registered during December 1990. It is recorded at cost and is being amortized over its estimated useful life of 10 years using the straight-line method. Accumulated amortization is $1,224 and $1,020 as of December 31, 1996 and 1995, respectively. The Company has capitalized the legal and consulting fees incurred as a result of the acquisition of a 70% interest in contracts from Professional CareSource, Inc. through the formation of the LLC as an intangible asset. The legal and consulting fees together with the $11,000 in cash paid to each of the three Principals of Professional CareSource, Inc. were incurred as a part of the acquisition of the Company's 70% interest in the LLC. These costs associated with the purchase are amortized under the straight line method over five years. Accumulated amortization is $27,050 and $0 as of December 31, 1996 and 1995, respectively. In accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During 1996 events and circumstances indicated that $175,828 of intangibles recorded as a result of the CareSource acquisition might be impaired based on its operating loss for the year. However, the Company's estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered and that the loss was not unusual for a developing business in its early stages. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write-down those assets to fair value. 7 47 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenues are recognized in the period services are provided and are recorded net of contractual adjustments representing the difference between standard rates and estimated net realizable amounts under reimbursement agreements with customers. NET INCOME PER SHARE Net income per share is computed using the weighted average number of common shares outstanding, giving effect to common stock equivalents arising from stock options, of 6,425,884, 6,414,709 and 6,218,113 in 1996, 1995 and 1994, respectively. A 20% stock dividend was declared by the Board of Directors on August 14, 1996 for stockholders of record on October 1, 1996. The stock dividend was issued on October 18, 1996 and common stock equivalents for all periods presented have been restated to reflect the stock dividend. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about the future that affect the amounts reported in the financial statements. These estimates include assessing the collectibility of accounts receivable and the usage and recoverability of long-lived assets. The actual results could differ from those estimates. RECLASSIFICATIONS Certain amounts for prior periods have been reclassified to conform with the current year presentation. 2. PROVISION FOR UNCOLLECTIBLE ACCOUNTS In June 1994, two contracts with one entity which leased facilities from one hospital were canceled due to the filing of bankruptcy by the hospital. All unpaid amounts due from the contracts have been written off in full at December 31, 1994, which totaled $141,620. 8 48 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. NOTE RECEIVABLE FROM OFFICER On December 29, 1995, the Company converted a series of short-term advances and a $97,000 note dated December 30, 1994 into a promissory note from an officer totaling $155,000. The note accrues interest at the rate of 4.03% and is due December 30, 1996. On December 31, 1996 the Company extended this note for an additional year. On June 24, 1994, the Company loaned two officers $26,400 and $13,200, respectively, to purchase corporate common stock in the open market. The notes accrued interest at the rate of 7.25% and were payable in monthly installments due July 1, 1995. On September 19, 1994 one officer repaid the $13,200 note in full. The other note was repaid in full on July 1, 1995. On May 12, 1995 the Company loaned an officer $22,800. The note accrued interest at the rate of 9% and was repaid in full on May 26, 1995. 4. LINE OF CREDIT On April 12, 1995, the Company entered into a $500,000 line of credit agreement with a bank that expired May 1, 1996. At the expiration date, the then principal balance of the loan was to be convertible into a one year term loan with an initial due date of May 1, 1997, but with a five (5) year repayment schedule. The term loan was to be renewable for an additional term of one year. The loan bore interest at the rate of 11% per year and is secured by all of the assets of the Company. On May 6, 1996 the maturity date of the line of credit was extended to July 1, 1996. On August 1, 1996 the line of credit was changed from a non-revolving line of credit to a formula line of credit, which allows the Company to borrow up to 75% of certain qualified receivables. The maximum indebtedness increased to $750,000. The variable interest rate is Wall Street Journal prime plus 1.50%. The weighted average interest rate was 10.06% and 11% in the year ended December 31, 1996 and 1995, respectively. On January 28, 1997, the maturity date was extended to June 1, 1997. At December 31, 1996, $104,000 was available for future draws on the line of credit agreement. During 1997, no additional funds were borrowed under this agreement. 9 49 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LEASE COMMITMENT The Company leases three office facilities under lease agreements that expire June 30, 1997, October 31, 1998 and October 14, 1999, respectively. The Company also leased space under seven separate lease agreements for the operation of five of its outpatient partial hospitalization psychiatric programs, of which three agreements are on a month-to-month basis and the remaining agreements expire, March 31, 1997, May 31, 1997, June 30, 1997 and July 13, 1997, respectively. Aggregate future minimum lease payments under remaining noncancelable leases with terms in excess of one year are as follows: 1997 $37,400 1998 34,200 1999 10,450 ------- $82,050 =======
The lease which expires June 30, 1997 contains five one-year options to extend the lease. Subleases with two of the Company's host hospitals exist for the entire amount of aggregate future minimum lease payments above. Sublease rental income was $160,596, $154,621 and $48,995 for the years ended December 31, 1996, 1995 and 1994, respectively. Rent expense was $244,185, $191,251, and $119,520 for the years ended December 31, 1996, 1995 and 1994, respectively. 6. STOCKHOLDERS' EQUITY STOCK DIVIDEND On August 14, 1996, a 20% stock dividend was declared by the Board of Directors for shareholders of record on October 1, 1996. The stock dividend was issued on October 18, 1996. Earnings per share amounts for all periods presented in the financial statements have been restated to give retroactive effect to the stock dividend. In such calculation common stock equivalents arising from stock options have not been restated as no anti-dilution rights have been granted to the option holders. 10 50 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLAN The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. During 1996, the Company granted stock options with an exercise price that differed from the market price of the underlying stock on the date of grant. However, the compensation expense with respect to these options was insignificant and not recognized by the Company. In July 1987, the Company adopted a stock option plan (the 1987 Plan) including incentive stock options and nonqualified stock options. A maximum of 455,000 shares of the Company's common stock has been reserved for issuance under the plan. Under the Plan, incentive stock options may be granted at an exercise price which is not less than 100% of the fair market value on the date of grant (110% for greater than 10% stockholders). In addition, nonqualified stock options may be granted at an exercise price which is no less than 85% of the fair market value on the date of grant. Options may be granted for terms up to 10 years (five years for greater than 10% stockholders). In 1991, the Company granted options to purchase 239,600 shares of its common stock at $.21 per share that were vested upon grant. Of these options 222,500 were granted to an officer of the Company and were exercised during 1996. In March 1994, the Company adopted and approved the 1994 Stock Option Plan (the 1994 Plan) including incentive stock options and nonqualified stock options. In December 1995, the Company readopted and approved the 1994 Stock Option Plan. A maximum of 500,000 shares of the Company's common stock has been reserved for issuance under the 1994 Plan. Under the 1994 Plan, incentive stock options may be granted at an exercise price which is not less than 100% of the fair market value on the date of grant (110% for greater than 10% stockholders). In addition, nonqualified stock options may be granted at an exercise price which is no less than 85% of the fair market value on the date of grant. Options may be granted for terms up to 10 years (five years for greater than 10% stockholders). 11 51 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (CONTINUED) In 1995, the Company granted options to purchase 200,000 shares of its common stock at $.65 per share that are vested upon grant. No options have been exercised under these grants. In April 1996, the Company granted options to purchase 33,000 shares of its common stock to three principals of its newly acquired LLC (Note 1). The exercise price is $.92 per share, the fair market value at the date of grant. Options vest over five years. No options have been exercised under these grants. During various dates in 1996, the Company granted to certain officers, directors, employees and consultants, non-qualified options to purchase 675,000 shares of its common stock at prices ranging from $.901 to $1.50 per share. Options to purchase 475,000 shares are vested upon grant. Options to purchase 200,000 shares vest over three years. No options have been exercised under these grants. A summary of stock option activity under the 1987 and 1994 Plans during 1994, 1995 and 1996 is as follows:
WEIGHTED WEIGHTED Shares under option AVERAGE AVERAGE 1987 EXERCISE 1994 EXERCISE PLAN PRICE PLAN PRICE ------------------------------------------------------------- Outstanding at December 31, 1993 344,500 $.29 - $ - Granted 50,000 .6375 225,000 .6375 Exercised (8,000) .21 - - Canceled (25,000) .21 - - ------------------------------------------------------------- Outstanding at December 31, 1994 361,500 .35 225,000 .6375 Granted - - 250,000 .91 Exercised (19,000) .6375 - - Canceled (25,000) .375 - - ------------------------------------------------------------- Outstanding at December 31, 1995 317,500 .32 475,000 .78 Granted 100,000 1.08 - - Exercised (267,500) .34 (250,000) .66 Canceled - - - - ------------------------------------------------------------- Outstanding at December 31, 1996 150,000 $.83 225,000 $.68 =============================================================
12 52 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- --------------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AT AVERAGE EXERCISE PRICE AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE 12/31/96 EXERCISE PRICE - ----------------------------------------------------------------- --------------------------------- $0.30 25,000 1.5 years $ .30 25,000 $ .30 $0.37 25,000 1.5 years .37 25,000 .37 $0.6375 125,000 2.5 years .6375 125,000 .6375 $0.91 75,000 3.5 years .91 75,000 .91 $0.93 25,000 3.5 years .93 25,000 .93 $1.08 100,000 4.5 years 1.08 - 1.08 - --------------------------------------------------------------- ------------------------------- $.30 to $1.08 375,000 2.5 years $ .78 275,000 $ .68 =============================================================== ===============================
A total of 1,283,000 and 1,394,600 shares of common stock were reserved for future issuance upon the exercise of stock options at December 31, 1996 and 1995, respectively. A total of 27,500 options were available for future grant at December 31, 1996 under existing stock option plans. Options under the Plans have expiration dates ranging from 1998 through 2001. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1995 and 1996, respectively: risk-free interest rates of 6.31% for those options expected to be exercised over a five year term and 5.6% for those options granted in 1995 and exercised in 1996; a dividend yield of 0%; a volatility factor of the expected market price of the Company's common stock of .529. 13 53 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1996 1995 -------- --------- Net income (loss) As reported $876,716 $ 2,070 Pro forma $538,255 $(187,430) Earnings (loss) per share Primary and fully diluted as reported $ .14 $ .00 Primary and fully diluted pro forma $ .08 $ (.04) Weighted average exercise price of: Options whose exercise price equals the market price of the stock on the grant date $ 1.50 - Options whose exercise price is less than the market price of the stock on the grant date $ 1.14 $ .72 Weighted average fair value of: Options whose exercise price equals the market price of the stock on the grant date $ .80 - Options whose exercise price is less than the market price of the stock on the grant date $ .75 $ .42
Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1998. 14 54 OPTIMUMCARE CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES A reconciliation of the provision for income taxes using the federal statutory rate to the book provision for income taxes follows:
1996 1995 1994 --------- -------- --------- Statutory federal provision for income taxes $ 339,229 $ 1,000 $ 167,583 Increase (decrease) in taxes resulting from: Current use of net operating loss carryforwards (339,229) (1,000) (167,583) Federal alternative minimum tax 14,000 - 6,000 State tax, net of federal benefit 107,015 800 7,776 --------- ------- --------- $ 121,015 $ 800 $ 13,766 ========= ======= =========
Significant components of the provision for income taxes are as follows:
1996 1995 1994 -------- ----- ------- Current: Federal $ 14,000 $ - $ 6,000 State 107,015 800 7,766 -------- ---- ------- Total current 121,015 800 13,766 -------- ---- ------- Deferred: Federal - - - State - - - -------- ---- ------- Total deferred - - - -------- ---- ------- $121,015 $800 $13,766 ======== ==== =======
At December 31, 1996, the Company has unused net operating loss carryforwards of approximately $95,000 for federal income tax purposes which expire beginning in the year 2003. A valuation allowance has been recorded to entirely offset the tax benefits of this attribute. 15 55 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the net deferred tax asset at December 31, 1996, 1995 and 1994 consist of the following:
1996 1995 1994 -------- --------- ---------- Net operating loss carryforwards $ 23,000 $ 413,000 $ 401,000 Alternative minimum tax credit carryforwards 18,000 4,000 4,000 Reserves and accruals not currently deductible for tax purposes 23,000 17,000 43,000 Depreciation and amortization not currently deductible for tax purposes 7,000 - 1,000 -------- --------- --------- Total deferred tax assets 71,000 434,000 449,000 Less valuation allowance (71,000) (434,000) (449,000) -------- --------- --------- Net deferred tax asset $ - $ - $ - ======== ========= =========
8. MAJOR CUSTOMERS The Company is dependent upon a small number of hospitals, the loss of any contract could have a significant adverse effect on the Company's operations. Further, certain contracts are terminable on 90 days notice and if certain patient census is not maintained. Management intends to use its best efforts to retain existing contracts and expand the scope of services on these contracts, obtain new contracts, and maintain patient census at the same or higher levels than has historically been experienced. The following table summarizes the amount of revenue for each customer representing greater than 10% of total revenues for the:
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 1996 1995 --------------------------------------------------------- DOLLAR PERCENT DOLLAR PERCENT --------------------------------------------------------- Hospital 1 $ 3,116,166 29.2% $ 975,652 16.2% Hospital 2 596,438 5.6% 791,995 13.1% Hospital 3 1,242,955 11.6% 1,675,942 27.8% Hospital 4 35,000 .4% 816,280 13.5% Hospital 5 4,221,088 39.5% 419,580 7.0% Other Hospitals 1,464,590 13.7% 1,347,673 22.4% --------------------------------------------------------- $10,676,237 100.0% $6,027,122 100.0% =========================================================
In addition, these hospitals accounted for approximately $1,973,715 and $1,080,633 of accounts receivable at December 31, 1996 and 1995, respectively. 16 EX-10.87 2 LEASE AGREEMENT LAGUNA NIGUEL OFFICE CTR & COMPANY 1 EXHIBIT 10.87 LEASE AMENDMENT --------------- That certain OFFICE BUILDING LEASE dated June 23, 1988 and Amended September 27, 1989, September 24, 1990, July 7, 1992, May 12, 1993, July 7, 1994 and June 5, 1995, by and between LAGUNA NIGUEL OFFICE CENTER, a California Limited Partnership, as Landlord and OPTIMUMCARE CORPORATION, a Delaware Corporation, as Tenant, is hereby amended as follows: 1) Lease has been extended for one (1) year. New expiration date shall be June 30, 1997. 2) Rental rate shall remain the same. 3) Suite shall be painted at Landlords expense when painting is convenient for Tenant. 4) All other terms and conditions of the original lease shall remain unchanged. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of April 30, 1996. LAGUNA NIGUEL OFFICE CENTER, OPTIMUMCARE CORPORATION, a California Limited Partnership a Delaware Corporation By: /s/ CARL J. GREENWOOD By: /s/ EDWARD JOHNSON ----------------------------- ----------------------------- Carl J. Greenwood Edward Johnson General Partner President (LANDLORD) (TENANT) EX-10.88 3 LEASE AGREEMENT BETWEEN COMPANY & JAY ARTEAGA 1 EXHIBIT 10.88 STANDARD OFFICE LEASE - GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Lease Provisions ("Basic Lease Provisions") 1.1 Parties: This Lease, dated, for reference purposes only, September 30. 1996, is made by and between Jav Arteaga (herein called "Lessor") and OptimumCare Corporation, doing business under the name of OptimumCare Corporation (herein called "Lessee"). 1.2 Premises: Suite Number(s) 308, 3rd floors, consisting of approximately 650 rentable sq. feet, more or less, as defined in paragraph 2 and as shown on Exhibit "A" hereto (the "Premises"). 1.3 Building. Commonly described as being located at Jade II, 15501 San Fernando Mission Blvd. in the City of Mission Hills (Los Angeles), County of Los Angeles, State of California, as more particularly described in Exhibit A hereto, and as defined in paragraph 2. 1.4 Use: General Offices, subject to paragraph 6. 1.5 Term: Three (3) years commencing October 15, 1996 (or sooner) ("Commencement Date") and ending October 14, 1999, as defined in paragraph 3. 1.6 Base Rent: $1,100.00 per month, payable on the 1st day of each month, per paragraph 4.1. 1.7 Base Rent Increase: On Anniversary of Commencement, the monthly Base Rent payable under paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below. 1.8 Rent Paid Upon Execution: $1,100.00 for first month's rent. 1.9 Security Deposit: $1,100.00. 1.10 Lessee's Share of Operating Expense Increase: 2.64% as defined in paragraph 4.2. 2. Premises, Parking and Common Areas. 2.1 Premises: The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall include adjacent parking structures used in connection therewith. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project". Lessor hereby leases to Lessee and Lessee leases from Lessor for the term at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises," including rights to the Common Areas as hereinafter specified. 2.2 Vehicle Parking: So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to rent and use 3/1000 parking spaces in the Office Building Project at the monthly rate applicable from time to time for monthly parking as set by Lessor and/or its licensee. 2.2.1 If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2 2.2.2 The monthly parking rate per parking space will be S -0- per month at the commencement of the term of this Lease, and is subject to change upon five (5) days prior written notice to Lessee. Monthly parking fees shall be payable one month in advance prior to the first day of each calendar month. 2.3 Common Areas - Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 Common Areas - Rules and Regulations. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to modify, amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project 2.5 Common Areas - Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Area and Office Building Project as Lessor may, in the exercise of sound business judgement deem to be appropriate. 3. Term. 3.1 Term. The term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 Delay in Possession. Not withstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease of the obligations of Lessee hereunder or extend the term thereof; but, in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, as hereinafter defined; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days following said commencement Date, as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all operations hereunder; provided, however, that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improvements); and provided further, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.2.1 Possession Tendered - Defined. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use in the Premises, (3) Lessee has reasonable access to the Premises, and (4) ten (10) days shall have expired following advance written notice to Lessee of the occurrence of the matters described in (1), (2) and (3), above of this paragraph 3.2.1. 3.2.2 Delays Caused by Lessee. There shall be no abatement of rent, and the sixty (60) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omissions of Lessee, Lessee's agents, employees and contractors. 3 3.3 Early Possession. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee shall pay rent for such occupancy. 3.4 Uncertain Commencement. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Possession (as defined in paragraph 3.2.1) or the actual taking of possession by Lessee, whichever first occurs, as the Commencement Date. 4. Rent. 4.1 Base Rent. Subject to adjustment as hereinafter provided in paragraph 4.3, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 Operating Expense Increase. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of the amount by which all Operating Expenses, as hereinafter defined, for each Comparison Year exceeds the amount of all Operating Expenses for the Base Year, such excess being hereinafter referred to as the "Operating Expense Increase", in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as the percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which percentage has been determined by dividing the approximate square footage of the Premises by the total approximate square footage of the rentable space contained in the Office Building Project. It is understood and agreed that the square footage figures set forth in the Basic Lease Provisions are approximations which Lessor and Lessee agree are reasonable and shall not be subject to revision except in connection with an actual change in the size of the Premises or a change in the space available for lease in the Office Building Project. (b) "Base Year" is defined as the calendar year in which the Lease term commences. (c) "Comparison Year" is defined as each calendar year during the term of this Lease subsequent to the Base Year; provided, however, Lessee shall have no obligation to pay a share of the Operating Expense increase applicable to the first twelve (12) months of the Lease Term (other than such as are mandated by a governmental authority, as to which government mandated expenses Lessee shall pay Lessee's Share, notwithstanding they occur during the first twelve (12) months). Lessee's Share of the Operating Expense increase for the first and last Comparison Years of the Lease Term shall be prorated according to that portion of such Comparison Year as to which Lessee is responsible for a share of such increase. (d) "Operating Expenses" is defined, for purposes of this Lease, to include all costs, if any, incurred by Lessor in the exercise of its reasonable discretion, for: (i) The operation, repair, maintenance, and replacement, in neat, clean, safe, good order and condition, of the Office Building Project, including but not limited to, the following: (aa) The Common Areas, including their surfaces, coverings, decorative items, carpets, drapes and window coverings, and including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, building exteriors and roofs, fences and gates; (bb) All heating, air conditioning, plumbing, electrical systems, life safety equipment, telecommunication and other equipment used in common by, or for the benefit of, lessees or occupants of the Office Building Project, including elevators and escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services; (iii) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense"; (iv) The cost of the premiums for the liability and property insurance policies to be maintained by Lessor under paragraph 8 hereof; (v) The amount of the real property taxes to be paid by Lessor under paragraph 10.1 hereof; (vi) The cost of water, sewer, gas, electricity, and other publicly mandated services to the Office Building Project; (vii) Labor, salaries and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Office Building Project and accounting and a management fee attributable to the operation of the Office Building Project; 4 (viii) Replacing and/or adding improvements mandated by any governmental agency and any repairs or removals necessitated thereby amortized over its useful life according to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgement of Lessor's accountants); (ix) Replacements of equipment or improvements that have a useful life for depreciation purposes according to Federal income tax guidelines of five (5) years or less, as amortized over such life. (e) Operating Expenses shall not include the costs of replacements of equipment or improvements that have a useful life for Federal income tax guidelines of five (5) years unless it is of the type described in paragraph 4.2(d)(viii), in which case their cost shall be included as above provided. (f) Operating Expenses shall not include any expenses paid by any lessee directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by insurance proceeds. (g) Lessee's Share of Operating Expense increase shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time in advance of Lessee's Share of the Operating Expense Increase for any Comparison Year, and the same shall be payable monthly or quarterly, as Lessor shall designate, during each Comparison Year of the Lease term on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expense Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60) days after the expiration of each Comparison Year a reasonably detailed statement showing Lessee's Share of the actual Operating Expense Increase incurred during such year. If Lessee's payments under this paragraph 4.2(g) during said Comparison Year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount under this paragraph during said Comparison Year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. Lessor and Lessee shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Lessee is responsible as to Operating Expense Increases, notwithstanding that the Lease term may have terminated before the end of such Comparison Year. 4.3 Rent Increase. 4.3.1 At the time set forth in paragraph 1.7 of the Basic Lease Provisions, the monthly Base Rent payable under paragraph 4.1 of this Lease shall be adjusted by the increase, if any, in the Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor for All Urban Consumers, (1967=100). "All items", for the city nearest the location of the Building, herein referred to as "C.P.I.", since the date of this Lease. 4.3.2 The monthly Base Rent payable pursuant to paragraph 4.3.1 shall be calculated as follows: the Base Rent payable for the first month of the term of this Lease, as set forth in paragraph 4.1 of this Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. for the calendar month in which the original Lease term commences. The sum so calculated shall constitute the new monthly Base Rent hereunder, but, in no event, shall such new monthly Base Rent be less than the Base Rent payable for the month immediately preceding the date for the rent adjustment. 4.3.3 In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculations. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in the County in which the Premises are located, in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties, notwithstanding one party failing to appear after due notice of the proceeding. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. 4.3.4 Lessee shall continue to pay the rent at the rate previously in effect until the increase, if any, is determined. Within five (5) days following the date on which the increase is determined, Lessee shall make such payment to Lessor as will bring the increased rental current, commencing with the effective date of such increase through the date of any rental installments then due. Thereafter the rental shall be paid at the increased rate. 4.3.5 At such time as the amount of any change in rental required by this Lease is known or determined, Lessor and Lessee shall execute an amendment to this Lease setting forth such change. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefore deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the monthly Base Rent shall, from time to time, increase during the term of this Lease. Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit hears to the initial Base Rent set forth in paragraph 1.6 of the Base Lease Provisions. Lessor shall not be required to keep said security deposit separate from its general 5 accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6.1 Use. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is reasonably comparable to that use and for no other purpose. 6.2 Compliance with Law. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record or any applicable building code, regulations or ordinance in effect on such Lease Term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expenses, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waster or a nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 Condition of Premises. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Commencement Date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and heating system in the Premises shall be in good operating condition. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost; rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 7. Maintenance, Repairs, Alterations and Common Area Services. 7.1 Lessor's Obligations. Lessor shall keep the Office Building Project, including the Premises, interior and exterior walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or area above the Building standards. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on account of any injury or Interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. 7.2 Lessee's Obligations. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repair or replacing wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. 6 (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the airlines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall paneling, ceilings, and plumbing on the Premises and in good operating condition. 7.3 Alterations and Additions. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, utility installations or repairs in, on, or about the Premises, or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, and telephone and telecommunication wiring and equipment. At the expiration of the term Lessor may require the removal of any or all of said alterations, improvements, additions or Utility installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the office Building Project that Lessee shall desire to make shall be presented to Lessor in written form with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises of the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgement that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premise, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest to do so. (e) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee) which may be made to the Premises by Lessee, including but not limited to, floor coverings, paneling, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the premises so that it cannot be removed without material damage to the Premises or the Building, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specification for any alterations, improvements, additions or Utility Installations. 7.4 Utility Additions. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilizes as plumbing, electrical systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. Insurance; Indemnity. 8.1 Liability Insurance - Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Comprehensive General Liability insurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (GL0404), or equivalent, in an amount of not less than $1,000,000 per occurrence of bodily injury and property damage combined or in a greater amount as reasonably determined by Lessor and shall insure Lessee with Lessor as an additional insured against liability arising out of the use, occupancy or maintenance of the premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 7 8.2 Liability Insurance - Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project in an amount not less than $5,000,000.00 per occurrence. 8.3 Property Insurance - Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvements. 8.4 Property Insurance - Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Office Building Project improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form or equivalent, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance premium for the Office Building Project over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's Insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the Commencement Date of this Lease. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its agents, Lessor's master or ground lessor, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims, costs and expenses arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees, or invitees, and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including, but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case any action or proceeding be brought against Lessor by reason of any such matter. Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 No Representation of Adequate Coverage. Lessor makes no representation that the limits or homes of coverage of insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. Definitions. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. 8 (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement cost of the building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees, other than those installed by Lessor at Lessee's expense. 9.2 Premises Damage: Premises Building Partial Damage. (a) Insured Loss: Subject to the provisions of paragraph 9.4 and 9.5, if at any time during the term of this lease there is damage which is an Insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage; then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect (b) Uninsured Loss: Subject to the provisions of paragraph 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 Premises Building Total Destruction; Office Building Project Total Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classifications of either (i) Premises Building Total Destruction, or (ii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this lease shall terminate as of the date of the occurrence of such damage. 9.4 Damage Near End of Term. (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an insured loss falling within the classification of Premises Damage during the last twelve (12 months) of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9 9.5 Abatement of Rent; Lessee's Remedies (a) In the event Lessor repairs or restores the Building or Premises pursuant to the provisions of this paragraph 9, and any part of the Premises are not usable (Including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expense Increase) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this Paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, or if Lessor shall not complete the restoration and repair within six (6) months after such occurrence, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (c) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 Termination - Advance Payments. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor, Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 Waiver. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10.1 Payment of Taxes. Lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 Additional Improvements. Lessee shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 Definition of "Real Property Tax". As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Office Building Project or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax", or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Office Building Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof 10.4 Joint Assessment. If the improvements or property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately assessed, Lessee's portion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessor's worksheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Taxes (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 10 11. Utilities. 11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air conditioning and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. 11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.3 Hours of Service. Said services and utilities shall be provided during generally accepted business days and hours or such other days or hours as may hereafter be set forth. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof Lessee shall have access 24 hours per day for lights and air conditioning/heating. 11.4 Excess Usage by Lessee. Lessee shall not make connection to the utilities except by through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease without the need for notice to Lessee under paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include the transfer or transfers aggregating: (a) if Lessee is a corporation, more than twenty-five percent (25%) of the voting stock of such corporation, or (b) if Lessee is a partnership, more than twenty-five percent (25%) of the profit and loss participation in such partnership. 12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of who shall not be necessary. 12.3 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expense Increase, and to perform all other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 or this Lease. (d) If Lessee's obligations under this Lease have hen guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease; however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or anyone else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor or Lessee. 11 (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. 12.4 Additional Terms and Conditions Applicable to Subletting. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur if the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under a such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and unto it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublessee as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublease shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within three (3) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 Lessor's Expenses. In the event Lessor shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys', architects', engineers' or other consultants' fees. 12.6 Conditions to Consent. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the Office Building Project and not in violation of any exclusives or rights then held by other tenants, and (b) the proposed assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 13.1 Default. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid. (b) The breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting), 13.1 (a) (vacation or abandonment), 13.1 (e) (insolvency), 13.1 (f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33 (auctions), or 41.1 (easements), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Lessor to Lessee thereof. (c) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. 12 (d) the failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c), above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) days notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors: (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. 101 or any successor statute thereto (unless, in the case of a pension filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receive to take possession is not restored to Lessee within thirty (30) days; or (iv) the attachments execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. 13.2 Remedies. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, and any real estate commission actually paid, the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 14 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently pursues the same to completion. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense increase or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such later charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. Condemnation. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation") this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expense Increase shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any past of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises 13 or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. Broker's Fee. (a) The brokers involved in this transaction are N/A as "listing broker" and N/A as "cooperating broker," licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there is no separate agreement between Lessor and said broker(s), the sum of $N/A, for brokerage services rendered by said broker(s) to Lessor in this transaction. (b) Lessor further agrees that (i) if Lessee exercises any Option, as defined in paragraph 39.1 of this Lease, which is granted to Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or (ii) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (iii) if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise an Option, or (iv) if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest or (v) if the Base Rent is increased, whether by agreement or operation of an escalation clause contained herein, there as to any of said transactions or rent increases, Lessor shall pay said broker(s) a fee in accordance with the schedule of said broker(s) in effect at the time of execution of this Lease. Said fee shall be paid at the time such increased rental is determined. (c) Lessor agrees to pay said fee not only on behalf of Lessor, but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Each listing and cooperating broker shall be a third party beneficiary of the provisions of this paragraph 15 to the extent of their interest in any commission arising under this Lease and may enforce that right directly against Lessor; provided, however, that all brokers having a right to any part of such total commission shall be a necessary party to any suit with respect thereto. (d) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm, broker or finder (other than the person(s), if any, whose names are set forth in paragraph 14(a), above) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and no other broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses, attorney's fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. Estoppel Certificate (a) Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date in which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any incurred defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrances of the Office Building Project or of the business of Lessee. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no incurred defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, or for Lessor's internal use, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project, and except as expressly provided in paragraph 14, and in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor 14 or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. Severability. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof 19. Interest on Past-due Obligations. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee not on any amounts upon which late charges are paid by Lessee. 20. Time of Essence. Time is of the essence with respect to the obligations to be performed under this Lease. 21. Additional Rent. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense increase and any other expense payable by Lessee hereunder shall be deemed to be rent. 22. Incorporation of Prior Agreements; Amendments. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 14 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach of time of acceptance of such rent. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be two hundred percent (200% of the rent payable immediately preceding the termination date of this Lease, and all Options, if any, granted under the terms of this Lease shall be deemed terminated and be no further effect during said month to month tenancy. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of Paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 15 30. Subordination. (a) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be, Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. Attorney's Fees. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgement. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 31.2 The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorney's fees and all other costs and expenses incurred in the preparation and service of notice of default and consultations in connection therewith, whether or not a legal transaction is subsequently commenced in connection with such default. 32. Lessor's Access. 32.1 Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or any eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. Signs. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 35. Merger. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 16 37. Guarantor. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entry term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. Options 39.1 Definition. As used in this paragraph the word "option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option of right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to lease other space within the Office Building Project or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the day after the monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessor gives to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1 (b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 40. Security Measures - Lessor's Reservations. 40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of operating Expenses, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office Building Project or building in which the Premises are located upon not less than 90 days prior written notice; 17 (b) To, at Lessee's expense, provide and install Building standard graphics on the door of the Premises and such portions of the Common areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on pole signs in the Common Areas; 40.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Building or the Office Building Project or their name(s) in connection with Lessee's business; (b) Suffer or permit anyone, except in emergency, to go upon the roof of the Building. 41. Easements. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights dedications Maps and restriction do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 41.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provision of this Lease. 43. Authority. If Lessee is a corporation, trust, or general or limited partnership, Lessee and each individual executing this Lease on behalf of such entity represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. Conflict. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 45. No Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to Lease this Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. Lender Modification. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Office Building Project. 47. Multiple Parties. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 48. Work Letter. This Lease is supplemental by that certain Work Letter of even date executed by Lessor and Lessee, attached hereto as Exhibit C, and incorporated herein by this reference. 49. Attachments. Attached hereto are the following documents which constitute a part of this Lease: 50. Relocation. Lessor shall have the right, at its option, upon at least thirty (30) days written notice to Lessee, to relocate Lessee and to substitute for the Premises (the "Original Premises") other space (the "Substituted Premises") in the building of which the premises are a part, containing at least as much rentable area as the Original Premium. Should Lessee not approve of the Substituted Premise, which approval shall not be unreasonable withheld, Lessee's sole remedy shall be to cancel this Lease. This Substituted Premises shall be improved at Lessor's expense, with decorations and improvements at least equal in quantity and quality to those in the Original Premises and may include improvements from the Original Premises and existing improvements in the Substituted Premises. Lessor shall pay the expenses reasonably incurred by Lessee in connection with such substitution of Premises, in an amount not to exceed $1,000.00 in the aggregate. Such expenses shall include, without limitation, costs of moving, door lettering, telephone relocation and reasonable quantities of new stationary, but shall not include any compensation for any alleged interruption of Lessee's business. 18 51. Confidentiality of Lease. Lessee acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Lessor and Lessee. Disclosure of the terms hereof could adversely affect the ability of Lessor to negotiate other leases with respect to the Building or impair Lessor's relationship with other tenants of the Building. Lessee agrees that it and its partners, officers, directors, employees and attorneys shall not disclose the terms and conditions of this Lease to any other persons without the prior written consent of Lessor. It is understood and agreed that damages would be inadequate remedy for the breach of this provision by Lessee, and Lessor shall have the right to performance of this provision and to injunctive to prevent breach or continued breach. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL, NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE Jay Arteaga OptimumCare Corporation By: JAY ARTEAGA By: EDWARD A. JOHNSON Its: Owner Its: C.E.O. by:__________________________________ by:___________________________________ Its:_________________________________ Its:__________________________________ Executed at:_________________________ Executed at:__________________________ on: 10/2/96 on: Address: Address: 15515 San Fernando Mission Blvd. #7 30011 Ivy Glean Drive Mission Hills, CA 91345 Laguna Niguel, CA 92677 (818) 365-7809 (714) 495-1100 19 STANDARD OFFICE LEASE FLOOR PLAN JADE 11 SUITE #308 EXHIBIT A 20 RULES AND REGULATIONS FOR STANDARD OFFICE LEASE ================================================================================ Dated: September 30, 1996 By and Between: Jay Arteaga and OptimumCare Corporation GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety, reputation, or property of the Office Building Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office Building Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the premises or Office Building Project. 9. Lessee shall not suffer or permit anything in or around the Premises or Building that causes excessive vibration or floor loading in any part of the office Building Project. 10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and legal holidays, and on other days between the hours of 7:00 P.M. and 7:00 A.M. of the following day. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. 13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 14. No window coverings, shades or awnings shall be installed or used by Lessee. 15. No Lessee, employee or invitee shall go upon the roof of the Building. 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 19. The Premises shall not be used for lodging or manufacturing, cooking or food preparation. 20. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 21 22. Lessee assumes all risks from theft or vandalism and agrees to keep its premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles". Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles". 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent offside location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws, ordinances and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such method or methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules, regulations, laws and agreements. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. 22 EXHIBIT C CERTIFICATE OF LESSEE'S ACCEPTANCE OF OCCUPANCY TO: Jay Arteaga 15515 San Fernando Mission Blvd. #7, Mission Hills, CA 91345 RE: 15501 San Fernando Mission Blvd., Suite Gentlemen: The undersigned is the Lessee under that certain Lease dated September 30, 1996 (referred to hereinafter as the "Lease"), by and between Jay Arteaga as Lessor (referred to hereinafter as "Landlord"), and the undersigned, as Tenant. In connection with occupancy of the premises, the undersigned delivers this Certificate of Lessee's Acceptance of Occupancy to you and the undersigned understands that you and others, including your lenders, will be relying on each of the statements contained herein. The undersigned hereby certifies to you as a condition to the obligation: (a) The undersigned accepts possession under the Lease on a current rent paying basis as of . (b) The Lease is in full force and effect and there are no defaults under the Lease by Lessor. (c) The Leased Premises and all parking and common areas have been improved to the undersigned's satisfaction and as may be called for under the Lease. (d) The initial monthly rental under the Lease is $1,100.00 and the undersigned from the date hereof agrees to deliver the same and all other charges to the undersigned under the Lease to you without any deduction, set off or counterclaim whatsoever. (e) The undersigned has listed "clean up" items for the Premises requested to be complied with by Lessor within a reasonable period of time and except as to the items set forth hereinbelow, accepts the complete obligation to repair and maintain the Premises. (f) There have been no amendments, modifications or other agreements respecting the Lease. Very truly yours, OptimumCare Corporation By: EDWARD A. JOHNSON, C.E.O. --------------------------- Date: 10/2/96 EX-10.89 4 LEASE AGREEMENT SOLOMON, SALTZMAN & JAMESON & CO. 1 EXHIBIT 10.89 THE PRUDENTIAL - JON DOUGLAS COMPANY A member of the Jon Douglas Real Estate Services Group, Inc. RESIDENTIAL LEASE AGREEMENT This is more than a receipt for money. This is intended to be a legally binding contract. Do not sign it until you have thoroughly read and understood each provision. This Residential Lease Agreement ("Agreement") is entered into at Playa Del Rey, State of California, this _____ day of _________, 1996, by and between SOLOMON, SALTSMAN & JAMIESON ("Lessor"), and OPTIMUMCARE CORP. ("Lessee"). In consideration of the rents and covenants contained herein, Lessor does hereby lease to Lessee, and Lessee does hereby lease from Lessor those certain premises with appurtenances situated in the City of Playa Del Rey, County of Los Angeles, State of California, and more particularly described as follows: 428 Culver Blvd. ("Property"). [ ] Furnished, [X] Unfurnished, [X] Single Family Residence, [ ] Condominium Unit and Parking Space(s) No. ______, [ ] Storage Area No. ___, [ ] Other ___________________________________________________________________ - ----------------------------------------------------------------------------- The following personal property is included as a part of this Agreement: None 1. RENT AND TERM. Lessee agrees to pay Lessor rent at the rate of $_______ per month in advance, on the 1st day of each calendar month. The term of this Agreement shall begin on November 1, 1996 ("Commencement Date"), as a: [ ] a. Month to month tenancy (Periodic Tenancy), which may be terminated by either party, by giving written notice to the other party at least 30 days prior to the intended termination date; or [ ] b. A lease with the Commencement Date as stated above and an ending date of October 31, 1998, with a total rental for the full term of $49,200, payable in monthly installments as defined above; or [X] c. Other: 1st 12 months @ $2,000 and 2nd 12 months @ $2,100. 2. DEPOSITS AND PREPAID RENTAL. a. Lessee has given The Prudential Jon Douglas Company ("Broker") an Earnest Money Deposit in the amount of...................... $________ in the form of [ ] cashier's check, [ ] certified check, [ ] personal check, [ ] other. In the event the Earnest Money Deposit is made in the form of a personal check, Lessee agrees to replace such check with a cashier's check within ____ days of Lessor's acceptance of this Agreement. b. Lessee shall pay to Lessor the first month's rent, in the amount of...................................................... $_______ c. Lessee shall pay to Lessor a Security Deposit, in the amount of $_______ d. Lessee shall pay to Lessor additional sums for _____________ in the amount of............................................... $_______ e. Lessee agrees to pay to Broker, if Lessee is represented by The Prudential Jon Douglas Company, the sum of One Hundred Dollars ($100.00) representing reimbursement to Broker of a portion of Broker's administrative and clerical costs, including the cost of document preparation and processing. Said sum shall only be payable to Broker in full upon execution of this Agreement by Lessor and Lessee.............................................. $ 100.00 Total Deposits, Prepaid Rent and Fees due (2a through 2e)...... $_______ Less (Item 2a) any Deposits received with this offer...........($_______) Balance due, in the form of a cashier's check, on or before _________________, 19____ ..................................... $_______ Note: The total advance payment, including the first month's rent may not exceed three times one month's rent for an unfurnished property or four times one month's rent for a furnished property. 3. LATE CHARGE/BAD CHECKS. Lessee agrees to pay a late charge of six (6) percent of all rents not paid within ___ calendar days from the date due under this Agreement. In the event Lessee pays any rent installment with a check that is returned for insufficient or uncollected funds, Lessee shall pay all subsequent rent due under this Agreement by cashier's check. Lessee shall also pay Lessor $15.00 for each check that is returned to Lessor by Lessee's bank. 4. RETENTION OF DEPOSIT. If Lessee defaults in the performance of any obligation under this Agreement, Lessor may apply or retain all or any part of the security deposit for, but not limited to, the following reasons: (a) to repair or replace any items damaged or missing; (b) to replace any keys, cards, remote control openers, or locks given to Lessee but not returned; (c) to clean and return the property and the items in it, into the condition it was in when the Lessee first occupied the property with the exception of reasonable wear and tear; (d) to pay for damages caused in the event of Lessee's breach of this Agreement including, but not limited to, a pro-rated portion of any lease commissions; (e) to pay arrearrages in rent and other charges due; (f) the deduction of late charges, if any, which have accrued and have not been paid by Lessee. If used during the tenancy, Lessee agrees to reinstate the total security deposit within five days after written notice is given to Lessee in person or by mail. If Lessee complies with all the covenants and conditions of this Agreement, the deposit, less any sums expended by Lessor and accounted for to Lessee, shall be returned to Lessee within the period required by law. IF THE DEPOSIT IS NOT ADEQUATE TO COVER ALL DAMAGES, COSTS AND ARREARAGES, LESSEE MUST PAY ALL COSTS WHICH EXCEED THE AMOUNT OF THE SECURITY DEPOSIT. 5. HANDLING AND/OR TRANSFER OF DEPOSIT. Lessee shall not be entitled to any interest on the deposit except as required by law. Lessor shall have the right to commingle said deposit with other funds of the Lessor. Should Lessor sell Lessor's interest in the Property, Lessor shall transfer to the purchaser the unexpended funds deposited by Lessee and shall so notify Lessee by certified U.S. mail. Lessor shall be discharged from any further liability for such funds. Any claim for refund of security deposit or other sums shall be handled directly between Lessor and Lessee. Lessee and Lessor acknowledge receipt of copy of this page, which constitutes Page 1 of 5 pages. Lessees' Initials ______________ OFFICE USE ONLY Lessors' Initials ______________ Reviewed by Broker or Designee___Date________ 2 PROPERTY ADDRESS 428 Culver Blvd. -------------------------------------------------------------- 6. POSSESSION. If Lessee abandons or vacates the Property, Lessor may terminate this Agreement and regain lawful possession. If Lessor for any reason cannot deliver possession of the Property to Lessee on the Commencement Date, Lessor shall not be liable to Lessee for any resulting loss or damage, but there shall be a proportionate reduction of rent through the date possession is delivered. In the event Lessor is unable to deliver possession within _____ calendar days from scheduled Commencement Date, Lessee may, prior to Lessor's delivery of the Property, declare this lease to be null and void and all money paid to Lessor shall be refunded to Lessee. 7. USE/RESTRICTIONS. It is agreed that the Property shall be used only for residential purposes, and for no other purposes whatsoever, for the occupancy of the following named persons only: OptimumCare business as used at the date of execution of this lease and no animals except ____________. Any changes or exceptions to the occupancy must be approved in writing in advance by Lessor. Lessee agrees to make no use of the Property, nor to do any acts, which will increase the existing rate of insurance on the Property, or will cause cancellation of any insurance policy covering the Property. Lessee further agrees to comply with all laws, ordinances, covenants, conditions, restrictions, rules, and orders affecting the Property or Lessee's occupancy. 8. UTILITIES/SERVICES. Lessee shall pay for all gas, heat, light, power, water, telephone service, alarm or security service, cable television and other services supplied to the property, except: N/A 9. CONDITION, REPAIRS AND MAINTENANCE. Lessor shall maintain the exterior walls, roof, electrical wiring, heating system, air conditioning system (if any), water heater, built-in appliances, and water lines in good and sanitary order, condition, and repair, at Lessor's sole cost and expense. Except for those items, Lessee shall, at Lessee's sole cost and expense, keep and maintain the Property, including household furniture, fixtures, goods and chattels belonging to Lessor, in the manner in which they were received, reasonable wear and tear excepted. In the event damage is caused by the abuse or negligence of Lessee or Lessee's guests or invitees, Lessee shall pay the full cost and expense of repairing such damage. Lessee shall immediately notify Lessor of damage from any cause. Lessee has examined the Property, all furniture, furnishings, and appliances, if any, and fixtures, including smoke detector(s), and hereby agrees that the Property is now in a habitable and good condition except: N/A. Lessor agrees to maintain landscaping, swimming pool and spa, if any, and Lessee agrees to adequately water said landscaping and add water as necessary to the swimming pool and spa. Lessor AND LESSEE ACKNOWLEDGE AND AGREE THAT BROKER HAS NO RESPONSIBILITY OR LIABILITY FOR THE CONDITION OF THE PROPERTY OR FOR ANY REPAIR OR MAINTENANCE OF THE PROPERTY. Lessor AND LESSEE SHALL LOOK SOLELY TO EACH OTHER FOR THE PERFORMANCE OF REPAIR AND MAINTENANCE OBLIGATIONS UNDER THIS AGREEMENT. 10. LEAD-BASED PAINT DISCLOSURE. Prior to occupancy, Lessor shall: (a) deliver to Lessee the EPA booklet entitled "Protect Your Family From Lead in Your Home" and (b) notify Lessee of all known lead-based paint hazards on the Property. 11. INVENTORY. Any furnishings and equipment to be included by Lessor in this Agreement, other than the items set forth herein, shall be set forth in a special inventory, to be signed by both Lessee and Lessor. It is agreed all such furnishings and equipment are in good condition when delivered, unless specifically noted in the inventory. Lessee agrees, upon termination of occupancy under this Agreement, to surrender to Lessor the Property with any furnishings and equipment belonging to Lessor in the same condition as when received, reasonable wear and tear excepted. Lessor AND LESSEE ACKNOWLEDGE AND AGREE THAT BROKER IS NOT RESPONSIBLE FOR PREPARING OR CHECKING INVENTORY. 12. ALTERATIONS AND ADDITIONS. Lessee shall not paint, wallpaper, or make any alterations to the Property without the prior written consent of Lessor. Any additions to, or alterations of, the Property, with the exception of movable furniture, shall become at once a part of the Property and belong to Lessor. Lessee shall not change or add any locks, opening devices and/or security codes on the Property without the prior written consent of Lessor. Should Lessor so consent, Lessee shall give Lessor keys, codes, and/or opening devices within forty-eight (48) hours of any such change. 13. FREE FROM LIENS. Lessee shall keep the Property free from any liens arising out of any work performed, materials furnished, or obligations incurred by Lessee or any person acting in Lessee's behalf. 14. ENTRY/SHOWING BY Lessor. Lessee shall permit Lessor and/or Lessor's representatives to access the Property at all reasonable times and with reasonable notice for the purpose of inspecting, maintaining, repairing or showing the Property to prospective purchasers or tenants. Verbal or written notice at least twenty-four (24) hours in advance of entry shall be deemed reasonable notice. No notice shall be required in case of emergency or to perform repairs or maintenance requested by Lessee. Lessee shall take reasonable precautions to safeguard, protect, and insure personal property items that might be accessible during the inspection, maintenance, repair, or showing of the Property. Lessor AND LESSEE ACKNOWLEDGE AND AGREE THAT BROKER IS NOT RESPONSIBLE FOR LOSS OF PERSONAL PROPERTY OR DAMAGE TO THE REAL PROPERTY. 15. DAMAGE. If the Property is damaged from any cause rendering same uninhabitable, either party shall have the right to terminate this Agreement by giving written notice to the other party within fifteen (15) days after the damage occurs. If this right is exercised by either party, rent for the current month shall be prorated between the parties as of the date the damage occurred. Any unearned rent and/or unused deposits shall be refunded to Lessee. If this Agreement is not terminated as provided in this paragraph, Lessor shall promptly repair the damage then the rent shall be reduced proportionately until the Property is repaired and ready for lessee's occupancy. If any damage or destruction occurs as a result of abuse or negligence of Lessee, or Lessee's guests or invitees, then Lessor only shall have the above right of termination, and no reduction of rent shall be made. 16. ASSIGNMENT/SUBLETTING. Lessee shall not sublet the Property or assign this Agreement, or the tenancy, or any interest therein, without the prior written consent of Lessor. Any consent to one assignment or subletting shall not be construed as a consent to any subsequent assignment or subletting. Lessor shall not unreasonably withhold such consent. Unless prior written consent is obtained, any assignment, transfer, or subletting of the Property, this Agreement, or the tenancy, by voluntary act of Lessee, operation of law, or otherwise, shall be null and void and shall, at the option of Lessor, terminate this Agreement. 17. ABANDONMENT/DEFAULT. Lessee shall not vacate or abandon the Property at any time during the term of this Agreement. In the event of any breach by Lessee of this Agreement, in addition to other rights and remedies available at law or in equity, Lessor shall have the option immediately to terminate this Agreement and all rights of Lessee hereunder by giving written notice of termination. In the event Lessor elects to so terminate this Agreement, Lessor may recover from Lessee all amounts of unpaid rents for the entire term, less any amounts received by Lessor for the re-letting of the Property. In the event Lessee vacates or abandons the Property or otherwise breaches this Agreement, Lessor may from time to time, without terminating this Agreement, either recover all rents as they become due or re-let the Property or any part thereof upon such terms and conditions as Lessor deems appropriate. 18. INDEMNIFICATION OF Lessor. Lessee, as a material part of the consideration to Lessor under this Agreement, hereby waives all claims against Lessor, Lessor's employees, and agents for damage to household furniture, goods, vehicles, and other property, and for injury to any persons in, upon, or about the property, from any cause arising at any time, except for Lessor's negligence. Lessee agrees to indemnify and hold harmless Lessor, Lessor's employees, and agents, from and against all claims of, and liability for, any such damage to property and injury to persons, from any cause arising at any time. 19. WAIVER. The waiver by Lessor of any breach of any covenant or condition of this Agreement shall not be construed as a waiver of any subsequent breach of the same or any other covenant or condition. The subsequent acceptance of rent by Lessor shall not be construed as a waiver of any preceding breach by Lessee of any covenant or condition of this Agreement, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding at the time of acceptance of such rent. 20. INSURANCE/SECURITY. Lessee is advised to secure, at Lessee's expense, insurance policies covering any potential loss or damage to Lessee's Lessee and Lessor acknowledge receipt of copy of this page, which constitutes Page 2 of 5 pages. Lessees' Initials ______________ OFFICE USE ONLY Lessors' Initials ______________ Reviewed by Broker or Designee___Date________ 3 PROPERTY ADDRESS 428 Culver Blvd. -------------------------------------------------------------- personal property or vehicles, and liability for injury to any persons in, upon, or about the Property. Lessee understands that Lessor does not maintain insurance to cover any lessee's liabilities, loss, or damage, whether caused by theft, vandalism, other criminal act, negligence of any person, fire, rain, water overflow/leakage, act of God, and/or any other causes. Lessee agrees Lessor is not liable for these occurrences and Lessee shall look solely to Lessee's insurance policies for any reimbursement for any such liabilities, injuries, loss, or damage sustained by Lessee. LESSEE AGREES NOT TO SEEK RECOVERY OR REIMBURSEMENT FROM LESSOR OR BROKER FOR SUCH OCCURRENCES OR ITEMS. LESSEE FURTHER AGREES LESSOR AND BROKER HAVE NO OBLIGATION TO PROVIDE ANY SECURITY FOR THE PROPERTY. 21. NOTICE: THE AMOUNT OR RATE OF REAL ESTATE COMMISSIONS IS NOT FIXED BY LAW. THEY ARE SET BY EACH BROKER INDIVIDUALLY AND MAY BE NEGOTIABLE BETWEEN THE LESSOR AND BROKER. COMMISSIONS. For Broker's services in arranging this Agreement, Lessor agrees to pay Broker as commission 6% of the total lease or rental payments to be made by Lessee for the entire term but payable now for the first year only then for the second year at the beginning of the 2nd year of this Agreement, or % of the first month's rent if the agreed term is month-to-month or is six (6) months or less. The commission shall be paid in full, irrespective of agency relationship(s), upon execution of this Agreement. See above. Lessor authorizes Broker to deduct the commission from any amounts paid by Lessee for rent or deposits. To the extent such rent and deposits are inadequate to pay in full the commission due, Lessor agrees to pay promptly to Broker any balance due. Of the commissions referred to in this Agreement, % shall be paid to The Prudential Jon Douglas Company and % to (other broker). 22. RENEWAL COMMISSIONS. Upon any extension or renewal of this Agreement or the tenancy, Lessor shall pay to Broker an additional commission of 6% of the total rent payments for said extension or renewal period. Lessor shall immediately notify Broker of each extension or renewal. The commission shall be paid within five (5) days after commencement of the extension or renewal. In the event Lessor fails to pay to Broker the additional commission when due, then, upon written notice by Broker to Lessee, Lessee shall pay to Broker the rent for each extension or renewal period commencing with the rent due immediately following Lessee's receipt of such notice. Rent shall continue to be paid to Broker until all additional commission due Broker has been paid in full. Lessee shall then resume paying rent directly to Lessor. Lessor agrees Broker may deduct and retain the commission due from rents collected by Broker and forward any balance to Lessor. See above. 23. SALE OR EXCHANGE. In the event Lessee, or any person or entity related to, or controlled by, or affiliated with Lessee, acting directly or indirectly, acquires title to the Property during Lessee's occupancy or within twelve (12) months after the termination of Lessee's occupancy, Broker shall be considered the procuring cause in negotiating said transfer of title or ownership by reason of this Agreement. As compensation for such services, Lessor agrees to pay Broker as commission 5% of the total consideration involved in such transfer upon close of escrow, or if there be no escrow, then upon execution of any sale contract or recordation of any deed, whichever occurs first. 24. LEASE PROCESSING FEE. Lessor agrees to pay to Broker, if represented by The Prudential Jon Douglas Company, the sum of One Hundred Dollars ($100.00), representing a reimbursement to Broker of a portion of Broker's administrative and clerical costs, including the cost of document preparation and processing. Said sum shall only be payable to Broker in full upon execution of a lease or rental agreement by Lessor. 25. HOLDING OVER. If Lessee remains in possession of the Property past the expiration of the term of this Agreement or any extension or renewal, with written consent of Lessor, then, unless otherwise agreed, the holding over shall create a month-to-month tenancy at a monthly rent of $ , or the rent for the immediately preceding month, whichever is greater. Should Lessee request a holdover, or extension or renewal of the term of this Agreement, Lessee shall notify Lessor in writing no later than sixty (60) days prior to the expiration of this Agreement. Any holdover, extension, or renewal is subject to the written consent of Lessor. All other terms and conditions of this Agreement shall remain in full force and effect. Lessee's Lessor's Initials Initials 26. _____/_____ _____/_____ OPTION TO PURCHASE. By initialing this paragraph, Lessor and Lessee acknowledge that this Agreement is subject to the provisions of the Option To Purchase which is attached as an addendum hereto. Lessee's Lessor's Initials Initials 27. _____/_____ _____/_____ RENT CONTROL. By initialing this paragraph, Lessor and Lessee acknowledge the Property may be subject to a rent control law. Lessor and Lessee hereby acknowledge they have been advised to check with legal counsel and/or the rent control board to determine rights and obligations under the law. Lessor represents the Property is not leased for any rent in excess of the maximum allowable rent permitted under such rent control law and the rental is in full compliance with such law. Lessor and Lessee further acknowledge they are not relying upon any advice from Broker regarding rent control laws. 28. HOME PROTECTION PLAN. Lessor and Lessee acknowledge that home protection plans may be available which provide various types of limited coverage to both Lessor and Lessee. Broker does not endorse or approve any particular company or plan. 29. CONDOMINIUM LEASE. In the event the Property is in a condominium, stock cooperative, or planned development, Lessee agrees to abide by the covenants, conditions, and restrictions, rules, regulations, orders, and decisions of the Homeowners' Association governing the development. Lessor further agrees to keep current all dues and/or assessments that may be levied against the Property during the term of this Agreement. Upon request, Lessor shall provide to Lessee a copy of the covenants, conditions, and restrictions, rules, and regulations of the Homeowners' Association. 30. BANKRUPTCY/FORECLOSURE. Lessee's rights under this Agreement may be affected by a bankruptcy of Lessor or foreclosure of a lender's interest in the Property. Lessee has been advised to obtain legal advice from Lessee's attorneys regarding Lessee's rights in the event of a bankruptcy or foreclosure. Lessor represents there is not presently a notice of default recorded against the Property and the Property is not an asset of any bankruptcy proceeding. Lessor further agrees to inform Lessee immediately in the event a notice of default is recorded against the Property or the Property becomes an asset of any bankruptcy proceeding during the term of this Agreement or any extension or renewal. LESSEE ACKNOWLEDGES THAT LESSEE IS NOT RELYING ON ANY REPRESENTATIONS OR STATEMENTS MADE BY BROKER REGARDING THESE MATTERS. 31. INFORMATION AUTHORIZATION. Lessor and Lessee agree that Broker may report the terms of this transaction to multiple listing services. 32. NOTICES. All notices to Lessee shall be given in writing, personally, or by deposit in the United States mail, postage prepaid and addressed to Lessee at the Property, whether Lessee still occupies or has departed from, abandoned, or vacated the Property, unless Lessee has given a different address in writing for this purpose. 33. SUCCESSORS/ASSIGNS. Subject to the provisions on assignment and subletting, the covenants and conditions in this Agreement shall apply to and bind the heirs, successors, executors, administrators, and assigns of all types of the parties. If at any time the Lessee consists of more than one person or entity, all such persons and entities shall be jointly and severally liable hereunder. 34. VALIDITY/SEVERABILITY. Any provision of this Agreement which is held to be invalid shall not affect the validity or enforceability of any other provisions of this Agreement. 35. MEDIATION OF DISPUTES. Any dispute or claim in law or equity, except an unlawful detainer action and the subject matter of an unlawful detainer action, arising out of this Agreement or any resulting transaction shall be submitted to neutral, non-binding mediation before the commencement of arbitration, litigation, or other proceeding, including all disputes or claims involving Broker (other than commission disputes between brokers only). The parties to the dispute or claim agree to act in good faith to participate in the mediation, and to identify a mutually acceptable mediator. If a mediator cannot be so selected, the dispute or claim shall be submitted for mediation to and in accordance with the mediation rules of Lessee and Lessor acknowledge receipt of copy of this page, which constitutes Page 3 of 5 Pages. Lessees' Initials ______________ OFFICE USE ONLY Lessors' Initials ______________ Reviewed by Broker or Designee___Date________ 4 PROPERTY ADDRESS 428 Culver Blvd. ----------------------------------------------------------- JAMS/ENDISPUTE, with all parties to the mediation sharing equally in its cost. If the dispute or claim is successfully resolved in the mediation, the resolution will be documented by a written agreement executed by all parties to the dispute or claim. If the mediation does not successfully resolve the dispute or claim, the mediator shall provide written notice of same to all parties to the mediation, and the parties may proceed to seek other resolution of the dispute or claim, in accordance with the terms of this Agreement and their other legal rights. If any party obligated to mediate a dispute or claim, commences arbitration or litigation without first attempting in good faith to resolve the matter through mediation, then, in the discretion of the arbitrator or judge, that party shall not be entitled to recover attorney fees, if that party or parties prevails in the arbitration or litigation, against the other party to the dispute or claim. 36. ARBITRATION OF DISPUTES. Any dispute or claim in law or equity arising out of this Agreement or any resulting transaction shall be decided by neutral, binding arbitration in accordance with the rules of JAMS/ENDISPUTE, and not by court action except as provided by California law for judicial review of arbitration proceedings. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. The parties shall have the right to discovery in accordance with California Code of Civil Procedure, Section 1283.05. Any dispute or claim by or against the broker(s), arising out of this Agreement or any resulting transaction, shall be submitted to arbitration as above, provided the broker(s) shall have agreed, prior to or within a reasonable period after the dispute or claim is presented, to submit it to arbitration consistent with this provision. The following matters are excluded from arbitration hereunder: (a) a judicial or non judicial foreclosure or other action or proceeding to enforce a deed of trust, mortgage or real property sales contract as defined in California Civil Code, Section 2985; (b) an unlawful detainer action; (c) the filing or enforcement of a mechanic's lien; (d) any matter which is within the jurisdiction of a small claims or probate court; (e) an action for bodily injury or wrongful death; or (f) an action for latent or patent defects to which California Code of Civil Procedure Sections 337.1 or 337.15 applies. The filing of a judicial action to enable the recording of a notice of pending action, for order of attachment, receivership, injunction, or other provisional remedies, shall not constitute a waiver of right to arbitrate under this provision. NOTICE: BY INITIALING IN THE SPACE BELOW, YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW, YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. WE HAVE READ AND UNDERSTOOD THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO NEUTRAL ARBITRATION. Lessees' Initials _____/_____, Lessors' Initials:_____/_____. 37. ADDITIONAL TERMS. 1. AFTER THE FIRST 12 MONTHS OF THIS LEASE IT IS AGREED THAT IN THE EVENT OF A SALE OF SUBJECT PROPERTY BY LESSOR PRIOR TO ITS EXPIRATION, LESSOR WILL GIVE LESSEE FOUR (4) MONTHS NOTICE TO VACATE PREMISES. 2. LESSOR GRANTS LESSEE THE RIGHT TO PURCHASE SAID PROPERTY ON THE SAME TERMS AND CONDITIONS THAT LESSOR ACCEPTS FROM A THIRD PARTY FOR THE SALE OF THE BUILDING. LESSEE SHALL ACCEPT OR REJECT SAID OFFER WITHIN 48 HOURS OF PRESENTATION. IF THE OFFER IS NOT ACCEPTED IN WRITING WITHIN 48 HOURS BY WRITTEN COMMUNICATION DELIVERED TO LESSOR, THEN SAID OFFER WILL BE DEEMED TO BE REFUSED. 3. THIS LEASE IS A RENEWAL OF THE LEASE EXECUTED OCT. 10, 1995 AND IS SUBJECT TO ALL TERMS AND CONDITIONS CONTAINED THEREIN. 38. CAPTIONS. The captions of this Agreement are for convenience only, are not a part of this Agreement, and do not in any way limit or amplify the terms and provisions of this Agreement. 39. ATTORNEY'S FEES. In any action, proceeding, or arbitration between the Lessor and the Lessee arising out of this Agreement or any resulting transaction, the prevailing Lessor or Lessee shall be entitled to reasonable attorney's fees and costs from the non-prevailing Lessor or Lessee. 40. FACSIMILE SIGNATURES. Should Lessee or Lessor transmit signed documents by facsimile, Lessee and Lessor shall accept and rely upon such documents in the same manner as if those transmitted copies were original signed documents. Lessee and Lessor shall forward signed originals of documents within 48 hours of transmission. The failure of Lessee or Lessor to forward signed originals of documents shall not invalidate the documents or this Agreement. Lessee and Lessor acknowledge receipt of copy of this page, which constitutes Page 4 of 5 Pages. Lessees' Initials ______________ OFFICE USE ONLY Lessors' Initials ______________ Reviewed by Broker or Designee___Date________ 5 PROPERTY ADDRESS 428 Culver Blvd. -------------------------------------------------------------- 41. AGENCY CONFIRMATION. The following agency relationship(s) are hereby confirmed for this transaction: Listing agent: THE PRUDENTIAL JON DOUGLAS CO. is the agent of (check one): [ ] the Lessor exclusively; or [X] both the Lessor and Lessee. Leasing agent:_____________________(if not the same as Listing agent) is the agent of (check one): [ ] the Lessee exclusively; or [ ] the Lessor exclusively; or [ ] both the Lessee and Lessor. 42. PLACE OF PAYMENTS. Lessee agrees to pay all rent by personal check at the address indicated below Lessor's signature, or at such address and in such manner as Lessor may specify. 43. INCORPORATION OF PRIOR AGREEMENTS AND AMENDMENTS. This Agreement covers in full every agreement of any kind between the parties concerning the lease or rental of the Property. All preliminary discussions, negotiations, and agreements with respect to the lease or rental of the Property, except those contained herein, are superseded and of no further force and effect. The parties agree no other representations or promises have been made. No verbal or implied agreement or covenant shall vary the provisions of this Agreement. Any changes or additions to this Agreement must be approved in writing by all parties or their respective successors in interest, subject to the provisions concerning assignments and sublettings. 44. APPLICATION AND CREDIT REPORT. Lessee warrants the accuracy of the information in Lessee's rental application and gives permission to Lessor to verify Lessee's information and to obtain Lessee's credit report. Lessee tenders to Broker the non-refundable sum of $15.00 to compensate for the cost of obtaining a credit report in Lessor's behalf. Broker cannot and will not interpret or verify any information furnished by Lessee or in Lessee's credit report. LESSOR SHALL HAVE TWO (2) BUSINESS DAYS FROM THE DATE LESSOR SIGNS THIS AGREEMENT TO NOTIFY LESSEE IN WRITING SHOULD LESSOR REASONABLY DISAPPROVE LESSEE'S APPLICATION BASED ON CREDIT OR OTHER INFORMATION REVIEWED BY LESSOR. IN SUCH EVENT LESSEE'S DEPOSIT (BUT NOT THE CREDIT REPORT FEE) SHALL BE REFUNDED IN FULL. IF LESSOR FAILS TO NOTIFY LESSEE, THIS CONDITION SHALL BE DEEMED SATISFIED. 45. REPRESENTATIONS. The parties agree Broker makes no representations regarding the ability of Lessee or Lessor to perform under the terms of this Agreement. Broker is unable to verify and/or determine the financial stability and performance of the Lessor and Lessee. Lessor assumes full responsibility to determine the creditworthiness of Lessee. Therefore, Lessor and Lessee are hereby advised to seek independent legal counsel regarding any risks, rights, or obligations that may arise from either party suffering financial hardship, bankruptcy, or foreclosure. It is understood that Broker is not providing property management services for Lessor or Lessee and is not responsible for damage by Lessee to the Property. Lessor and Lessee understand it is illegal for Lessor or Broker to refuse to show or lease the Property to any person because of race, color, religion, national origin, ancestry, sex, marital or family status, children or physical disability. Any obligation of Lessor to make alterations, improvements or repairs to the Property during the term of this Agreement shall be solely the obligation of Lessor. Lessee and Lessor acknowledge that Broker is not responsible for the parties' performance hereunder, and shall look solely to the other party for performance of obligations, duties and responsibilities. No representation is made as to the legal validity of any provision or the adequacy of any provision in any specific transaction. A real estate broker is the person qualified to advise on real estate. If you desire legal advice, consult your attorney. Lessor represents that Lessor is the owner of the Property or has the authority to execute this Agreement on behalf of the owner of the Property, and hereby agrees to lease the Property on the above terms and conditions. Lessor and Lessee acknowledge that they have read and understood each and every paragraph of all pages of this Agreement; agree to the above confirmation of agency relationship(s); and have executed this Agreement and hereby acknowledge receipt of a copy thereof. Brokers are not parties to the Agreement between Lessor and Lessee. 46. OFFER DEADLINE. This offer to lease expires on OCT. 15, 1996, at 6 p.m. [SIG] 10/7/96 - -------------------- ------------ ----------------------- --------------- Lessee Date Lessor Date [SIG] 10/15/96 - -------------------- ------------ ----------------------- --------------- Lessee Date Lessor Date The Prudential Jon Douglas Company 426 Culver Blvd. PDR 90293 -------------------------------------- Address for all Notices and Rental Payments /s/ BRUCE KASPER 310 822-9848 - ---------------------------------- -------------------------------------- Sales Associate Lessor's Phone Number MDR - ---------------------------------- Sales Associate's Office 310-301-3500 - ---------------------------------- Sales Associate's Office Phone Number Agency relationships are confirmed as above THE PRUDENTIAL JON DOUGLAS CO. 10/2/96 - ---------------------------------- -------------------------------------- Real Estate Broker (Listing) Date /s/ BRUCE KASPER - ---------------------------------- By: Bruce Kasper ------------------- OFFICE USE ONLY ------------------- Reviewed by Broker or Designee __________ Date ___________ __________________________________________________________ EX-10.90 5 UNANIMOUS WRITTEN CONSENT DATED DECEMBER 31, 1996 1 EXHIBIT 10.90 UNANIMOUS WRITTEN CONSENT OF THE BOARD OF DIRECTORS OF OPTIMUMCARE CORPORATION A DELAWARE CORPORATION - ------------------------------------------------------------------------------- The undersigned, being all of the directors of OptimumCare Corporation, a Delaware corporation (the "Corporation"), hereby adopt the following resolutions by their written consent thereto, effective as of December 31, 1996, hereby waiving all notice of and the holding of any meeting of the board of directors to act upon such resolutions. WHEREAS, the Company has previously converted $155,000 of temporary advances of Mr. Johnson to loans. WHEREAS, a payment plan of $500 per pay period currently exists. NOW, THEREFORE, BE IT RESOLVED, that the Company hereby extend the temporary advances into a one year loan with interest deferred for one year to be computed at the existing interest rate. RESOLVED FURTHER, that the officers of the Company be and are hereby authorized, empowered and directed to do or cause to be done any and all such further acts and things and to execute any and all such further documents as they may deem necessary or advisable in order to carry into effect the purposes and intent of the foregoing resolutions. RESOLVED, FURTHER, that this transaction be neither void nor voidable, the interests of Mr. Johnson being known to this Board of Directors and the transactions being fair and reasonable to the Corporation. IN WITNESS WHEREOF, the undersigned have executed this Unanimous Written Consent effective as of December 31, 1996. /s/ EDWARD A. JOHNSON - ------------------------------- Edward A. Johnson /s/ MICHAEL S. CALLISON - ------------------------------- Michael S. Callison /s/ GARY L. DREHER - ------------------------------- Gary L. Dreher /s/ JON E. JENETT - ------------------------------- Jon E. Jenett EX-10.91 6 CHANGE IN TERMS AGREEMENT 1 EXHIBIT 10.91 [LOGO] NATIONAL BANK OF SOUTHERN CALIFORNIA CHANGE IN TERMS AGREEMENT - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $750,000.00 06-01-1997 4000928 5005 423157 112 - --------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- BORROWER: OPTIMUMCARE CORPORATION LENDER: NATIONAL BANK OF SOUTHERN CALIFORNIA 30011 IVY GLENN DRIVE NEWPORT REGIONAL OFFICE #219 4100 NEWPORT PLACE LAGUNA NIGUEL, CA 92677 NEWPORT BEACH, CA 92660 ================================================================================ PRINCIPAL AMOUNT: $750,000.00 DATE OF AGREEMENT: January 28, 1996 DESCRIPTION OF EXISTING INDEBTEDNESS. ORIGINAL PROMISSORY NOTE DATED APRIL 14, 1995 IN THE PRINCIPAL AMOUNT OF $500,000.00. MODIFIED MAY 6, 1996 AS FOLLOWS: MATURITY DATE EXTENDED TO JULY 1, 1996. MODIFIED AUGUST 1, 1996 AS FOLLOWS: NOTE WAS CHANGED FROM A NON-REVOLVING LINE OF CREDIT TO A FORMULA LINE OF CREDIT. MATURITY DATE WAS EXTENDED TO MARCH 1, 1997. PRINCIPAL NOTE AMOUNT INCREASED TO $750,000.00. VARIABLE INTEREST RATE WAS CHANGED TO WALL STREET JOURNAL PRIME PLUS 1.50%. DESCRIPTION OF COLLATERAL. SECURITY AGREEMENT AND UCC-1 FILING ON AL ACCOUNTS RECEIVABLE, INVENTORY, FIXED ASSETS AND EQUIPMENT. DESCRIPTION OF CHANGE IN TERMS. EXTENDING MATURITY DATE FROM MARCH 1, 1997 TO JUNE 1, 1997. ALL OTHER TERMS AND CONDITIONS SHALL REMAIN THE SAME. PROMISE TO PAY. OPTIMUMCARE CORPORATION ("BORROWER") PROMISES TO PAY TO NATIONAL BANK OF SOUTHERN CALIFORNIA ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF SEVEN HUNDRED FIFTY THOUSAND & 00/100 DOLLARS ($750,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE. PAYMENT. BORROWER WILL PAY THIS LOAN ON DEMAND, OR IF NO DEMAND IS MADE, IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED, UNPAID INTEREST ON JUNE 1, 1997. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING FEBRUARY 1, 1997, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. Interest on this Agreement is computed on a 365/365 simple interest basis; that is, by applying the ratio of the annual interest rate over the number of days in a year, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an independent index which is the Prime rate as published in the Wall Street Journal. When a range of rates has been published, the lower of the rates will be used (the "Index"). The Index is not necessarily the lowest rate charged by Lender on it loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each DAY. THE INDEX CURRENTLY IS 8.250% PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS AGREEMENT WILL BE AT A RATE OF 1.500 PERCENTAGE POINTS OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 9.750% PER ANNUM. NOTICE: Under no circumstances will the interest rate on this Agreement be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Agreement, Borrower understands that Lender is entitled to a MINIMUM INTEREST CHARGE OF $100.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged 5.000% OF THE REGULARLY SCHEDULED PAYMENT OR $10.00, WHICHEVER IS GREATER. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due, (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Agreement or any agreement related to this Agreement, or in any other agreement or loan Borrower has with Lender, (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished, (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws, (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender, (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Agreement, (h) Any material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired, (i) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Agreement and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Agreement to 6.500 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Agreement (including any increased rate). Lender may hire or pay someone else to help collect this Agreement if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF ORANGE COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. (INITIAL HERE _________) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Agreement against any and all such accounts. LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances under this Agreement may be requested only in writing by Borrower or by an authorized person. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: EDWARD A. JOHNSON, PRESIDENT. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Agreement at any time may be evidenced by endorsements on this Agreement or by Lender's internal 2 01-28-1997 CHANGE IN TERMS AGREEMENT Page 2 Loan No 400028 (CONTINUED) ================================================================================ records, including daily computer print-outs. Lender will have no obligation to advance funds under this Agreement if: (a) Borrower or any guarantor is in default under the terms of this Agreement or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Agreement; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Agreement or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Agreement for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Agreement or any other agreement between Lender and Borrower. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. MISCELLANEOUS PROVISIONS. This Agreement is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Agreement on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: OPTIMUMCARE CORPORATION By: /s/ EDWARD A. JOHNSON ------------------------------------ EDWARD A. JOHNSON, PRESIDENT ================================================================================ 3 [LOGO] NATIONAL BANK OF SOUTHERN CALIFORNIA DISBURSEMENT REQUEST AND AUTHORIZATION - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $750,000.00 06-01-1997 4000928 5005 423157 112 - --------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- BORROWER: OPTIMUMCARE CORPORATION LENDER: NATIONAL BANK OF SOUTHERN CALIFORNIA 30011 IVY GLENN DRIVE NEWPORT REGIONAL OFFICE #219 4100 NEWPORT PLACE LAGUNA NIGUEL, CA 92677 NEWPORT BEACH, CA 92660 ================================================================================ LOAN TYPE. This is a Variable Rate (1.500% over Prime rate as published in the Wall Street Journal. When a range of rates has been published, the lower of the rates will be used, making an initial rate of 9.750%), Revolving Line of Credit Loan to a Corporation for $750,000.00 due on June 1, 1997. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for (please initial): [ ] ________ PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT. [X] ________ BUSINESS (INCLUDING REAL ESTATE INVESTMENT). SPECIFIC PURPOSE. The specific purpose of this loan is: TO FINANCE SHORT-TERM CASH REQUIREMENTS. DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Lender's conditions for making the loan have been satisfied. Please disburse the loan proceeds of $750,000.00 as follows: UNDISBURSED FUNDS: $104,187.61 AMOUNT PAID ON BORROWER'S ACCOUNT: $645,812.39 $645,812.39 Payment on Loan #EXTEND 4000928 ----------- NOTE PRINCIPAL: $750,000.00 =========== CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges: PREPAID FINANCE CHARGES PAID IN CASH: $ 0.00 OTHER CHARGES PAID IN CASH: $ 6,567.66 $6,567.66 INTEREST TO 2-1-97 ----------- TOTAL CHARGES PAID IN CASH: $ 6,567.66 =========== FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED JANUARY 28, 1997. BORROWER: OPTIMUMCARE CORPORATION By /s/ EDWARD A. JOHNSON ----------------------------------------- EDWARD A. JOHNSON, PRESIDENT ================================================================================ EX-10.92 7 STAFFING AGREEMENT 1 EXHIBIT 10.92 MARGATE, FLORIDA COMMUNITY MENTAL HEALTH CENTER FACILITY SITE ------------------------------------------------------------- STAFFING AGREEMENT ------------------ THIS AGREEMENT is made this first day of February, 1997 ("Effective Date"), by and between OPTIMUMCARE CORPORATION, whose address is 428 Culver Boulevard, Playa Del Rey, California 90293 and Treatment Resources, Inc. ("TR"), a wholly owned subsidiary of Galaxy Health Care Inc. whose address is 290 N.W. 165 Street, Miami, Florida 33169. WITNESSETH WHEREAS, OPTIMUMCARE CORPORATION is engaged in the business of providing professional nursing, therapy and mental health staff to Partial Hospital Programs at Community Mental Health Centers. WHEREAS, TR is a Community Mental Health Center providing partial hospitalization services ("Program"), which needs professional nursing, therapy and mental health staffing services, and wishes to contract with OPTIMUMCARE CORPORATION to provide such staffing services under the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the premises set forth above and the mutual benefits, covenants, and agreements set forth below, the parties agree to the terms and conditions set forth below. 1. SCOPE OF AGREEMENT 1.1 Staff OPTIMUMCARE CORPORATION shall provide professional nursing, therapy and rehabilitation staff ("Staff") to TR at its Margate, Florida facility located at 5100 Coconut Creek Parkway, Margate, Florida 33063, including but not limited to nurses, occupational therapists, clinical social workers, mental health counselors, certified nurses aides and mental health technicians. Services provided by such Staff shall include, but shall not necessarily be limited to, initial and ongoing assessments and care planning, direct patient care, teaching, supervision and consultations. 1.2 Terms and Conditions In performing its obligations under this Agreement TR and OPTIMUMCARE CORPORATION agree as follows: a) Plan of Care All services are to be furnished by OPTIMUMCARE CORPORATION and Staff in accordance with the plan of care established by the physician responsible for the patient's care and may not be altered in type, scope, frequency, or duration by OPTIMUMCARE CORPORATION or Staff (except in the case of an adverse reaction to a specific treatment), without the permission of such treating physician and TR. The physician responsible for the patient shall supervise all services by the Staff. b) Geographical Area OPTIMUMCARE CORPORATION and TR agree that all services provided by OPTIMUMCARE CORPORATION shall be provided in the State of Florida. c) Requirements OPTIMUMCARE CORPORATION agrees that all Staff and services provided by it pursuant to the Agreement shall meet the same requirements and possess the same 1 2 credentials as those requirements and credentials which would be applicable if the staff and services were being furnished directly by TR. d) Conferences and Records OPTIMUMCARE CORPORATION agrees that, as needed, the Staff shall participate in any conferences required to coordinate the care of an individual patient, and shall provide for the preparation of treatment records, with progress notes and observations, and for the prompt incorporation of such into the clinical records of TR. e) Billing OPTIMUMCARE CORPORATION agrees that it may not bill the patient or any health insurance program for covered services performed by the Staff pursuant to this Agreement, and that all services shall be billed through TR exclusively. Receipt of payment by TR for all services on behalf of a patient discharges the patient from any liability to pay for such services. 1.3 Standard of Performance In performing its obligations under this Agreement, OPTIMUMCARE CORPORATION shall: a) Act in good faith and with due diligence; b) Perform professional and supervisory services in accordance with recognized standards of the medical and mental health professions; c) Act in a manner consistent with the Principles of Medical Ethics of the American Medical Association; d) Comply with all material and applicable federal, state and local laws and regulations; e) Provide the skill and intensity of services as provided for under the Program's Policy Guidelines. OPTIMUMCARE CORPORATION and TR agree that their mutual goal is to provide quality health care to patients in an efficient and economical manner and that TR has entered into this Agreement with OPTIMUMCARE CORPORATION for the purpose of obtaining staff and services designed to assist its Programs in providing such health care. 1.4 All Staff services will be provided pursuant to a written request from TR, and the placement of Staff shall be confirmed in writing by TR. Staff provided to TR by OPTIMUMCARE CORPORATION shall be employees of OPTIMUMCARE CORPORATION and Staff, in performance of the services hereunder, are bona fide independent contractors of TR. Accordingly, OPTIMUMCARE CORPORATION and Staff are responsible to deduct from compensation paid by TR to OPTIMUMCARE CORPORATION any sums for income tax, unemployment insurance, social security, or any other withholding as is required by law or other requirement of any governmental body. OPTIMUMCARE CORPORATION and Staff shall have no claim under this Agreement or otherwise against TR for vacation pay, sick leave, retirement benefits, social security benefits, workers compensation, disability or unemployment insurance benefits of any kind. 2 3 1.5 TR has the right, at its sole option, to request that OPTIMUMCARE CORPORATION immediately replace any of the Staff provided pursuant to this Agreement. 2. Compensation All Staff necessary to meet projected Program staffing levels will be provided by OPTIMUMCARE CORPORATION a grouped rate of 25% over the direct actual cost for such Staff services on a bi-weekly basis. Such rate is based upon the average fair market value for the projected level of Staff necessary to provide at least four (4) hours of direct patient services per day, pursuant to the Program's Policy Guidelines. OPTIMUMCARE CORPORATION shall bill TR on a bi-weekly basis for all Staff and services provided pursuant to this Agreement. All invoices submitted by OPTIMUMCARE CORPORATION shall contain acceptable documentation of all charges, and TR shall make no payment for charges not reasonably documented by OPTIMUMCARE CORPORATION. a) Repayment Schedule of Staffing Costs and Fees Treatment Resources will pay to OptimumCare on or before June 1, 1997 1/2 of the total amount of direct costs and fees owing to OptimumCare by that date. The balance shall be paid by Treatment Resources to OptimumCare in twelve (12) equal consecutive monthly installments commencing July 1, 1997. An additional 10% profit will be computed and added to the amount owing to OptimumCare by Treatment Resources. 3. Term and Termination 3.1 Term This Agreement shall be for a term of ninety days from the Effective Date of this Agreement, unless terminated earlier or extended by the parties by the parties hereto pursuant to subsection 3.2 or 3.3 or below. 3.2 Termination for Cause This Agreement may be terminated by either party for the following: a) Upon the other party's materials default or breach of any of its obligations hereunder, if such default or breach remains uncorrected for a period of thirty (30) days after the receipt by the defaulting or breaching party from the other party of written notice of such default or breach. b) Immediately upon notice that either party has entered bankruptcy or made an assignment for the benefit of creditors, or is otherwise unable to meet its financial obligations or objectives under this Agreement, unless otherwise agreed to in writing by both parties or unless said bankruptcy, assignment or inability does not materially alter the affected party's ability to perform under this Agreement. c) Immediately upon the reasonable determination that the health and safety of patients is being endangered by the other party hereto. d) Immediately upon OPTIMUMCARE CORPORATION's failure to provide the level of care and documentation as provided for in the Program's Policy Guidelines. 3 4 3.3 Effect of Termination In the event of any expiration or termination of this Agreement, such expiration or termination shall not effect any of the obligations of either party arising prior to the date of such expiration or termination, nor shall such expiration or termination effect any allegations, promises or covenants contained herein which are expressly made to extend beyond the term of this Agreement. 4. Licenses, Permits and Certifications OPTIMUMCARE CORPORATION represents to TR that it and all of its Staff, employees, agents and representatives possess and will maintain in valid and current status during the term of this Agreement, all required licenses, permits and certifications. OPTIMUMCARE CORPORATION shall provide copies of all Staff licenses, permits and certifications to TR prior to assigning such Staff to the Program. 5. Indemnification 5.1 By Staffing OPTIMUMCARE CORPORATION indemnities and holds harmless TR, its directors, officers, employees and agents from any and all claims, losses, liabilities, obligations, demands, actions, judgments, suits and related costs and expenses of any nature whatsoever, including reasonable attorney's fees, arising in any way out of the willful misconduct or negligence of OPTIMUMCARE CORPORATION, its Staff employees, agents and representatives in providing services pursuant to this Agreement. 5.2 By TR TR hereby indemnifies and holds harmless OPTIMUMCARE CORPORATION, its directors, officers, employees and agents from any and all claims, losses, liabilities, obligations, demands, actions, judgments, suits and related costs and expenses of any nature whatsoever, including reasonable attorney's fees, arising in any way out of the willful misconduct or negligence of TR, its employees, agents and representatives pursuant to this Agreement. 6. Insurance Each party hereto shall maintain during the term of this Agreement, at its sole cost and expense, the following insurance. 6.1 Liability and Worker's Compensation Insurance Each party hereto shall, at its sole cost and expense, maintain comprehensive general and professional liability insurance with one or more commercial insurers satisfactory to the other party hereto, in the amount of at least Five Hundred Thousand Dollars ($500,000.00) per occurrence and One Million Dollars ($1,000,000.00) in the aggregate; and maintain workers' compensation insurance as may be required by law. 6.2 Proof of Insurance Upon request, each party shall deliver to the other copies of certificates of insurance reflecting each type of insurance under this Section. Each party agrees to notify the other party within ten (10) calendar days of any material change or cancellation in any policy of insurance required to be secured or maintained by such party hereunder. 7. Confidentiality 7.1 Patient Records 4 5 a) OPTIMUMCARE CORPORATION shall comply with its policies and all state and federal laws and regulations regarding the confidentiality, disclosure and retention of patient records. b) All medical records of its patients are and shall remain the property of TR and shall not be copied or removed from its storage areas without the express written consent of TR, unless otherwise directed by court order. 7.2 Confidentiality Information Each party hereto agrees and acknowledges that each party possesses books, manuals, documents, materials, or other business or technical information in any from whatsoever, which relate to their own proprietary business, and which were distributed or otherwise disclosed to the other party or its employees, agents or representatives or developed pursuant to the operation of their business to which the such party or its employees, agents or representatives had access as a result of the operation of such party's business and which are not in the public domain shall Constitute confidential information under this Agreement ("Confidential Information"). Such Confidential Information shall include technical and business information, including but not limited to information related to invention, brochures, forms, customer lists, research and development, engineering, products, designs, manufacture, methods, systems, improvements, trade secrets, formulas, process, protocols, records and financial information, or strategy concerning its business plan or policies. Each party, and its employees, agents and representatives shall not use any of the other party's Confidential Information for any purpose other than under Agreement, and shall not disclose, publicize or disseminate any such Confidential Information to any third party without the express written consent of the party, except as may be required under state or federal law. In the event applicable law requires a party to disclose such Confidential Information of the other party, such party shall immediately notify the party whose Confidential Information is in question of the request for disclosure, and to the extent permissible by law, such other party shall respond to said request. Upon termination of this Agreement, each party shall use its best efforts to retrieve from employees, agents and representatives and return to the other party any and all materials containing Confidential Information of the other party. 7.3 Use of Name Company shall use in any manner the name, logo, trade-name or trademark of the other party hereto, other than pursuant to the terms and conditions of this Agreement, without the express prior written consent of the other party. 8. Medicare Reporting Requirements 8.1 Reporting Requirements The parties agree that this Agreement may be subject to the Medicare/Medicaid statutes and regulations and upon request made in accordance with applicable law and regulations, and upon request made in accordance with applicable law and regulations, the Comptroller General or Inspector General of the United States Department of Health and Human Services and the duty authorized representative, of the foregoing shall be given access to the following records from the date of this Agreement until the expiration of four (4) years after the furnishing of the services under this Agreement: a) This Agreement; b) All books, records and other documents of TR or OPTIMUMCARE CORPORATION any subcontractor of TR or OPTIMUMCARE CORPORATION that receives more than Ten Thousand Dollars ($10,000.00) in a twelve (12) month period that are necessary to verify the nature and extent of the 5 6 costs of services rendered hereunder. 8.2 Subcontracts All subcontracts of OPTIMUMCARE CORPORATION pursuant to this Agreement shall contain a clause imposing the same obligation on the subcontractor regarding such subcontractor's contracts, books, records and other documents. 9. Notices Any notice, demand, designation, or other communication given or required to be given under this Agreement shall be in writing and shall be deemed to have been given upon actual receipt, or personal delivery, or three (3) days after deposit of such writing in the U.S. Mail registered or certified, return receipt requested, postage and registration or certified fees prepaid, to the following addresses or such other addresses as the parties shall designate from time to time: If to TR at GALAXY HEALTH CARE: if to OPTIMUMCARE CORPORATION: 290 N.W. 165th Street 428 Culver Boulevard Miami, Florida 33169 Playa Del Rey, California 90293 Tel. (305) 940-1290 Tel: (888) 448-1848 Fax: (305) 940-0162 Fax: (310) 448-1850 10. Arbitration of Disputes Any controversies or disagreements arising out of, or relating to this Agreement or the breach thereof, shall be settled by arbitration in Dade County, Florida, in accordance with the rules then existing of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. Such arbitration shall be binding and the expenses and costs thereof shall become by each party as incurred. Any disputes between the parties and resulting arbitration and/or mediation shall be kept confidential by the parties. 11. Compliance with Laws If any changes in state but not limited to laws relating to reimbursement, in the opinion or counsel for TR or OPTIMUMCARE CORPORATION, (a) does or could have a material adverse effect upon third-party reimbursement to TR (b) causes or has significant probability or causing either party to be in violation of state or federal laws or regulations, either party may request renegotiation of the applicable terms of this Agreement by written notice to the other party. In the event the parties do not execute an amended agreement within thirty (30) days of such notice, either party may terminate the agreement upon ten (10) days prior written notice to the other party. TR and OPTIMUMCARE CORPORATION will comply with those provisions of law or regulations that affect reimbursement to the TR. 12. Miscellaneous Provisions 12.1 Assignment Neither party may assign its rights or obligations under this Agreement without the consent of the other, except that either party may assign all or part of its rights or obligations under this Agreement to an entity in which the principals of such party have a substantial ownership interest, or to public corporation formed by the merger or consolidation of such party and other corporations or entities in which the principals of such party have a substantial ownership interest. 12.2 Modification There are no other agreements, promises, or undertaking between the parties except as specifically set forth herein. No alterations, changes, modifications or amendments shall be made to this Agreement except in writing and signed or initiated by the parties hereto. 12.3 Severability If any provision or paragraph of this Agreement is deemed to be unlawful or unenforceable by any court, administrative agency or statute, law or ordinance, the said provision or 6 7 paragraph shall be served from the Agreement without affecting the enforceability of the remainder of the Agreement. The parties shall make a good faith effort to redraft the severed provision or paragraph consistent with the parties' original intention but in such a way as to be lawful and enforceable. 12.4 Binding Effect This Agreement shall be binding upon and insure to the benefit of the respective successors and assigns of the parties hereto. 12.5 Survivability The covenants, representations and warranties of the respective parties hereto shall survive the termination of this Agreement. 12.6 California Contract This Agreement shall be deemed a California Contract and shall be construed in accordance with the laws of such state, regardless of whether or not this Agreement is being executed by any of the parties hereto in other states or otherwise. 12.7 Counterparts This Agreement may be executed in several counterparts, each of which shall be deemed an original. 12.8 Compliance Dates In the event that any date specified in this Agreement shall be on a Saturday, Sunday or nationally declared holiday, then the date so specified shall be deemed to be the next business day following such date, and compliance by such business day hereunder shall be deemed a default by any of the parties under this Agreement. 12.9 Headings The headings of each section or subsection in this Agreement are for convenience of reference only, and shall in no manner or way whatsoever affect the interpretation or meaning of such section or subsection. 12.10 Negotiation of Partnership, Joint Venture and Equity Interest Nothing contained in this Agreement shall constitute or be construed to be or to create a partnership or joint venture between TR and OPTIMUMCARE CORPORATION with respect to TR or its program or any equity interest in TR on the part of OPTIMUMCARE CORPORATION. The relationship of TR and OPTIMUMCARE CORPORATION under this Agreement is that of independent contractors. 12.11 Entire Agreement This constitutes the entire agreement between the parties relating to the subject thereof, and prior agreements pertaining thereto, whether oral or written, have been merged and integrated into this Agreement. 12.12 Execution and Delivery, etc. Each party hereto represents and warrants to the other that neither the execution and delivery, nor the performance of the terms of this Agreement, violate or will violate the terms of its article of incorporation, bylaws, any agreement, or any other instrument by which such party is bound upon execution of this Agreement. 7 8 IN WITNESS WHEREOF, the parties have executed this Agreement this first day of February, 1997. GALAXY HEALTH CARE INC. D/B/A TREATMENT RESOURCES, INC. /s/ DALE P. REDLICH - ----------------------------- Dale P. Redlich Chief Executive Officer OPTIMUMCARE CORPORATION /s/ EDWARD A. JOHNSON - ----------------------------- Edward A. Johnson President & CEO 8 EX-10.93 8 COMMUNITY MENTAL HEALTH CENTER AGREEMENTS 1 EXHIBIT 10.93 COMMUNITY MENTAL HEALTH CENTER AGREEMENT THIS AGREEMENT is entered into as of this first day of February 1997, by and between Galaxy Health Care Inc., a Florida Corporation, d/b/a Treatment Resources Inc. (CMHC), and OptimumCare(R) Corporation (Manager), a Delaware Corporation. RECITALS A. Galaxy Health Care Inc. intends to develop and operate a Community Mental Health Center in the State of California called Treatment Resources for the treatment of psychiatric disorders, and CMHC desires to have a Partial Hospitalization Program (the "Out-Patient Program"); the city and address to be determined within thirty (30) days after the date of execution hereof. B. Manager is in the business of providing management services for the treatment of patients with psychiatric disorders as well as creating and/or managing Partial Hospitalization Programs with CMHCs and; C. CMHC desires to retain Manager, and Manager desires to be retained, to provide the services described herein. THEREFORE, it is mutually agreed as follows: 1. DEFINITIONS ----------- (a) "Confidential Information" of the Manager shall mean all documents and other materials provided by Manager not available through sources in the public domain. Manager's documents and other materials may include, but are not limited to, memoranda, manuals, handbooks, production books and audio and visual recordings, which contain information relating to the Out-Patient Program (including written materials distributed to Out-Patient Program patients or for promotion of the Out-Patient Program); and all models, techniques, formulations and procedures used to provide psychiatric services to Program patients. 1 2 limitation, the employer's contribution under the Federal Insurance Contributions Act, unemployment compensation and related insurance, payroll and other employment taxes, pension and retirement plan contributions, worker's compensation and related insurance, group life, health, disability and accident insurance, severance and other benefits. (c) A "Patient Day" shall be deemed to exist with each out-patient visit to be the Out-Patient Program. An out-patient visit is defined as a patient attending at least two (2) therapy sessions a day. (d) "Out-Patient Program" shall mean the out-patient partial hospitalization psychiatric program managed by Manager at CMHC. 2. TERM ---- (a) This Agreement shall have an initial term of five (5) years commencing (effective) on _______________ and termination ______________ 20; the agreement will continue automatically for a second term of five (5) years unless the termination provisions set forth in Section (11) becomes applicable. (b) Thereafter, each party may exercise the option to continue the agreement for a succession of one (1) year terms by exercising an "option for continuation" within sixty (60) days prior to the expiration date in each succeeding year; the option may be exercised by providing written notice to the other parties address as set forth herein. (c) Termination provisions as in Section (11) of this Agreement. 3. COVENANTS OF CMHC ----------------- CMHC will: (a) CMHC will cooperate with manager in locating appropriate program space for potential capacity of at least twenty-five (25) chairs. (b) Bill and collect all Out-Patient Program changes due for Out-Patient Program services, and provide record keeping as customary in the ordinary course of CMHC's business. (c) Maintain license from the California Department of Health Services and pay all related fees associated with this license. 2 3 (d) Provide Manager's employees and contracted personnel with copies of all relevant CMHC Policies and Procedures, as amended from time to time. (e) Indemnify, save harmless, and defend Manager from all claims and liability and expenses (including reasonable attorney's fees) arising solely from the negligence of or breach of this Agreement by CMHC or its employees or contracted personnel. (f) Maintain professional and comprehensive general liability insurance for itself and its employees and contracted personnel in an amount not less than $1,000,000 per occurrence or claim and whenever reasonably requested provide Manager with a certificate from the insurer stating that such insurance is in effect and which also states that Manager will be given at least ten (10) days advance written notice of any cancellation, non-renewal, or changes in policy limits, deductible, or co-insurance. Any deductible or co-insurance or aggregate limits shall be subject to Managers approval which shall not be unreasonably withheld. Manager agrees that $100,000 is an acceptable deductible or co-insurance. CMHC shall use reasonable efforts to maintain "tail" coverage if necessary for any terminated "claims made" policy so as to apply to any of its acts or omissions which occur during the term of this Agreement until the expiration of any applicable statute of limitation but not to exceed seven (7) years. 4. COVENANTS OF MANAGER -------------------- Manager will do the following at its own cost and expense: (a) Provide out-patient program consultation, orientation, direction and training for the program. (b) Rent facility program space for the duration of this Agreement. (c) Provide the following staffing: (i) A full-time Partial Hospitalization Program Director, (ii) Social services, (iii) Psychological Services; (iv) Therapy/Activities and other services as appropriate, (v) A Medical Director (who shall be a physician duly licensed in the State of California, (vi) registered nurse services, (vii) professional counseling staff and (viii) qualified unit secretary as needed to provide for the professional counseling of 3 4 Out-Patient Program patients and other personnel as required to adequately supervise and operate the Out-Patient Program. All such personnel shall be subject to CMHC approval but CMHC shall be deemed to have accepted such personnel unless it informs Manager otherwise in writing within five (5) business days of receipt of all such required information. Such personnel shall not be deemed employees or contracted personnel or borrowed servants of CMHC. Manager shall have full responsibility for their wages, compensation and employee benefits and acts or Omissions. (c) Indemnify, save harmless, and defend CMHC from all claims and liability and expenses (including reasonable attorney's fees) (1) arising solely from the negligence of or breach of this Agreement by Manager or its employees or contracted personnel or (2) arising out of CMHC negligence if the sole basis for any such negligence consists of entering into this Agreement with Manager, failing to properly supervise, monitor or oversee Manager or its employees or agents, or failing to properly review or act upon its review of the qualifications of Manager or its employees or contracted personnel. (d) Staff training for initial operating date. (e) Supervision of staff hiring. (f) Implementation of training on basic Medicare regulation policies as to operational policies. (g) Oversight of computer software and hardware installation by consultant. (h) Hiring and oversight of QA consultant. (i) Implementation of employee policies. (j) Installation of policies and procedures, intake forms, patient chart documents and all forms and documents required to commence operation. (k) Oversight of compliance with OSHA regulations and fire inspection. (l) Oversight of acquisition of equipment leases, furniture lease and office lease, including interior planning. (m) Oversight of all day to day continued operational and financial management issues. 4 5 (n) Continued staff training and development through in-services. (o) Oversight of continued TQM and QA. (p) Continued oversight of reimbursement/expenditure issues. (q) Development of strategic policies regarding surplus funds issues. (r) Continued development and training of staff as to personnel policies and procedures, compliance with Federal Labor Laws, and oversight of EAP Consultant; installation of Employee Manual, patient handbooks, external EAP and Drug Free work place policies. (s) Continued collaboration and suggestions as to legal and accounting consultants. (t) Oversight of all employment contract preparation. (u) Implementation of corporate compliance policies with respect to internal control mechanisms for fraud and abuse prevention protocols. (v) Collaboration with preparation for year-end cost audit report with Accounting and Legal Consultant. (w) Continued training in admissions and in-take protocols. (x) Oversight and suggestions as to all necessary contractual relationships. (y) Consulting computer, technology and communications consulting as to services, as required for day to day operational management of Facility. (z) All other necessary continued management and regulatory compliance services as to day to day operations. (ai) Consult, manage and support the Out-Patient Program treatment team's effort to provide quality psychiatric treatment while maintaining prudent control of patient length of stay. (bi) Maintain professional and comprehensive general liability insurance for itself and its employees and contracted personnel in an amount not less than $5,000,000 per occurrence or claim and whenever reasonably requested provide CMHC with a certificate from the insurer stating that such insurance is in effect and which also states that CMHC will be given at least ten (10) days advance written notice of any cancellation, non-renewal, changes in policy limits, 5 6 deductible, or co-insurance or aggregate limits shall be subject to CMHC's approval which shall not be unreasonably withheld. CMHC agrees that $100,000 is an acceptance deductible or co-insurance. Manager shall use reasonable efforts to maintain "tail" coverage if necessary for any terminated "claims made" policy so as to apply to any of its acts or omissions which occur during the term of this Agreement until the expiration of any applicable statute of limitation but not to exceed seven (7) years. Manager shall use reasonable efforts to have CMHC named as an additional insured on Manager's insurance with respect to any claim or liability arising solely out of any act of omission by Manager, its employees, or contracted personnel. (fi) Until the expiration of four (4) years after the furnishing of any services to be provided under this Agreement made available, upon request, to the Secretary of Health and Human Services or to the Comptroller General of the United States of America, or their duly authorized representatives, this Agreement and books, documents and records which are necessary to certify the nature and extent of reimbursable costs under the Medicare laws. (gi) Comply with all applicable laws (including but not limited to 42.U.S.C. 1395(nn)(b) or any similar law or regulation, regulations, CMHC policies and procedures, program policies and procedures any applicable standards of care. (hi) Use reasonable efforts to resolve any issues regarding acceptability of Out-Patient Program Personnel to CMHC personnel and to Out-Patient Program patients which may arise with respect to any of Manager's employees or contracted personnel. (ii) Provide monthly written reports to CMHC regarding all pertinent aspects of the operation of the Out-Patient Program. (ji) Commit no act or omission which adversely affects the CMHC license. 6 7 (ki) Admit patients to the Out-Patient Program (including but not limited to Medicare, Medicaid or Managed Care or private pay patients) only if the admission is ordered by a physician on the Out-Patient Program staff with admitting privileges. (li) Provide appropriate utilization review and quality assessment services for all out-patient program patients. Utilization and review extends to filing and pursuing clinical appeals with the CMHC's fiscal intermediary. 5. REPRESENTATION AND WARRANTS OF CMHC ----------------------------------- CMHC hereby represents to Manager as follows: (a) CMHC is a corporation duly organized and validly existing in good standing under the laws of the State of Florida with the power and authority to carry on the business in which it is engaged and to perform its obligations under this Agrement subject to maintaining the license described in subpart (d) of Section (3). (b) The execution of this Agreement and the performance of the obligations of the CMHC hereunder will not result in any breach of any of the terms, conditions or provisions of any Agreement or other instrument to which CMHC is a party or by which it may be bound or affected, or any governmental license, franchise, permit or other authorization possessed by the CMHC, nor will such execution and performance violate any Federal, State or local law, rule or regulation. (c) There is no litigation, administrative proceeding or investigation pending or threatened against CMHC (nor is the CMHC subject to any judgment, order, decree or regulation of any court or other governmental administrative agency) which would materially adversely affect the performance of CMHC's obligations hereunder. (d) No Certificate of Need is required by CMHC from any state regulatory agency for the operation of the Out-Patient Program. 7 8 6. REPRESENTATIONS OF MANAGER -------------------------- Manager hereby represents to CMHC as follows: (a) Manager is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware with the power and authority to carry on the business in which it is engaged and to perform its obligations under this Agreement. (b) The execution of this Agreement and the performance of the obligations of the Manager hereunder will not result in any breach of any of the terms, conditions or provisions of any Agreement or other instrument to which the Manager is a party or by which it may be bound or affected, or any governmental license, franchise, permit or other authorization possessed by the Manager, nor will such execution and performance violate any Federal, State or local law, rule or regulation. (c) There is no litigation, administrative proceeding or investigation pending or threatened against Manager (nor is Manager subject to any judgment, order, decree or regulation of any court or other governmental administrative agency) which would materially adversely affect the performance of Manager's obligations hereunder. 7. MANAGEMENT FEES AND STAFFING FEES --------------------------------- (a) CMHC shall pay to Manager a management fee of $200.00 per patient day for each patient attending the Out-Patient Program. (b) CMHC shall be entitled to a two hundred dollar ($200.00) per day credit against the management fee otherwise due with respect to each Patient Day of any patient for which any payor has finally denied payment for clinical reasons, if in excess of 10%. (c) CMHC shall pay Manager within five (5) working days of the date CMHC receives payment. (d) For all funds (including fees) advanced by OptimumCare including, without limitation staffing costs and fees and facility location costs, prior to CMHC(TR) receiving its initial reimbursement check from Medicare. 1. CMHC will repay to OptimumCare 1/2 of all funds advanced to be fully paid within fifteen (15) days after CMHC is in receipt of the first reimbursement check. 8 9 2. Balance payable over succeeding twelve (12) months in consecutive equal installments including an additional 10% profit on the unpaid balance. 8. EQUIPMENT LEASING ----------------- Upon being presented with the vendor invoices, OptimumCare will purchase and lease back to CMHC business equipment as needed for operation of facility including communications, MIS, furniture, copier and a fax. Such lease will be paid by CMHC over 36 months in equal consecutive monthly payments including a 10% profit per year over direct costs to OptimumCare. At the end of 36 months, CMHC shall own the said equipment. 9. CONFIDENTIAL AND PROPRIETARY INFORMATION ---------------------------------------- (a) CMHC agrees and acknowledges that Confidential Information is disclosed to it in confidence with the understanding that it constitutes business information developed by Manager. CMHC further agrees that it shall not use such Confidential Information for any purpose other than in connection with the Out-Patient Program. CMHC further agrees not to disclose such Confidential Information to any third party except as required by law or regulation or in order to serve the purposes of the Out-Patient Program or as permitted by written authorization of Manager. (b) Manager hereby grants to CMHC for the term of this Agreement, a non-exclusive license to use the registered service marks of Manager when identifying the Out-Patient Program. These service marks are the exclusive property of Manager. (c) Manager agrees not to disclose confidential information pertaining to the CMHC business or Out-Patient Program patients except as required by law or regulation or as permitted by written authorization of CMHC or the respective patient as the case may be. 9 10 10. RECRUITMENT OF EMPLOYEES AND AGENTS ----------------------------------- (a) CMHC acknowledges that Manager has expended and will continue to expend substantial time, effort, and money to train its employees and contracted personnel in the operation of the Out-Patient Program. The employees and contracted personnel of Manager who will operate the Out-Patient Program at the CMHC will have access to and possess Confidential Information of Manager. CMHC, therefore, agrees that for the earlier of two (2) years after the cessation of the employment or agency relationship between the Manager and the employee or agent or two (2) years after termination of this Agreement, it will not knowingly (and it will not induce any of its affiliates to) employ or solicit the employment of, or in any way retain the services of any employee, former employee, or contracted personnel or former agent of Manager if such individual has been employed or retained by Manager in the Out-Patient Program unless Manager gives CMHC prior written consent thereto or unless this Agreement is terminated by CMHC pursuant to paragraph (10) of this Agreement. (b) Manager agrees that during the same respective period of time, it will not knowingly (and it will not induce any of its affiliates to) employ or solicit the employment in any way retain the services of any employee, former employee, or contracted personnel or former agent of CMHC without CMHC's prior written consent thereto. 11. TERMINATION ----------- (a) Termination by Manager: (1) By written notice to CMHC, if CMHC should have a bankruptcy, reorganization or similar action filed by or against it, become insolvent, go liquidation for any purpose. (2) In the event CMHC has failed to comply with the terms of this Agreement in any material respect, including substantial completion of all refurbishing in the identified program space, Manager shall, in writing, notify all of the nature of the breach and CMHC shall have thirty (30) days to cure such breach or else the Agreement will thereupon be terminated upon written notice to CMHC. 10 11 (3) By written notice to CMHC if CMHC fails to maintain any license granted to it by a regulatory agency without which the Out-Patient Program would be materially and adversely affected. (4) By written notice to CMHC if CMHC fails to maintain professional and general liability insurance in the minimum amount of $1,000,000. (b) Termination by CMHC: 1. By written notice to Manager if Manager should have a bankruptcy, reorganization or similar action filed by or against it, become insolvent, or go into liquidation for any purpose. 2. In the event Manager has failed to comply with the terms of this Agreement in any material respect, CMHC shall, in writing, notify Manager of the nature of the breach, and Manager shall have thirty (30) days to cure such breach or else the Agreement will thereupon be terminated upon written notice to Manager. 3. By written notice to Manager if Manager fails to provide professional and general liability insurance in the minimum amount of $5,000,000. (c) Termination by either party. 1. In the event that Medicare, Medicaid, a third party payor or other Federal, State, Local Laws, rules, regulations, or interpretations thereof at any time during this Agreement duration; prohibit, restrict or substantially change the method, payment or amount of reimbursement or the like for services provided under this Agreement, then the CMHC and Manager in good faith shall amend the Agreement to provide for payment of compensation to each other in a manner consistent with any such prohibition restriction and/or limitation. If this Agreement is not or cannot be amended prior to any event as above or to the mutual satisfaction of the CMHC and Manager, then this Agreement may be terminated by either party with thirty (30) days written notice. 11 12 (d) Governing Law: The validity of this Agreement and any of its terms or provisions, the interpretation of the rights and duties of the parties hereunder, and the construction of the terms or provisions hereof shall be government in accordance with the laws of the State of California. (e) Force Majeure: If either of the parties hereto is delayed or prevented from fulfilling any of its obligations under this Agreement by force majeure, said party shall not be liable for said delay or failure. "Force Majeure" means any cause beyond the reasonable control of a party, including but not limited to an act of God, act or omission of civil military authorities, fire, strike, flood, riot, war, delay or transportation, or inability due to the aforementioned causes to obtain necessary labor, materials, or facilities. (f) Severability: If any part of this Agreement is held to be void or unenforceable, such part will be treated as severable, leaving valid the remainder of this Agreement notwithstanding the part found void or unenforceable. (g) Waiver: A waiver by either party of a breach or failure to perform shall not constitute a waiver of any provision hereof or of any other breach or failure whether or not similar. There shall be no wavier unless in writing signed by the party against whom the waiver is sought to be enforced. (h) Binding Effect: This Agreement shall be binding on the successors, and assigns of the respective parties, provided, however, neither party may assign or otherwise transfer this Agreement or delegate obligations hereunder without the other's written consent. (i) Complete Agreement: This Agreement constitutes the complete understanding of the parties and supersedes all other Agreements, either oral or in writing, between the parties hereto with respect to the subject matter hereof, and no other Agreement, representation, statement, or promise relating to the subject matter of this Agreement which is not contained herein shall be valid or binding. There shall be no amendment unless in writing signed by both parties. 12 13 (j) No Agency or Partnership: The relationship between Manager and CMHC is that of independent contractors and nothing in the Agreement shall be deemed to create an agency, joint venture, partnership or similar relationship between the parties hereto. Neither party shall have the right to bid for the other or enter into any contract or commitment in the name of, or on behalf of the other. (k) Notice: All notices hereunder shall be in writing, delivered personally or by U.S. Certified or Registered post mails, postage prepaid, return receipt requested, and shall be deemed given when delivered personally or upon the earlier of actual receipt or five (5) days after deposit in said United States Mail, addressed as below with proper postage affixed, but each party may change his address by written notice in accordance with this paragraph. 13. MISCELLANEOUS PROVISIONS ------------------------ (a) Compulsory Arbitration: Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration in accordance with the rules of the American Arbitration Association, and judgment on the award rendered may be entered in any court having jurisdiction. However, this shall not apply with respect to any claim for indemnity for bodily injury or death. (b) UCC1 Filing: Galaxy agrees to allow OptimumCare to file a UCC1 payment promising against Galaxy's psychiatric out-patient accounts receivable for the facilities referred to in the staffing and/or Management Agreements. (c) Attorney's Fees: If any legal action (including arbitration) is necessary to enforce the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees and costs awarded against the other party in addition to any other relief to which that party may be entitled. 13 14 CMHC's Address: Galaxy Health Care Inc./Treatment Resources, Inc. 290 N.W. 165th Street, Suite P-300 Miami, Florida 33169 Manager's Address: OptimumCare Corporation 30011 Ivy Glen Drive, #219 Laguna Niguel, California 92677 IN WITNESS WHEREOF, this Agreement has been executed at Laguna Niguel, California At Miami, Florida Manager: OPTIMUMCARE CORPORATION GALAXY HEALTH CARE, INC. By: /s/ EDWARD A. JOHNSON By: /s/ DALE P. REDLICH ----------------------------- ------------------------------- Edward A. Johnson Dale P. Redlich President Chief Executive Officer Date: 2/11/97 Date: 2/11/97 --------------------- ---------------------- 14 EX-11 9 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 OptimumCare Corporation Exhibit 11 - Statement Re: Computation of Per Share Earnings
Year ended December 31 -------------------------------------------------- 1996 1995 1994 -------------------------------------------------- PRIMARY Average shares outstanding 6,237,751 5,892,824 5,871,660 Net effect of dilutive stock options - based on the treasury stock method using average market price 188,133 521,885 346,453 --------- --------- --------- Total 6,425,884 6,414,709 6,218,113 --------- --------- --------- Net income $ 876,716 $ 2,070 $ 465,045 --------- --------- --------- Per share amount $0.14 $0.00 $0.07 --------- --------- --------- FULLY DILUTED Average shares outstanding 6,237,751 5,892,824 5,871,660 --------- --------- --------- Net effect of dilutive stock options - based on the treasury stock method using year-end market price, if higher than average market price 246,169 597,186 346,453 --------- --------- --------- Total 6,483,920 6,490,010 6,218,113 --------- --------- --------- Net income $ 876,716 $ 2,070 $ 465,045 --------- --------- --------- Per share amount $0.14 $0.00 $0.07 ========= ========= =========
A 20% stock dividend was declared by the Board of Directors on August 14, 1996 for shareholders of record on October 1, 1996. The stock dividend was issued on October 18, 1996 and all stock related data in this exhibit reflects the stock dividend for all periods presented. 34 EX-23 10 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-8833 and 33-78340) pertaining to the 1987 and 1994 Stock Option Plans of OptimumCare Corporation of our report dated March 21, 1997, with respect to the consolidated financial statements and schedule of OptimumCare Corporation included in the Annual Report (Form 10K) for the year ended December 31, 1996. /s/ ERNST & YOUNG LLP ---------------------- Ernst & Young LLP Orange County, California March 27, 1997 EX-27 11 FINANCIAL DATA SCHEDULE
5 0000820474 OPTIMUMCARE CORPORATION 1 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 1,113,809 0 2,389,019 0 0 3,518,003 73,496 52,135 3,953,100 1,244,909 0 0 0 6,786 3,272,407 3,953,100 10,676,237 10,681,553 8,313,317 9,683,822 0 26,544 997,731 121,015 0 0 0 0 0 876,716 $.14 0
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