-----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, FTTlIj0tg977y9R3dZNQfS/SbgI7l9t3j0Jm21OUg4fSgIthhlarNqEHUc6x1Xj5 Ospl3B1VOrS6n5m0ZrYkig== 0000892569-99-000816.txt : 19990331 0000892569-99-000816.hdr.sgml : 19990331 ACCESSION NUMBER: 0000892569-99-000816 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: SEC FILE NUMBER: 001-17401 FILM NUMBER: 99578649 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 219 CITY: LAGUNA MIGUEL STATE: CA ZIP: 92677 10-K405 1 FORM 10-K405 FOR THE YEAR ENDED DECEMBER 31, 1998 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, 1998 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from _________________ to __________________ Commission file number 0-17401 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 (Zip Code) executive offices) Registrant's telephone number, including area code: (949) 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 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x --- The aggregate market value of the voting stock held by non-affiliates of the Company on February 16, 1999 (4,658,321 shares of Common Stock) was $4,145,907 based on the average bid and asked price of the Company's voting stock on February 16, 1999.* The number of shares outstanding of each of the Company's classes of Common Stock, as of February 15, 1999 was: Common Stock, - 5,919,897 shares $.001 par value Documents Incorporated by Reference None. * 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 primarily 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. In some instances, a fixed monthly fee and reimbursement of certain direct program costs are received. 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 inpatient management fee per patient which averages $190 per patient inpatient day, or pays the Company a fixed outpatient management fee per visit which averages $120 per outpatient visit. In some cases, a percentage of collected revenues, a reimbursement of direct costs or a monthly fee for partial hospitalization contracts is received. 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 15, 1999, the Company has ten (10) Programs that are hosted by five (5) hospitals and one community mental health center: one inpatient and one partial hospitalization PsychProgram at Huntington InterCommunity Hospital, D/B/A Humana Hospital Huntington Beach, Huntington Beach, California, one inpatient and one partial hospitalization PsychProgram at St. Francis Medical Center, Lynwood, California, one partial hospitalization PsychProgram at Sherman Oaks Hospital and Health Center, Sherman Oaks, California, one inpatient and one partial hospitalization PsychProgram at Mission Community Hospital, San Fernando, California, one partial hospitalization PsychProgram through Citrus Valley Medical Center, West Covina, California and one partial hospitalization PsychProgram at Friendship Community Mental Health Center, Phoenix, Arizona. The Company also operates one partial hospitalization PsychProgram in Las Vegas, Nevada for which it is seeking its own license as a Community Mental Health Center (CMHC). 1 4 During January 1999, the Company was informed by the Healthcare Financing Administration that it "has been examining its process for approving new applications and final decisions have not yet been reached. Once the process is defined (expected within 60 days)" the Company will be contacted and "all efforts will subsequently be made to process the application as expeditiously as possible at that time." The Company is actively seeking the agency's approval, as it has two other locations (Long Beach, California and Portland, Oregon) where it has leased facilities for partial hospitalization programs. 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 provided management and other behavioral health services to skilled nursing and other similar bed & board facilities. The Company recorded a charge to earnings for the unamortized balance of goodwill during the fourth quarter of 1997 of $135,255 associated with the purchase of the interest in the LLC. This decision was due to the LLC's insignificant revenues, net losses and negative cash flow. The LLC was inactive during 1998 and is not expected to resume operations. (b) Financial Information About Industry Segments The Company operates 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, partial hospitalization and outpatient 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 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 an inpatient 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. 2 5 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. OptimumCare's Outpatient Services Outpatient Services is a component of a partial hospitalization program intended for patients with long-term, chronic conditions. Treatment must, at a minimum, be designed to reduce or control the patient's psychiatric symptoms so as to prevent relapse requiring a higher level of care. For patients with long-term, chronic conditions, control of symptoms and maintenance of a functional level to avoid further deterioration or hospitalization is an acceptable expectation of improvement. "Improvement" in this context is measured by comparing the effect of continuing treatment versus discontinuing it. Meeting this criteria of improvement in patients with long-term, chronic conditions may be measured by gradually reducing the treatment and measuring the effect on the patient. Outpatient Services is a voluntary program. Patients attend up to a maximum of 10 hours a week, as prescribed by a psychiatrist, under the direct supervision of the multi disciplinary team. Treatment includes individual and group therapy with a range of activities geared toward the individual needs of each patient. Length of stay varies, depending on the needs of the individual. Outpatient Services provides a third level in the continuum of care that enables patients to enter an OptimumCare program at an appropriate level, then advance as their treatment progresses to a point where they feel confident, productive and able to experience life fully with minimal intervention. Expansion of Products The Company is seeking to expand the scope of psychological services it offers by enlarging the continuum of care it provides. The Company believes that it can more effectively market its services to managed care payors by increasing the scope of services it provides. 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 3 6 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. 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 assumed 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 within five (5) days after the close of the month in which the services were 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. 4 7 Regulatory Matters Many of the hospitals the Company contracts with have a large number of Medicare and Medicaid patients. It is unknown, whether in the future other contracts or programs will be dependent on a disproportionate amount of Medicare/Medicaid patients. However, the Company has negotiated with these hospitals whereby it is 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 current contracts. The healthcare facilities rely upon payment from Medicare. The healthcare facilities are reimbursed their costs on an interim basis by Medicare fiscal intermediaries and the health care facilities submit annual cost reimbursement reports to the fiscal intermediaries for audit and payment reconciliation. The healthcare facilities seek reimbursement of the Company's management fees from these fiscal intermediaries as part of their overall payments from Medicare. 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 changes to Medicare/Medicaid policies. Medicare is part of a federal health program which is administered by the U.S. Department of Health and Human Services which has established Health Care Financing Administration ("HCFA") to promulgate rules and regulations governing Medicare and the benefits associated therewith. All of the programs managed by the Company are treated as "provider based" programs by HCFA. This designation is important since partial hospitalization services are covered only when furnished by a "provider", i.e., a hospital or a CMHC. To the extent the partial hospitalization programs are not located in a site which is deemed by HCFA to be "provider-based", there would not be Medicare coverage for the services furnished at the site under Medicare's partial hospitalization benefit. In August, 1996, HCFA published criteria for determining when programs operated in facilities separate from a hospital's or CMHC's main premises may be deemed to be "provider-based" programs. The proper interpretation and application of these criteria are not entirely clear, and there is a risk that some of the sites managed by the Company could be found not to be "provider-based". Historically, CMHC's, unlike hospitals, were not surveyed by a Medicare contractor before being permitted to participate in the Medicare program. However, HCFA is now in the process of surveying all CMHC's to confirm that they meet all applicable Medicare conditions for furnishing partial hospitalization programs. Management believes that the CMHC which contracts with the Company is in compliance with the applicable requirements. Currently proposed legislation would implement a prospective payment system for all outpatient hospital services for the calendar year beginning January 1, 2000. Proposed reimbursement rates have been determined, and their effect is not believed to be substantially different from what the hospitals are currently receiving as reimbursement. The amount paid by Medicare is the provider's reasonable cost less a "coinsurance" of twenty percent (20%) of the charges which is ordinarily to be paid by the patient. The coinsurance must be charged to the patient by the provider unless the patient is indigent. 5 8 If the patient is indigent, or if the patient does not pay the provider the billed coinsurance amounts after reasonable collection efforts, the Medicare program has historically paid those amounts as allowable Medicare bad debts. The allowability of Medicare bad debts to providers for whom the Company manages partial hospitalization programs is significant since many of the patients in programs managed by the Company are indigent or have very limited resources. The reduction in allowable Medicare bad debts could have a materially adverse impact on Medicare reimbursement to the healthcare facilities for which the Company provides services and could further result in the restructuring or loss of contracts. To the extent that healthcare facilities which contract with the Company for management services suffer material losses in Medicare payments, there is a greater risk to the Company of non-payment, and a risk that the healthcare facilities will terminate or not renew their contracts with the Company. Thus, even though the Company does not submit claims to Medicare, it may be adversely affected by reductions in Medicare payments or other Medicare policies. 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 its 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. 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 local marketing plan, in conjunction with the program marketer and director of marketing. The marketing development strategy is to increase public awareness of the Program. All Programs share the goal that is consistent with the Company's overall marketing plan. The host hospital's administrative and medical staff 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. Licensed Community Care Residential Facilities are also targeted for marketing because the residents are the ones who will require inpatient psychiatric treatment. The Company's marketing approach emphasizes the care giver to become involved in one on one communication with the professionals who will provide patient referrals. These professionals and care givers are invited to the Company sponsored community relations activities, speaker programs and continuing education seminars. 6 9 (iii) Raw Materials Inapplicable. (iv) Patents and Trademarks The Company holds a federal service mark, Registration #1628745, for its trade name "OptimumCare". The Company has marketed its programs under the names "OptimumCare PsychProgram" and "OptimumCare Treatment Program". (v) Seasonality The Company acknowledges that patient volume appears to be susceptible to some seasonal variation. Census tends to substantially decrease near certain holidays, particularly during the fourth quarter, where individuals are more reluctant to hospitalize family members. (vi) Working Capital Items The Company expects to experience an initial 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. However, this delay may vary, as in the case of the Company seeking CMHC licensure for its Las Vegas site, for which a healthcare provider/supplier application was filed with the Healthcare Financing Administration on May 29, 1998. (vii) Dependence on a Few Customers The Company presently has ten (10) Programs operating through five (5) 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. During 1998, one termination required a bad debt write-off of approximately $300,000. (viii) Backlog Inapplicable. (ix) Government Contracts Inapplicable. (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, Comprehensive Care Corporation, Mental Health Management, PMR Corporation and Horizon Health Services, most 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. 7 10 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 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 8 11 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 assist the medical directors in performing their duties. 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 containment will occur. However, legislation has begun to recognize the need for placing mental health illness on par with other physical ailments. For example, federal legislation effective in 1998, (the Kennedy-Kassebaum bill), mandates parity with other reimbursable medical services for those who receive behavioral health care. This law raised the lifetime cap from the current $50,000 level to $1 million. 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 16, 1999, the Company employed approximately 100 persons full-time and 70 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 1,277-square- foot suite of executive offices in Laguna Niguel, California, under a lease agreement providing for a monthly base rent of 9 12 $1,900 which expires June 30, 1999. The Company leases additional satellite corporate offices in Culver City and Venice, California. Lease agreements provide for monthly base rents of $3,072 and $2,800 and expire November 30, 2001 and October 30, 1999 respectively. The Company also maintains 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 leases space under five separate lease agreements for the operation of its outpatient partial hospitalization programs. One agreement is on a month to month basis. The remaining agreements expire June 30, 2000, September 30, 2000, September 30, 2000 and August 14, 2002 respectively. Aggregate monthly payments total $23,107 of which $5,786 is fully reimbursed through a sublease with a host hospital. 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. 10 13 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 -------- ------- 1998: - ----- Fourth Quarter 59/64 23/32 Third Quarter 63/64 23/32 Second Quarter 1 25/32 First Quarter 1 5/16 11/16 1997: - ----- Fourth Quarter 1 7/16 1 3/16 Third Quarter 1 3/8 1 1/16 Second Quarter 1 5/8 1 1/8 First Quarter 2 3/16 1 1/4
The listed prices represent inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. (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 15, 1999 is set forth below:
Approximate Title of Class Number of Record Holders - -------------- ------------------------ Common Stock, $.001 par value 200
The Company believes that there are approximately 800 beneficial owners of its common stock. (c) Dividends The Company has not 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. 11 14 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, 1998 and December 31, 1997 and for each of the fiscal years in the three year period ended December 31, 1998 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
=========================================================================================================================== 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- NET REVENUES $11,409,690 $12,089,398 $10,676,237 $6,027,122 $5,596,283 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME 377,133 454,350 876,716 2,070 465,045 - --------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS* PER SHARE OF COMMON STOCK .06 .07 .14 .00 .08 - --------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS* PER SHARE OF COMMON STOCK .06 .06 .13 .00 .07 - --------------------------------------------------------------------------------------------------------------------------- WEIGHTED NUMBER OF SHARES OUTSTANDING 6,567,280 6,870,049 6,237,751 5,892,824 5,871,660 - --------------------------------------------------------------------------------------------------------------------------- TOTAL DILUTED SHARES 6,699,648 7,194,872 6,677,156 6,388,570 6,218,113 - --------------------------------------------------------------------------------------------------------------------------- CASH DIVIDENDS PER COMMON SHARE 0 0 0 0 0 ===========================================================================================================================
BALANCE SHEET INFORMATION AS OF DECEMBER 31
=========================================================================================================================== 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 3,154,744 3,953,241 3,980,307 $2,059,537 $1,814,153 - --------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS 2,652,044 3,213,626 3,518,003 1,731,290 1,699,801 - --------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES 429,375 679,774 1,244,909 381,531 333,209 - --------------------------------------------------------------------------------------------------------------------------- NET WORKING CAPITAL 2,222,669 2,533,852 2,273,094 1,349,759 1,366,592 - --------------------------------------------------------------------------------------------------------------------------- LONG-TERM OBLIGATIONS 0 0 0 166,000 0 ===========================================================================================================================
* Earnings per share for all periods prior to 1997 have been restated to conform with the requirements of FASB statement No. 128, "Earnings Per Share". 12 15 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 At fiscal year end 1998 and 1997, the Company's working capital was $2,222,669 and 2,533,852 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. In February 1997, the Company formed an alliance with Galaxy Health Care, Inc. to develop community mental health centers. In August 1997, the Company relicensed one partial hospitalization program with Galaxy. In December 1997, an insurance reimbursement audit of Galaxy's Florida treatment sites placed Galaxy under severe working capital constraints. The Company had perfected a security interest in all funds due Galaxy arising from the operation of this program. The allowance for doubtful accounts at December 31, 1997 reserved all amounts due from Galaxy at that point in time. During 1998, the Company learned that the magnitude of debt owed by Galaxy from this audit appeared to be extremely substantial. This caused the Company to believe that the collectibility of its receivables covered by the security interest was remote. As a result, the Company wrote off all amounts due from Galaxy during the first quarter of 1998 and terminated its relationship with the entity. Despite the write-off of this receivable, the Company has been able to effectively manage collections on other receivables and payments for services such that there has been no significant impairment of working capital. Cash flows from operations were $499,964 for the year ended December 31, 1998, resulting primarily from income from operations, net of an increase in accounts receivable, and a decrease in deferred tax assets. The decrease in deferred tax assets occurred from the write-off of a 1997 bad debt previously reserved, to 1998 taxable income. Cash used in investing activities was $131,501 for the year ended December 31, 1998. Funds used in 1998 were due to an increase in a note receivable due from one officer and purchases of property and equipment. The cash used in financing activities was $1,125,231 for the year ended December 31, 1998. Funds used during 1998 were for the purchase of treasury stock and for paydowns on the Company's line of credit agreement with a bank. The line of credit expires May 1, 1999. The maximum indebtedness of the line is $1,500,000. Amounts allowable for draw are based on 75% of certain qualified accounts receivable. As of February 15, 1999, approximately $1,325,000 is available for future draws on the line of credit agreement. The Company's principal sources of liquidity for the fiscal year 1999 are cash on hand, accounts receivable, the line of credit with a bank and continuing revenues from programs. 13 16 (b) Results of Operations FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997. The Company operated thirteen (13) programs during the year ended December 31, 1998 and twelve (12) programs during the year ended December 31, 1997. As of February 15, 1999, the Company currently has ten (10) operating programs. These are composed of three inpatient and seven partial hospitalization programs. Generally, the size and profit potential of inpatient programs are greater than partial hospitalization programs. Net revenues were $11,409,690 and $12,089,398 for the years ended December 31, 1998 and 1997, respectively. This decrease is due to a greater number of programs generating revenue for a longer period of time in 1997 versus 1998. This is particularly the case with two partial hospitalization programs, one of which was consolidated into another program during the second quarter of 1998. The other program operated, but did not generate revenues during 1998. This was due to the Company's inability to find a host hospital for this location. During 1997, this program operated and generated revenue for a portion of that year. During 1999, the Company closed this program. However, it has retained the lease on this site, as it believes that a successful program can be operated from this location and is seeking its own community mental health center license for this purpose. Cost of services provided were $8,977,538 and $8,894,987 for the years ended December 31, 1998 and 1997. Costs have remained relatively stable in the aggregate among years. However, increases in wage, insurance and benefit expense at certain individual programs have occurred, which have been offset by significant cost reductions which were achieved from the consolidation of two partial hospitalization programs which occurred during the second quarter of 1998. The provision for uncollectible accounts decreased from the prior year primarily due to the write off of receivables generated by the Galaxy alliance previously discussed, which was terminated during the first quarter of 1998. Selling general and administrative expenses have decreased from the prior year. This was due to lower executive bonus compensation earned in 1998 versus 1997 based on the Company's interim profitability. The decrease was also due to the change in the manner in which the Company records its workers compensation insurance costs. During 1998, these costs were directly allocated to its individual programs. This occurred due to a change in the reporting requirements of the carrier, which necessitated the Company to be classification specific among employees, and the growing magnitude of these costs. During 1997, these costs were treated as general corporate overhead. The Company recorded a charge to earnings for the unamortized balance of goodwill during the fourth quarter of 1997 of $135,255 associated with the purchase of the interest in the LLC. This decision was due to the LLC's insignificant revenues, net losses and negative cash flow. The LLC was inactive during 1998 and is not expected to resume operations. The Company's income taxes have remained relatively stable among years. Net income was $377,133 and $454,350 for the years ended December 31, 1998 and 1997, respectively. The decrease was primarily attributable to lower revenues, partially offset by a decrease in bad debts, general and administrative costs and the absence of any goodwill impairment. 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. Sites for Long Beach, California and Portland, Oregon have been retained for potential partial hospitalization programs. The Company is continuing all current service programs, and is exploring other expansion opportunities. The Company has continued to provide a larger scope of services to its customers for a greater management fee. As a result, revenues should continue to increase and gross profit should continue to rise favorably and disproportionately 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 14 17 adversely impact the results of operations and the Company's available resources. The Company's revenue is expected to increase in 1999 due to an anticipated expansion in the number of operational programs. Marketing plans for expanding the volume of the business by obtaining new contracts for programs currently exist. However, it is uncertain at this time to what extent the Company's fixed costs will be impacted by this expansion. Due to the Company's dependence on a relatively small customer base presently consisting of five (5) 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, 1998. The Company upgraded its general ledger accounting system to be year 2000 compliant effective January 1, 1999. The cost of addressing the year 2000 approximated $2,500 and was not material to its financial position, operating results or cash flows. However, it does appear that this is a major concern for its host hospitals and the various insurance companies from which the hospitals receive reimbursements. The large volume, small dollar transactions processed by these entities' computer systems would most likely require reconfiguration to accommodate the year 2000. The trickle down effect of this situation to the Company is not yet known at this point in time. FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 The Company operated twelve (12) programs during the year ended December 31, 1997 and fifteen (15) programs during the year ended December 31, 1996. As of February 17, 1998, the Company currently had twelve (12) operating programs. These were 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 $12,089,398 and $10,676,237 for the years ended December 31, 1997 and 1996, respectively. The increase in revenues in 1997 over 1996 was due to the increase in patient volume among periods. This occurred particularly at two programs which the Company began managing in 1996. Cost of services provided were $8,894,987 and $8,313,317 for the years ended December 31, 1997 and 1996, respectively. The increase in the cost of services provided among years was primarily due to the increase in patient volume among years and an expanded scope of services provided in connection with certain contracts such as staffing, dietary, transportation and lease costs. Selling, general and administrative expenses increased over the prior year due to the position change of one employee from an Inpatient Program Administrator, directly responsible for an individual program and previously included in the costs of services provided, to the Executive Vice President/Chief Operating Officer of the Company. Also contributing to the increase were higher insurance expenses associated with the Company's growing revenues and wages. The provision for uncollectible accounts increased from the prior year primarily due to a reserve placed on the Galaxy receivables previously discussed. During the fourth quarter, due to insignificant revenues, continued net losses and negative cash flows, associated with the LLC, the Company determined that the unamortized goodwill of $135,255 associated with the purchase of the interest in the LLC had little if any future value. Accordingly, the Company recorded a charge to earnings for the unamortized balance. The Company's effective income tax rate increased 36% from 12% in the prior year, due to the Company's utilization of its federal net operating loss carry forwards to offset 1996 taxable income. Net income was $454,350 and $876,716 for the years ended December 31, 1997 and 1996, respectively. The decrease was primarily attributable to an increase in the provision for uncollectible accounts. 15 18 ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Immaterial. 16 19 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OPTIMUMCARE CORPORATION INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page Number Report of Independent Auditors F-4 Consolidated Balance Sheets as of December 31, F-5 1998 and December 31, 1997 Consolidated Statements of Operations for the years F-6 ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the F-7 years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the F-8 year ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements F-9 through F-19
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 20 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 53 Chief Executive Officer, Principal Financial Officer, Secretary and Chairman of the Board Mulumebet G. Michael 50 Director, President and Chief Operating Officer Gary L. Dreher 52 Director Michael S. Callison 60 Director, Vice President of Corporate Development Jon E. Jenett 46 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 Edward A. Johnson - Chairman & CEO Mr. Johnson has spent almost his entire professional career in behavioral healthcare services and co-founded OptimumCare in 1986. As Chief Executive Officer, Mr. Johnson has overall responsibility for developing strategic program direction with the firm's current and future healthcare providers at hospitals, medical centers and community care centers. He also monitors and evaluates trends shaping the healthcare industry that will impact the Company. In response, from this larger perspective, he fashions policies, procedures and systems to maximize patient service while enhancing profitability for OptimumCare and value for its shareholders. Mr. Johnson received an M.S. degree in psychology and a B.A. degree in business from Colorado State College. He is also licensed in California as a Marriage and Family Counselor. 18 21 Mulumebet G. Michael - President, COO & Board Member Ms. Michael joined OptimumCare in 1993 as a Program Administrator, advanced to Executive Vice President and COO in 1997, and was named President and a member of the Board of Directors in June 1998. Ms. Michael's extensive experience both as a registered nurse and in behavioral healthcare management over a sixteen year career has provided superb insight, vision and knowledge, ensuring the best behavioral health practices are incorporated into each OptimumCare program. She manages the Company's staff of more than 150 professionals and support personnel. Ms. Michael completed a four-year nursing school curriculum leading to her being a licensed nurse (RN) in three countries: America, Canada and Ethiopia. She also completed a three-year advanced hospital management program with the British Columbia Institute of Technology in Canada. Gary L. Dreher - Director 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. He was recently named Vice President of Sales and Marketing for AMDL, an inventor and marketer of state-of-the-art diagnostic kits. Prior to this, Mr. Dreher was President of Medical Market International, a marketing and management services company he co-founded. Mr. Dreher also served as Vice President of International Sales for Apotex Scientific, an international distributor network for Esoteric Diagnostic Tests, from 1992 to 1996. Michael Callison - Vice President Corporate Development Mr. Callison joined OptimumCare in 1990, and is responsible for sales and business development, as well as seeking out and nurturing relationships with strategic alliance partners to help the Company expand its services and coverage area. His 40 years of healthcare experience began while he attended college and worked as a psychiatric technician at a Washington state veterans hospital. Thereafter, he held positions of increasing responsibility primarily in sales and marketing with Pfizer Labs, Borg Warner Healthcare and Hill-rom, a hospital architectural and furnishing company. In 1993, he was elected to OptimumCare's board of directors. Mr. Callison received his B.A. degree in Economics from the University of Puget Sound. Jon E. Jenett - Director Mr. Jenett was elected to the Board of Directors during December, 1995. Since October 1998, Mr. Jenett has served as President and Chief Financial Officer of M4 Labs, Inc., which sells a suite of software and hardware products to manage video and multimedia in networked environments, including cellular and the Internet. From 1990 to 1998, Mr. Jenett served as 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 and private companies. Mr. Jenett received his B.A. degree from Harvard College and his M.B.A. from Stanford Business School. Section 16(a) Beneficial Ownership Reporting Compliance No director, officer or beneficial owner of ten percent (10%) or more of the Company's common stock failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934 during the most recent fiscal year or prior fiscal year as disclosed in Forms 3 and 4 amendments thereto furnished to the Company pursuant to Section 240.16a-3 during its most recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year and any written representation that no Form 5 was required. (f) Involvement in Certain Legal Proceedings Inapplicable. 19 22 ITEM 11 - EXECUTIVE COMPENSATION (a) (b) 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 PAYOUTS COMPEN- POSITION YEAR SALARY($) BONUS($) SATION($) AWARDS($) /SARS ($) SATION($) - ------------------------------------------------------------------------------------------------------------------------------------ EDWARD A. JOHNSON, 1998 $144,000 $118,188 100,000 $18,304 (1)(2) CHIEF EXECUTIVE 1997 144,000 127,474 0 17,526 (1)(2) OFFICER 1996 144,000 123,234 200,000 16,736 (1)(2) MULUMEBET G 1998 $160,865 $ 63,806 100,000 MICHAEL 1997 156,180 113,027 0 PRESIDENT & CHIEF 1996 142,167 56,272 175,000 OPERATING OFFICER HELEN TVELIA 1998 $ 62,400 $ 71,917 25,000 PROGRAM 1997 58,020 62,868 0 DIRECTOR 1996 55,500 56,733 25,000 ===================================================================================================================================
# NUMBER OF UNITS $ DOLLAR AMOUNTS (1) CAR ALLOWANCE (2) LIFE INSURANCE PREMIUMS 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. 20 23 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, provided 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 terminated on July 28, 1997. The purpose of the Plan was 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 25,000 shares were exercised during fiscal year ended December 31, 1998. There are currently 100,000 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 was 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 could have been no less than 85% of the fair market value on the date of grant, although the Company did 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 were granted for terms up to 10 years (five years in the case of incentive stock options granted to greater than 10% stockholders). No optionee was granted incentive stock options such that the fair market value of the options which first become exercisable in any one calendar year exceeded $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. 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 common stock were reserved for issuance pursuant to the plan. No options to purchase shares were exercised during fiscal year ended December 31, 1998. There are currently 200,000 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. 21 24 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 350,000 shares of common stock to various officers, directors, employees and consultants of the Company during 1998. On February 3, 1998, the Board of Directors granted options to Edward A. Johnson and Mulumebet G. Michael to each 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 $1.00. The options have a five year term and vest immediately. During 1998, no other options previously granted were exercised. (c) Options/SAR Grants in Last Fiscal Year The following table sets forth certain information concerning Options/SARs granted during 1998 to the named individuals:
============================================================================================================================== POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM - ------------------------------------------------------------------------------------------------------------------------------ % OF TOTAL GRANT DATE OPTIONS/SARs PRESENT GRANTED TO EXERCISE VALUE ($)* OPTIONS/SARs EMPLOYEES OF BASE EXPIRATION NAME GRANTED IN FISCAL PRICE DATE 5% ($) 10% ($) YEAR ($/SHARE) - ------------------------------------------------------------------------------------------------------------------------------ EDWARD A. JOHNSON 100,000 28 1/2% $1 2/3/2003 31,000 66,000 46,000 - ------------------------------------------------------------------------------------------------------------------------------ MULUMEBET G. MICHAEL 100,000 28 1/2% $1 2/3/2003 31,000 66,000 46,000 - ------------------------------------------------------------------------------------------------------------------------------ HELEN TVELIA 25,000 7% $1 2/3/2003 7,750 16,500 11,500 ==============================================================================================================================
* 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 $.46 based on the following inputs:
Stock Price (Fair Market Value) at Grant $1.0313 Exercise Price $1 Expected Option Term 5 years Risk-Free Interest Rate 6.25% Stock Price Volatility 38% Dividend Yield 0%
22 25 The model assumes: (a) an Expected Option Term of 5 years which reflects the actual life of the option; (b) a Risk-Free Interest Rate that represents the interest rate on a U.S. Treasury Note with a maturity date corresponding to that of the Expected Option Term; and (c) Stock Price Volatility is calculated using quarterly stock prices over the period from January 1, 1994 to December 31, 1998. (d) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values The following table summarizes options and SARs exercised during 1998, and presents the value of unexercised options and SARs held by the named individuals at fiscal year end:
================================================================================================================================= VALUE OF NUMBER OF UNEXERCISED IN- SHARES UNEXERCISED THE-MONEY NAME ACQUIRED ON OPTIONS/SARs AT OPTIONS/SARs AT EXERCISE (#) VALUE REALIZED ($) FISCAL YEAR-END (#) FISCAL YEAR-END ($)* - --------------------------------------------------------------------------------------------------------------------------------- EDWARD A. JOHNSON 0 0 350,000 $12,625 - --------------------------------------------------------------------------------------------------------------------------------- MULUMEBET G. 0 0 300,000 $0 MICHAEL ** - --------------------------------------------------------------------------------------------------------------------------------- HELEN TVELIA 0 0 100,000 $6,313 =================================================================================================================================
* The difference between fair market value at February 16, 1999 and the exercise price. ** 100,000 of options vest over five years, 40,000 of which are exercisable at 12/31/98. (g) 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 $66,000 of wages as Vice President of Corporate Development in 1998. Mr. Dreher received $12,000 in marketing fees during 1998 for the marketing of the Company's programs to the hospitals during 1998. (k) 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. (l) 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, 1998 as well as the U.S. NASDAQ stock market index and the S&P Healthcare (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. OptimumCare S&P NASDAQ Corporation Healthcare Market ----------- ---------- ------ DEC 31, 1993 100 100 100 DEC 31, 1994 137 106 97 DEC 31, 1995 197 148 135 DEC 31, 1996 241 173 166 DEC 31, 1997 232 151 202 DEC 31, 1998 149 124 282 23 26 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 16, 1999, (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.
======================================================================================================== AMOUNT & NATURE OF NAME (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS - -------------------------------------------------------------------------------------------------------- EDWARD A. JOHNSON 914,470 (2) 14.6% - -------------------------------------------------------------------------------------------------------- MULUMEBET G. MICHAEL 269,466 (3) 4.4% - -------------------------------------------------------------------------------------------------------- MICHAEL S. CALLISON 580,895 (4) 9.7% - -------------------------------------------------------------------------------------------------------- GARY L. DREHER 252,745 (5) 4.2% - -------------------------------------------------------------------------------------------------------- JON E. JENETT 134,000 (6) 2.2% - -------------------------------------------------------------------------------------------------------- ALL OFFICERS AND DIRECTORS AS A GROUP (5 PERSONS) 2,151,576 (7) 31.6% ========================================================================================================
(1) The addresses of these persons are as follows: Mr. Johnson - 24 South Stonington Road, South Laguna, CA 92677; Ms. Michael - 5304 Shenandoah Avenue, Los Angeles, CA 90056; Mr. Callison - 21972 Summerwind Lane, Huntington Beach, CA 92646; Mr. Dreher - 6301 Acacia Hill Drive, Yorba Linda, CA 92886; Mr. Jenett - - 8 South Vista De La Luna, South Laguna, CA 92677. (2) Includes presently exercisable options to purchase 350,000 shares of Common Stock. All shares are directly owned. (3) Includes presently exercisable options to purchase 240,000 shares of Common Stock. All shares are directly owned. (4) Includes presently exercisable options to purchase 75,000 shares of Common Stock directly held, 480,000 shares held through a revocable living trust, 17,500 shares held indirectly through an individual retirement account, 2,395 shares held indirectly through a 401K plan and 6,000 shares held as custodian for five of Mr. Callison's grandchildren. (5) Includes presently exercisable options to purchase 125,000 shares of Common Stock and 58,890 shares directly held, with 64,210 shares held indirectly through an individual retirement account and 4,645 held indirectly through an individual retirement account of Mr. Dreher's spouse. (6) Includes presently exercisable options to purchase 100,000 shares of Common Stock, with 34,000 shares held indirectly through an individual retirement account. (7) Includes presently exercisable options to purchase 890,000 shares of Common Stock. (c) Changes in Control Inapplicable. 24 27 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) Transactions With Management and Others Inapplicable. (b) Certain Business Relationships Inapplicable. (c) Indebtedness of Management The Company converted a series of short-term advances to Mr. Johnson and a $274,000 note dated December 29, 1997 into a $392,070 promissory note due from Mr. Johnson. The note accrues interest at the current prime rate and provides for a bi-monthly payment plan. (d) Transactions With Promoters Inapplicable. 25 28 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 F-2 Consolidated Balance Sheets as of December 31, F-3 1998 and December 31, 1997 Consolidated Statements of Operations for the years F-4 ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the F-5 years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the F-6 year ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements. F-7 through F-19
(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. 26 29 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. 10.43 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 ended December 31, 1993, Exhibit 10.48. (Terminated in 1998) 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. (Terminated in 1998) 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. 27 30 10.66 Agreement between Sherman Oaks Hospital and Health Center dated March 30, 1995, incorporated 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, incorporated 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, incorporated 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, incorporated by reference from Form 10-K for the year ended December 31, 1995. (Terminated in 1998) 10.70 Lease Agreement between the Company and 757 Pacific Partnership dated July 3, 1995, incorporated 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, incorporated by reference from Form 10-K for the year ended December 31, 1995. (Terminated in 1998) 10.72 Lease Agreement between the Company and Columbia Healthcare Corporation dated September 14, 1995 which supersedes lease dated October 18, 1993, incorporated by reference from Form 10-K for the year ended December 31, 1995. (Terminated in 1998) 10.73 Agreement between San Fernando Community Hospital, Inc. dba Mission Community Hospital and the Company dated October 6, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1995. 10.77 Operating Agreement for Optimum Care Source, LLC incorporated 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 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.78. 10.82 Registration Agreement between Professional CareSource, Inc. and the Company dated April 24, 1996 incorporated 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 incorporated 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 incorporated 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 incorporated by reference from March 1996 Form 10-Q Exhibit 10.85. 28 31 10.86 Agreement between Friendship Community Mental Health Center and the Company dated April 25, 1996 incorporated 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, incorporated by reference from Form 10- K for the year ended December 31, 1996. 10.88 Lease Agreement between the Company and Jay Arteaga dated September 30, 1996, incorporated by reference from Form 10-K for the year ended December 31, 1996. 10.89 Lease Agreement between the Company and Solomon, Saltzman & Jameson dated October 15, 1996, incorporated by reference from Form 10-K for the year ended December 31, 1996. (Terminated in 1998) 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, incorporated by reference from Form 10-K for the year ended December 31, 1996. 10.91 Change in terms Agreement between the Company and National Bank of Southern California dated January 28, 1997 (Modified), incorporated by reference from Form 10-K for the year ended December 31, 1996. 10.92 Staffing Agreement between the Company and Treatment Resources, Inc. dated February 1, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1996. (Terminated in 1998) 10.93 Community Mental Health Center Agreements (California and Nevada) between the Company and Treatment Resources, Inc. dated February 1, 1997 (Modified), incorporated by reference from Form 10-K for the year ended December 31, 1996. (Terminated in 1998) 10.94 Change in Terms Agreement between the Company and National Bank of Southern California dated May 15, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.95 Inpatient and Outpatient Psychiatric Unit Management Services Agreement between the Company and Catholic Healthcare West Southern California dated June 1, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.96 Lease Agreement between the Company and The Ribeiro Corporation dated June 23, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.97 Lease Agreement between the Company and Harriet Maizels, Daniel Gold, Lesley Gold and Mildred Gold dated July 8, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.98 Lease Agreement between the Company and Michael F. Maluccio dated August 6, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. (Terminated in 1998) 29 32 10.99 Community Mental Health Center Agreement between the Company and Treatment Resources, Inc. dated August 27, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.100 Lease Agreement between the Company and Laguna Niguel Office Center dated September 5, 1997 which supersedes lease dated June 23, 1988, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.101 First Lease Extension Agreement between the Company and Whittier Narrows Business Park and the Company dated September 11, 1997 which supersedes lease dated January 10, 1994, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.102 Lease Extension Agreement between the Company and 757 Pacific Avenue Partnership dated September 19, 1997 which supersedes lease dated July 3, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.103 Unanimous Written Consent dated December 29, 1997 of the Board of Directors amending the Promissory Note between the Company and Edward A. Johnson dated December 31, 1996, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.104 Agreement to terminate agreements between the Company and Galaxy Health Care, Inc. dated March 19, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.105 Agreement between Friendship Community Mental Health Center and the Company dated June 25, 1997 which supersedes the Agreement dated April 25, 1996. 10.106 Lease Agreement between the Company and Laguna Niguel Office Center dated May 14, 1998 which supersedes lease dated June 23, 1988. 10.107 Change in terms Agreement between the Company and Southern California Bank dated May 27, 1998. 10.108 Lease Agreement between Whittier Narrows Business Park and the Company dated July 28, 1998. 10.109 Lease Agreement between the Company and P.S. Business Parks, L.P. dated August 14, 1998. 10.110 Inpatient and Outpatient Psychiatric Unit Management Services Agreement between the Company and Catholic Healthcare West Southern California dated September 15, 1998 which supersedes Agreement dated June 1, 1997. 10.111 Agreement between Citrus Valley Medical Center and the Company dated September 18, 1998. 10.112 Sublease Agreement between Citrus Valley Medical Center and the Company dated September 23, 1998. 10.113 Lease Agreement between the Company and Coldwell Banker dated November 1, 1998. 30 33 10.114 Amendment to the Agreement dated June 25, 1997 between Friendship Community Mental Health Center and the Company dated November 12, 1998. 23 Consent of Independent Auditors. 27 Financial Data Schedule (b) Reports on Form 8-K Inapplicable. 31 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 30, 1999 OPTIMUMCARE CORPORATION By: /s/ EDWARD A. JOHNSON ------------------------------------------ Edward A. Johnson, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the persons on behalf of the registrant in the capacities and on the dates indicated. /s/ EDWARD A. JOHNSON March 30, 1999 - -------------------------------------------- Edward A. Johnson, Chief Executive Officer and Director (Principal Financial and Accounting Officer) /s/ MULUMEBET G. MICHAEL March 30, 1999 - -------------------------------------------- Mulumebet G. Michael, Director, President and Chief Operating Officer /s/ MICHAEL S. CALLISON March 30, 1999 - -------------------------------------------- Michael S. Callison, Director /s/ GARY L. DREHER March 30, 1999 - -------------------------------------------- Gary L. Dreher, Director /s/ JON E. JENETT March 30, 1999 - -------------------------------------------- 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, 1998 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $ 560,198 $ 334,564 $ 0 $(894,762)(1) $ 0 YEAR ENDED DECEMBER 31, 1997 Reserves and allowances from asset accounts: Allowance for uncollectible accounts $ 0 $ 602,643 $ 0 $ (42,445)(1) $ 560,198 YEAR ENDED DECEMBER 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $ 0 $ 0 $ 0 $ 0 $ 0
(1) Uncollectable accounts written off, net of recoveries. 33 36 Financial Statements OptimumCare Corporation YEARS ENDED DECEMBER 31, 1998 AND 1997 WITH REPORT OF INDEPENDENT AUDITORS 37 OptimumCare Corporation Financial Statements Years ended December 31, 1998 and 1997 CONTENTS Report of Independent Auditors...............................................1 Financial Statements Consolidated Balance Sheets..................................................2 Consolidated Statements of Income............................................3 Consolidated Statements of Stockholders' Equity..............................4 Consolidated Statements of Cash Flows........................................5 Notes to Consolidated Financial Statements...................................6 F-1 38 Report of Independent Auditors The Stockholders and Board of Directors OptimumCare Corporation We have audited the accompanying consolidated balance sheets of OptimumCare Corporation and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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 and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, 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. /s/ ERNST & YOUNG LLP Orange County, California March 5, 1999 F-2 39 OptimumCare Corporation Consolidated Balance Sheets
DECEMBER 31 ---------------------------- 1998 1997 ----------- ----------- ASSETS Current assets: Cash $ 188,636 $ 945,404 Accounts receivable, net of allowance of $0 in 1998 and $560,198 in 1997 2,293,583 2,186,906 Note receivable from officer 78,000 -- Prepaid expenses 71,537 81,316 Deferred tax asset 20,288 -- ----------- ----------- Total current assets 2,652,044 3,213,626 Note receivable from officer 314,070 274,000 Furniture and equipment, less accumulated depreciation of $131,062 in 1998 and $90,473 in 1997 59,527 86,685 Deferred tax asset 75,817 334,000 Other assets 53,286 44,930 ----------- ----------- Total assets $ 3,154,744 $ 3,953,241 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 244,525 $ 270,178 Accrued vacation 50,720 65,639 Accrued expenses 134,130 143,957 Line of credit -- 200,000 ----------- ----------- Total current liabilities 429,375 679,774 Commitments Stockholders' equity: Common stock, $.001 par value: Authorized shares - 20,000,000 Issued and outstanding shares - 5,919,897 in 1998 and 6,902,611 in 1997 5,920 6,903 Paid-in-capital 2,431,761 3,356,009 Retained earnings (deficit) 287,688 (89,445) ----------- ----------- Total stockholders' equity 2,725,369 3,273,467 ----------- ----------- Total liabilities and stockholders' equity $ 3,154,744 $ 3,953,241 =========== ===========
See accompanying notes. F-3 40 OptimumCare Corporation Consolidated Statements of Income
YEAR ENDED DECEMBER 31 --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net revenues $11,409,690 $12,089,398 $10,676,237 Interest income 24,736 7,685 5,316 ----------- ----------- ----------- 11,434,426 12,097,083 10,681,553 Operating expenses: Costs of services provided 8,977,538 8,894,987 8,313,317 Selling, general and administrative 1,505,169 1,724,942 1,343,961 Provision for uncollectible accounts 334,564 602,643 -- Goodwill impairment -- 135,255 -- Interest 2,401 31,906 26,544 ----------- ----------- ----------- 10,819,672 11,389,733 9,683,822 ----------- ----------- ----------- Income before income taxes 614,754 707,350 997,731 Income taxes 237,621 253,000 121,015 ---------- ----------- ----------- Net income $ 377,133 $ 454,350 $ 876,716 =========== =========== =========== Basic earnings per share $ 0.06 $ .07 $ .14 =========== =========== =========== Diluted earnings per share $ 0.06 $ .06 $ .13 =========== =========== ===========
See accompanying notes. F-4 41 OptimumCare Corporation Consolidated Statements of Stockholders' Equity Years ended December 31, 1996, 1997 and 1998
COMMON STOCK -------------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- ----------- ----------- ----------- ----------- 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 Optimum CareSource 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 Exercise of stock options 25,000 25 9,350 -- 9,375 Common stock issued for consulting fees 91,393 92 74,252 -- 74,344 Net income -- -- -- 454,350 454,350 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1997 6,902,611 6,903 3,356,009 (89,445) 3,273,467 Exercise of stock options 25,000 25 7,475 -- 7,500 Purchase and retirement of treasury stock (1,007,714) (1,008) (931,723) -- (932,731) Net income -- -- -- 377,133 377,133 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1998 5,919,897 $ 5,920 $ 2,431,761 $ 287,688 $ 2,725,369 =========== =========== =========== =========== ===========
See accompanying notes. F-5 42 OptimumCare Corporation Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 ------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- OPERATING ACTIVITIES Net income $ 377,133 $ 454,350 $ 876,716 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 40,589 38,338 17,753 Amortization -- 40,777 27,254 Provision for uncollectible accounts 334,564 602,643 -- Common stock issued as consulting fees -- 74,344 -- Impairment of goodwill -- 135,255 -- Deferred taxes 237,895 (334,000) -- Changes in operating assets and liabilities: Increase in accounts receivable (441,241) (400,530) (852,326) Decrease (increase) in prepaid expenses 9,779 (34,071) 7,390 (Increase) decrease in other assets (8,356) 12,846 (27,207) (Decrease) increase in accounts payable (25,653) 42,889 34,546 (Decrease) increase in accrued expenses (24,746) (194,282) 183,020 ----------- ----------- ----------- Net cash provided by operating activities 499,964 438,559 267,146 INVESTING ACTIVITIES Intangible asset from business acquisition -- -- (202,878) Purchases of equipment (13,431) (51,527) (65,632) Deferred acquisition costs -- -- 138,753 Note receivable from officer (118,070) (119,000) -- ----------- ----------- ----------- Net cash used in investing activities (131,501) (170,527) (129,757) FINANCING ACTIVITIES Note payable to bank (200,000) (445,812) 479,812 Purchase of treasury stock (932,731) -- -- Exercise of stock options 7,500 9,375 325,676 ----------- ----------- ----------- Net cash (used in) provided by financing (1,125,231) (436,437) 805,488 activities ----------- ----------- ----------- Net (decrease) increase in cash (756,768) (168,405) 942,877 Cash at beginning of year 945,404 1,113,809 170,932 ----------- ----------- ----------- Cash at end of year $ 188,636 $ 945,404 $ 1,113,809 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 2,401 $ 32,912 $ 25,538 Income taxes paid $ 11,366 $ 629,000 $ 95,133
See Accompanying Notes. F-6 43 OptimumCare Corporation Notes to Consolidated Financial Statements December 31, 1998 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. Hospitals are primarily reimbursed by Medicare and Medicaid for the majority of these programs, which in turn pay the Company a contracted management fee. The Company's programs are currently being marketed in the United States, principally California, to independent acute general hospitals and other health care facilities. The accompanying financial statements include the accounts of the Company and its majority owned subsidiary, Optimum CareSource, LLC (discussed below). 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 Optimum CareSource, 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 was used to record the transaction. No tangible assets of the LLC were acquired and as such, the purchase price was allocated to intangibles to be amortized over five years. F-7 44 OptimumCare Corporation Notes to Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BUSINESS ACQUISITION (CONTINUED) During 1997, based on recurring losses at the LLC and a lack of substantive new contracts, management determined that this goodwill was impaired and based on its estimate of discounted cash flows the Company wrote off the remaining balance of $135,000 at December 31, 1997. The impairment loss is recorded as a separate line item in operating expenses on the accompanying statements of operations. The Company did not proceed with a proposed business acquisition with Drs. Giem, Guerra and Meyers and expensed $96,000 of direct costs as selling, general and administrative expenses during 1996. FURNITURE AND EQUIPMENT Furniture and equipment is stated at cost. Depreciation is computed on the straight-line method based upon the estimated useful lives of the related assets, which range from three to five years. 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. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform with Statement 128 requirements. The calculation of earnings per share for all periods presented also reflects the effect of a stock dividend issued in 1996 (NOTE 6). F-8 45 OptimumCare Corporation Notes to Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist principally of cash, accounts and note receivable, accounts payable, and borrowings. The Company believes all of the financial instruments' recorded values approximate current values. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, REPORTING COMPREHENSIVE INCOME, which establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. For the years ended December 31, 1998, 1997, and 1996, the Company did not have any components of comprehensive income as defined in Statement No. 130. In 1997, the Financial Accounting Standards Board issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, effective for fiscal years beginning after December 15, 1997. Statement No. 131 supercedes Statement No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. Statement No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement No. 131 did not affect the consolidated results of operations or financial position of the Company. The Company operates in one industry segment. F-9 46 OptimumCare Corporation Notes to Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROFESSIONAL LIABILITY INSURANCE Effective October 7, 1997, OptimumCare maintains an occurrence based professional liability insurance coverage of up to $500,000 per occurrence, $5,000,000 annual aggregate. RISKS AND UNCERTAINTIES The Company contracts with hospitals which are primarily reimbursed by Medicare and Medicaid for the majority of the company's programs. Laws and regulations governing Medicare and Medicaid reimbursement programs are complex and subject to interpretation. The Company is indirectly affected by such laws and regulations governing Medicare and Medicaid programs. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrong doing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation. RECLASSIFICATIONS Certain amounts for prior periods have been reclassified to conform with the current year presentation. 2. NOTE RECEIVABLE FROM OFFICER During 1998, the Company converted a series of short-term advances and a $274,000 note dated December 29, 1997 into a promissory note from an officer totaling $392,000. The note accrues interest at the current prime rate and provides for a bi-monthly payment plan. During 1996 the note accrued interest at the rate of 4.03%. 3. LINE OF CREDIT The Company has a line of credit with a bank, which allows the Company to borrow up to 75% of certain qualified receivables with a maximum indebtedness of $1,500,000. The interest rate is based on the Wall Street Journal prime plus 1.25%. The weighted average interest rate was 9.60% and 9.94% in the years ended December 31, 1998 and 1997, respectively. The line of credit matures on May 1, 1999 and is collateralized by substantially all of the Company's assets. At December 31, 1998, $1,325,000 was available for future draws under the line of credit agreement, and no amounts were outstanding. F-10 47 OptimumCare Corporation Notes to Financial Statements (continued) 4. EMPLOYEE BENEFIT PLAN Effective January 1, 1997, the Company began to provide a 401(k) Plan for all employees having completed one year of service. Under the 401(k) Plan, eligible employees voluntarily contribute to the Plan up to 15% of their salary through payroll deductions. OptimumCare matches 50% of the first 4% of employee contributions to the Plan through payroll deductions. Expenses associated with employer contributions were $54,181, $40,190, and $0 for 1998, 1997 and 1996, respectively. 5. LEASE COMMITMENT The Company leases four office facilities under lease agreements that expire June 30, 1999, October 14, 1999, October 30, 1999 and November 30, 2001, respectively. The Company also leased space under five separate lease agreements for the operation of five of its outpatient partial hospitalization psychiatric program sites, of which one agreement is on a month-to-month basis and the remaining agreements expire, June 30, 2000, September 30, 2000, September 30, 2000 and August 14, 2002, respectively. Aggregate future minimum lease payments under remaining noncancelable leases with terms in excess of one year are as follows: 1999 262,376 2000 178,464 2001 83,016 2002 33,840 ------- 557,696 ======= Subleases with one of the Company's host hospitals exist for $121,319 of aggregate future minimum lease payments above. Sublease rental income was $87,693, $157,844 and $160,596 for the years ended December 31, 1998, 1997 and 1996, respectively. Rent expense was $354,520, $307,192 and $244,185 for the years ended December 31, 1998, 1997 and 1996, 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. F-11 48 OptimumCare Corporation Notes to 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 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. 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 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). 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. F-12 49 OptimumCare Corporation Notes to Financial Statements (continued) 6. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLAN (CONTINUED) 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. In October 1997, the Company granted non-qualified options to purchase 48,000 shares of its common stock at prices ranging from $1.21 to $1.81 per share which vest over six months. No options have been exercised under these grants. On February 3, 1998, the Company granted to certain officers, directors, employees and consultants, non-qualified options to purchase 350,000 shares of its common stock at $1.00 per share. All options are vested upon grant. A summary of stock option activity under the 1987 and 1994 Plans during 1996, 1997 and 1998 is as follows:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE VARIOUS EXERCISE 1987 EXERCISE 1994 EXERCISE Shares under option NON PLAN PRICE PLAN PRICE PLAN PRICE -------- -------- --------- -------- ------- -------- Outstanding at December 31, 1995 -- $ -- 317,500 $ .32 475,000 $.78 Granted 708,000 1.25 100,000 1.08 -- -- Exercised -- -- (267,500) .34 (250,000) .66 Canceled -- -- -- -- -- -- -------- ------ -------- ------ -------- ---- Outstanding at December 31, 1996 708,000 $ 1.25 150,000 $ .83 225,000 $.68 Granted 48,000 1.51 -- -- -- -- Exercised -- -- (25,000) .375 -- -- Canceled (200,000) (1.50) -- -- (25,000) .91 -------- ------ -------- ------ -------- ---- Outstanding at December 31, 1997 556,000 $ 1.18 125,000 $ .92 200,000 $.74 Granted 350,000 1.00 -- -- -- -- Exercised -- -- (25,000) .30 -- -- Canceled -- -- -- -- -- -- -------- ------ -------- ------ -------- ---- Outstanding at December 31, 1998 906,000 $ 1.11 100,000 $1.08 200,000 $.74 ======== ====== ======== ====== ======== ====
F-13 50 OptimumCare Corporation Notes to Financial Statements (continued) 6. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------- ------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICE AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE - ----------------- ----------- ----------- --------- ----------- -------- $ .6375 125,000 .5 years $.6375 125,000 $.6375 .91 50,000 1.5 years .91 50,000 .91 .93 25,000 1.5 years .93 25,000 .93 . 901 to 1.3133 608,000 2.5 years 1.14 528,200 1.15 1.21 to 1.81 48,000 3.5 years 1.51 48,000 1.51 1.00 350,000 4.5 years 1.00 350,000 1.00 - ----------------- --------- --------- ------- --------- ------- $.6375 to $1.3133 1,206,000 2.5 years $ 1.05 1,126,200 $ 1.05 ================= ========= ========= ======= ========= =======
A total of 1,206,000 shares of common stock are reserved for future issuance upon the exercise of stock options at December 31, 1998. A total of 52,500 options were available for future grant at December 31, 1998 under existing stock option plans. Pro forma information regarding net income and earnings per share is required by Statement No. 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 1996, 1997 and 1998, respectively: risk-free interest rates of 6.25%, 6.625% and 6.31%; a dividend yield of 0%; a volatility factor of the expected market price of the Company's common stock of .38, .521, .529 for 1998 1997 and 1996, respectively. F-14 51 OptimumCare Corporation Notes to 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:
YEAR ENDED DECEMBER 31 ------------------------------------ 1998 1997 1996 -------- --------- -------- Net income As reported $377,133 $454,350 $876,716 Pro forma $324,696 $425,306 $538,255 Earnings per share Basic as reported $ .06 $ .07 $ .14 Diluted as reported $ .06 $ .06 $ .13 Basic pro forma $ .05 $ .06 $ .09 Diluted pro forma $ .05 $ .06 $ .08 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 $ -- $ 1.21 $ 1.14 Options whose exercise price is more than the market price of the stock on the grant date $ 1 $ 1.81 $ -- 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 $ -- $ .67 $ .75 Options whose exercise price is more than the market price of the stock on the grant date $ .46 $ .52 $ --
F-15 52 OptimumCare Corporation Notes to Financial Statements (continued) 6. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (CONTINUED) Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect is not fully reflected until 1998. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
YEAR ENDED DECEMBER 31 -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Numerator: Net income $ 377,133 $ 454,350 $ 876,716 Denominator: Denominator for basic earnings per share--weighted-average shares outstanding 6,567,280 6,870,049 6,237,751 Dilutive employee stock options 132,368 324,823 439,405 ---------- ---------- ---------- Denominator for diluted earnings per share 6,699,648 7,194,872 6,677,156 ========== ========== ========== Basic earnings per share $ .06 $ .07 $ .14 ========== ========== ========== Diluted earnings per share $ .06 $ .06 $ .13 ========== ========== ==========
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 table reflects the stock dividend for all periods presented. F-16 53 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:
1998 1997 1996 --------- --------- --------- Statutory federal provision for income taxes $ 209,000 $ 240,499 $ 339,229 Increase (decrease) in taxes resulting from: Change in valuation allowance -- (71,000) -- Current use of net operating loss carryforwards -- -- (339,229) Federal alternative minimum tax -- -- 14,000 Permanent differences and other (5,379) 25,596 -- State tax, net of federal benefit 34,000 57,905 107,015 --------- --------- --------- $ 237,621 $ 253,000 $ 121,015 ========= ========= =========
Significant components of the provision for income taxes are as follows:
1998 1997 1996 --------- --------- --------- Current: Federal $ (1,124) $ 449,000 $ 14,000 State 850 138,000 107,015 --------- --------- --------- Total current (274) 587,000 121,015 --------- --------- --------- Deferred: Federal 185,239 (284,000) -- State 52,656 (50,000) -- --------- --------- --------- Total deferred 237,895 (334,000) -- --------- $ 237,621 $ 253,000 $ 121,015 ========= ========= =========
F-17 54 OptimumCare Corporation Notes to 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, 1998, 1997 and 1996 consist of the following:
1998 1997 1996 -------- -------- -------- Net operating loss carryforwards $ -- $ -- $ 23,000 Alternative minimum tax credit carryforwards -- -- 18,000 Reserve for bad debts -- 224,000 -- Reserves and accruals not currently deductible for tax purposes 20,288 53,000 23,000 Depreciation and amortization not currently deductible for tax purposes 75,817 57,000 7,000 -------- -------- -------- Total deferred tax assets $ 96,105 334,000 71,000 Less valuation allowance -- -- (71,000) -------- -------- -------- Net deferred tax asset $ 96,105 $334,000 $ -- ======== ======== ========
8. MAJOR CUSTOMERS The Company is dependent upon a small number of hospitals and 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. F-18 55 OptimumCare Corporation Notes to Financial Statements (continued) 8. MAJOR CUSTOMERS (CUSTOMERS) The following table summarizes the amount of revenue for each customer representing greater than 10% of total revenues for the:
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 ---------------------- ---------------------- AMOUNT PERCENT AMOUNT PERCENT ----------- ------- ----------- -------- Hospital 1 $ 2,563,088 22.5% $ 3,182,156 26.3% Hospital 2 1,381,666 12.1% 1,433,494 11.9% Hospital 3 4,838,421 42.3% 4,753,094 39.3% Hospital 4 1,396,317 12.3% 1,160,444 9.6% Other Hospitals and Community Mental Health Centers 1,197,713 10.5% 1,560,210 12.9% ----------- ----- ----------- ----- $11,377,205 100.0% $12,089,398 100.0% =========== ===== =========== =====
In addition, these hospitals accounted for approximately $2,138,861 and $2,006,817 of accounts receivable at December 31, 1998 and 1997, respectively. Customer payments of accounts receivable are reasonably prompt and collateral is not required. F-19 56 Exhibit Index
Exhibit Number Description ------- ----------- 10.105 Agreement between Friendship Community Mental Health Center and the Company dated June 25, 1997 which supersedes the Agreement dated April 25, 1996. 10.106 Lease Agreement between the Company and Laguna Niguel Office Center dated May 14, 1998 which supersedes lease dated June 23, 1988. 10.107 Change in terms Agreement between the Company and Southern California Bank dated May 27, 1998. 10.108 Lease Agreement between Whittier Narrows Business Park and the Company dated July 28, 1998. 10.109 Lease Agreement between the Company and P.S. Business Parks, L.P. dated August 14, 1998. 10.110 Inpatient and Outpatient Psychiatric Unit Management Services Agreement between the Company and Catholic Healthcare West Southern California dated September 15, 1998 which supersedes Agreement dated June 1, 1997. 10.111 Agreement between Citrus Valley Medical Center and the Company dated September 18, 1998. 10.112 Sublease Agreement between Citrus Valley Medical Center and the Company dated September 23, 1998. 10.113 Lease Agreement between the Company and Coldwell Banker dated November 1, 1998. 10.114 Amendment to the Agreement dated June 25, 1997 between Friendship Community Mental Health Center and the Company dated November 12, 1998. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule
EX-10.105 2 AGREEMENT BETWEEN FRIENDSHIP COMM. AND CO. 1 EXHIBIT 10.105 AGREEMENT THIS AGREEMENT is entered into as of this 25th day of June, 1997, by and between FRIENDSHIP COMMUNITY MENTAL HEALTH CENTER (CMHC), and OptimumCare(R) Corporation (Manager), a Delaware Corporation. RECITALS A. CMHC operates a Community Mental Health Center in Phoenix, Arizona, including a Partial Hospitalization Program (the "Out-Patient Program") for the treatment of psychiatric disorders, and B. Manager is in the business of providing management services for the treatment of patients with psychiatric disorders; and C. CMHC desires to retain Manager, and Manager desires to be retained, to provide the services described herein; and D. CMHC will provide (subject to the provisions of this Agreement) appropriate program and office space for the use of this Out-Patient Program during the term of this Agreement. 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. (b) "Employee Benefits" shall include, by way of illustration and not 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, -1- 2 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 the Out-Patient Program. An outpatient 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 twenty-one (21) months commencing (effective) on July 1, 1997 and terminating April 30, 1999. (b) Termination provisions are in Section (10) of this Agreement. 3. COVENANTS OF CMHC CMHC will: (a) Furnish necessary and identified program space as per Exhibit A and rent said space to the Manager for the duration of this agreement as described in Addendum 1. CMHC will cooperate with Manager in providing appropriate program space for a potential capacity of at least twenty-five (25) chairs. (b) Provide support activities including: i) maintenance of or installation of carpet and decorating of patient treatment areas as needed; (ii) furniture, (iii) clerical support and (iv) all telephone expenses at CMHC. (For illustration see Addendum 3) (c) Bill and collect all Out-Patient Program charges due for Out-Patient Program services, and (i) provide record keeping as customary in the ordinary course of CMHC's business, and (II) furnish OptimumCare with all Information necessary to bill Management fee. (d) Staff the Out-Patient Program with qualified Administrator, Assistant Administrator and Unit Secretary and be solely liable to those personnel who are CMHC employees for their wages, compensation and employee benefits. CMHC personnel shall comply with the Out-Patient Program policies and procedures as mutually agreed upon in writing by CMHC and Manager. CMHC shall not, without Manager's prior written consent (which shall not be unreasonably withheld), deviate, change or otherwise decrease the agreed staffing. -2- 3 (e) Maintain license from the Arizona Department of Health Services and pay all related fees associated with this license. (f) Provide Manager's employees and contracted personnel with copies of all relevant CMHC Policies and Procedures, as amended from time to time. (g) 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. (h) 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 certification 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, deductibles, 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: (For illustration see Exhibits and Addendums). (a) Rent facility as described on Exhibit A from CMHC for the duration of this agreement. (b) Pay for all supplies and materials necessary for operating CMHC's partial hospitalization program. (c) Pay for the dietary and transportation services for all patients. (d) Provide for Out-Patient Program management and direction. (e) Provide for Out-Patient Program marketing including community awareness and liaison concerning the care and treatment of the Out-Patient Program's patients. (f) Provide housekeeping services for patients and manager's offices at CMHC. -3- 4 (g) Provide the following: (i) A full-time Partial Hospitalization Program Director; (ii) Social Services; (iii) Psychological Services; (iv) Therapy/Activities and other services as appropriate. (v)A registered nurse services (vi) and professional counseling staff as needed to provide for the professional counseling of Out-Patient Program patients and 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. (h) Provide to CMHC an accounting of Manager's expenses in operating program. (i) Provide Out-Patient Program orientation and training for all appropriate personnel. (j) 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. (k) 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. (l) 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, deductible, or co-insurance or aggregate limits. Any 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" -4- 5 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. (m) Until the expiration of four (4) years after the furnishing of any services to be provided under this Agreement make 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. (n) 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 and any applicable standards of care. (o) 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. (p) Provide monthly written reports to CMHC regarding all aspects of the operation of the Out-Patient Program. (q) Commit no act or omission which adversely affects the CMHC license. (r) Admit patients to the Out-Patient Program (including but not limited to Medicare and Medicaid patients) only if the admission is ordered by a physician on the Out-patient Program staff with admitting privileges. (s) Provide appropriate utilization review and quality assessment services for all outpatient program patients. Utilization and review extends to filing and pursuing clinical appeals with the fiscal intermediary, Blue Cross & Blue Shield of Phoenix, Arizona. 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 Arizona with the power and authority to carry on the business in which it is engaged and to perform its -5- 6 obligations under this Agreement subject to maintaining the license described in subpart (e) of the 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. 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 judgement, order, decree or regulation of any court or other governmental administrative agency) which would materially adversely affect the performance of Manager's obligations hereunder. -6- 7 7. MANAGEMENT FEE Group Therapy $45.00 per unit Individual Therapy $90.00 per unit Nursing Assessments $150.00 per unit 8. MEALS AND TRANSPORTATION A) CMHC and OptimumCare agree that the management fee does not include Meals and Transportation. However, Meals and Transportation may be provided by OptimumCare as a cost of doing business where necessary to comply with State Certification Requirements or out of OptimumCare's profits or as an increase of its loss and not as a component of OptimumCare's management fee. B) OptimumCare agrees to indemnify CMHC for Medicare reimbursement of OptimumCare's fees as a result of OptimumCare providing or paying for meals and transportation costs for patients of the program. The indemnification shall be applied by CMHC to the disallowed portion of OptimumCare's fees. In no event shall the indemnity payment be deemed to be reduction in OptimumCare's fees to the extent that such fees are allowable by Medicare. C) Any indemnity payments made by OptimumCare are contingent and shall be returned to OptimumCare to the extent that any disallowance are subsequently reversed. The indemnity payments are also contingent upon CMHC designating OptimumCare or OptimumCare's nominee as CMHC representative in an appeal of disallowance of OptimumCare's fees, and CMHC otherwise cooperating fully in such appeal through furnishing relevant documentation and information, making available one or more witnesses to testify in the appeal, and as otherwise may be reasonably requested by OptimumCare. If CMHC designates OptimumCare or OptimumCare's designee as CMHC's representative in such appeal, OptimumCare may pursue such appeal, and the costs of any such appeal, if pursued by OptimumCare, shall be borne exclusively by OptimumCare. If OptimumCare is successful in such appeal, OptimumCare shall be reimbursed its costs by CMHC to the extent that such costs are reimbursable to CMHC by the intermediary. -7- 8 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. 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 of or in any way retain the services of any employee, former -8- 9 employee, or contracted personnel or former agent of CMHC without CMHC's prior written consent. 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 into 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. (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. Within six months of the date of this agreement, if Manager does not maintain an average daily census of 10 patients over a three (3) consecutive month period. -9- 10 2. In the event that Medicare, Medicaid, a third party payer 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. (d) Manager agrees not to affiliate with other providers of partial hospitalization services within a ten (10) mile radius of CMHC. (e) Prior to Managing another partial hospitalization outpatient program in Maricopa or Pinal County, Manager will give CMHC three (3) months in which to make reasonable progress towards opening a facility in that area, therein providing CMHC first right of refusal and a time frame. Any future agreement for another partial hospitalization outpatient program will be identical to this agreement unless mutually agreed otherwise. (f) Governing Law: The validity of this Agreement and of 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 governed in accordance with the laws of the State of California. (g) 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 of transportation, or inability due to the aforementioned causes to obtain necessary labor, materials, or facilities. (h) 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. (i) 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 waiver unless in writing signed -10- 11 by the party against whom the waiver is sought to be enforced. (j) 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. (k) 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. (l) 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. (m) Notice: All notices hereunder shall be in writing, delivered personally or by U.S. Certified or Registered postal 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. 12. 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 judgement 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) Attorneys' Fees: If any legal action (including arbitration) is necessary to enforce the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs awarded against the other party in addition to any other relief to which that party may be entitled. (c) UCC1: CMHC agrees to allow Manager, at Manager's expense, file a UCC1 payment promise against the CMHC's psychiatric outpatient accounts receivables referred to in this agreement. -11- 12 CMHC's Address: Friendship Community Mental Health Center 3201 North 16th Street #6 Phoenix, AZ 85011-8646 Manager's Address: OptimumCare Corporation 30011 Ivy Glenn Drive, Suite 219 Laguna Niguel, CA 92677-5018 IN WITNESS WHEREOF, this Agreement has been executed at Laguna Niguel, California at Phoenix, Arizona Manager: OPTIMUMCARE CORPORATION CMHC FRIENDSHIP COMMUNITY MENTAL HEALTH CENTER By: By: Steve Nelson ----------------------------- -------------------------------- Edward A. Johnson Steve Nelson President Administrator Date: Date: June 25, 1997 --------------------------- ------------------------------ -12- 13 EXHIBIT A Approximately 3300 Sq. Ft. of office space in commercial building located at 3201 North 16th Street, Phoenix, AZ 85011. Described further as follows: Cheery Lynn Executive Office Building
Approx. Sq. Ft. ------- Suite 6 1,452 Suite 14 & 15 1,920 Suite 11 200
-13- 14 ADDENDUM 1 1. Manager will rent from CMHC the program space described in Exhibit A for the duration of this agreement. Said rent shall be paid monthly from the effective date of this agreement. Payment will be made to the building owner or as requested by CMHC. The figures below will include local and State sales tax additions.
APPROX. MONTHLY RENT SQUARE FT. ------------ ---------- Suite 6 $1,089.00/month 1,452 Suite 14 & 15 $1,477.50/month 1,920 Suite 11 $ 200.00/month 200
-14- 15 ADDENDUM 2 ILLUSTRATION 1. CMHC pays for the following: A. Telephone B. Office Supplies C. Postage D. Clerical Support E. Furniture F. Copy Machine/Fax G. Two Computers H. Billing Services I. Stationary J. Admin. Business Cards K. Accounting Fees L. Annual Audit M. Preparation of Cost Reports N. General Liability Insurance O. Educational Costs for Admin. Employees 2. Manager pays for following expenses as Manager deems necessary or appropriate for program management. A. Yellow Page Advertising B. Therapy Supplies C. Housekeeping Services D. Clinical Business Cards E. Printing of Brochures F. Beverages - Soft Drinks and Coffee G. Meals for Clients H. Nursing Supplies I. Transcription Services J. Toilet Paper, Paper Towels and Kleenexes K. Salaries and Benefits of all Clinical Staff L. All costs associated with transporting patients -15- 16 ADDENDUM 3 CMHC will not pay Manager for initial clinical denials until such denials (if any) have been paid for by intermediary. CMHC will receive credit for retroactive clinical denials (if any) which will be adjusted off credit once such denials have been paid for by intermediary. A. EXAMPLE: 1. Claim paid by Medicare 2. CMHC pays management fee 3. Medicare retroactively denies claim 4. CMHC adjusts management fee accordingly during the next month 5. Medicare approves claim 6. Management fee is paid accordingly during the next month EX-10.106 3 LEASE AGREEMENT BETWEEN CO. AND LAGUNA NIGUEL 1 EXHIBIT 10.106 LEASE AMENDMENT That certain OFFICE BUILDING LEASE dated June 23, 1988 and amended on September 27, 1989, September 24, 1990, July 7, 1992, June 5, 1995, April 30, 1996, May 19, 1997 and September 5, 1997 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 shall be extended for a period of one (1) year. New expiration date shall be June 30, 1998. 2) Rental rate shall increase to $1,900.00 per month effective July 1, 1998. 3) Landlord shall clean carpets at Tenant's request, at Landlord's expense. 4) All other terms and conditions of the original lease shall remain the same. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of May 14, 1998. LAGUNA NIGUEL OFFICE CENTER OPTIMUMCARE CORPORATION a California Limited Partnership a Delaware Corporation BY: CARL J. GREENWOOD BY: EDWARD JOHNSON - ---------------------------------- ------------------------------------- Carl J. Greenwood, General Partner Edward Johnson, President (Landlord) (Tenant) EX-10.107 4 CHANGE IN TERMS AGREEMENT BETWEEN CO. & SO. CAL. 1 EXHIBIT 10.107 SOUTHERN CALIFORNIA BANK MEMBER FDIC
CHANGE IN TERMS AGREEMENT ================================================================================================================================== Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $1,500,000.00 05-01-1999 4000928 51 5005 382 - ---------------------------------------------------------------------------------------------------------------------------------- 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 (TIN: 33-0218003) Lender: SOUTHERN CALIFORNIA BANK 30011 IVY GLENN DRIVE #219 ORANGE COUNTY CORPORATE BANKING LAGUNA NIGUEL, CA 92677 P.O. BOX 588 LA MIRADA, CA 90637
Principal Amount: $1,500,000.00 Date of Agreement: May 27, 1998 DESCRIPTION OF EXISTING INDEBTEDNESS. - - PROMISSORY NOTE DATED APRIL 14, 1995 IN THE ORIGINAL AMOUNT OF $500,000.00. - - Change in Terms Agreement dated May 6, 1996 extending the maturity date to July 1, 1996. - - Change in Terms Agreement dated August 1, 1996 increasing the principal amount to $750,000.00 and extending the maturity date to March 1, 1997. - - Change in Terms Agreement dated January 28, 1997, extending the maturity date to June 1, 1997. - - Change in Terms Agreement dated May 15, 1997, increasing the principal amount to $1,500,000.00 and extending the maturity date to May 1, 1998. - - And Change in Terms Agreement dated May 1, 1998 extending the maturity date to June 15, 1998. DESCRIPTION OF COLLATERAL. All Inventory, Chattel Paper, Accounts, Equipment, General Intangibles and Fixtures. DESCRIPTION OF CHANGE IN TERMS. MATURITY DATE SHALL BE EXTENDED FROM JUNE 15, 1998 TO MAY 1, 1999. PROMISE TO PAY. OPTIMUMCARE CORPORATION ("Borrower") promises to pay to SOUTHERN CALIFORNIA BANK ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million Five Hundred Thousand & 00/100 Dollars ($1,500,000.00) 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 May 1, 1999. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning July 1, 1998, 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 of 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 WALL STREET JOURNAL PRIME RATE (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may be 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 8.500% per annum. The Interest rate to be applied to the unpaid principal balance of this Agreement will be at a rate of 1.250 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. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Agreement, Borrower understands that Lender is entitled to a minimum interest charge of $250.00. 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 $5.00, 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) A 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. 2 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, increase the variable interest rate on this Agreement to 6.250 percentage points over the Index. 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. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of California. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $16.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SET OFF. Borrower grants to Lender a contractual 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 SET OFF 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 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; or (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. ARBITRATION. Lender and Borrower agree that all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Agreement or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association, upon request of either party. No act to take or dispose of any collateral securing this Agreement shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any collateral securing this Agreement, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral securing this Agreement, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Lender and Borrower agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. 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: EDWARD A JOHNSON, PRESIDENT 3 SOUTHERN CALIFORNIA BANK MEMBER FDIC
DISBURSEMENT REQUEST AND AUTHORIZATION ================================================================================================================================== Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $1,500,000.00 05-01-1999 4000928 51 5005 382 - ---------------------------------------------------------------------------------------------------------------------------------- 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 (TIN: 33-0218003) Lender: SOUTHERN CALIFORNIA BANK 30011 IVY GLENN DRIVE #219 ORANGE COUNTY CORPORATE BANKING LAGUNA NIGUEL, CA 92677 P.O. BOX 588 LA MIRADA, CA 90637
LOAN TYPE. This is a Variable Rate (1.250% over WALL STREET JOURNAL PRIME RATE, making an initial rate of 9.750%), Revolving Line of Credit Loan to a Corporation for $1,500,000.00 due on May 1, 1999. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for: Personal, Family or Household Purposes or Personal Investment X Business (Including Real Estate Investment). SPECIFIC PURPOSE. The specific purpose of this loan is: Short term working capital needs. 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 $1,500,000.00 as follows: Undisbursed Funds: $1,500,000.00 Amount paid on Borrower's account: $ 0.00 ------------- Note Principal: $1,500,000.00 CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges: Prepaid Finance Charges Paid in Cash: $3,750.00 $3,750.00 Loan Fee --------- Total Charges Paid in Cash: $3,750.00 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 MAY 27, 1998. BORROWER: OPTIMUMCARE CORPORATION By: EDWARD A. JOHNSON ----------------------------------- EDWARD A. JOHNSON, PRESIDENT 4 SOUTHERN CALIFORNIA BANK MEMBER FDIC
LOAN AGREEMENT ================================================================================================================================== Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $1,500,000.00 05-01-1999 4000928 51 5005 382 - ---------------------------------------------------------------------------------------------------------------------------------- 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 (TIN: 33-0218003) Lender: SOUTHERN CALIFORNIA BANK 30011 IVY GLENN DRIVE #219 ORANGE COUNTY CORPORATE BANKING LAGUNA NIGUEL, CA 92677 P.O. BOX 588 LA MIRADA, CA 90637
THIS LOAN AGREEMENT between OPTIMUMCARE CORPORATION ("BORROWER") and SOUTHERN CALIFORNIA BANK ("LENDER"), is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans". Borrower understands and agrees that: (a) In granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b)the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgement and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of May 27, 1998, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Loan Agreement from time to time. Account. The word "Account" means a trade account, account receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). Account Debtor. The words "Account Debtor" mean the person or entity obligated upon an Account. Advance. The word "Advance" means a disbursement of Loan funds under this Agreement. Borrower. The word "Borrower" means OPTIMUMCARE CORPORATION. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates". Borrowing Base. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of (a) $1,500,000.00; or (b) 75.000% of the aggregate amount of Eligible Accounts. Business Day. The words "Business Day" mean a day on which commercial banks are open for business in the State of California. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract or otherwise. The word "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower. 5 (b) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (e) Accounts which are subject to dispute, counterclaim, or SET OFF. (f) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (g) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (h) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (i) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States. (j) Accounts which have not been paid in full within 90 DAYS from the invoice date. The entire balance of any Account of any single Account debtor will be ineligible whenever the portion of the Account which has not been paid within 90 DAYS from the invoice date is in excess of 25.000% of the total amount outstanding on the Account. (k) That portion of the Accounts of any single Account Debtor which exceeds 25.000% of all of Borrower's Accounts. (l) Eligible accounts shall exclude amounts due from OptimumCare Source LLC. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT". Expiration Date. The words "Expiration Date" mean the date of termination of Lender's commitment to lend under this Agreement. Grantor. The words "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodations parties in connection with any Indebtedness. Indebtedness. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means SOUTHERN CALIFORNIA BANK, its successors and assigns. Line of Credit. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. Loan. The word "Loan" or Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract or otherwise. 6 SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. Subordinated Debt. The words "Subordinated Debt" means indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e. goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. Working Capital. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows. Conditions Precedent to Each Advance. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (b) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. (c) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (d) All guaranties required by Lender for the Line of Credit shall have been executed by each Guarantor, delivered to Lender and be in full force and effect. (e) Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower's Accounts, books, records, and operations, and Lender shall be satisfied as to their condition. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable. (g) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." Making Loan Advances. Advances under the Line of Credit may be requested only in writing by authorized persons. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. Under no circumstances shall Lender be required to make any Advance in an amount less than $1,000.00. Mandatory Loan Repayments. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. Loan Account. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"), including without limitation Borrower's present and future Accounts and general intangibles. Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender: Perfection of Security Interests. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. Collateral Records. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. The following is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower's Accounts: 30011 Ivy Glenn Drive, Suite 219, Laguna Niguel, Ca. 92677. 7 Collateral Schedules. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender a schedule of Accounts and Eligible Accounts, in form and substance satisfactory to the Lender. Thereafter Borrower shall execute and deliver to Lender such supplemental schedules of Eligible Accounts and such other matters and information relating to Borrower's Accounts as Lender may request. Supplemental schedules shall be delivered according to the following schedule: MONTHLY. Representations and Warranties Concerning Accounts. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (b) all Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (c) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Borrower's incorporation and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except for Permitted Liens, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Hazardous Substances. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement shall have the same meanings as set forth in the "CERCLA", "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant of any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any if the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the properties. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the indebtedness and the termination or expiration of this Agreement and shall not be affected by Lenders' acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. 8 Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, and (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 30011 IVY GLENN DRIVE, SUITE 219, LAGUNA NIGUEL, CA 92677. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Financial Covenants and Ratios. Comply with the following covenants and ratios: Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less than $3,000,000.00. Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than 1.00 to 1.00. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages, and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be canceled or diminished without at least thirty (30) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing Insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often then annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided, however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. 9 Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except U.S. federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (a) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (b) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (c) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. ADDITIONAL TERMS, CONDITIONS, AND COVENANTS. An exhibit, titled "ADDITIONAL TERMS, CONDITIONS, AND COVENANTS," is attached to this Agreement and by this reference is made a part of this Agreement just as if all the provisions, terms and conditions of the Exhibit had been fully set forth in this Agreement. RIGHT OF SET OFF. Borrower grants to Lender a contractual 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 SET OFF all sums owing on the indebtedness against any and all such accounts. 10 EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Should Borrower or any Grantor default 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 or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This incudes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the indebtedness. Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. Insecurity. Lender, in good faith, deems itself insecure. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable 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. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of California. ARBITRATION. Lender and Borrower agree that all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Agreement or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association, upon request of either party. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Lender and Borrower agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. 11 Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees incurred in connection with the preparation, execution, enforcement and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay 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 attorney's fees 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. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile (unless otherwise required by law), and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MAY 27, 1998. BORROWER: OPTIMUMCARE CORPORATION BY: EDWARD A. JOHNSON ----------------------------------- EDWARD A. JOHNSON, PRESIDENT LENDER: SOUTHERN CALIFORNIA BANK BY: ----------------------------------- AUTHORIZED OFFICER 12 ADDITIONAL TERMS, CONDITIONS, AND COVENANTS ============================================================================================== Borrower: OptimumCare Corporation (TIN: 33-0218003) Lender: SOUTHERN CALIFORNIA BANK 30011 Ivy Glenn Dr., Suite 219 ORANGE COUNTY CORPORATE BANKING Laguna Niguel, CA 92677 P.O. BOX 588 LA MIRADA, CA 90637 ==============================================================================================
This ADDITIONAL TERMS, CONDITIONS, AND COVENANTS is attached to and by this reference is made a part of each Business Loan Agreement or Negative Pledge Agreement and Boarding Data, dated May 27, 1998, and executed in connection with a loan or other financial accommodations between SOUTHERN CALIFORNIA BANK and OptimumCare Corporation. AFFIRMATIVE COVENANTS--OTHER: Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will provide the following financial information and statements and such additional information as requested by the Lender from time to time: (a) A Collateral Schedule and Borrowing Base Certificate setting forth the respective amounts of Eligible Accounts as of the last day of each month within 25 days after the end of each month. (b) Accounts Receivable summary aging within 25 days after the end of each month. (c) Promptly upon the Lender's request, such other statements, lists, budgets, forecasts, projections, or reports as to the Borrower and as to each guarantor of the Borrower's obligations to the Lender as the Lender may request. (d) St. Francis Hospital, Mission Community and Humana Hospital shall not be subject to 25% concentration limit. (e) Maximum annual capital expenditures of $50,000.00 in excess of Borrower's annual depreciation and amortization expense. (f) Advances to Officers/Shareholders not to exceed $274,000.00 without prior consent of Lender. (g) In the event Borrower obtains additional equity financing through a public or private offering or venture capital financing and such funding exceeds, in one or more transactions, an aggregate of at least $2,000,000.00, Bank may request that the line be repaid in full unless Borrower shall satisfy Bank that the disposition of such funding will not adversely impact the repayment of the line. (h) Annual 10-K report and CPA Audited fiscal year end financial statement shall be submitted within 120 days of fiscal year end. (l) Quarterly 10-Q and internally prepared financial statements shall be submitted within 45 days of period end. ADDITIONAL COVENANTS AND RATIOS. Borrower agrees to comply with the following covenants and ratios: (1) Maintain a Debt Coverage Ratio of at least 1.5x ADDITIONAL DEFINITIONS. Debt Coverage Ratio is defined as (a) The sum of (i) Net Income, (ii) Depreciation and (iii) Interest Expense to (b) the sum of (i) the current portion of Long Term Debt, and (ii) Interest Expense (Calculated on an annualized basis) THIS ADDITIONAL TERMS, CONDITIONS, AND COVENANTS IS EXECUTED ON MAY 27, 1998. BORROWER: OptimumCare Corporation By: ___________________________________ Edward A. Johnson, President LENDER: SOUTHERN CALIFORNIA BANK By: ___________________________________ Authorized Officer EX-10.108 5 LEASE AGREEMENT BETWEEN WHITTIER NARROWS & CO. 1 EXHIBIT 10.108 OFFICE BUILDING LEASE
PAGE Paragraph 1 LEASE OF PREMISES...................................... 1 Paragraph 2 DEFINITIONS............................................ 1 Paragraph 3 EXHIBITS AND ADDENDA................................... 2 Paragraph 4 DELIVERY OF POSSESSION................................. 2 Paragraph 5 RENT................................................... 2 Paragraph 6 INTEREST AND LATE CHARGES.............................. 5 Paragraph 7 SECURITY DEPOSIT....................................... 5 Paragraph 8 TENANT'S USE OF THE PREMISES........................... 5 Paragraph 9 SERVICES AND UTILITIES................................. 5 Paragraph 10 CONDITION OF THE PREMISES.............................. 6 Paragraph 11 CONSTRUCTION, REPAIRS AND MAINTENANCE.................. 6 Paragraph 12 ALTERATIONS AND ADDITIONS.............................. 7 Paragraph 13 LEASEHOLD IMPROVEMENTS;TENANT'S PROPERTY............... 8 Paragraph 14 RULES AND REGULATIONS.................................. 8 Paragraph 15 CERTAIN RIGHTS RESERVED BY LANDLORD.................... 8 Paragraph 16 ASSIGNMENT AND SUBLETTING.............................. 8 Paragraph 17 HOLDING OVER........................................... 9 Paragraph 18 SURRENDER OF PREMISES.................................. 9 Paragraph 19 DESTRUCTION OR DAMAGE..................................10 Paragraph 20 EMINENT DOMAIN.........................................10 Paragraph 21 INDEMNIFICATION........................................11 Paragraph 22 TENANT'S INSURANCE.....................................11 Paragraph 23 WAIVER OF SUBROGATION..................................12 Paragraph 24 SUBORDINATION AND ATTORNMENT...........................12 Paragraph 25 TENANT ESTOPPEL CERTIFICATES...........................12 Paragraph 26 TRANSFER OF LANDLORD'S INTEREST........................12 Paragraph 27 DEFAULT................................................12 Paragraph 28 BROKERAGE FEES.........................................14 Paragraph 29 NOTICES................................................14 Paragraph 30 GOVERNMENT ENERGY OR UTILITY CONTROLS..................14 Paragraph 31 RELOCATION OF PREMISES.................................14
2 Paragraph 32 QUIET ENJOYMENT........................................15 Paragraph 33 OBSERVANCE OF LAW......................................15 Paragraph 34 FORCE MAJEURE..........................................15 Paragraph 35 CURING TENANT'S DEFAULTS...............................15 Paragraph 36 SIGN CONTROL...........................................15 Paragraph 37 MISCELLANEOUS..........................................15
3 OFFICE BUILDING LEASE This Lease between WHITTIER NARROWS BUSINESS PARK ("Landlord"), and OPTIMUM CARE CORPORATION, a Delaware Corporation, ("Tenant"), is dated, for reference purposes only, July 28, 1998. 1. LEASE OF PREMISES. In consideration of the Rent (as defined at Section 5.4) and the provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises shown by diagonal lines on the floor plan attached hereto as Exhibit "A", and further described at Section 21. The Premises are located within the Building and Project described in Section 2m. Tenant shall have the non-exclusive right (unless otherwise provided herein) in common with Landlord, other tenants, subtenants and invitees, to use the Common Area (as defined at Section 2e.). 2. DEFINITIONS. As used in this Lease, the following terms shall have the following meanings: a. Base Rent: $ 61,142.63 b. Base Year: 1998 c. Broker(s) and Sales Agents: None d. Commencement Date: See Addendum Paragraph 40 e. Common Areas: the building lobbies, common corridors and hallways, restrooms, garage and parking areas, stairways, elevators and other generally understood public or common areas. Landlord shall have the right to regulate or restrict the use of the Common Areas. f. Expense Stop: (fill in if applicable): $ N/A. g. Expiration Date: September 30, 2000. h. Index (Section 5.2): United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Consumers, Greater Los Angeles Area Average, Subgroup "All Items" (1982-1984=100). i. Landlord's Mailing Address: Whittier Narrows Business Park c/o Liberty West Inc. 16027 Ventura Blvd., Suite 550 Encino, CA 91436 Tenant's Mailing Address: Optimum Care Corporation ATTN: Edward A. Johnson, President 30011 Ivy Glenn Drive Laguna Niguel, CA 92677 j. Monthly Installments of Base Rent: $ 2,397.75 k. Parking: Tenant shall be permitted upon payment of the then prevailing monthly rate (as set by Landlord from time to time) to park 8 cars on a non-exclusive basis in the area(s) designated for the 1170 Durfee Avenue building by Landlord for parking. Tenant shall abide by any and all parking regulations and rules established from time to time by Landlord or Landlord's parking operator. Landlord reserves the right to separately charge Tenant's guests and visitors for parking. ------- INITIAL 1 4 l. Premises: that portion of the Building containing approximately 2,085 square feet of useable area, shown by diagonal lines on Exhibit "A", located on the 1st floor of the Building and known as Suites A and B. m. Project: the building of which the Premises are a part (the "Building") and any other buildings or improvements on the real property (the "Property") located at 1170 Durfee Ave., So. El Monte, CA and further described at Exhibit "B". The Project is known as the Whittier Narrows Business Park. n. Useable and/or Rentable Area: as to both the Premises and the Project, the respective measurements of floor area as may from time to time be subject to lease by Tenant and all tenants of the Project, respectively, as determined by Landlord and applied on a consistent basis throughout the Project. o. Security Deposit (Article 7): $ 2,397.75 p. State: the State of CALIFORNIA. q. Tenant's First Adjustment Date (Section 5.2): the first day of the calendar month following the Commencement Date plus 11 months (see Addendum). r. Tenant's Proportionate Share: 2.602%. Such share is a fraction, the numerator of which is the Useable Area of the Premises, and the denominator of which is the Useable Area of the Project, as determined by Landlord from time to time. The Project consists of 3 building(s) containing a total Useable Area of 80,183 square feet. s. Tenant's Use Clause (Article 8): Psychological Counseling and General Office t. Term: the period commencing on the Commencement Date and expiring at midnight on the Expiration Date. 3. EXHIBITS AND ADDENDA. The exhibits and addenda listed below (unless lined out) are incorporated by reference in this Lease: a. Exhibit "A"-Floor Plan showing the Premises. b. Exhibit "B"-Site Plan of the Project. c. Exhibit "C"-Tenant Improvement Plan. d. Exhibit "D"-Rules and Regulations. e. Exhibit "E"-. f. Addenda: Addendum to Lease - -------------------------------------------- - -------------------------------------------- 4. DELIVERY OF POSSESSION. If for any reason Landlord does not deliver possession of the Premises to Tenant on the Commencement Date, Landlord shall not be subject to any liability for such failure, the Expiration Date shall not change and the validity of this Lease shall not be impaired, but Rent shall be abated until delivery of possession. "Delivery of possession" shall be deemed to occur on the date Landlord completes Landlord's Work as defined in Exhibit "C". If Landlord permits Tenant to enter into possession of the Premises before the Commencement Date, such possession shall be subject to the provisions of this Lease, including without limitation, the payment of Rent. 5. RENT. 5.1. Payment of Base Rent. Tenant agrees to pay the Base Rent for the Premises. Monthly installments of Base Rent shall be payable in advance on the first day of each calendar month of the Term. If the Term begins (or ends) on other than the first (or last) day of a calendar month, the Base Rent for the partial month shall be prorated on a per diem basis. Tenant shall pay Landlord the first Monthly Installment of Base Rent when Tenant executes the Lease. ------- INITIAL 2 5 5.2 Adjusted Base Rent. a. The amount of Base Rent (and the corresponding Monthly Installments of Base Rent) payable hereunder shall be adjusted annually (the "Adjustment Date"), commencing on Tenant's First Adjustment Date. Adjustments, if any, shall be based upon increases (if any) in the Index. The Index in publication three (3) months before the Commencement Date shall be the "Base Index". On each Adjustment Date, the Base Rent shall be increased by a percentage equal to the percentage increase, if any, in the Index in publication three (3) months before the Adjustment Date (the "Comparison Index") over the Base Index ("adjusted Base Rent"). In the event the Comparison Index in any year is less than the Comparison Index (or Base Index, as the case may be) for the preceding year, the Base Rent shall remain the amount of Base Rent payable during that preceding year. When the adjusted Base Rent payable as of each Adjustment Date is determined Landlord shall give Tenant written notice of such adjusted Base Rent and the manner in which it was computed. The adjusted Base Rent shall thereafter be the "Base Rent" for all purposes under this Lease. b. If at any Adjustment Date the Index no longer exists in the form described in this Lease, Landlord may substitute any substantially equivalent official index published by the Bureau of Labor Statistics or its successor. Landlord shall use any appropriate conversion factors to accomplish such substitution. The substitute index shall become the "Index" hereunder. (See Addendum) 5.3 Project Operating Costs. a. In order that the Rent payable during the Term reflect any increase in Project Operating Costs, Tenant agrees to pay to Landlord as Rent, Tenant's Proportionate Share of all increase in costs, expenses and obligations attributable to the Project and its operation, all as provided below. b. If during any calendar year during the Term, Project Operating Costs exceed the Project Operating Costs for the Base Year, Tenant shall pay to Landlord, in addition to the Base Rent and all other payments due under this Lease, an amount equal to Tenant's Proportionate Share of such excess Project Operating Costs in accordance with the provisions of this Section 5.3b. (1) The term "Project Operating Costs" shall include all those items described in the following subparagraphs (a) and (b). (a) All taxes, assessments, water and sewer charges and other similar governmental charges levied on or attributable to the Building or Project or their operation, including without limitation, (i) real property taxes or assessments levied or assessed against the Building or Project, (ii) assessments or charges levied or assessed against the Building or Project by any redevelopment agency, (iii) any tax measured by gross rentals received from the leasing of the Premises, Building or Project, excluding any net income, franchise, capital stock, estate or inheritance taxes imposed by the State or federal government or their agencies, branches or departments; provided that if at any lime during the Term any governmental entity levies, assesses or imposes on Landlord any (1) general or special, ad valorem or specific, excise, capital levy or other tax, assessment, levy or charge directly on the Rent received under this Lease or on the rent received under any other leases of space in the Building or Project, or (2) any license fee, excise or franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rent, or (3) any transfer, transaction, or similar tax, assessment, levy or charge based directly or indirectly upon the transaction represented by this Lease or such other leases, or (4) any occupancy, use, per capita or other tax, assessment, levy or charge based directly or indirectly upon the use or occupancy of the Premises or other premises within the Building or Project, then any such taxes, assessments, levies and charges shall be deemed to be included in the term Project Operating Costs. If at any time during the Term the assessed valuation of, or taxes on, the Project are not based on a completed Project having al least eighty-five percent (85%) of the Rentable Area occupied, then the "taxes" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the taxes which would have been payable if the Project were completed and at least eighty-five percent (85%) occupied. (b) Operating costs incurred by Landlord in maintaining and operating the Building and Project, including without limitation the following: costs of (1) utilities; (2) supplies; (3) insurance (including public liability, property damage, earthquake, and fire and extended coverage insurance for the full replacement cost of the Building and Project as required by Landlord or its lenders for the Project; (4) services of independent contractors; (5) compensation (including employment taxes and fringe benefits) of all persons who perform duties connected with the operation, maintenance, repair or overhaul of the Building or Project, and equipment, improvements and facilities located within the Project, including without limitation engineers, janitors, painters, floor waxers, window washers, security and parking personnel and gardeners (but excluding persons performing services not uniformly available to or performed for substantially all Building or Project tenants); (6) operation and maintenance of a room for delivery and distribution of mail to tenants of the Building or Project as required by the U.S. Postal Service (including, without limitation, an amount equal to the fair market rental value of the mail room premises); (7) management of the Building or Project, whether managed by Landlord or an independent contractor (including, without limitation, an amount equal to the fair market value of any on-site manager's office); (8) rental expenses for (or a reasonable depreciation allowance on) personal property used in the maintenance operation or repair of the Building or Project; (9) costs, expenditures or charges (whether capitalized or not) required by any governmental or quasi- governmental authority; (10) amortization of capital expenses (including financing costs) (i) required by a governmental entity for energy conservation or life safety purposes, or (ii) made by Landlord to reduce Project Operating Costs; and (11) any other costs or expenses incurred by Landlord under this Lease and not otherwise reimbursed by tenants of the Project. If at any time during the Term, less than eighty- five percent (85%) of the Rentable Area of the Project is occupied, the "operating costs" component of ------- INITIAL 3 6 Project Operating Costs shall be adjusted by Landlord to reasonably approximate the operating costs which would have been incurred if the Project had been at least eighty-five percent (85%) occupied. (2) Tenant's Proportionate Share of Project Operating Costs shall be payable by Tenant to Landlord as follows: (a) Beginning with the calendar year following the Base Year and for each calendar year thereafter ("Comparison Year"), Tenant shall pay Landlord an amount equal to Tenant's Proportionate Share of the Project Operating Costs incurred by Landlord in the Comparison Year which exceeds the total amount of Project Operating Costs payable by Landlord for the Base Year. This excess is referred to as the "Excess Expenses." (b) To provide for current payments of Excess Expenses, Tenant shall, at Landlord's request, pay as additional rent during each Comparison Year, an amount equal to Tenant's Proportionate Share of the Excess Expenses payable during such Comparison Year, as estimated by Landlord from time to time. Such payments shall be made in monthly installments, commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount it is to pay hereunder and continuing until the first day of the month following the month in which Landlord gives Tenant a new notice of estimated Excess Expenses. It is the intention hereunder to estimate from time to time the amount of the Excess Expenses for each Comparison Year and Tenant's Proportionate Share thereof, and then to make an adjustment in the following year based on the actual Excess Expenses incurred for that Comparison Year." c) On or before April 1 of each Comparison Year after the first Comparison Year (or as soon thereafter as is practical), Landlord shall deliver to Tenant a statement setting forth Tenant's Proportionate Share of the Excess Expenses for the preceding Comparison Year. If Tenant's Proportionate Share of the actual Excess Expenses for the previous Comparison Year exceeds the total of the estimated monthly payments made by Tenant for such year, Tenant shall pay Landlord the amount of the deficiency within ten (10) days of the receipt of the statement. If such total exceeds Tenant's Proportionate Share of the actual Excess Expenses for such Comparison Year, then Landlord shall credit against Tenant's next ensuing monthly installment(s) of additional rent an amount equal to the difference until the credit is exhausted. If a credit is due from Landlord on the Expiration Date, Landlord shall pay Tenant the amount of the credit. The obligations of Tenant and Landlord to make payments required under this Section 5.3 shall survive the Expiration Date. (d) Tenant's Proportionate Share of Excess Expenses in any Comparison Year having less than 365 days shall be appropriately prorated. (e) If any dispute arises as to the amount of any additional rent due hereunder, Tenant shall have the right after reasonable notice and at reasonable times to inspect Landlord's accounting records at Landlord's accounting office and, if after such inspection Tenant still disputes the amount of additional rent owed, a certification as to the proper amount shall be made by Landlord's certified public accountant, which certification shall be final and conclusive. Tenant agrees to pay the cost of such certification unless it is determined that Landlord's original statement overstated Project Operating Costs by more than five percent (5%). (f) If this Lease sets forth an Expense Stop at Section 2f, then during the term Tenant shall be liable for Tenant's Proportionate Share of any actual Project Operating Costs which exceed the amount of the Expense Stop. Tenant shall make current payments of such excess costs during the Term in the same manner as is provided for payment of Excess Expenses under the applicable provisions of Section 5.3b(2)(b) and (c) above. 5.4 Definition of Rent. All costs and expenses which tenant assumes or agrees to pay to Landlord under this Lease shall be deemed additional rent (which, together with the Base Rent is sometimes referred to as the "Rent"). The Rent shall be paid to the Building manager (or other person) and at such place, as Landlord may from time to time designate in writing, without any prior demand therefor and without deduction or offset, in lawful money of the United States of America. 5.5 Rent Control. If the amount of Rent or any other payment due under this Lease violates the terms of any governmental restrictions on such Rent or payment, then the Rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Landlord shall, to the extent it is legally permitted, recover from Tenant the difference between the amounts received during the period of the restrictions and the amounts Landlord would have received had there been no restrictions. 5.6 Taxes Payable by Tenant. In addition to the Rent and any other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) which are not otherwise reimbursable under this Lease, whether or not now customary or within the contemplation of the parties, where such taxes are upon, measured by or reasonably attributable to (a) the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises, or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, other than Building Standard Work made by Landlord, regardless of whether title to such improvements is held by Tenant or Landlord; (b) the gross or net Rent payable under this Lease, including, without limitation any rental or gross receipts tax levied by any taxing authority with respect to the receipt of the Rent hereunder; (c) the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. ------- INITIAL 4 7 If it becomes unlawful for Tenant to reimburse Landlord for any costs as required under this Lease, the Base Rent shall be revised to net Landlord the same net Rent after imposition of any tax or other charge upon Landlord as would have been payable to Landlord but for the reimbursement being unlawful. 6. INTEREST AND LATE CHARGES. If Tenant fails to pay when due any Rent or other amounts or charges which Tenant is obligated to pay under the terms of this Lease, the unpaid amounts shall bear interest at the maximum rate then allowed by law. Tenant acknowledges that the late payment of any Monthly Installment of Base Rent will cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, it any such installment is not received by Landlord within ten (10) days from the date it is due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. Acceptance of any interest or late charge shall not constitute a waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease. 7. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord the Security Deposit set forth at Section 2.0 upon execution of this Lease, as security for Tenant's faithful performance of its obligations under this Lease. Landlord and Tenant agree that the Security Deposit may be commingled with funds of Landlord and Landlord shall have no obligation or liability for payment of interest on such deposit. Tenant shall not mortgage, assign, transfer or encumber the Security Deposit without the prior written consent of Landlord and any attempt by Tenant to do so shall be void, without force or effect and shall not be binding upon Landlord. If Tenant fails to pay any Rent or other amount when due and payable under this Lease, or fails to perform any of the terms hereof, Landlord may appropriate and apply or use all or any portion of the Security Deposit for Rent payments or any other amount then due and unpaid, for payment of any amount for which Landlord has become obligated as a result of Tenant's default or breach, and for any loss or damage sustained by Landlord as a result of Tenant's default or breach, and Landlord may so apply or use this deposit without prejudice to any other remedy Landlord may have by reason of Tenant's default or breach. If Landlord so uses any of the Security Deposit, Tenant shall, within ten (10) days after written demand therefor, restore the Security Deposit to the full amount originally deposited; Tenant's failure to do so shall constitute an act of default hereunder and Landlord shall have the right to exercise any remedy provided for at Article 27 hereof. Within fifteen (15) days after the Term (or any extension thereof) has expired or Tenant has vacated the Premises, whichever shall last occur, and provided Tenant is not then in default on any of its obligations hereunder, Landlord shall return the Security Deposit to Tenant, or, if Tenant has assigned its interest under this Lease, to the last assignee of Tenant. If Landlord sells its interest in the Premises, Landlord may deliver this deposit to the purchaser of Landlord's interest and thereupon be relieved of any further liability or obligation with respect to the Security Deposit. 8. TENANT'S USE OF THE PREMISES. Tenant shall use the Premises solely for the purposes set forth in Tenant's Use Clause. Tenant shall not use or occupy the Premises in violation of law or any covenant, condition or restriction affecting the Building or Project or the certificate of occupancy issued for the Building or Project, and shall, upon notice from Landlord, immediately discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or the certificate of occupancy. Tenant, at Tenant's own cost and expense, shall comply with all laws, ordinances, regulations, rules and/or any directions of any governmental agencies or authorities having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or its use or occupation. A judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant that Tenant has violated any such laws, ordinances, regulations, rules and/or directions in the use of the Premises shall be deemed to be a conclusive determination of that fact as between Landlord and Tenant. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or other insurance policy covering the Building or Project and/or property located therein, and shall comply with all rules, orders, regulations, requirements and recommendations of the Insurance Services Office or any other organization performing a similar function. Tenant shall promptly upon demand reimburse Landlord for any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of this Article. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or Project, or injure or annoy them or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 9. SERVICES AND UTILITIES. Provided that Tenant is not in default hereunder, Landlord agrees to furnish to the Premises during generally recognized business days, and during hours determined by Landlord in its sole discretion, and subject to the Rules and Regulations of the ------- INITIAL 5 8 Building or Project, electricity for normal desk top office equipment and normal copying equipment, and heating, ventilation and air conditioning ( HVAC ) as required in Landlord's judgment for the comfortable use and occupancy of the Premises. If Tenant desires HVAC at any other time, Landlord shall use reasonable efforts to furnish such service upon reasonable notice from Tenant and Tenant shall pay Landlord's charges therefor on demand. Landlord shall also maintain and keep lighted the common stairs, common entries and restrooms in the Building. Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the Rent be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services where such failure or delay is caused by accident or any condition or event beyond the reasonable control of Landlord, or by the making of necessary repairs or improvements to the Premises, Building or Project, or (iii) the limitation, curtailment or rationing of, or restrictions on, use of water, electricity, gas or any other form of energy serving the Premises, Building or Project. Landlord shall not be liable under any circumstances for a loss of or injury to property or business, however occurring, through or in connection with or incidental to failure to furnish any such services. If Tenant uses heat generating machines or equipment in the Premises which affect the temperature otherwise maintained by the HVAC system, Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. Tenant shall not, without the written consent of Landlord, use any apparatus or device in the Premises, including without limitation, electronic data processing machines, punch card machines or machines using in excess of 120 volts, which consumes more electricity than is usually furnished or supplied for the use of premises as general office space, as determined by Landlord. Tenant shall not connect any apparatus with electric current except through existing electrical outlets in the Premises. Tenant shall not consume water or electric current in excess of that usually furnished or supplied for the use of premises as general office space (as determined by Landlord), without first procuring the written consent of Landlord, which Landlord may refuse, and in the event of consent, Landlord may have installed a water meter or electrical current meter in the Premises to measure the amount of water or electric current consumed. The cost of any such meter and of its installation, maintenance and repair shall be paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, the excess cost for such water and electric current shall be established by an estimate made by a utility company or electrical engineer hired by Landlord at Tenant's expense. Nothing contained in this Article shall restrict Landlord's right to require at any time separate metering of utilities furnished to the Premises. In the event utilities are separately metered, Tenant shall pay promptly upon demand for all utilities consumed at utility rates charged by the local public utility plus any additional expense incurred by Landlord in keeping account of the utilities so consumed. Tenant shall be responsible tor the maintenance and repair of any such meters at its sole cost. Landlord shall furnish elevator service, lighting replacement for building standard lights, restroom supplies, window washing and janitor services in a manner that such services are customarily furnished to comparable office buildings in the area. 10. CONDITION OF THE PREMISES. Tenant's taking possession of the Premises shall be deemed conclusive evidence that as of the date of taking possession the Premises are in good order and satisfactory condition, except for such matters as to which Tenant gave Landlord notice on or before the Commencement Date. No promise of Landlord to alter, remodel, repair or improve the Premises, the Building or the Project and no representation, express or implied, respecting any matter or thing relating to the Premises, Building, Project or this Lease (including, without limitation, the condition of the Premises, the Building or the Project) have been made to Tenant by Landlord or its Broker or Sales Agent, other than as may be contained herein or in a separate exhibit or addendum signed by Landlord and Tenant. 11. CONSTRUCTION, REPAIRS AND MAINTENANCE. a. Landlord's Obligations. Landlord shall perform Landlord's Work to the Premises as described in Exhibit "C." Landlord shall maintain in good order, condition and repair the Building and all other portions of the Premises not the obligation of Tenant or of any other tenant in the Building. b. Tenant's Obligations. (1) Tenant shall perform Tenant's Work to the Premises as described in Exhibit "C." (2) Tenant at Tenant's sole expense shall, except for services furnished by Landlord pursuant to Article 9 hereof, maintain the Premises in good order, condition and repair, including the interior surfaces of the ceilings, walls and floors, all doors, all interior windows, all plumbing, pipes and fixtures, electrical wiring, switches and fixtures, Building Standard furnishings and special items and equipment installed by or at the expense of Tenant. (3) Tenant shall be responsible for all repairs and alterations in and to the Premises, Building and Project and the facilities and ------- INITIAL 6 9 systems thereof, the need for which arises out of (i) Tenant's use or occupancy of the Premises, (ii) the installation, removal, use or operation of Tenant's Property (as defined in Article 13) in the Premises, (iii) the moving of Tenant's Property into or out of the Building, or (iv) the act, omission, misuse or negligence of Tenant, its agents, contractors, employees or invitees. (4) If Tenant fails to maintain the Premises in good order, condition and repair, Landlord shall give Tenant notice to do such acts as are reasonably required to so maintain the Premises. If Tenant fails to promptly commence such work and diligently prosecute it to completion, then Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant promptly after demand with interest at the prime commercial rate then being charged by Bank of America NT & SA plus two percent (2%) per annum, from the date of such work, but not to exceed the maximum rate then allowed by law. Landlord shall have no liability to Tenant for any damage, inconvenience, or interference with the use of the Premises by Tenant as a result of performing any such work. c. Compliance with Law. Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances, and rules of any public authority relating to their respective maintenance obligations as set forth herein. d. Waiver by Tenant. Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford the Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. e. Load and Equipment Limits. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry, as determined by Landlord or Landlord's structural engineer. The cost of any such determination made by Landlord's structural engineer shall be paid for by Tenant upon demand. Tenant shall not install business machines or mechanical equipment which cause noise or vibration to such a degree as to be objectionable to Landlord or other Building tenants. f. Except as otherwise expressly Provided in this Lease, Landlord shall have no liability to Tenant nor shall Tenant's obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease or by any other tenant's lease or required by law to make in or to any portion of the Project, Building, or the Premises. Landlord shall nevertheless use reasonable efforts to minimize any interference with Tenant's business in the Premises. g. Tenant shall give Landlord prompt notice of any damage to or defective condition in any part or appurtenance of the Building's mechanical, electrical, plumbing, HVAC or other systems serving, located in, or passing through the Premises. h. Upon the expiration or earlier termination of this Lease, Tenant shall return the Premises to Landlord clean and in the same condition as on the date Tenant took possession, except for normal wear and tear. Any damage to the Premises, including any structural damage, resulting from Tenant's use or from the removal of Tenant's fixtures, furnishings and equipment pursuant to Section 13b shall be repaired by Tenant at Tenant's expense. 12. ALTERATIONS AND ADDITIONS. a. Tenant shall not make any additions, alterations or improvements to the Premises without obtaining the prior written consent of Landlord. Landlord's consent may be conditioned on Tenant's removing any such additions, alterations or improvements upon the expiration of the Term and restoring the Premises to the same condition as on the date Tenant took possession. All work with respect to any addition, alteration or improvement shall be done in a good and workmanlike manner by properly qualified and licensed personnel approved by Landlord, and such work shall be diligently prosecuted to completion. Landlord may, at Landlord's option, require that any such work be performed by Landlord's contractor, in which case the cost of such work shall be paid for before commencement of the work. Tenant shall pay to Landlord upon completion of any such work by Landlord's contractor, an administrative fee of fifteen percent (15%) of the cost of the work. b. Tenant shall pay the costs of any work done on the Premises pursuant to Section 12a, and shall keep the Premises, Building and Project free and clear of liens of any kind. Tenant shall indemnify, defend against and keep Landlord free and harmless from all liability, loss, damage, costs, attorneys' fees and any other expense incurred on account of claims by any person performing work or furnishing materials or supplies for Tenant or any person claiming under Tenant. Tenant shall keep Tenant's leasehold interest, and any additions or improvements which are or become the property of Landlord under this Lease, free and clear of all attachment or judgment liens. Before the actual commencement of any work for which a claim or lien may be filed, Tenant shall give Landlord notice of the intended commencement date a sufficient time before that date to enable Landlord to post notices of non-responsibility or any other notices which Landlord deems necessary for the proper protection of Landlord's interest in the Premises, Building or the Project, and Landlord shall have the right to enter the Premises and post such notices at any reasonable time. c. Landlord may require, at Landlord's sole option, that Tenant provide to Landlord, at Tenant's expense, a lien and completion bond in an amount equal to at least one and one-half (1 1/2) times the total estimated cost of any additions, alterations or ------- INITIAL 7 10 improvements to be made in or to the Premises, to protect Landlord against any liability for mechanic's and materialmen's liens and to insure timely completion of the work. Nothing contained in this Section 12c shall relieve Tenant of its obligation under Section 12b to keep the Premises, Building and Project free of all liens. d. Unless their removal is required by Landlord as provided in Section 12a, all additions, alterations and improvements made to the Premises shall become the property of Landlord and be surrendered with the Premises upon the expiration of the Term; provided, however, Tenant's equipment, machinery and trade fixtures which can be removed without damage to the Premises shall remain the property of Tenant and may be removed, subject to the provisions of Section 13b. 13. LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY. a. All fixtures, equipment, improvements and appurtenances attached to or built into the Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant ("Leasehold Improvements"), shall be and remain a part of the Premises, shall be the property of Landlord and shall not be removed by Tenant, except as expressly provided in Section 13b. b. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment located in the Premises and acquired by or for the account of Tenant, without expense to Landlord which can be removed without structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (collectively "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that if any of Tenant's Property is removed, Tenant shall promptly repair any damage, to the Premises or to the Building resulting from such removal. 14. RULES AND REGULATIONS. Tenant agrees to comply with (and cause its agents, contractors, employees and invitees to comply with) the rules and regulations attached hereto as Exhibit "D" and with such reasonable modifications thereof and additions thereto as Landlord may from time to time make. Landlord shall not be responsible for any violation of said rules and regulations by other tenants or occupants of the Building or Project. 15. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights, exercisable without liability to Tenant for (a) damage or injury to property, person or business, (b) causing an actual or constructive eviction from the Premises, or (c) disturbing Tenant's use or possession of the Premises: a. To name the Building and Project and to change the name or street address of the Building or Project; b. To install and maintain all signs on the exterior and interior of the Building and Project; c. To have pass keys to the Premises and all doors within the Premises, excluding Tenant's vaults and sales; d. At any time during the Term, and on reasonable prior notice to Tenant, to inspect the Premises, and to show the Premises to any prospective purchaser or mortgagee of the Project, or to any assignee of any mortgage on the Project, or to others having an interest in the Project or Landlord, and during the last six months of the Term, to show the Premises to prospective tenants thereof; and e. To enter the Premises for the purpose of making inspections, repairs, alterations, additions or improvements to the Premises or the Building (including, without limitation, checking, calibrating, adjusting or balancing controls and other parts of the HVAC system), and to take all steps as may be necessary or desirable for the safety, protection, maintenance or preservation of the Premises or the Building or Landlord's interest therein, or as may be necessary or desirable for the operation or improvement of the Building or in order to comply with laws, orders or requirements of governmental or other authority. Landlord agrees to use its best efforts (except in an emergency) to minimize interference with Tenant's business in the Premises in the course of any such entry. 16. ASSIGNMENT AND SUBLETTING. No assignment of this Lease or sublease of all or any part of the Premises shall be permitted, except as provided in this Article 16. a. Tenant shall not, without the prior written consent of Landlord, assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. Any of the foregoing acts without such consent shall be void and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without the written consent of Landlord. ------- INITIAL 8 11 b. If at any time or from time to time during the Term Tenant desires to assign this Lease or sublet all or any part of the Premises, Tenant shall give notice to Landlord setting forth the terms and provisions of the proposed assignment or sublease, and the identity of the proposed assignee or subtenant. Tenant shall promptly supply Landlord with such information concerning the business background and financial condition of such proposed assignee or subtenant as Landlord may reasonably request. Landlord shall have the option, exercisable by notice given to Tenant within twenty (20) days after Tenant's notice is given, either to sublet such space from Tenant at the rental and on the other terms set forth in this Lease for the term set forth in Tenant's notice, or, in the case of an assignment, to terminate this Lease. If Landlord does not exercise such option, Tenant may assign the Lease or sublet such space to such proposed assignee or subtenant on the following further conditions: (1) Landlord shall have the right to approve such proposed assignee or subtenant, which approval shall not be unreasonably withheld; (2) The assignment or sublease shall be on the same terms set forth in the notice given to Landlord; (3) No assignment or sublease shall be valid and no assignee or sublessee shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord; (4) No assignee or sublessee shall have a further right to assign or sublet except on the terms herein contained; and (5) Any sums or other economic consideration received by Tenant as a result of such assignment or subletting, however denominated under the assignment or sublease, which exceed, in the aggregate, (i) the total sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to any portion of the Premises subleased), plus (ii) any real estate brokerage commissions or fees payable in connection with such assignment or subletting, shall be paid to Landlord as additional rent under this Lease without affecting or reducing any other obligations of Tenant hereunder. c. Notwithstanding the provisions of paragraphs a and b above, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent and without extending any recapture or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that (i) the assignee or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii) Tenant remains fully liable under this Lease, and (iii) the use of the Premises under Article 8 remains unchanged. d. No subletting or assignment shall release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by an assignee or subtenant of Tenant or any successor of Tenant in the performance of any of the terms hereof. Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions shall not relieve Tenant of liability under this Lease. e. If Tenant assigns the Lease or sublets the Premises or requests the consent of Landlord to any assignment or subletting or if Tenant requests the consent of Landlord for any act that Tenant proposes to do, then Tenant shall, upon demand, pay Landlord an administrative fee of One Hundred Fifty and No/100ths Dollars ($150.00) plus any attorneys' fees reasonably incurred by Landlord in connection with such act or request. 17. HOLDING OVER. If after expiration of the Term, Tenant remains in possession of the Premises with Landlord's permission (express or implied), Tenant shall become a tenant from month to month only, upon all the provisions of this Lease (except as to term and Base Rent), but the "Monthly Installments of Base Rent" payable by Tenant shall be increased to one hundred fifty percent (150%) of the Monthly Installments of Base Rent payable by Tenant at the expiration of the Term. Such monthly rent shall be payable in advance on or before the first day of each month. If either party desires to terminate such month to month tenancy, it shall give the other party not less than thirty (30) days advance written notice of the date of termination. 18. SURRENDER OF PREMISES. a. Tenant shall peaceably surrender the Premises to Landlord on the Expiration Date, in broom-clean condition and in as good condition as when Tenant took possession, except for (i) reasonable wear and tear, (ii) loss by fire or other casualty, and (iii) loss by condemnation. Tenant shall, on Landlord's request, remove Tenant's Property on or before the Expiration Date and promptly repair all damage to the Premises or Building caused by such removal. ------- INITIAL 9 12 b. If Tenant abandons or surrenders the Premises, or is dispossessed by process of law or otherwise, any of Tenant's Property left on the Premises shall be deemed to be abandoned, and, at Landlord's option, title shall pass to Landlord under this Lease as by a bill of sale. If Landlord elects to remove all or any part of such Tenant's Property, the cost of removal, including repairing any damage to the Premises or Building caused by such removal, shall be paid by Tenant. On the Expiration Date Tenant shall surrender all keys to the Premises. 19. DESTRUCTION OR DAMAGE. a. If the Premises or the portion of the Building necessary for Tenant's occupancy is damaged by fire, earthquake, act of God, the elements of other casually, Landlord shall, subject to the provisions of this Article, promptly repair the damage, if such repairs can, in Landlord's opinion, be completed within (90) ninety days. If Landlord determines that repairs can be completed within ninety (90) days, this Lease shall remain in full force and effect, except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's agents, employees, contractors, licensees or invitees, the Base Rent shall be abated to the extent Tenant's use of the Premises is impaired, commencing with the date of damage and continuing until completion of the repairs required of Landlord under Section 19d. b. If in Landlord's opinion, such repairs to the Premises or portion of the Building necessary for Tenant's occupancy cannot be completed within ninety (90) days, Landlord may elect, upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not so elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. c. If any other portion of the Building or Project is totally destroyed or damaged to the extent that in Landlord's opinion repair thereof cannot be completed within ninety (90) days, Landlord may elect upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. d. If the Premises are to be repaired under this Article, Landlord shall repair at its cost any injury or damage to the Building and Building Standard Work in the Premises. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. Landlord shall not be liable for any loss of business, inconvenience or annoyance arising from any repair or restoration of any portion of the Premises, Building or Project as a result of any damage from fire or other casualty. e. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Premises, Building or Project by fire or other casualty, and any present or future law which purports to govern the rights of Landlord and Tenant in such circumstances in the absence of express agreement, shall have no application. 20. EMINENT DOMAIN. a. If the whole of the Building or Premises is lawfully taken by condemnation or in any other manner for any public or quasi-public purpose, this Lease shall terminate as of the date of such taking, and Rent shall be prorated to such date. If less than the whole of the Building or Premises is so taken, this Lease shall be unaffected by such taking, provided that (i) Tenant shall have the right to terminate this Lease by notice to Landlord given within ninety (90) days after the date of such taking if twenty percent (20%) or more of the Premises is taken and the remaining area of the Premises is not reasonably sufficient for Tenant to continue operation of its business, and (ii) Landlord shall have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such taking. If either Landlord or Tenant so elects to terminate this Lease, the Lease shall terminate on the thirtieth (30th) day after either such notice. The Rent shall be prorated to the date of termination. If this Lease continues in force upon such partial taking, the Base Rent and Tenant's Proportionate Share shall be equitably adjusted according to the remaining Rentable Area of the Premises and Project. b. In the event of any taking, partial or whole, all of the proceeds of any award, judgement or settlement payable by the condemning authority shall be the exclusive property of Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any award, judgment or settlement from the condemning authority. Tenant, however, shall have the right, to the extent that Landlord's award is not reduced or prejudiced, to claim from the condemning authority (but not from Landlord) such compensation as may be recoverable by Tenant in its own right for relocation expenses and damage to Tenant's personal property. c. In the event of a partial taking of the Premises which does not result in a termination of this Lease, Landlord shall restore the remaining portion of the Premises as nearly as practicable to its condition prior to the condemnation or taking, but only to the extent of Building Standard Work. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. ------- INITIAL 10 13 21. INDEMNIFICATION. a. Tenant shall indemnify and hold Landlord harmless against and from liability and claims of any kind for loss or damage to property of Tenant or any other person, or for any injury to or death of any person, arising out of: (1) Tenant's use and occupancy of the Premises, or any work, activity or other things allowed or suffered by Tenant to be done in, on or about the Premises; (2) any breach or default by Tenant of any of Tenant's obligations under this Lease; or (3) any negligent or otherwise tortious act or omission of Tenant, its agents, employees, invitees or contractors. Tenant shall at Tenant's expense, and by counsel satisfactory to Landlord, defend Landlord in any action or proceeding arising from any such claim and shall indemnify Landlord against all costs, attorneys' fees, expert witness fees and any other expenses incurred in such action or proceeding. As a material part of the consideration for Landlord's execution of this Lease, Tenant hereby assumes all risk of damage or injury to any person or property in, on or about the Premises from any cause. b. Landlord shall not be liable for injury or damage which may be sustained by the person or property of Tenant, its employees, invitees or customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing; air conditioning or lighting fixtures, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Building or Project or from other sources. Landlord shall not be liable for any damages arising from any act or omission of any other tenant of the Building or Project. 22. TENANT'S INSURANCE. a. All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies acceptable to Landlord and Landlord's lender and qualified to do business in the State. Each policy shall name Landlord, and at Landlord's request any mortgagee of Landlord, as an additional insured, as their respective interests may appear. Each policy shall contain (i) a cross-liability endorsement, (ii) a provision that such policy and the coverage evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance, and (iii) a waiver by the insurer of any right of subrogation against Landlord, its agents, employees and representatives, which arises or might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or representatives. A copy of each paid up policy (authenticated by the insurer) or certificate of the insurer evidencing the existence and amount of each insurance policy required hereunder shall be delivered to Landlord before the date Tenant is first given the right of possession of the Premises, and thereafter within thirty (30) days after any demand by Landlord therefor. Landlord may, at any time and from time to time, inspect and/or copy any insurance policies required to be maintained by Tenant hereunder. No such policy shall be cancelable except after twenty (20) days written notice to Landlord and Landlord's lender. Tenant shall furnish Landlord with renewals or "binders" of any such policy at least ten (10) days prior to the expiration thereof. Tenant agrees that if Tenant does not take out and maintain such insurance, Landlord may (but shall not be required to) procure said insurance on Tenant's behalf and charge the Tenant the premiums together with a twenty-five percent (25%) handling charge, payable upon demand. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by the Tenant, provided such blanket policies expressly afford coverage to the Premises, Landlord, Landlord's mortgagee and Tenant as required by this Lease. b. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect policies of casualty insurance covering (i) all Leasehold Improvements (including any alterations, additions or improvements as may be made by Tenant pursuant to the provisions of Article 12 hereof), and (ii) trade fixtures, merchandise and other personal property from time to time in, on or about the Premises, in an amount not less than one hundred percent (100%) of their actual replacement cost from time to time, providing protection against any peril included within the classification "Fire and Extended Coverage" together with insurance against sprinkler damage, vandalism and malicious mischief. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this Lease following a casualty as set forth herein, the proceeds under (i) shall be paid to Landlord, and the proceeds under (ii) above shall be paid to Tenant. c. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect workers' compensation insurance as required by law and comprehensive public liability and property damage insurance with respect to the construction of improvements on the Premises, the use, operation or condition of the Premises and the operations of Tenant in, on or about the Premises, providing personal injury and broad form property damage coverage for not less than One Million Dollars ($1,000,000.00) combined single limit for bodily injury, death and property damage liability. d. Not less than every three (3) years during the Term, Landlord and Tenant shall mutually agree to increases in all of Tenant's insurance policy limits for all Insurance to be carried by Tenant as set forth in this Article. In the event Landlord and Tenant cannot mutually agree upon the amounts of said increases, then Tenant agrees that all insurance policy limits as set forth in this Article shall be adjusted for increases in the cost of living in the same manner as is set forth in Section 5.2 hereof for the adjustment of the Base Rent. ------- INITIAL 11 14 23. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all rights of recovery against the other and against the officers, employees, agents and representatives of the other, on account of loss by or damage to the waiving party of its property or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of the loss or damage, Tenant shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 24. SUBORDINATION AND ATTORNMENT. Upon written request of Landlord, or any first mortgagee or first deed of trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in writing, subordinate its rights under this Lease to the lien of any first mortgage or first deed of trust, or to the interest of any lease in which Landlord is lessee, and to all advances made or hereafter to be made thereunder. However, before signing any subordination agreement, Tenant shall have the right to obtain from any lender or lessor or Landlord requesting such subordination, an agreement in writing providing that, as long as Tenant is not in default hereunder, this Lease shall remain in effect for the full Term. The holder of any security interest may, upon written notice to Tenant, elect to have this Lease prior to its security interest regardless of the time of the granting or recording of such security interest. In the event of any foreclosure sale, transfer in lieu of foreclosure or termination of the lease in which Landlord is lessee, Tenant shall attorn to the purchaser, transferee or lessor as the case may be, and recognize that party as Landlord under this Lease, provided such party acquires and accepts the Premises subject to this Lease. 25. TENANT ESTOPPEL CERTIFICATES. Within ten (10) days after written request from Landlord, Tenant shall execute and deliver to Landlord or Landlord's designee, a written statement certifying (a) that this Lease is unmodified and in full force and effect, or is in full force and effect as modified and stating the modifications; (b) the amount of Base Rent and the date to which Base Rent and additional rent have been paid in advance; (c) the amount of any security deposited with Landlord; and (d) that Landlord is not in default hereunder or, if Landlord is claimed to be in default, stating the nature of any claimed default. Any such statement may be relied upon by a purchaser, assignee or lender. Tenant's failure to execute and deliver such statement within the time required shall at Landlord's election be a default under this Lease and shall also be conclusive upon Tenant that: (1) this Lease is in full force and effect and has not been modified except as represented by Landlord; (2) there are no uncured defaults in Landlord's performance and that Tenant has no right of offset, counter-claim or deduction against Rent; and (3) not more than one month's Rent has been paid in advance. 26. TRANSFER OF LANDLORD'S INTEREST. In the event of any sale or transfer by Landlord of the Premises, Building or Project, and assignment of this Lease by Landlord, Landlord shall be and is hereby entirely freed and relieved of any and all liability and obligations contained in or derived from this Lease arising out of any act, occurrence or omission relating to the Premises, Building, Project or Lease occurring after the consummation of such sale or transfer, providing the purchaser shall expressly assume all of the covenants and obligations of Landlord under this Lease. If any security deposit or prepaid Rent has been paid by Tenant, Landlord may transfer the security deposit or prepaid Rent to Landlord's successor and upon such transfer, Landlord shall be relieved of any and all further liability with respect thereto. 27. DEFAULT. 27.1. Tenant's Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: a. If Tenant abandons or vacates the Premises; or b. If Tenant fails to pay any Rent or any other charges required to be paid by Tenant under this Lease and such failure continues for five (5) days after such payment is due and payable; or c. If Tenant fails to promptly and fully perform any other covenant, condition or agreement contained in this Lease and such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; or d. If a writ of attachment or execution is levied on this Lease or on any of Tenant's Property; or e. If Tenant makes a general assignment for the benefit of creditors, or provides for an arrangement, composition, extension or adjustment with its creditors; or ------- INITIAL 12 15 f. If Tenant files a voluntary petition for relief or if a petition against Tenant in a proceeding under the federal bankruptcy laws or other insolvency laws is filed and not withdrawn or dismissed will, in forty-five (45) days thereafter, or if under the provisions of any law providing for reorganization or winding up of corporations, any court of competent jurisdiction assumes jurisdiction, custody or control of Tenant or any substantial part of its property and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of forty-five (45) days; or g. If in any proceeding or action in which Tenant is a party, a trustee, receiver, agent or custodian is appointed to take charge of the Premises or Tenant's Property (or has the authority to do so) for the purpose of enforcing a lien against the Premises or Tenant's Property; or h. If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other person or entity is involved in any of the acts or events described in subparagraphs d through g above. 27.2. Remedies. In the event of Tenant's default hereunder, then in addition to any other rights or remedies Landlord may have under any law, Landlord shall have the right, at Landlord's option, without further notice or demand of any kind to do the following: a. Terminate this Lease and Tenant's right to possession of the Premises and reenter the Premises and take possession thereof, and Tenant shall have no further claim to the Premises or under this Lease; or b. Continue this Lease in effect, reenter and occupy the Premises for the account of Tenant, and collect any unpaid Rent or other charges which have or thereafter become due and payable; or c. Reenter the Premises under the provisions of subparagraph b, and thereafter elect to terminate this Lease and Tenant's right to possession of the Premises. If Landlord reenters the Premises under the provisions of subparagraphs b or c above, Landlord shall not be deemed to have terminated this Lease or the obligation of Tenant to pay any Rent or other charges thereafter accruing, unless Landlord notifies Tenant in writing of Landlord's election to terminate this Lease. In the event of any reentry or retaking of possession by Landlord, Landlord shall have the right, but not the obligation, to remove all or any part of Tenant's Property in the Premises and to place such property in storage at a public warehouse at the expense and risk of Tenant. If Landlord elects to relet the Premises for the account of Tenant, the rent received by Landlord from such reletting shall be applied as follows: first, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such reletting; third, to the payment of the cost of any alterations or repairs to the Premises; fourth, to the payment of Rent due and unpaid hereunder; and the balance, if any, shall be held by Landlord and applied in payment of future Rent as it becomes due. If that portion of rent received from the reletting which is applied against the Rent due hereunder is less than the amount of the Rent due; Tenant shall pay the deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall be calculated and paid monthly, Tenant shall also pay to Landlord, as soon as determined, any costs and expenses incurred by Landlord in connection with such reletting or in making alterations and repairs to the Premises, which are not covered by the rent received from the reletting. Should Landlord elect to terminate this Lease under the provisions of subparagraph a or c above, Landlord may recover as damages from Tenant the following: 1. Past Rent. The worth at the time of the award of any unpaid Rent which had been earned at the time of termination; plus 2. Rent Prior to Award. The worth at the time of the award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus 3. Rent After Award. The worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the rental loss that Tenant proves could be reasonably avoided; plus 4. Proximately Caused Damages. Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses (including attorneys' fees), incurred by Landlord in (a) retaking possession of the Premises, (b) maintaining the Premises after Tenant's default, (c) preparing the Premises for reletting to a new tenant, including any repairs or alterations, and (d) reletting the Premises, including broker's commissions. "The worth at the time of the award" as used in subparagraphs 1 and 2 above, is to be computed by allowing interest at the rate of ten percent (10 %) per annum. "The worth at the time of the award" as used in subparagraph 3 above, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank situated nearest to the Premises at the time of the award plus one percent (1%). ------- INITIAL 13 16 The waiver by Landlord of any breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition. Acceptance of Rent by Landlord subsequent to any breach hereof shall not be deemed a waiver of any preceding breach other than the failure to pay the particular Rent so accepted, regardless of Landlord's knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant or condition unless Landlord gives Tenant written notice of such waiver. 27.3 Landlords Default. If Landlord fails to perform any covenant, condition or agreement contained in this Lease within thirty (30)days after receipt of written notice from Tenant specifying such default, or if such default cannot reasonably be cured within thirty(30) days, if Landlord fails to commence to cure within that thirty (30) day period, then Landlord shall be liable to Tenant for any damages sustained by Tenant as a result of Landlord's breach; provided, however, it is expressly understood and agreed that if Tenant obtains a money judgment against Landlord resulting from any default or other claim arising under this Lease, that judgment shall be satisfied only out of the rents, issues, profits, and other income actually received on account of Landlord's right, title and interest in the Premises, Building or Project, and no other real, personal or mixed property of Landlord (or of any of the partners which comprise Landlord, if any) wherever situated, shall be subject to levy to satisfy such judgment. If, after notice to Landlord of default, Landlord (or any first mortgagee or first deed of trust beneficiary of Landlord) fails to cure the default as provided herein, then Tenant shall have the right to cure that default at Landlord's expense. Tenant shall not have the right to terminate this Lease or to withhold, reduce or offset any amount against any payments of Rent or any other charges due and payable under this Lease except as otherwise specifically provided herein. 28. BROKERAGE FEES. Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except those noted in Section 2.c. Tenant shall indemnify and hold Landlord harmless from any cost, expense or liability (including costs of suit and reasonable attorneys' fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Tenant. 29. NOTICES. All notices, approvals and demands permitted or required to be given under this Lease shall be in writing and deemed duly served or given if personally delivered or sent by certified or registered U.S. mail, postage prepaid, and addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and to the Building manager, and (b) if to Tenant, to Tenant's Mailing Address; provided, however, notices to Tenant shall be deemed duly served or given if delivered or mailed to Tenant at the Premises. Landlord and Tenant may from time to time by notice to the other designate another place for receipt of future notices. 30. GOVERNMENT ENERGY OR UTILITY CONTROLS. In the event of imposition of federal, state or local government controls, rules, regulations, or restrictions on the use or consumption of energy or other utilities during the Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation by Landlord and Tenant of any such controls, the interpretation of Landlord shall prevail, and Landlord shall have the right to enforce compliance therewith, including the right of entry into the Premises to effect compliance. 31. RELOCATION OF PREMISES. Landlord shall have the right to relocate the Premises to another Part of the Building in accordance with the following: a. The new premises shall be substantially the same in size, dimensions, configuration, decor and nature as the Premises described in this Lease, and if the relocation occurs after the Commencement Date, shall be placed in that condition by Landlord at its cost. b. Landlord shall give Tenant at least thirty (30) days written notice of Landlord's intention to relocate the Premises. c. As nearly as practicable, the physical relocation of the Premises shall take place on a weekend and shall be completed before the following Monday. If the Physical relocation has not been completed in that time, Base Rent shall abate in full from the time the physical relocation commences to the time it is completed. Upon completion of such relocation, the new premises shall become the "Premises" under this Lease. d. All reasonable costs incurred by Tenant as a result of the relocation shall be paid by Landlord. e. If the new premises are smaller than the Premises as it existed before the relocation, Base Rent shall be reduced proportionately. f. The parties hereto shall immediately execute an amendment to this Lease setting forth the relocation of the Premises and the ------- INITIAL 14 17 reduction of Base Rent, if any. 32. QUIET ENJOYMENT. Tenant, upon paying the Rent and performing all of its obligations under this Lease, shall peaceably and quietly enjoy the Premises, subject to the terms of this Lease and to any mortgage, lease, or other agreement to which this Lease may be subordinate. 33. OBSERVANCE OF LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. 34. FORCE MAJEURE. Any prevention, delay or stoppage of work to be performed by Landlord or Tenant which is due to strikes, labor disputes, inability to obtain labor, materials, equipment or reasonable substitutes therefor, acts of God, governmental restrictions or regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform hereunder, shall excuse performance of the work by that party for a period equal to the duration of that prevention, delay or stoppage. Nothing in this Article 34 shall excuse or delay Tenant's obligation to pay Rent or other charges under this Lease. 35. CURING TENANT'S DEFAULTS. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may (but shall not be obligated to) without waiving such default, perform the same for the account at the expense of Tenant. Tenant shall pay Landlord all costs of such performance promptly upon receipt of a bill therefor. 36. SIGN CONTROL. Tenant shall not affix, paint, erect or inscribe any sign, projection, awning, signal or advertisement of any kind to any part of the Premises, Building or Project, including without limitation, the inside or outside of windows or doors, without the written consent of Landlord. Landlord shall have the right to remove any signs or other matter, installed without Landlord's permission, without being liable to Tenant by reason of such removal, and to charge the cost of removal to Tenant as additional rent hereunder, payable within ten (10) days of written demand by Landlord. 37. MISCELLANEOUS. a. Accord and Satisfaction; Allocation of Payments. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent provided for in this Lease shall be deemed to be other than on account of the earliest due Rent, nor shall any endorsement or statement on any check or letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of the Rent or pursue any other remedy provided for in this Lease. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant then not current and due or delinquent. b. Addenda. If any provision contained in an addendum to this Lease is inconsistent with any other provision herein, the provision contained in the addendum shall control, unless otherwise provided in the addendum. c. Attorneys' Fees. If any action or proceeding is brought by either party against the other pertaining to or arising out of this Lease, the finally prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred on account of such action or proceeding. d. Captions, Articles and Section Numbers. The captions appearing within the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease. All references to Article and Section numbers refer to Articles and Sections in this Lease. e. Changes Requested by Lender. Neither Landlord or Tenant shall unreasonably withhold its consent to changes or amendments to this Lease requested by the lender on Landlord's interest, so long as these changes do not alter the business terms of this Lease ------- INITIAL 15 18 or otherwise materially diminish any rights or materially increase any obligations of the party from whom consent to such charge or amendment is requested. f. Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State. g. Consent. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have no claim, and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefor shall be an action for specific performance, injunction or declaratory judgement to enforce any right to such consent, etc. h. Corporate Authority. If Tenant is a corporation, each individual signing this Lease on behalf of Tenant represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation and that this Lease is binding on Tenant in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of a resolution of its board of directors authorizing such execution. i. Counterparts. This Lease may be executed in multiple counterparts, all of which shall constitute one and the same Lease. j. Execution of Lease; No Option. The submission of this Lease to Tenant shall be for examination purposes only, and does not and shall not constitute a reservation of or option for Tenant to lease, or otherwise create any interest of Tenant in the Premises or any other premises within the Building or Project. Execution of this Lease by Tenant and its return to Landlord shall not be binding on Landlord notwithstanding any time interval, until Landlord has in fact signed and delivered this Lease to Tenant. k. Furnishing of Financial Statements. Tenant's Representations. In order to induce the Landlord to enter into this Lease, Tenant agrees that it shall promptly furnish Landlord, from time to time, upon Landlord's written request, with financial statements reflecting Tenant's current financial condition. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord in connection with this Lease are true, correct and complete in all respects. l. Further Assurances. The parties agree to promptly sign all documents reasonably requested to give effect to the provisions of this Lease. m. Mortgagee Protection. Tenant agrees to send by certified or registered mail to any first mortgagee or first deed of trust beneficiary of Landlord whose address has been furnished to Tenant, a copy of any notice of default served by Tenant on Landlord. If Landlord fails to cure such default within the time provided for in this Lease, such mortgagee or beneficiary shall have an additional thirty (30) days to cure such default; provided that if such default cannot reasonable be cured within that thirty (30) day period, then such mortgagee or beneficiary shall have such additional time to cure the default as is reasonably necessary under the circumstances. n. Prior Agreements; Amendments. This Lease contains all of the agreements of the parties with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties or their respective successors in interest. o. Recording. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a "short form" memorandum of this Lease for recording purposes. p. Severability. A final determination by a court of competent jurisdiction that any provision of this Lease is invalid shall not affect the validity of any other provision, and any provision so determined to be invalid shall, to the extent possible, be construed to accomplish its intended effect. q. Successors and Assigns. This Lease shall apply to and bind the heirs, personal representatives, and permitted successors and assigns of the parties. r. Time of the Essence. Time is of the essence of this Lease. s. Waiver. No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant shall impair such right or remedy or be construed as a waiver of such default. The receipt and acceptance by Landlord of delinquent Rent shall not constitute a waiver of any other default; it shall constitute only a waiver of timely payment for the particular Rent payment involved. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or ------- INITIAL 16 19 render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. THE PARTIES HERETO HAVE EXECUTED THIS LEASE AS OF THE DATES SET FORTH BELOW. Date: Date: ---------------------------- ------------------------------------ Landlord: WHITTIER NARROWS BUSINESS Tenant: OPTIMUM CARE CORPORATION PARK A Delaware Corporation c/o Liberty West Inc. By: By: ------------------------------- ------------------------------------- Adam Milstein, President Edward A. Johnson, President CONSULT YOUR ADVISORS - This document has been prepared for approval by your attorney. No representation or recommendation is made as to the legal sufficiency or tax consequences of this document of the transaction to which it relates. These are questions for your attorney. In any real estate transaction, it is recommended that you consult with a professional, such as a civil engineer, industrial hygienist or other person, with experience in evaluating the condition of the property, including the possible presence of asbestos, hazardous materials and underground storage tanks. ------- INITIAL 17 20 ADDENDUM TO LEASE ADDENDA TO THAT LEASE, DATED FOR REFERENCE PURPOSES ONLY, JULY 28, 1998, BETWEEN WHITTIER NARROWS BUSINESS PARK, AS LANDLORD, AND OPTIMUM CARE CORPORATION, A DELAWARE CORPORATION, AS TENANT. 38. TENANT IMPROVEMENTS: Landlord will deliver Premises in its as-is condition, with the exception that Landlord will perform the following improvements, before the Commencement Date of the Lease, per the attached plan marked Exhibit "C": 1) remove the wall between rooms B and C, and the easterly wall and door of room K 2) patch and paint areas where walls were removed 3) repair carpet in areas where walls were removed 4) install a door on the westerly wall of room K if possible. Otherwise, door to be placed on westerly wall of rooms C or D 5) clean carpets The cost of the above improvements (estimated to be approximately $ 2,500 - $ 3,000) is being amortized into the Base Rent over a three year period. Tenant will be responsible for any unamortized portion of the above improvement cost if Tenant occupies the space for less than three (3) years. 39. RENTAL RATE: Notwithstanding any of the provisions of Sections 2.a., 2.j. 2.q. and Section 5 of the Lease, the Rental Rate to be fixed for the initial term of the Lease. 40. COMMENCEMENT DATE: Lease to commence upon the earlier of either August 15, 1998 or the date the above improvements are completed. 41. UTILITIES: Notwithstanding the provisions of Section 9 of the Lease, Tenant to be responsible for payment, to the proper utility company, of its own electric bill for both suites, for the term of the Lease. 42. PARKING: Notwithstanding the provisions of Section 2.k. of the Lease, Landlord agrees to not charge Tenant for the 8 non- exclusive parking spaces during the term of the Lease. APPROVED: APPROVED: LANDLORD TENANT Whittier Narrows Business Park Optimum Care Corporation c/o Liberty West Inc. A Delaware Corporation By: By: ------------------------------- ------------------------------------- Adam Milstein, President Edward A. Johnson, President DATE: SEP 01, 98 DATE: 8/8/98 ---------------------------- ---------------------------------- ------- INITIAL 21 EXHIBIT "A" WHITTIER NARROWS BUSINESS PARK 1170-1190 DURFEE AVE. EL MONTE CALIFORNIA 1170 DURFEE FLOOR PLAN (EXHIBIT A IS AN OUTLINE OF THE FLOOR PLAN) ------- INITIAL 22 EXHIBIT "B" WHITTIER NARROWS BUSINESS PARK 1170-1190 DURFEE AVE. EL MONTE CALIFORNIA 1170 DURFEE ONE STORY BUILDING 18,000 SQ. FT. (EXHIBIT B IS AN OUTLINE OF THE SITE PLAN) ------- INITIAL 23 EXHIBIT B-1 A. AGREEMENT: A.1 Lessor and Lessee agree to the construction of improvements in the Premises according to the terms and conditions of the Lease, Exhibit A-1, and this Exhibit B. A.2 Lessee agrees to provide Lessor with a fully executed lease on or before September 24, 1998. A.3 Provided the A.2 deadline date is adhered to, Lessor will provide Lessee with final detailed plans and specifications of all proposed improvements on or before n/a. A.4 Lessee will return to Lessor a copy of said final detailed plans and specifications Exhibit A-1 approved by Lessee on or before n/a , subject to the provisions or paragraph D.1 DELAYS of this Exhibit B. A.5 Any changes required by Lessee to final plans and specifications previously approved by both Lessor and Lessee, shall be approved by Lessor at its sole discretion, subject to the provisions or paragraph D.1 DELAYS of this Exhibit B. A.6 Provided Lessee and Lessor perform according to the mentioned provisions of A.1 through A.5 and there are no Delays which are identified in provisions D.1 & D.2 of this Exhibit, Lessor shall complete all final proposed improvements to the best of its ability on or before November 15, 1998 . B. LESSEE PAID IMPROVEMENT: B.1 Lessee at its sole cost and expense will pay for the following improvements to the Premises: ITEM AMOUNT 1. Carpet Installation $2,700.00* 2. * (To be paid in monthly installments of $75.00 per month along with monthly rental payment.) ------- INITIAL 24 EXHIBIT C (THIS EXHIBIT IS AN OUTLINE OF FLOOR PLAN FOR UNIT A AND UNIT B SHOWING PROPOSED ALTERATIONS OF ADDING A DOOR AND REMOVING TWO WALLS.) ------- INITIAL 25 EXHIBIT "D" RULES AND REGULATIONS WHITTIER NARROWS BUSINESS PARK 1. Building Hours: 7:00 a.m. - 6:00 p.m. WEEKDAYS HVAC: 7:00 a.m. - 6:00 p.m. WEEKDAYS WNBP recognizes the following holidays: President's Day Memorial Day Independence Day Labor Day Thanksgiving Day Day after Thanksgiving Christmas New Year's Day 2. Overtime heating, ventilating and air conditioning must be requested at least 24 hours in advance and is billed at $30.00 per hour. 3. The sidewalks, passages, exits and entrances shall not be obstructed by Tenant or used for any purpose other than for ingress to and egress from their respective premises. The Landlord shall in all cases retain the right to control and prevent access by all persons whose presence, in the judgment of the Landlord, shall be prejudicial to the safety, character, reputation and interests of the Building and its Tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom the Tenants normally deal in the ordinary course of Tenant's business, unless such persons are engaged in illegal activities. No Tenant and no employees or invitees of any Tenant shall go upon the roof of the Building. 4. The directory of the Building will be provided exclusively for the display of the name and location of Tenant only, and Landlord reserves the right to exclude any other names thereon. 5. No signs shall be attached to or placed in windows. No awning or shade shall be affixed or installed over or in the windows or the exterior of the Premises. The windows of the Building shall not be covered or obstructed by Tenant. 6. The toilets and urinals shall not be used for any purpose other than those for which they were constructed and no rubbish, newspapers or other substances of any kind shall be thrown into them. Tenants shall not mark, drive nails, screw or drill into, paint, nor in any way deface the walls, ceilings, partitions or floors. The expense of any breakage, stoppage or damage resulting from a violation of this rule shall be borne by the Tenant who has caused such breakage, stoppage or damage. 7. Electric wiring of any kind shall be introduced and connected as directed by Landlord, and no boring or cutting for wires will be allowed except with the consent of Landlord. The location of telephones, call boxes, etc., shall be prescribed by Landlord. 8. Landlord reserves the right to prescribe the weight and position of all safes and other heavy equipment so as to distribute properly the weight thereof and to prevent any unsafe condition from arising. Safes or other heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for any loss or damage to any such safe or property from any cause; but all damage done to the Building by moving or maintaining any such safe or property shall be repaired at the expense of Tenant. 9. There shall not be used in any space, or in the public halls of the Building, either by Tenant or others, any hand trucks, except those equipped with rubber tires and side guards. 10. No additional lock or locks shall be placed by Tenants on any door in the Building unless written consent of Landlord shall have first been obtained. Two keys will be furnished by Landlord for entry door or doors only, and any additional keys required must be obtained from Landlord, at Tenant's cost, and neither Tenant nor his agents or employees shall have any ------- INITIAL 26 Rules and Regulations Whittier Narrows Page Two duplicate key made. The Tenant, upon termination of the tenancy, shall deliver to the Landlord the keys of the offices, rooms and toilet rooms which shall have been furnished, or shall pay the Landlord the cost of replacing same or changing the lock or locks opened by such lost key if Landlord deems it necessary to make such changes. 11. The carrying in or out of freight, furniture or bulky matter of any description, must take place during such hours as Landlord may from time to time reasonably determine. The installation and moving of such property shall be made upon previous notice to the superintendent of the Building, but Landlord shall not be responsible for loss of or damage to such property, from any cause. 12. Tenant shall use, at Tenant's cost, such pest extermination contractor as Landlord may direct and at such intervals as Landlord may require. 13. Tenant and tenant's officers, agents and employees shall not make or permit any loud, unusual or improper noises, nor interfere in any way with other Tenants or those having business with them, not bring into nor keep any animal or bird, or any bicycle, automobile, or other vehicle, except such vehicles as they are permitted to park in the parking lot, and shall park in the areas designated from time to time for employee parking. 14. Tenant shall not employ any person or person for the purpose of cleaning the Premises unless otherwise agreed to by Landlord. Except with the written consent of Landlord, no person other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning same. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall in no way be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of Tenant by the janitor or any other employee or any other person. Janitor service shall include ordinary dusting and cleaning by the janitor assigned to such work and shall not include cleaning of carpets or rugs, except normal vacuuming, or moving of furniture and other special services. 15. No machinery of any kind will be allowed in the Premises without the written consent of Landlord. This shall not apply, however, to customary office equipment or trade fixtures or package handling equipment. 16. No aerial shall be erected on the roof or exterior walls of the Premises, or on the grounds, without in each instance, the written consent of Landlord. 17. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner, except as approved by Landlord. The expense of repairing any damage resulting from a violation of this rule or removal of any floor covering shall be borne by the tenant by whom, or by whose contractors, employees, or invitees, the damage shall have been caused. 18. All garbage, including wet garbage, refuse, or trash shall be placed by the Tenant in the receptacles provided by the Landlord for the purpose. 19. No vending machine or machines of any description shall be installed, maintained or operated upon the Premises without the written consent of Landlord. 20. Landlord shall have the right, exercisable without notice and without liability to Tenant, to change the name and the street address of the Building of which the Premises are a part. 21. Tenant agrees that it shall comply with all fire and security regulations that may be issued from time to time by Landlord, and Tenant also shall provide Landlord with the name of a designated responsible employee to represent Tenant in all matters pertaining to such fire or security regulations. 22. Tenant shall see that the doors of the Premises are closed and securely locked before leaving the Building and must observe strict care and caution that all water faucets or water apparatus are entirely shut off before Tenant or Tenant's employees leave the Building, and that all electricity shall be likewise carefully shut off, so as to prevent waste or damage, and for any default or carelessness Tenant shall make good all injuries sustained by Tenant, other tenants, or occupants of the Building. Landlord reserves the right to close and keep locked all entrances and exit doors of the Building before and after the normal hours of operation, and during such further hours as Landlord may deem advisable for the adequate ------- INITIAL 27 Rules and Regulations Whittier Narrows Page Three protection of said Building and the property of its tenants. 23. The requirements of Tenant will be attended to only upon application at the Building Office. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee will admit any person (Tenant or otherwise) to any office without specific instructions from the Landlord. 24. Landlord reserves the right by written notice to Tenant to add to, rescind, alter or waive these rules and regulations at any time prescribed for the Building when, in Landlord's reasonable judgment, it is necessary, desirable or proper for the best interest of the Building and its Tenants. 25. Tenants shall not disturb, solicit, or canvass any occupant of the Building and shall cooperate to prevent same. All city and county ordinances shall be observed by Tenants in the use of this Building and leased Premises. It is understood and agreed between Tenant and Landlord that no assent or consent to any waiver of any part hereof by Landlord in spirit or letter shall be deemed or taken as made except when the same is done in writing and attached to or endorsed hereon by Landlord. In the event of any conflict between these rules and regulations or any further or modified rules and regulations from time to time issued by Landlord and the Lease provisions, the Lease provisions shall govern and control. WHITTIER NARROWS BUSINESS PARK ------- INITIAL EX-10.109 6 LEASE AGREEMENT BETWEEN CO. & PS BUSINESS PARK 1 EXHIBIT 10.109 STANDARD BUSINESS COMPLEX LEASE Lease Preparation Date: August 14, 1998 --------------------------------------------------------- Lessor: PS Business Parks, L.P. ------------------------------------------------------------------------- Lessee: Optimum Care Corporation ------------------------------------------------------------------------- Trade Name: Optimum Care Corporation --------------------------------------------------------------------- 1. LEASE TERMS 1.01 Premises: The Premises referred to in this Lease contain approximately 2,259 rentable square feet and are located on Exhibit "A" as described in Exhibit "A1" attached. The address of the leased Premises is 5850 Hannum Drive, Culver City CA 90230. 1.02 Project: The Project consists of approximately 146,402 rentable square feet. 1.03 Lessee's Notice Address: Lessee's Notice Address is the address of the leased Premises as defined in paragraph 1.01 unless otherwise specified here: Same as 1.01. 1.04 Lessor's Notice Address: Lessor's Notice Address is: PS Business Parks, L.P. 17326 Edwards Rd., Suite 115 Cerritos, CA 90703 1.05 Lessee's Permitted Use: Management of Mental Health Programs and other related legal uses. 1.06 Lease Term: The Lease Term commences on November 15, 1998 and ends on November 30, 2001 (Thirty-six months, and Sixteen days). 1.07 Base Monthly Rent: $ 3,072.00 * in lawful money of the United States of America. *See provision #46 for base rent adjustment. 1.08 Security Deposit: $ 3,280.00 In lawful money of the United States of America. 1.09 Lease Documentation Fee: $ 75.00 in lawful money of the United States of America. INITIAL 1.10 Proportionate Share: Lessee's Proportionate Share is .0154. 1.12 Expense Base Year: The calendar year: 1999. 1.13 Expense Base Rate: If paragraph 4.02D is initialed, the Expense Base Rate used for determining the Expense Base Year amount is $ n/a. 1.14 Tax Base Year: The fiscal year commencing on January 1, 1999 and ending on December 31, 1999. ------- INITIAL 1 2 2. DEMISE AND POSSESSION 2.01 Lessor leases to Lessee and Lessee leases from Lessor the Premises described in 1.01. By entering the Premises, Lessee acknowledges that it has examined the Premises and accepts the Premises in their present condition subject to any additional work Lessor has agreed to do as stated on Exhibit B. 2.02 If for any reason Lessor cannot deliver possession of the Premises on the date the Lease commences, Lessor shall not be subject to any liability nor shall the validity of this Lease be affected. If Lessee has not caused such delay there shall be a proportionate reduction of the Base Monthly Rent covering the period between the commencement of the Lease Term and the date when Lessor can deliver possession. However, either Lessor or Lessee, unless it is the cause of the delay, has the right to cancel this Lease by written notification if possession of the Premises is not delivered within ninety (90) days of the date the Lease Term commences. 3. BASE MONTHLY RENT 3.01 Base Monthly Rent: On the first day of each calendar month of the Lease Term, Lessee will pay, without deduction or offset, prior notice or demand, Base Monthly Rent at the place designated by Lessor. However, the first month's rent is due and payable upon execution of this Lease. In the event that the Term of this Lease commences or ends on a day other than the first day of a calendar month, a prorated amount of Base Monthly Rent shall be due upon execution and it will be calculated using a thirty (30) day month. A. At the same time the Base Monthly Rent is adjusted, the Security Deposit will also be adjusted to equal the new Base Monthly Rent amount and the deficiency is due concurrently with the next payment of Base Monthly Rent. 3.03 Any Installment of rent or any other charge payable which is not paid within five (5) days after it becomes due will be considered past due and Lessee will pay to Lessor as Additional Rent a late charge equal to ten percent (10%) of such Installment or the sum of twenty-five dollars ($25.00), whichever is greater, for each month or fractional month transpiring from the date due until paid. A twenty-five dollar ($25.00) handling charge will be paid by Lessee to Lessor for each returned check and, thereafter, Lessee will pay all future payments of rent or other charges due by money order or cashier's check. 3.04 The amount of the Base Monthly Rent includes projected construction of Lessee's improvements as indicated on Exhibit "B" attached. In the event that Lessee requests Lessor to construct additional improvements and/or final construction costs exceed original estimates, Lessor may increase the Base Monthly Rate according to the terms and conditions outlined on Exhibit "B," or elsewhere in this Lease. 4. ADDITIONAL RENT 4.01 All charges payable by Lessee other than Base Monthly Rent are called "Additional Rent." Unless this lease provides otherwise, Additional Rent is to be paid with the next monthly installment of Base Monthly Rent and is subject to the provisions of 3.03. The term "rent" whenever used in this Lease means Base Monthly Rent and Additional Rent. 4.02 OPERATING EXPENSES A. Definitions: "EXPENSE COMPARISON YEAR": Each calendar year after the Expense Base Year. ------- INITIAL 2 3 "OPERATING EXPENSES" are all costs and expenses of ownership, operation, maintenance, repair and insurance of the Project, as determined according to generally accepted accounting principles applied by Lessor in its sole discretion, including, but not limited to the following costs: all supplies, materials, labor and equipment, used in or related to the operation and maintenance of the Project; all utilities, including but not limited to, water, electricity, gas, heating, lighting, sewer, waste disposal, security, air-conditioning and ventilating costs and all charges relating to the use, ownership or operation of the Project; all maintenance, management, janitorial and service agreements related to the Project; all legal expenses and accounting costs; all insurance premiums and including but not limited to the premiums and costs of fire, casualty and liability coverage, rent abatement and earthquake insurance and any other type of insurance related to the Project; all maintenance costs relating to the public and service areas within and around the Project, including but not limited to, sidewalks, landscaping, service areas, driveways, parking areas, walkways, building exteriors (including painting), signs and directories, including for example, costs of resurfacing and restriping parking areas; amortization (along with reasonable financing charges) of capital improvements made to the Project which may be required by any government authority or which will improve the operating efficiency of the Project; all Lessor's costs in managing, maintaining, repairing, operating and insuring the project, including for example, clerical, supervisory and janitorial staff; a five percent (5%) fee for Lessor's supervision of the common areas (five percent (5%) of the total above mentioned costs and expenses incurred in a calendar year); however, such costs shall not include depreciation on the Project, loan payments, executive salaries, or real estate broker commissions. B. If the Operating Expenses incurred or paid by Lessor for any Expense Comparison Year during the Lease Term are greater than the Operating Expenses incurred or paid by Lessor for the Expense Base Year, then Lessee will pay as Additional Rent an amount equal to the increase multiplied by Lessee's Proportional Share as defined in 1.10. In the event of any partial Expense Comparison Year, Lessee will pay the increase, if any, based on the number of days of the Expense Comparison Year included within the Lease Term. C. By April 1st of each Expense Comparison Year, Lessor will provide Lessee a statement of Lessor's best estimate of Lessee's share of the increase in Operating Expenses for the coming year over the costs for the Expense Base Year. This amount will be divided by twelve (12) and beginning with the next regular Base Monthly Rent payment, Lessee will pay 1/12th of the increase multiplied by the number of elapsed months from the commencement of the Expense Comparison Year and thereafter will continue to pay 1/12th of the increase each month until Lessee receives the next Expense Comparison Year's statement. By April 1st following each Expense Comparison Year, Lessor will provide Lessee a statement showing the total actual Operating Expenses for the calendar year just ended, and Lessee's share of any increase over the Expense Base Year. If Lessee's estimates paid to date for the preceding calendar year are less than Lessee's share of the increase, Lessee will pay the difference concurrently with the next payment of Base Monthly Rent. In the event that Lessee has paid more than his share of estimates for the preceding calendar year, Lessor will credit the amount towards Lessee's future Operating Expense obligations. Thereafter if any succeeding Expense Comparison Year results in a further increase in Operating Expenses, Lessee will pay, upon receipt of the statement, a lump sum equal to its share of the total increase over the Expense Base Year less the total of the monthly estimate installments paid in that Expense Comparison Year, and the monthly estimate installments for the next Expense Comparison Year will be adjusted to reflect Lessor's new best estimate. D. If this paragraph is initialed, Lessee understands that upon execution of this Lease the Project is less than 50% occupied, and the Operating Expense amount for the Expense Base Year will be established by multiplying the Expense Base Rate shown in 1.13 by the Project square footage reflected in 1.02. E. Lessee will not be entitled to any reduction, refund, offset, allowance or rebate in Base Monthly Rent or any other sums due if the Operating Expenses for any Expense Comparison Year are less than those of the Expense Base Year nor shall the failure by Lessor to provide Lessee with a statement by April 1st of each year constitute a waiver by ------- INITIAL 3 4 Lessor of its right to collect Lessee's share of any increase in Operating Expenses. In addition, if for any reason Lessor should not elect to bill Lessee for lump sum Operating Expense increase or estimates for a particular Expense Comparison Year, Lessor's right to charge Lessee for such expense in subsequent years is not waived. 4.03 TAXES A. As Additional Rent, Lessee will reimburse Lessor upon demand for all taxes payable by Lessor (other than net income) as defined and stated in the following paragraphs. B. Definitions: "TAX BASE YEAR" is the tax fiscal year as indicated in 1.14. However, if the project in which the Premises are located is not yet fully assessed or completed as improved real property by the tax fiscal year shown in 1.14, the Tax Base Year is the year in which the first tax bill reflects the full assessed value of the Property. "TAX COMPARISON YEAR" is each tax fiscal year commencing on the anniversary of the Tax Base Year and ending twelve (12) months thereafter. "REAL PROPERTY TAXES" are: (i) any fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment, penalty or tax imposed by any taxing authority against the Property; (ii) any tax or fee on Lessor's right to receive, or the receipt of, rent or income from the Property or against Landlord's business of leasing the Property; (iii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the Property by any governmental agency; (iv) any tax imposed upon this transaction, or based upon a reassessment of the Project due to a change in ownership or transfer of all or part of Lessor's interest in the Property; and (v) any charge or fee replacing, substituting for, or in addition to any tax previously included within the definition of real property tax. Real Property Taxes do not, however, include Lessor's federal or state income, franchise, inheritance or estate taxes. C. If the Real Property Taxes incurred or paid by Lessor for any Tax Comparison Year ending or commencing during the Lease Term, are greater than the Real Property Taxes incurred or paid by Lessor for the Tax Base Year, the Lessee will pay Lessor an amount equal to the increase multiplied by Lessee's Proportionate Share as indicated in 1.10. In the event of any partial Tax Comparison Year, Lessee shall pay the increase, if any, based on the number of days of such Tax Comparison Year included within the Lease Term. D. Following the end of each Tax Comparison Year, Lessor shall provide Lessee a statement of the amount of the increase, if any, in Real Property Taxes, but failure to do so by Lessor does not constitute a waiver of its right to collect Lessee's share of the increase in Real Property Taxes. Upon receipt of the statement, Lessee will pay in full the amount of its share of increase. In the event that any Tax Comparison Year amount is less than the Tax Base Year amount, Lessee will not be entitled to any reduction in rent or to any refund, offset, allowable or rebate of any nature. Should Lessee's Lease expire before Lessor is able to determine the increase, if any, for the Lessee's last Tax Comparison Year, Lessor will estimate the increase and Lessee will pay the estimated amount upon demand by Lessor. E. Personal Property Taxes: Lessee will pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Lessee. Lessee will have personal property taxes billed separately from the Project. If any of Lessee's personal property is taxed with the Project, Lessee will pay Lessor the taxes for the personal property upon demand by Lessor. 4.04 Based on Lessee's Proportionate Share defined in 1.10, Lessee agrees to pay as Additional Rent to Lessor its share of any parking charges, utility surcharges, occupancy taxes, or any other costs resulting from the statues or ------- INITIAL 4 5 regulations, or interpretations thereof, enacted by any governmental authority in connection with the use or occupancy of the Project or the parking facilities serving the Project, or any part thereof. 5. SECURITY DEPOSIT 5.01 If Lessee defaults with respect to any provision of this Lease, Lessor may retain, use or apply all or any part of the Security Deposit to compensate Lessor for any loss or damage suffered by Lessee's default including, but not limited to, the payment of Base Monthly Rent, Additional Rent or other rental sums due, and for payment of amounts Lessor is obligated to spend by reason of Lessee's default. If any portion is so retained, used or applied, Lessee, upon demand, will deposit with Lessor an amount sufficient to restore the deposit to its original amount, as adjusted per 3.02. Lessor will not be required to keep the Security Deposit separate from its general funds, and Lessee will not be entitled to interest on it. If Lessee fully and faithfully performs every provision of this Lease, the Security Deposit or a balance thereof will be returned to Lessee within the time frame permitted by law. In no event will Lessee have the right to apply any part of the Security Deposit to any rents payable under this lease. 6. LEASE DOCUMENTATION FEE 6.01 For expenses incurred related to the execution of this Lease including, but not limited to, legal costs, administration and credit verification, Lessee will pay Lessor upon execution of this Lease, the Lease Documentation Fee. Lessee acknowledges and agrees that this fee is nonrefundable and will not be credited to any sums which may become due during the Lease Term. 7. USE OF PREMISES; QUIET CONDUCT 7.01 The Premises may be used and occupied only for Lessee's Permitted Use as shown in 1.05 and for no other purpose, without obtaining Lessor's prior written consent. Lessee will comply with all covenants, conditions and restrictions affecting the Premises. Lessee will promptly comply with all laws, ordinances, orders and regulations affecting the Premises. Lessee will not perform any act or carry on any practices that may injure the Project or the Premises or be a nuisance or menace, or disturb the quiet enjoyment of other lessees in the Project including, but not limited to, equipment which causes vibration, use or storage of chemicals, or heat or noise which is not properly insulated. Lessee will not cause, maintain or permit any outside storage on or about the Premises. In addition, Lessee will not allow any condition or thing to remain on or about the Premises which diminishes the appearance or aesthetic qualities of the Premises and/or the Project or the surrounding property. The keeping of a dog or other animal on or about the Premises is expressly prohibited. 8. TENANT IMPROVEMENTS 8.01 Tenant Improvements to be performed in the Premises, if any, will be performed in accordance with the terms and provisions entitled "Lessor's Work" contained in "Exhibit B" attached. Thereafter during the Lease Term, Lessor will be under to obligation to alter, change, decorate or improve the Premises. 9. PARKING 9.01 Lessee and Lessee's customers, suppliers, employees and invitees have the non-exclusive right to park in common with other lessees in the parking facilities as designated by Lessor. Lessee agrees not to overburden the parking facilities and agrees to cooperate with Lessor and other lessees in the use of the parking facilities. Lessor reserves the right to, on an equitable basis, assign specific spaces with or without charge to Lessee as Additional Rent, make changes in the parking layout from time to time, and to establish reasonable time limits on parking. ------- INITIAL 5 6 10. UTILITIES (DELETE 10.01 OR 10.02) 10.01 Serviced Space: Lessor will provide to the Premises between the hours of 8 a.m. and 6 p.m., Monday through Friday or any other time periods established by Lessor: A. All utilities, including heat, electricity, gas, power and air-conditioning, if any, as are commercially reasonable for normal office use. If Lessee uses heat, water, electricity, gas, power or air-conditioning in excess of normal office use, Lessor may separately meter such services at Lessee's expense where applicable, or Lessor, may, at its sole discretion, measure or estimate the increased use and Lessee will pay Lessor, on demand, the amount of the measured or estimated increase. Lessor will also provide water for restroom facilities (if any). However, Lessee will pay all services directly contracted for by Lessee. B. Such janitorial service as is commercially reasonable. 10.03 Lessor will not be liable or deemed in default to Lessee nor will there be any abatement of rent for any interruption or reduction of utilities or services not caused by any act of Lessor or any act reasonably beyond Lessor's control. Lessee agrees to comply with energy conservation programs implemented by Lessor by reason of enacted laws or ordinances. 10.04 Lessee will contract and pay for all telephone and such other services for the Premises subject to the provisions of 11.03. 11. ALTERATIONS, MECHANIC'S LIENS 11.01 Lessee will not make any alterations to the interior of the Premises, without Lessor's prior written consent which will not be unreasonably withheld. If Lessor gives its consent, no such alterations will proceed without Lessor's prior written approval of (i) Lessee's contractor, (ii) certificates of insurance by Lessee's's contractor for public liability and automobile liability and property damage insurance with limits not less than $1,000,000/$250,000/$500,000 respectively endorsed to show Lessor as an additional insured and for worker's compensation as required and (iii) detailed plans and specifications for such work. In addition, before alterations may begin, valid building permits or other permits or licenses required must be furnished to Lessor, and, once the alterations begin, Lessee will diligently and continuously pursue their completion. At Lessor's option, any alterations may become part of the realty and belong to Lessor. If requested by Lessor, Lessee will pay, prior to the commencement of construction, an amount determined by Lessor necessary to cover the costs of demolishing such alterations and/or the cost of returning the Premises to their condition before any such alterations. Lessor may also require Lessee to provide Lessor, at Lessee's sole cost and expense, a payment and performance bond in form acceptable to Lessor, in a principal amount not less than one and one-half times the estimated cost of such alterations, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work and such bond will continue in force for a period no less than 131 days after the completion of such work. 11.02 Notwithstanding anything in 11.01, Lessee may, with written consent of Lessor, install trade fixtures, equipment and machinery in conformance with the ordinances of the applicable city and county, and they may be removed upon termination of this Lease provided the Premises are not damaged by their removal. 11.03 All private telephone systems and/or other related telecommunications equipment and lines may not be installed without Lessor's prior written consent. In addition, if Lessor gives consent all equipment must be installed within Lessee's Premises and, upon termination of this Lease, removed and the Premises restored to the same condition as before such installation. ------- INITIAL 6 7 11.04 Lessee will pay all costs for alterations and will keep the Premises, the Project and the underlying property free from any liens arising out of work performed for, materials furnished to, or obligation incurred by Lessee. 11.05 Lessor will have the right to construct or permit construction of tenant improvements in or about the Project for existing and new lessees and to alter any public areas in and around the Project. Notwithstanding anything which may be contained in this Lease, Lessee understands this right of Lessor and agrees that such construction will not be deemed to constitute a breach of this Lease by Lessor. Lessee waives any such claims which it might have arising from such construction. 12. FIRE INSURANCE; HAZARDS AND LIABILITY INSURANCE 12.01 Except as expressly provided as Lessee's Permitted Use, subsection 1.05, or as otherwise consented to by Lessor in writing, Lessee shall not do or permit anything to be done within or about the Premises which will increase the existing rate of insurance on the Project or cause the cancellation of any insurance policy covering the Project. Nor shall Lessee keep, use or sell, or permit anyone to keep, use or sell, any article in or about the Premises, which may be prohibited by the standard form of fire and other insurance policies. Lessee shall, at its sole cost and expense, comply with any requirements pertaining to the Premises or any insurance organization insuring the Project and Project related apparatus. Lessee agrees to pay to Lessor, as Additional Rent, any increases in premiums on policies from Lessee's Permitted Use or other use consented to by Lessor which increases Lessor's premiums or requires extended coverage by Lessor to insure the Premises. 12.02 Lessee, at all times during the term of this Lease and at Lessee's sole expense, will maintain a policy of standard fire and extended coverage insurance with "all risk" coverage on all Lessee's improvements and alterations in or about the Premises and on all personal property and equipment to the extent of at least ninety percent (90%) of their full replacement value. The proceeds from this policy will be used by Lessee for the replacement of personal property and equipment and the restoration of Lessee's improvements and/or alterations. This policy will contain an express waiver, in favor of Lessor, of any right of subrogation by the insurer. 12.03 Lessee, at all times during the term of this Lease and at Lessee's sole expense, will maintain a policy of comprehensive general liability coverage with limits of not less than $1,000,000 combined single limit for bodily injury and property damage insuring against all liability of Lessee and its authorized representatives arising out of or in connection with Lessee's use or occupancy of the Premises. This policy of insurance will name Lessor as an additional insured and will include an express waiver of subrogation by the insurer in favor of Lessor and will release Lessor from any claims for damage to any person, to the Premises, and to the Project, and to Lessee's personal property, equipment, improvements and alterations in or on the Premises of the Project, caused by or resulting from risks which are to be insured against by Lessee under this Lease. 12.04 All insurance required to be provided by Lessee under this Lease will (a) be issued by an insurance company authorized to do business in the state in which the Premises are located and which is satisfactory to Lessor, (b) be primary and noncontributing with any insurance carried by Lessor, and (c) contain an endorsement requiring at lease thirty (30) days prior written notice of cancellation to Lessor before cancellation or change in coverage, scope or limit of any policy. Lessee will deliver a certificate of insurance or a copy of the policy to Lessor within thirty (30) days of execution of the Lease and will provide evidence of renewed insurance coverage at each anniversary, prior to the expiration of any current policies. Lessee's failure to provide evidence of this coverage to Lessor may, in Lessor's sole discretion, constitute a default under this Lease. 13. INDEMNIFICATION AND WAIVER OF CLAIMS 13.01 Lessee waives all claims against Lessor for damage to any property in or about the Premises and for injury ------- INITIAL 7 8 to any persons, including death resulting therefrom, regardless of cause or time of occurrence. Lessee will defend, indemnify and hold Lessor harmless from and against any and all claims, actions, proceedings, expenses, damages and liabilities, including attorney's fees, arising out of, connected with, or resulting from any use of the Premises by Lessee, its employees, agents, visitors or licensees, except for any damage or injury which is the direct result of intentional acts by Lessor, its employees, agents, visitors or licensees. 14. REPAIRS 14.01 Lessee shall, at its sole expense, keep and maintain the Premises and every part thereof (excepting air-conditioning, common use equipment, exterior walls and roofs, which Lessor agrees to repair unless damages are due to the neglect or intentional acts of Lessee or its agents, employees, visitors, or licensees), including interior windows, skylights, doors, any store fronts and the interior of the Premises, in good and sanitary order, condition and repair. Lessee will, also at its sole cost keep and maintain all utilities, fixtures, plumbing and mechanical equipment used by Lessee in good order and repair and furnish all expendable (light bulbs [unless provided by Lessor], paper goods, soaps, etc.) used in the Premises. The standard for comparison and need of repair will be the condition of the Premises at the time of commencement of this Lease and all repairs will be made by a licensed and bonded contractor approved by Lessor. 14.02 Lessee will not make repairs to the Premises at the cost of Lessor whether by reduction of rent or otherwise, or to vacate the Premises or terminate the Lease with abatement or termination of rent if repairs are not made. If during the Term, any alteration, addition or change to the Premises is required by legal authorities, Lessee, at its sole expense, shall promptly make the same. Lessor reserves the right to make any such repairs not repaired or maintained in good condition by Lessee and Lessee shall reimburse Lessor for all such costs upon demand. If such repairs have not been made within 30 days of notice to repair by Lessor to Lessee, Lessor may make such repairs and such costs of repairs shall be at Lessee's expense. Failure to pay such expenses within 30 days of presentation shall be deemed to be a breach of this Lease. 15. AUCTIONS, SIGNS, LANDSCAPING 15.01 Lessee will not conduct or permit to be conducted any sale by auction on the Premises. Lessor will have the right to control landscaping and approve the placement, size, and quality of signs. Lessee shall comply with the terms and conditions regarding sign criteria set forth in Exhibit "C" attached. Lessee will not make alterations or additions to the landscaping and will not place signs which are visible from the outside of any buildings of the Project without prior written consent of Lessor. Lessor will have the right in its sole discretion to withhold its consent. Any signs not in conformity with this Lease may be removed by Lessor at Lessee's expense. 16. ENTRY BY LESSOR 16.01 Lessee will permit Lessor and Lessor's agents to enter the Premises at all reasonable times for the purpose of inspecting the same, or for the purpose of maintaining the Project, or for the purpose of making repairs, alterations or additions to any portion of the Project, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required, or for the purpose of posting notices of nonresponsibility for alterations, additions or repairs, or for the purpose of showing the Premises to prospective tenants during the last six months of the Lease Term, or placing upon the Project any usual or ordinary "for sale" signs, without any rebate of rents and without any liability to Lessee for any loss of occupation or quiet enjoyment of the Premises thereby occasioned. Lessee will permit Lessor at any time within sixty (60) days prior to the expiration of this Lease, to place upon the Premises any usual or ordinary "to let" or "to lease" signs. For each of the above purposes, Lessor will at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Lessee's vaults and safes. Lessee will not alter any lock or install a new or additional lock or any bolt on any door of the Premises without the prior written consent of ------- INITIAL 8 9 Lessor, which will not be unreasonably withheld. If Lessor gives its consent, Lessee will furnish Lessor with a key and Lessor retains the right to charge Lessee for restoring any altered doors to their conditions prior to the installation of the new or additional locks. 17. ABANDONMENT 17.01 Lessee will not vacate or abandon the Premises at any time during the Lease Term or permit the Premises to remain unoccupied for a period longer than fifteen (15) consecutive days during the Lease Term. If Lessee abandons, vacates or surrenders the Premises, or is dispossessed by process of law, or otherwise, any personal property belonging to Lessee is left in or about the Premises will, at the options of Lessor be deemed abandoned and may be disposed of by Lessor in the manner provided for by the laws of the state in which the Premises are located. 18. DESTRUCTION 18.01 Should the Premises or the building on the Premises be partially destroyed by any cause not the fault of Lessee (or any person in or about the Premises with the consent, expressed or implied, of Lessee), this Lease will continue in full force and effect and Lessor, at Lessor's own cost and expense, will promptly commence the work of repairing and restoring the Premises to their prior condition providing that the work can be accomplished under all applicable government laws and regulations within sixty (60) days from the date of damage at a cost not exceeding twenty-five percent (25%) of the total replacement cost of the Premises. Within thirty (30) days of the occurrence of partial destruction, Lessor may terminate this Lease as of the date of the occurrence if nine (9) months or less remain the Lease Term. 18.02 Should the Premises or the building in which the Premises are a part be so far destroyed by any cause not the fault of Lessee (or any person in or about the Premises with the consent, expressed or implied, of Lessee) that they cannot be repaired or restored to their former condition within sixty (60) days of the date of damage or at a cost exceeding twenty-five percent (25%) of the total replacement cost of the Premises, Lessor may at Lessor's options either: A. Continue this Lease in full force and effect by repairing and restoring, at Lessor's own cost and expense, the Premises to their former condition; or B. Terminate this Lease by giving Lessee written notice of such termination. 18.03 Should the Premises be partially or totally destroyed by any cause of Lessee, or any person in or about the Premises with the consent, expressed or implied of Lessee, this Lease will remain in full force and effect and Lessee shall immediately commence work to repair the damage and diligently pursue its completion. 18.04 Any insurance proceeds received by Lessor because of the total or partial destruction of the Premises or the building on the Premises will be the sole property of Lessor, free from any claims of Lessee, and may be used by Lessor for whatever purposes Lessor may desire. 18.05 Should Lessor elect to repair and restore the Premises to their former condition, or should Lessor be required to restore the Premises to their former condition, there will be a proportional abatement in the amount of rent payable during the period of repair and restoration as long as Lessee (or any person in or about the Premises with the consent, expressed or implied of Lessee) is not the cause of the total or partial destruction. The rent due under the terms of the Lease will be reduced between the date of destruction and the date of completion of restoration and repairs based on the extent to which destruction interferes with Lessee's use of the Premises. ------- INITIAL 9 10 19. ASSIGNMENT, SUBLETTING AND TRANSFERS OF OWNERSHIP 19.01 Lessee will not directly or indirectly, voluntarily or by operation of law, assign, sell, mortgage, encumber, convey, or otherwise Transfer all or any part of Lessee's Leasehold estate, or permit the Premises to be occupied by anyone other than Lessee and Lessee's employees or sublet the Premises or any portion thereof (collectively called "Transfer") without Lessor's prior written consent. If Lessee desires at any time to Transfer this Lease, Lessee shall first give written notice to Lessor of its desire to do so, which notice shall contain (a) the identity of the proposed Transferee, (b) the terms and provisions of the proposed Transfer, (c) the nature of the proposed Transferee's business to be carried on in the Premises, (d) a detailed summary of the business background and financial condition of the proposed Transferee, and (e) such financial information as deemed necessary by Lessor to evaluate any proposed Transfer. All of the foregoing information shall be provided to Lessor by Lessee at least sixty (60) days in advance of Lessee's proposed Transfer date. 19.02 Lessor will not unreasonably withhold its consent to any proposed Transfer except that such consent need not be granted if: (a) in the reasonable judgment of Lessor the Transferee is of a character is engaged in a business which is not in keeping with the standards of the Lessor for the Project; (b) in the reasonable judgment of Lessor any purpose for which the Transferee intends to use the Premises is not in keeping with the standards of Lessor for the Project; provided in no event may any purpose for which Transferee intends to use the Premises be in violation of this Lease; (c) the portion of the Premises subject to the Transfer is not regular in shape with appropriate means of entering and exiting, including adherence to any local, county or other governmental codes, or is not otherwise suitable for the normal purposes associated with such a Transfer; (d) the proposed Transferee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or (e) Tenant is in default under this Lease. 19.03 In the event Lessor consents to a Transfer, Lessee will pay Lessor the excess, if any, of the rent and other charges reserved in the Transfer over the allocable portion of the rent and other charges hereunder for that portion of the Premises subject to the Transfer. For the purpose of this section, the rent reserved in the Transfer will be deemed to include any lump sum payment or other consideration given to Lessee in consideration for the Transfer. Lessee will pay or cause the Transferee to pay to Lessor this additional rent together with the monthly installments of rent due. 19.04 Any consent to any Transfer which may be given by Lessor, or the acceptance of any rent, charges or other consideration by Lessor from Lessee or any third party, will not constitute a waiver by Lessor of the provisions of this Lease or a release of Lessee from the full performance by it or the covenants stated herein; and any consent given by Lessor to any Transfer will not relieve Lessee (or any transferee of Lessee) from the above requirements for obtaining the written consent of Lessor to any subsequent Transfer. 19.05 If a default under this Lease should occur while the Premises or any part of the Premises are assigned, sublet or otherwise transferred, Lessor, in addition to any other remedies provided for within this Lease or by law, may at its option collect directly from the Transferee all rent or other consideration becoming due to Lessee under the Transfer and apply these monies against any sums due to Lessor by Lessee; and Lessee authorizes and directs any Transferee to make payments of rent or other consideration direct to Lessor upon receipt of notice from Lessor. No direct collection by Lessor from any Transferee should be construed to constitute a novation or a release of Lessee or any guarantor of Lessee from the further performance of its obligations in connection with this Lease. 19.06 Any Transfer without the Lessor's consent shall be void and shall, at the option of Lessor, terminate this Lease. 19.07 If Lessee requests a consent of Lessor to any Transfer, then Lessee shall, upon demand, pay Lessor an administrative fee of One Hundred Fifty Dollars ($150.00) plus any attorneys' fees reasonably incurred by Lessor in connection with such request. ------- INITIAL 10 11 20. BREACH BY LESSEE 20.01 Lessee will be in breach of this Lease if at any time during the term of this Lease (and regardless of the pendency of any bankruptcy, organization, receivership, insolvency or other proceedings in law, in equity or before any administrative tribunal which have or might have the effect of preventing Lessee from complying with the terms of this Lease): A. Lessee fails to make payment of any installment of Base Monthly Rent, Additional Rent, or of any other sum herein specified to be paid by Lessee, and such failure is not cured within three (3) days after Lessor's written notice to Lessee of such failure of payment, which notice shall be in lieu of and not in addition to any notice required by statute; or B. Lessee fails to observe or perform any of its other covenants, agreements or obligations hereunder, and such failure is not cured within ten (10) days after Lessor's written notice to Lessee of such failure, which notice shall be in lieu of and not in addition to any notice required by statute provided, however, that if the nature of Lessee's obligation is such that more than ten (10) days are required for performance, then Lessee will not be in breach if Lessee commences performance within such ten (10) day period and thereafter diligently prosecutes the same to completion; or C. Lessee becomes insolvent, makes a transfer in fraud of its creditors, makes a transfer for the benefit of its creditors, voluntarily files for bankruptcy, is adjudged bankrupt or insolvent in proceedings filed against Lessee, a receiver, trustee, or custodian is appointed for all or substantially all of Lessee's assets, fails to pay its debts as they become due, convenes a meeting of all or a portion of its creditors, or performs any act of bankruptcy or insolvency, including the selling of its assets to pay creditors; or D. Lessee has abandoned the Premises as defined in paragraph 17 above. 21. REMEDIES OF LESSOR 21.01 Termination of Lease After Breach: If Lessee breaches this Lease and abandons the Premises before the end of the term, or if its right to possession is terminated by Lessor because of Lessee's breach of this Lease, then this Lease may be terminated by Lessor at its option. On such termination Lessor may recover from Lessee, in addition to the remedies permitted by law: A. The worth at the time of award of the unpaid rents which had been earned at the time of termination; B. The worth at the time of award of the amount by which the unpaid rents which would have been earned after termination until the time of award exceeds the amount of such rental loss that Lessee proves could have been reasonably avoided; C. The worth at the time of award of the amount by which the unpaid rents for the balance of the Lease Term after the time of award exceeds the amount of such rental loss for such period that Lessee proves could be reasonably avoided; and D. Any other amount necessary to compensate Lessor for all the damage proximately caused by Lessee's breach of its obligations under this Lease, or which in the ordinary course of events would be likely to result therefrom. The damage proximately caused by Lessee's breach will include, without limitation, (i) expenses for cleaning, repairing or restoring the Premises, (ii) expenses for altering, remodeling or otherwise improving the Premises for the purpose of reletting, (iii) brokers' fees and commissions, advertising costs and other expenses of reletting the Premises, (iv) costs of carrying the Premises such as taxes, insurance premiums, utilities and security precautions, (v) expenses in retaking ------- INITIAL 11 12 possession of the Premises, (vi) attorneys' fees and court costs, (vii) any unearned brokerage commissions paid in connection with this Lease and (viii) reimbursement of any previously waived Base Rent or Additional Rent. 21.02 Continuation of Lease After Breach: Notwithstanding the foregoing, in the event Lessee has breached this Lease and abandoned the Premises, this Lease, at Lessor's option, will continue in full force and effect so long as Lessor does not terminate Lessee's right to possession of the Premises, and in such event Lessor may enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due. For purposes of this Subparagraph 21.02, the following acts by Lessor will not constitute the termination of Lessee's right to possession of the premises: A. Acts of maintenance or preservation or efforts to relet the Premises, including, but not limited to, alterations, remodeling, redecorating, repairs, replacements and/or painting as Lessor shall consider advisable for the purpose of reletting the Premises or any part thereof; or B. The appointment of a receiver upon the initiative of Lessor to protect Lessor's interest under this Lease or in the Premises. 21.03 In the event of bankruptcy, Lessee assigns to Lessor all its rights, title and interest in the Premises as security for its obligations and covenants set forth in this Lease. 21.04 Definitions and Incidental Rights. A. The "worth at the time of award" of the amounts referred to in 21.01A, and 21.01B, will be computed by allowing interest at the rate of ten percent (10%) per annum. The "worth at the time award" of the amount referred to above in 21.01C will be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco in effect at the time of award, plus one percent (1%). B. Any efforts by Lessor to lessen the damages caused by Lessee's breach of this Lease will not waive Lessor's right to recover the damages set forth above. C. Nothing herein will be construed to affect other provision of this Lease regarding Lessor's right to indemnification from Lessee for liability arising prior to the termination of this Lease for personal injuries or property damage. D. No right or remedy conferred upon or reserved to Lessor in the Lease is intended to be exclusive of any other right or remedy granted to Lessor by statute or common law, and each and every such right and remedy will cumulative. 22. SURRENDER OF LEASE NOT MERGER 22.01 The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, will not work a merger and will, at the option of Lessor, terminate all or any existing transfers, or may, at the option of Lessor, operate as an assignment to it of any or all of such transfers. 23. ATTORNEYS FEES / COLLECTION CHARGES 23.01 In the event of any legal action or proceeding between the parties hereto, actual attorneys' fees and expenses of the prevailing party in any such action or proceeding will be added to the judgment therein. Should Lessor be named as defendant in any suit brought against Lessee in connection with or arising out of Lessee's occupancy hereunder, Lessee will pay to Lessor its costs and expenses incurred in such suit, including actual attorneys' fees. ------- INITIAL 12 13 23.02 If Lessor utilizes the services of any attorney at law for the purpose of collecting any rent due and unpaid by Lessee after three (3) days' written notice to Lessee of such nonpayment of rent or in connection with any other breach of this Lease by Lessee, Lessee agrees to pay Lessor actual attorneys' fees as determined by Lessor for such services, regardless of the fact that no legal action may be commenced or filed by Lessor. 24. CONDEMNATION 24.01 If twenty-five percent (25%) or more of the Premises is taken for any public or quasi-public purpose by any lawful government power or authority, by exercise of the right of appropriation, reverse condemnation, condemnation or eminent domain, or sold to prevent such taking, the Lessee or the Lessor may at its option terminate this Lease as of the effective date thereof. Lessee will not because of such taking assert any claim against the Lessor or the taking authority for any compensation because of such taking, and Lessor will be entitled to receive the entire amount of any award without deduction for any estate of interest of Lessee. If less than twenty-five percent (25%) of the Premises is taken, Lessor at its options may terminate this Lease. If Lessor does not so elect, Lessor will promptly proceed to restore the Premises to substantially its same condition prior to such partial taking, allowing for any reasonable effects of such taking, and a proportionate allowance will be made to Lessee for the rent corresponding to the time during which, and to the part of the Premises which, Lessee is deprived on account of such taking and restoration. 25. RULES AND REGULATIONS 25.01 Lessee will faithfully observe and comply with the Rules and Regulations printed on or attached to this Lease and Lessor reserves the right to modify and amend them as it deems necessary. Lessor will not be responsible to Lessee for the nonperformance by any other lessee or occupant of the Project of any said Rules and Regulations. 25.02 Violation of any such Rules and Regulations shall be deemed a material breach of this Lease by Lessee. 26. ESTOPPEL CERTIFICATE 26.01 Lessee will execute and deliver to Lessor, within ten (10) days of receiving written notice, a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification) and the date to which rent and other charges are paid in advance, if any, and acknowledging that there are not, to Lessee's knowledge, and uncured defaults on the part of Lessor hereunder or specifying such defaults if they are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Lessee's failure to deliver such statement within such time shall be conclusive upon Lessee that (1) this Lease is in full force and effect, without modification except as may be represented by Lessor; (2) there are no defaults not cured in Lessor's performance; and (3) not more than one (1) month's rent has been paid in advance. 27. SALE BY LESSOR 27.01 In the event of a sale of conveyance by Lessor of the Project the same shall operate to release Lessor from any liability upon any of the covenants or conditions, expressed or implied, herein contained in favor of Lessee, and in such event Lessee agrees to look solely to the responsibility of the successor in interest of Lessor in and to this Lease. This Lease will not be affected by any such sale, and Lessee agrees to attorn to the purchaser or assignee. 28. NOTICES 28.01 All notices, statements, demands, requests, consents, approvals, authorizations, offers, agreements, appointments, or designations under this Lease by either party to the other will be in writing and will be considered sufficiently given and served upon the other party if sent by certified mail, return receipt requested, postage prepaid, and ------- INITIAL 13 14 addressed as indicated in 1.03 and 1.04. 29. WAIVER 29.01 The failure of Lessor to insist in any one or more cases upon the strict performance of any term, covenant or condition of this Lease will not be construed as a waiver of a subsequent breach of the same or any other covenant, term or condition; nor shall any delay or omission by Lessor to seek a remedy for any breach of this Lease be deemed a waiver by Lessor of its remedies or rights with respect to such a breach. 30. LESSEE'S INTENT, HOLDING OVER 30.01 Lessee will give Lessor, ninety (90) days prior to the expiration of the Lease Term, written notification of Lessee's intent to either remain in or vacate the Premises on the Lease Expiration Date. If Lessee does not notify Lessor by the date specified herein, Lessor deems that Lessee will vacate the Premises by the Lease Expiration Date and Lessor will have no further obligation. 30.02 Any holding over after the expiration or termination of the term of this Lease, or after the date in any notice given by Lessor to Lessee terminating this Lease, such possession by Lessee will be deemed to be a month-to-month tenancy terminable on thirty (30) days notice at any time by either party. All provisions of this Lease, except those pertaining to term and rent, will apply to the month-to-month tenancy. Lessee will pay Base Monthly Rent in an amount equal to 150% of rent for the last full calendar month during the regular term. 31. PROJECT PLAN 31.01 In the event Lessor requires the Premises for use in conjunction with another suite or for other reasons connected with the Project planning program, Lessor, upon notifying Lessee in writing, shall have the right to move Lessee to space in the Project of which the Premises forms a part, at Lessor's sole cost and expense (excluding private telephone systems which Lessee must bear the cost of moving and installing), and the terms and conditions of the original Lease will remain in full force and effect excepting that the Premises will be in a new location. However, if the new space does not meet with Lessee's approval, Lessee will have the right to cancel this Lease upon giving Lessor thirty (30) days' notice within ten (10) days of receipt of Lessor's notification. Should Lessee elect to cancel the Lease as provided in this paragraph, the effective expiration date will equal the projected move-in date of the suite Lessor wishes Lessee to move to as indicated in Lessor's written notification to Lessee. 32. DEFAULT OF LESSOR / LIMITATION OF LIABILITY 32.01 In the event of any default by Lessor hereunder, Lessee agrees to give notice of such default, by registered mail, to Lessor at Lessor's Notice Address as stated in 1.04 and to offer Lessor a reasonable opportunity to cure the default. 32.02 In the event of any actual or alleged failure, breach or default hereunder by Lessor, Lessee's sole and exclusive remedy will be against Lessor's interest in the Project, and no partner of Lessor will be sued, be subject to service or process, or have a judgment obtained against him in connection with any alleged breach or default, and no writ of execution will be levied against the assets of any partner of Lessor. The covenants and agreements are enforceable by Lessor and also by any partner of Lessor. 33. RELEASE OF PARTNERS OF LESSOR 33.01 If Lessee has any claim against Lessor under or arising out of this Lease, Lessee's recourse shall be against 14 15 the assets of Lessor and Lessee further hereby waives any and all right to assert any claims against, or obtain any damages from the partners, employees, officers, directors or agents of Lessor. 34. EXPANSION CLAUSE 34.01 If during the Lease Term, Lessee executes a lease within the Project for space larger than the present Premises with a lease term at least equal to that which remains on this Lease or one (1) year, whichever is greater, with a Base Monthly Rent amount at least equal to the present Base Monthly Rent of this Lease, this Lease shall be terminated upon the commencement date of the lease for such substitute space. Notwithstanding the above-stated, Lessee shall remain obligated to pay for any adjustments in rent pursuant to Paragraphs 3 and 4 due Lessor as a result of Lessee's tenancy hereunder and this obligation shall survive the termination of this Lease pursuant to this Paragraph 34. 35. SUBORDINATION 35.01 Without the necessity of any additional document being executed by Lessee for the purpose of effecting a subordination, and at the election of Lessor or any mortgagee with a lien on the Project or any ground lessor with respect to the Project, this Lease will be subject and subordinate at all times to (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Project, and (b) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Project, ground leases or underlying leases, or Lessor's interest or estate in any of said items is specified as security. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Lessee will, notwithstanding any subordination, attorn to and become the Lessee of the successor in interest to Lessor, at the option of such successor in interest. Lessee covenants and agrees to execute and deliver, upon demand by Lessor and in the form requested by Lessor any additional documents evidencing the priority or subordination of this Lease with respect to any such ground lease or underlying leases or the lien of any such mortgage or deed of trust. Lessee hereby irrevocably appoints Lessor as attorney-in-fact of Lessee to execute, deliver and record any such document in the name and on behalf of Lessee. 36. MISCELLANEOUS PROVISIONS 36.01 Whenever the singular number is used in this Lease and when required by the context, the same will include the plural, and the masculine gender will include the feminine and neuter genders, and the word "person" will include corporation, firm, partnership, or association. If there be more than one Lessee, the obligations imposed upon Lessee under this Lease will be joint and several. 36.02 The headings or titles to paragraphs of this Lease are not a part of this Lease and will have no effect upon the construction or interpretation of any part of this Lease. 36.03 This instrument contains all of the agreements and conditions made between the parties to this Lease and may not be modified orally or in any other manner than by an agreement in writing signed by all parties to this Lease. Lessee acknowledges that neither Lessor nor Lessor's agents have made any representation or warranty as to the suitability of the Premises to the conduct of Lessee's business. Any agreements, warranties or representations not expressly contained herein will in no way bind either Lessor or Lessee, and Lessor and Lessee expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement, if any, not contained in this Lease. 36.04 Time is of the essence of each term and provision of this Lease. 36.05 Except as otherwise expressly stated, each payment required to be made by Lessee is in addition to and not in substitution for other payments to be made by Lessee. ------- INITIAL 15 16 36.06 Subject to Paragraph 19, the terms and provisions of this Lease are binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of Lessor and Lessee. 36.07 All covenants and agreements to be performed by Lessee under any of the terms of this Lease will be performed by Lessee at Lessee's sole cost and expense and without any abatement of rent. 36.08 Any provision of this Lease, except for the payment of rents, determined to be invalid by a court of competent jurisdiction will in no way affect any other provision hereof. 36.09 In consideration of Lessor's covenants and agreements hereunder, Lessee hereby covenants and agrees not to disclose any terms, covenants or conditions of this Lease to any other party without the prior written consent of Lessor. 37. DEPOSIT AGREEMENT 37.01 Lessor and Lessee hereby agree that Lessor will be entitled to immediately endorse and cash Lessee's good faith rent and the Security Deposit check(s) accompanying this Lease. It is further agreed and understood that such action will not guarantee acceptance of this Lease by Lessor, but, in the event Lessor does not accept this Lease, such deposits will be refunded to Lessee. This Lease will be effective only after Lessee has received a copy fully executed by Lessor. 38. GOVERNING LAW 38.01 This Lease is governed by and construed in accordance with the laws of the state in which the Premises are located, and venue of any suit will be in the county where the Premises are located. 39. SEVERABILITY 39.01 If any provision of this Lease is found to be unenforceable, all other provisions shall remain in full force and effect. 40. LANDLORD'S LIEN 40.01 LESSOR HEREUNDER WILL HAVE THE BENEFIT OF, AND THE RIGHT TO, ANY AND ALL LANDLORD'S LIENS PROVIDED UNDER THE LAW BY WHICH THIS LEASE IS GOVERNED. 41. SPECIAL PROVISIONS 41.01 Special provisions of this Lease number 42 through 46 are attached hereto and made a part hereof. If none, so state in the following space: see attached exhibits . IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of the day and year indicated by Lessor's execution date as written below. Individuals signing on behalf of a Lessee warrant that they have the authority to bind their principals. In the event that Lessee is a corporation, Lessee shall deliver to Lessor, concurrently with the execution and delivery of this Lease, a certified copy of corporate resolutions adopted by Lessee authorizing said corporation to enter into and perform the Lease and authorizing the execution and delivery of the Lease on behalf of the corporation by the parties executing and delivering this Lease. THIS LEASE, WHETHER OR NOT EXECUTED BY LESSEE, IS SUBJECT TO ------- INITIAL 16 17 ACCEPTANCE BY LESSOR, ACTING ITSELF OR BY ITS AGENT ACTING THROUGH ITS PRESIDENT AND VICE PRESIDENT AT ITS HOME OFFICE, REGIONAL MANAGERS, DIRECTOR OF LEASING AND ASSISTANT VICE PRESIDENTS. LESSOR LESSEE PS Business Parks, L.P. Optimum Care Corporation: Federal Tax ID# 95-4609269 A Delaware Corporation By Lisa Freitas - Assistant Vice President By Edward A. Johnson - Chairman & CEO ------------------------------------------- -------------------------------------------- AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE - ---------------------------------------------- ----------------------------------------------- TITLE TITLE DATE DATE 9/23/98 ------------------------------------------ ------------------------------------------- EXECUTION DATE
------- INITIAL 17 18 Provision 42 HAZARDOUS MATERIALS Compliance with Law Lessee, at Lessee's expense, shall comply with all laws, rules, orders, ordinances, directions, regulations and requirements of federal, state, county and municipal authorities pertaining to Lessee's use of the premises and with the recorded covenants, conditions and restrictions, regardless of when they become effective, including, without limitation, all applicable federal, state and local laws, regulations or ordinances pertaining to air and water quality, Hazardous Materials (as hereinafter defined), waste disposal, air emissions and other environmental matters, all zoning and other land use matters, and utility availability, and with any direction of any public officer or officers, pursuant to law, which shall impose any duty upon Lessor or Lessee with respect to the use or occupation of the Premises. Use of Hazardous Materials (1) Lessee shall (i) not cause or permit any Hazardous Material to be brought upon, kept or used in or about the premises or the project by Lessee, its agents, employees, contractor or invitees without prior written consent of Lessor, which Lessor shall not unreasonably withhold as long as Lessee demonstrates to Lessor's reasonable satisfaction that such Hazardous Material is necessary or useful to Lessee's business and will be used, kept and stored in a manner that complies with all laws regulating any such Hazardous Material so brought upon or used or kept in or about the Premises. If Lessee breaches the obligations stated in the preceding sentence, or if the presence of Hazardous Material on the Premises or the Project caused or permitted by Lessee results in contamination of the Premises or the Project by Hazardous Material otherwise occurs for which Lessee is legally liable to Lessor for damage resulting therefrom, then Lessee shall indemnify, defend and hold Lessor harmless from any and all claims, judgements, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution in value of the Premises or the Project, damages for the loss or restriction on use of rentable or useable space or of any amenity of the Premises or the Project, damages arising from any adverse impact on marketing of space, and sums paid in settlement of claims, attorney's fees, consultant fees and expert fees) which arise during or after the Lease term as a result of such contamination. This indemnification of Lessor by Lessee includes, without limitations, costs, incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the Premises on the Project. Without limiting the foregoing, if the presence of any Hazardous Material on the Premises or the Project caused or permitted by Lessee results in any contamination of the Premises or the Project, Lessee shall promptly take all actions at its sole expense as are necessary to return the Premises and the Project to the condition existing prior to the introduction of any such Hazardous Material to the Premises or the Project; provided that Lessor's approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the Premises or the Project. The foregoing indemnity shall survive the expiration or earlier termination of this Lease. (2) Definition of "Hazardous Material". As used herein, the term "Hazardous Material" means any hazardous or toxic substance, substances, or materials, and wastes listed in the United States Department of Transportation Hazardous Material Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances, material and wastes that are or become regulated under any applicable local, state of federal law. (3) Disclosure. At the commencement of this Lease, and on January 1st of each year thereafter (each such date being hereafter called "Disclosure Dates"), including January 1 of the year after termination of this Lease, Lessee shall disclose to Lessor the names and amount of all Hazardous Materials, or any combination thereof, which were stored, used or disposed of on or about the Premises, or which Lessee intends to store, use or dispose of on or about the ------- INITIAL 18 19 Premises. (4) Inspection. Lessor and its agents shall have the right, but not the duty, to inspect the Premises and the Project at any time to determine whether Lessee is complying with the terms of this Lease. If Lessee is not in compliance with this Lease, Lessor shall have the right to immediately enter upon the Premises and the Project to remedy any contamination caused by Lessee's failure to comply notwithstanding any other provision of this Lease. Lessor shall use its best efforts to minimize interference with Lessee's business but shall not be liable for any interference caused thereby. (5) Default. Any default under this Paragraph shall be a material default enabling Lessor to exercise any of the remedies set forth in the Lease. Provision #43 USE CLAUSE. Tenant has negotiated the use clause contained in sec. 1.05 of this lease. Tenant hereby agrees that the use clause as so written is deemed to be reasonable for all purposes. Tenant hereby further agrees that this use clause is enforceable for all purposes and specifically waives all challenges to this clause now and in the future. The purposes for which this use clause is deemed to be reasonable and enforceable include, but are not limited to, any and all future changes tenant may request in the use of the premises, and any and all circumstances relating to breach of lease, and/or mitigation of damages, and/or assignment, and/or subletting. Provision #44 SMOKING. Smoking of any kind is strictly prohibited, at all times, at any location on this property, except in the designated smoking area which is located at the OUTSIDE PERIMETER OF BUILDING ONLY. The designated smoking area may be relocated by Lessor, at its sole discretion, at any time during the term of this lease. Provision #45 NON DISCRIMINATION. The Lessee herein covenants by and for itself, its heirs, executors, administrators and assigns, and all persons claiming under or through it, and this lease is made and accepted upon and subject to the following conditions; that there shall be no discrimination against or segregation of any person or group of persons, on account of sex, marital status, race, color, religion, creed, national origin, or ancestry, the leasing, sub-leasing, renting, transferring, use occupancy or enjoyment of the land herein leased not shall the Lessee itself or any person claiming under or through it, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number use or occupancy of tenants, lessees, sublessees, subtenants, or vendees, in the land herein leased. Provision #46 ADJUSTMENT TO BASE MONTHLY RENT: The base monthly rent shall increase to the following amounts for the following period: June 1, 2000 - November 30, 2001 the Base Monthly Rent will be $3,280.00. ------- INITIAL 19 20 EXHIBIT A PS BUSINESS PARK CULVER CITY (THIS EXHIBIT IS A MAP OF THE LOCATION OF THE PROJECT, AS WELL AS, AN OUTLINE OF THE PROJECT.) ------- INITIAL 21 EXHIBIT A-1 PS BUSINESS PARK 5850 HANNUM AVE. CULVER CITY, CALIFORNIA SCALE 1/8" = 1'-0" Approximately 2,259 r.s.f. (THIS EXHIBIT IS AN OUTLINE OF THE PREMISES, INCLUDING THE "PROPOSED ADDITION OF CONFERENCE ROOM.) ------- INITIAL 22 EXHIBIT "A-2" LEGAL DESCRIPTION - CULVER CITY (#24534) The land referred to herein is situated in the County of Los Angeles, State of California, and is described as follows: Parcel 1: Lots 11 to 13 inclusive, of Tract No. 22864, in the city of Culver City, in the County of Los Angeles, State of California, as per map recorded in Book 880 Pages 49 to 55 inclusive of maps, in the office of the County Recorder of said County. Excepting from said land, all metals and minerals and all oil, natural gas, asphaltum and other hydrocarbons, without right of surface entry, together with the right to explore and to drill and to produce, extract and take metals and minerals, oil, natural gas, asphaltum and other hydrocarbons, together with all rights necessary and convenient thereto for any or all of the above purposes, including without limiting the generality hereof subsurface rights of way for drilling, repairing, redrilling, deepening, maintaining, operating, abandoning, reworking, and removing wells into and through said land, below a plan of 500 feet below the surface thereof and excepting and reserving the right to maintain pipes and to transport any such substances and to cross and traverse from other lands below a depth of 500 feet, as reserved by Home Savings and Loan Association, a California Corporation, in deed recorded December 30, 1969 as Instrument No. 261, in Book D-4593 Page 72, Official Records. Parcel 2: Parcel 1 of Parcel 2 Map No. 12436, in the city of Culver City, as per map filed in Book 122 Pages 22 and 23 of parcel maps, in the office of the County Recorder of said County. Excepting from said land, all metals and minerals and all oil, natural gas, asphaltum and other hydrocarbons, without right of surface entry, together with the right to explore and to drill and to produce, extract and take metals and minerals, oil, natural gas, asphaltum, and other hydrocarbons, together with all rights necessary and convenient thereto for any or all of the above purposes, including without limiting the generality hereof subsurface rights of way for drilling, repairing, redrilling, deepening, maintaining, operating, abandoning, reworking, and removing wells into and through said land, below a plane of 500 feet below the surface thereof and excepting and reserving the right to maintain pipes and to transport any such substances and to cross and traverse from other lands below a depth of 500 feet, as reserved by Home Savings and Loan Association, a California Corporation, in deed recorded December 30, 1969 as Instrument No. 261, in Book D-4593 Page 72, Official Records. ------- INITIAL 23 EXHIBIT B Lessee accepts premises in present condition Subject to the provision of Article 8 , Lessee accepts the premises in the condition they are in at the commencement of this lease and shall maintain said premises in the same condition, order, and repair, excepting only reasonable wear and tear, arising from the use under this Agreement. Lessee has examined and knows the condition of the leased premises and agrees that no representations, except such as are contained herein, have been made to Lessee respecting the condition of said premises. The taking possession of said premises by Lessee shall be conclusive that the premises are in good and satisfactory condition. Lessor agrees to install a conference room as per the drawing in Exhibit A-1. ------- INITIAL 24 EXHIBIT C Lessee shall submit in writing to Lessor, for Lessor's approval, all plans for suite signage, prior to installation of such signage. All signage shall be subject to Lessor's approval. CONTACT: Tim Jetmore (562) 427-0123 ------- INITIAL 25 EXHIBIT D RULES AND REGULATIONS In order to promote the safety, cleanliness, and aesthetics of the Business Park, the following rules and regulations are in effect which may be modified or amended at any time by Lessor upon notice to Lessee. In the case of conflict between these regulations and the lease, the lease shall be controlling. 1. Furniture safes/moving. Safes, furniture, freight, or bulky articles shall be moved in and out of the complex in a manner and as such times so as not to create an inconvenience to other tenants and is subject to direction and approval of Lessor. Heavy articles that exceed the structural support of the premises or exceed fifty (50) pounds per square foot is not permitted. 2. Windows/signs. All tenant identification signs shall be a type, size, and color as specified by Lessor and provided at Lessee's expense. No sign, picture, or advertisement may be placed in the windows or exterior of the building. Where Lessor provides standard window coverings, such coverings shall not be altered, removed or replaced by Lessee. Where Lessor does not provide standard window coverings, installation of window coverings by Lessee shall be subject to Lessor's prior written approval. 3. Common area/roof. Sidewalks, entrances, and exits shall not be obstructed or used by Lessee for any purpose other than normal ingress and egress. Neither Lessee nor employees or invitees of Lessee shall go upon the roof of the building. 4. Parking. The parking areas, include surface parking, parking structure, driveways, entrances, exits, pedestrian walkways, and any other areas designated for parking and shall be regulated and modified by Lessor with respect to restricted areas, direction and flow of traffic, hours of use and any other related facilities. The parking area shall be used solely for the parking of passenger vehicles during normal business hours. The parking of trucks, trailers, recreational vehicles, and campers is not permitted. No vehicle of any type shall be stored in the parking areas at any time. In the event that a vehicle is disabled, it shall be removed within 48 hours. Maintenance of vehicles is not permitted in the parking areas. All vehicles shall be parked in designated parking areas in conformance with all signs and markings and shall not be parked in areas not designated for parking, in aisles, driveways, no-parking areas, or in any manner which impeded the flow of traffic. "For Sale" signs or any other advertising is not permitted on or about any parked vehicles. 5. Advertising. Lessee shall not use the name of the building in connection with promoting or advertising Lessee's business except as the Lessees address. Lessor shall have the right to prohibit the use of the name of the project or other publicity by Lessee which in Lessor's opinion tends to impair the reputation of the project or its desirability for other Lessees. Lessee will discontinue such publication immediately upon receipt of notice from Lessor. 6. Nuisance. Lessee shall not keep or allow to be used any foul or noxious gas or substance on the premises. Nor shall Lessee occupy or use the premises in any manner which is objectionable or offensive to other occupants by reason of odors, noise, vibration, or interference in any way with other tenants or those having about the premises or any part of the project. Lessee shall maintain the leased premises free of mice, ants, bugs, or other vermin. 7. Dangerous articles. Lessee shall not use or keep on the premises or any part of the project any kerosene, gasoline, or inflammable or combustible fluid or material or any article deemed extra hazardous. Lessee shall not use any method of heating or air conditioning other than supplied by Lessor. ------- INITIAL 26 EXHIBIT D (PAGE 2) 8. Improper conduct. Lessor reserves the right to expel from the Business Park any person who is intoxicated or under the influence of liquor or drugs or who shall act in violation of any of these rules and regulations 9. Janitorial Service. Lessee shall not dispose any dirt or other substance into the parking areas, landscaping, walkways or common area. Lessee shall not do any act which would create additional costs to maintain the cleanliness of the project. 10. Locks. Lessee shall not alter any lock or install new or additional lock or bolt on any door of the of the premises without prior written consent, Lessee shall furnish a key to such lock. Upon termination of the tenancy, Lessee must return all keys of the premises to Lessor. 11. Use of premises. The leased premises shall not be used for lodging, sleeping, cooking or for any immoral or illegal purpose that will damage the premises or the reputation thereof. Lessee shall not use the premises for any purpose other than that specified in the lease covering the premises. 12. Solicitations. Lessee shall not disturb, solicit, or canvas any occupant of the project and shall cooperate to prevent the same. 13. Safety. Lessee shall not do or permit any act or bring anything on the premises which shall in any way increase rate of fire insurance on the building, obstruct or interfere with the right of other tenants, conflict with the fire regulations and fire laws, or conflict ordinances established by the Board of Health or other governmental authority. 14. Damage. Walls, floors and ceilings shall not be defaced in any way and no one shall be permitted to mark, paint, penetrate or in any way mark the building surfaces, walkways, stairwells, driveways, or parking area. Pictures, certificates, licenses, and similar items normally used in Lessee's premises may be carefully attached to the walls or other surfaces shall be repaired by Lessee. 15. Wiring. No electrical wiring, electrical apparatus, or additional electrical outlets shall be installed without the prior written approval of Lessor. Any such installation may be removed by Lessor at Lessee's expense. Lessee may not alter any existing electrical outlets or overburden them beyond their designed capacity. Lessor reserves the right to enter the leased premises, with reasonable notice to tenant, for the purpose of installing additional electrical wiring and other utilities for the benefit of Lessee or adjoining tenants. Lessor will direct electricians as to where and how telephone and telegraph wires are to be introduced. The location of telephones, call boxes, and other equipment affixed to the premises shall be subject to the approval of Lessor. 16. Auction. No auction, public or private will be permitted. 17. Exterior. Lease shall not place any improvement or moveable object including antennas, awnings, outside furniture, etc. in the parking areas, landscaped areas, on the roof, or other areas outside of the leased premises. 18. Requirements of Lessee. Employees of Lessor shall not perform any work or do anything outside of their regular duties unless under special instruction from Lessor. Lessee shall give Lessor prompt notice of any defects in the water, sewage, gas pipes, exterior electrical lights and fixtures, or other service equipment. ------- INITIAL 27 19. General. It is understood that if Lessee, his employees, agents, or invitees violate any of these rules and regulations which results in any damage to the property, increases costs of maintenance of the property, or incurs expenses to reasonably enforce the rules and regulations, Lessee shall pay to Lessor all such costs as additional rent. ------- INITIAL EX-10.110 7 INPATIENT & OUTPATIENT PSYCHIATRIC UNIT MANAGEMENT 1 EXHIBIT 10.110 PSYCHIATRIC UNIT MANAGEMENT SERVICES AGREEMENT THIS PSYCHIATRIC UNIT MANAGEMENT SERVICES AGREEMENT ("Agreement") is made and entered into by and between CATHOLIC HEALTHCARE WEST SOUTHERN CALIFORNIA, a California nonprofit public corporation doing business as St. Francis Medical Center ("Medical Center"), and OPTIMUMCARE CORPORATION, a Delaware corporation ("Manager"). RECITALS A. Medical Center operates a general acute care hospital in which is located a mental health unit which provides adult inpatient psychiatric services ("Inpatient Program"). B. Manager is in the business of providing management and other services for the treatment of inpatient psychiatric patients in compliance with industry, regulatory, and governmental standards and requirements through its OPTIMUMCARE PSYCH UNIT PROGRAM. C. Medical Center and Manager desire to enter into this Agreement in order to set forth the terms and conditions upon which Manager will provide Inpatient Program management and other services to or for the benefit of Medical Center. NOW, THEREFORE, in consideration of the mutual covenants, conditions, and promises set forth herein, and for such other good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Term and Termination. 1.1 Term: Unless sooner terminated in accordance with the provisions of Sections 10 hereof, this agreement shall commence at 12:01 a.m. on September 15, 1998 and shall remain in full force and effect for a term of two (2) years, expiring at 11:59 p.m. on September 14, 2000. 1.2 Termination: In addition to any other events causing termination under this Agreement, this Agreement may be terminated on the first to occur of any of the following: 1.2.1 Either party, at any time during the term of this Agreement, may terminate this Agreement without cause upon ninety (90) days' prior written notice. 1.2.2 Either party shall have the right to terminate this Agreement on thirty (30) days' prior written notice to the other party if the party to whom such notice is given is in breach of any material provision of this Agreement. The party claiming the right to terminate hereunder shall set forth, in the notice of intended termination required hereby, the facts 2 underlying its claim that the other party is in breach of this Agreement. Notwithstanding the foregoing, this Agreement shall not terminate in the event that the breaching party cures the breach within ten (10) days of the receipt of such notice, or if such breach is not reasonably capable of cure within such period, diligently prosecutes such cure to completion within the thirty (30) day notice period. 1.2.3 In the event there are any changes effected in the California Medical Assistance Program ("Medi-Cal"), Title XVIII of the Federal Social Security Act ("Medicare"), and/or substantial changes under other public or private health and/or hospital care insurance programs or policies which may have a material effect on the operations of Medical Center, Medical Center may elect to renegotiate this Agreement upon written notice of Manager. Medical Center shall indicate the basis upon which it has determined that such a material impact on its operations may result. In any case where such notice is provided, both parties shall negotiate a revised agreement, which, to the extent reasonably practicable, under the circumstances, each party will adequately protect its interests and fulfill its objectives in light of the governmental program or private insurance policy changes which constituted the basis for the exercise of this provision. In the event the parties are unable to negotiate a revised agreement within said period, Medical Center may thereupon elect to terminate this Agreement upon thirty (30) days' prior written notice. 1.3 Subject to the provisions of the sections above, Manager shall immediately cause the removal of any Inpatient Program Director, Medical Director or any physician or licensed professional providing professional services for the Inpatient Program under Manager's employment or contract, who is subject to or under disciplinary action by licensing or other authorities, or whose performance results in disciplinary action by the Medical Staff, and/or whose performance results in a final judgement awarding damages of $100,000 or more against the Medical Center and/or if any such physician(s) loses (or has suspended or modified or placed on probation) his or her Medical Staff membership and/or clinical privileges to practice psychiatry or his or her profession at the Medical Center. If Manager fails to immediately terminate any such professional, then Medical Center may immediately terminate this Agreement. 1.4 If either party to this Agreement should be declared bankrupt or become insolvent or liquidate for any reason, the other party may transmit to the former party written notice of its intention to immediately terminate this Agreement, specifying with particularity the event justifying such notice; provided, that the delay or failure of a party so to transmit written notice shall not constitute a waiver by said party of any default hereunder or of any other or further default under this Agreement by the former party. If the event justifying such notice is the bankruptcy, insolvency or liquidation of the party receiving such notice, this Agreement shall terminate forthwith. 1.5 This Agreement may be terminated by Medical Center immediately on written notice if: 1.5.1 Medical Center gives written notice to Manager (specifying in reasonable detail the reasons and events giving rise to the delivery of such notice) that the 3 Inpatient Program operated by manager has failed to meet licensing, payor certification, or JCAHO standards of patient care or requirements, or Medical Center's or its Medical Staff's standards, and Manager fails to remedy such deficiencies to Medical Center's absolute satisfaction within thirty (30) days of receipt of such notice. 1.5.2 Manager initiates or undergoes, without Medical Center's prior written approval, (a) any sale or transfer of all or substantially all of its assets other than in the ordinary course of business; (b) any dissolution, merger or reorganization; or (c) any change, individually or through a series of transactions, in a 20% or greater ownership, voting or control interest in Manager or any change in Manager's management with responsibility over the Inpatient Program. 2. Covenants of the Medical Center. Medical Center shall: 2.1 Subject to availability and budgetary constraints, shall provide space that shall accommodate a minimum of forty (40) inpatient beds in a discrete contiguous wing of the Medical Center facility for Program inpatients ("Unit"). Medical Center shall also provide the services, facilities and support of other Medical Center departments, including without limitation, available diagnostic facilities, as Medical Center determines is reasonably necessary for Program patients and as ordered by said patients' attending physicians. Medical Center shall also provide office space for Manager's Program Director within the Unit as Medical Center reasonably determines is necessary for the operation of the Program, subject to space and budgetary constraints. Manager shall accept such space, facilities, etc. of Medical Center in "as is" condition, and title to such space, facilities, etc. shall remain at all times in Medical Center. Said Unit space shall be used solely for the operation of the Program and for no other purposes. 2.2 Provide the Inpatient Program with qualified nursing personnel, at staffing levels sufficient to meet Inpatient Program needs as determined by Medical Center in its sole discretion, who are trained and experienced in psychiatric nursing and provide other non-physician personnel, such personnel collectively referred to herein as "Medical Center Personnel". Medical Center shall be responsible for employing or engaging such Medical Center Personnel and are solely liable to such personnel for payment of their wages, compensation and employee benefits. Said personnel shall comply with the Inpatient Program policies and procedures as developed by Medical Center. 2.3 Assist Manager in maintaining accreditation of the Inpatient Program by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), Accreditation Council for Psychiatric Facilities, and pay all related application fees, and assist Manager in the preparation of any and all information, data and materials required in connection with application or renewal for such accreditation. Medical Center shall also obtain, with Manager's full cooperation and assistance, any and all certifications or approvals from the Medicare and MediCal Programs and from any other governmental or private payment or reimbursement programs. Medical Center shall also obtain, with Manager's full assistance and cooperation, any consents 4 or approvals to maintain the Program as an inpatient service under Medical Center's general acute care hospital license. Manager shall be solely liable for any costs or expenses that it incurs in connection with providing assistance to, and cooperating with, Medical Center in obtaining the consents and approvals described in this Section 2.4. 2.4 Acknowledges that the selection, continued employment and termination of employment and overall supervision and direction of Medical Center Personnel for the Inpatient Program shall be at the sole discretion of Medical Center's Administration. However, Medical Center agrees that it shall consult with Manager in the event Manager desires the removal from the Program of any Medical Center Personnel, provided that such request is made in writing specifying with particularity the cause for such request and such request shall not be made unreasonably. 2.5 Provide: (1) maintenance of the patient care areas used for the Inpatient Program as Medical Center determines is necessary upon consultation with Manager; (2) dietary service for Program patients as is normally available to other Medical Center patients; (3) housekeeping services for patients and Manager's offices at the Medical Center as is normally available to other Medical Center patients; (4) telephone and utilities for patient areas and Manager's offices at the Medical Center as is normally available for Medical Center facilities; and (5) other services of Medical Center departments customarily provided in the ordinary course of business to Medical Center patients (e.g. record keeping); all of which as reasonably determined by Medical Center to be necessary for the efficient operation of the Program. 2.6 Provide oversight and supervision for appropriate utilization review ("UR") and quality improvement ("QI") programs and procedures developed and implemented by Manager in cooperation with Medical Center for the Inpatient Program, and integrate such programs and procedures with Medical Center's other such programs and procedures. 2.7 Review and, if acceptable, approve Manager's publicity and marketing plans and advertising, publicity and marketing materials for the Program, from time to time. 2.8 Maintain its general and professional liability insurance, or self-insurance, coverage for Medical Center and Medical Center employees or agents. 3. Covenants of Manager. Manager shall: 3.1 Provide professional and general liability insurance coverage of at least Three Million Dollars ($3,000,000) per occurrence with an aggregate limitation of Five Million Dollars ($5,000,000) with respect to Manager and Manager's employees, agents, and contractors that Manager retains to provide services to the Program. If Manager provides a claims-made policy, Manager shall either maintain such insurance coverage in force following the termination of this Agreement, or provide evidence of adequate "tail" coverage, with such terms and conditions approved in advance by Medical Center. Manager shall also ensure that each physician 5 providing professional services on behalf of the Inpatient Program maintains professional liability insurance in the minimum coverage amounts and subject to the terms specified herein. All insurance policies providing coverage as described above shall provide for at least thirty (30) days' prior written notice to Medical Center prior to any modification, amendment or cancellation of such coverage taking effect. Manager shall provide Medical Center with certificates evidencing the insurance coverage required above immediately upon the execution of this Agreement. 3.2 Subject to Medical Center's approval, Manager shall develop, implement and supervise the Inpatient Program. The Inpatient Program shall include intensive, specialized inpatient services for the care and treatment of adult psychiatric patients. Manager shall, in general, develop clinical treatment programs that meet the clinical needs and community standards, and are in compliance with the licensure and accreditation requirements for governmental and regulatory agencies and payors. Manager shall provide ongoing management and support services for the Inpatient Program. 3.3 Provide the following personnel for the Inpatient Program: (1) a Medical Director assigned exclusively full-time to the Program (who shall be a psychiatrist duly licensed in good standing by the State of California, shall be certified by the Board of Psychiatry, and shall be a member in good standing of the Medical Center's Medical Staff with clinical privileges in Psychiatry); (2) a Program Director to manage the Inpatient Program and who shall have day-to-day management responsibility for the Program and Program personnel, (3) clinical psychologist(s) in a number acceptable to Medical Center, one of whom shall be designated as chief therapist; (4) A Program Coordinator, with such licensure and background as shall be approved in advance by Medical Center; and (5) occupational/recreational therapist(s) in numbers sufficient to meet Inpatient Program needs, additional licensed counselors in numbers sufficient to meet Inpatient Program needs, and any other non-physician personnel required for the Inpatient Program who are not provided by Medical Center hereunder. Any and all non-Medical Center personnel employed or contracted for by Manager to render services in the Inpatient Program shall be subject to prior approval by Medical Center and, as applicable, its Medical Staff and shall be compatible with Medical Center's employment standards, and Medical Center shall be furnished a job description and resume of qualifications and work experience with respect to such personnel as well as any completed applications as may be required by Medical Center or its Medical Staff. Such personnel shall not be deemed employees or agents of Medical Center, and Manager shall have full responsibility for wages, vacation pay, sick leave, payroll and other employment taxes, pension and retirement plan contributions, worker's compensation and unemployment insurance, social security, or any other benefits, or other pay or compensation whatsoever (collectively, "employee benefits") for any of Manager's employees or contractors provided hereunder, or providing services under this Agreement, as defined below. 3.4 Consult with the Medical Center for the development of clinical needs for the selection of Program nursing staff. 3.5 Provide, at its sole cost and expense, qualified personnel of Manager to conduct on-site orientation programs, to enable Medical Center to train the Program nursing staff and selective nursing personnel from other units of the Medical Center to act as back-up for the 6 Program nursing staff. 3.6 Consult, manage and support the Inpatient Program treatment team's effort to provide quality psychiatric treatment working collaboratively with Medical Center's Medical Staff, and care management, UR and Discharge Planning personnel. 3.7 Any employee or contractor of Manager who, Medical Center, in its sole discretion, determines is incompatible with the goals, bylaws, rules, regulations, policies or procedures of Medical Center and/or its Medical Staff shall be removed by Manager upon thirty (30) days' prior written notice. Medical Center shall have the right, in its sole discretion, to approve or disapprove in advance in writing any proposed replacement or substitute for any of Manager's personnel hereunder. Any employee or contractor of Manager shall be immediately removed if Medical Center, in its sole discretion, determines that the individual's presence is a threat to patient care or the Medical Center's operations. Professionals provided by Manager shall apply for and maintain in good standing appropriate membership as an allied health professional or physician (as applicable) on Medical Center's Medical Staff with appropriate clinical privileges, as required by the Medical Staff bylaws, rules and regulations and shall not cause any suspension, reduction or termination of such membership or privileges or be placed on probation by the Medical Staff. 3.8 Submit monthly status reports for the Program to Medical Center's Administration in a form acceptable to Medical Center that will review Program operations during the previous month and outline planned activities for the coming month. 3.9 Initiate a comprehensive public information, education, marketing and referral development program, which shall be reviewed and approved periodically in coordination with other Medical Center public relations and marketing plans. Within thirty (30) days following the commencement date hereof, Manager shall present Medical Center for its review and approval with a detailed publicity and marketing plan, and Manager shall implement such plan within no later than thirty (30) days following Medical Center's approval thereof. Such publicity and marketing activities shall be conducted at Manager's sole cost and expense, which costs and expenses may include, without limitation, development of patient handbooks or brochures; printing of articles, business cards, stationery, and the like; development of public service announcements, advertising campaigns, press releases and radio commercials; preparation of invitations and announcements for educational programs; preparation of referral letters; and hosting seminars and workshops. Medical Center shall have the right and must approve or disapprove in advance all marketing programs, which approval shall not be unreasonably withheld. Manager shall not be permitted to use Medical Center's or Medical Center's name, logo or likeness without Medical Center's prior written approval. 3.10 Develop and implement operational policies and procedures for the Inpatient Program, including, without limitation, UR/QI procedures, in collaboration with Medical Center. Any and all Inpatient Program policies, procedures, programs and activities are subject to prior review and approval by Medical Center's administration and its Medical Staff. 7 3.11 Use its best efforts to assist Medical Center in working with governmental agencies, third-party payors and others to secure necessary licenses, permits, approvals, accreditation and certifications for the Program. 3.12 Follow admission policies and procedures developed by Medical Center in respect to patients of Inpatient Program, as well as other authorizations for admission of patients to the Program and the provision of services to such patients on behalf of Medical Center as are required by governmental agencies or any other third-payor prior to the patient's admission. Utilize its best efforts to obtain additional Treatment Authorization Record's ("TAR's") and approvals for continued hospitalization and/or services as necessary to promote timely payment. 3.13 Obtain and maintain worker's compensation insurance for its employees and agents as required by California law. If permitted, Medical Center shall be added as an additional insured on such policy. 3.14 Commit no act or omission which adversely affects Medical Center's licensure reimbursement or certification or accreditation in connection with the management and operation of the Inpatient Program. 3.15 Cause patients to be admitted to the Inpatient Program (including but not limited to Medicare and Medi-Cal patients) only if the admission is ordered by a physician who is a member in good standing of the Medical Center Medical Staff with admitting privileges, and strictly in compliance with Medical Center's admission policies and procedures (as described above). 4. Representation and Warranties of Manager. Manager hereby represents and warrants to Medical Center as follows, which representations and warranties shall be true, accurate and complete on the date of this Agreement (as defined herein) and at all other times during the term hereof: 4.1 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. 4.2 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 contravene any governmental license, franchise, permit or other authorization possessed by either party, nor will such execution and performance violate any federal, state or local law, rule or regulation. This Agreement is a legal and binding obligation of Manager, and all corporate actions and approvals have been taken and obtained in order for Manager to enter into this Agreement. No approval, authorization or other action by, or filing with, any governmental authority or any other third party is required in connection with either party performing its duties and obligations hereunder. 8 4.3 There is no litigation, administrative proceedings or investigation pending or threatened against Manager (nor is it subject to any judgement, order, decree or regulations of any court or other governmental administrative agency) pending or affect Manager which would materially adversely affect the performance of Manager's obligations hereunder. Without limiting the foregoing, Manager represents and warrants that it has strictly complied, is currently in compliance and shall strictly comply with any and all statutes, rules, regulations, decisions and guidelines applicable to the operation, management, reimbursement and/or payment of services provided by inpatient psychiatry programs which Manager is, has or shall be operating and/or managing, under the Medicare and Medi-Cal Programs and any other public or private third party reimbursement or payment program, and that Manager is not, has not been and shall not be under investigation, audit or challenge by any federal or state agency or authority in connection with any of its operations, policies or procedures. 4.4 Any and all personnel and professionals provided by Manager to the Inpatient Program shall be duly licensed and qualified, as applicable, and shall fulfill each of their terms, duties, obligations covenants, representations, warranties, responsibilities and indemnities applicable to them hereunder at all times while performing services for the Program. 5. Compensation. 5.1 Compensation payable to Manager by Medical Center shall be on a fixed fee basis and shall be the sum of Seventy Five Thousand Dollars ($75,000) per month for each month of service provided hereunder. On or before the fifth (5th) day of each calendar month Manager will forward to Medical Center an invoice from the previous month for the fees due and payable by Medical Center under this Section 5. Medical Center shall have ten (10) days following receipt of any such invoice to dispute Manager's days of service or claim for reimbursement in writing, which shall set forth the reasons for such dispute. If Medical Center does not dispute an invoice, the payment of the Management Fee is expressly conditioned upon Manager: (1) preparing and submitting to Medical Center on a periodic basis, as determined by Medical Center, complete and accurate time records on such forms specified by Medical Center, and complying with all requirements and supplying all documents necessary to otherwise substantiate claims by Medical Center to third party payors for services of Manager, Medical Director, Inpatient Program Director and Manager's other personnel; and (2) otherwise at all times being in compliance with the terms and conditions of this Agreement. Except as otherwise provided herein, a failure by Medical Center to pay the submitted invoice by the thirtieth (30th) day following receipt of the invoice shall be a material breach of this Agreement by Medical Center, which shall give Manager the right to terminate this Agreement for cause, unless such failure is due to Manager's default under this or any other provision of this Agreement. Any such termination of this Agreement by Manager shall not affect Medical Center's obligation to pay undisputed amounts due Manager under this Agreement, less any applicable credits, withholds or deductions. Should this Agreement terminate for any reason as provided for under this Agreement prior to the end of a calendar month, Manager shall be paid a pro-rata amount for services rendered prior to the termination as payment in full for services provided under this Agreement. 5.2 Medical Center or its duly authorized agents shall have the exclusive and 9 sole right to bill and collect all charges for services rendered by Manager to patients in the Inpatient Program. All amounts collected by Medical Center or its duly authorized agents pursuant to such invoices shall belong to Medical Center, and Manager shall have no right or interest in the same; provided however, this in no way restricts the Medical Director or other members of the Medical Center Medical Staff from billing and collecting fees for professional services rendered to patients in the Inpatient Program. 5.3 Both parties agree to evaluate the impact which HMO, Managed Care, PPO, and other group business opportunities may have on Inpatient Program operations, and to work collaboratively in the strategic planning and marketing processes. 5.4 If Medical Center is denied reimbursement for ten percent (10%) or more of the patient days billed under the Inpatient Program, compensation payable to Manager under Section 5.1 shall be decreased at the rate of Two Hundred and Fifty Dollars ($250.) per day denied in excess of that ten percent (10%). A denied day is defined as reimbursement that is denied by any third party payor, including MediCal, which denial has been appealed through the appropriate appeals process in accordance with Medical Center's regular billing and collection standards and practices. 5.4.1 The percentage of denied days shall be determined as follows: 5.4.1.1 The number of patient days billed under the Inpatient Program shall be identified for each six (6) month period of services ("billing period") provided hereunder. At the end of that billing period, the percentage of denied days for that billing period shall equal the sum of the number of denied days for that billing period divided by the total number of patient days billed. 6. Confidential Information. 6.1 For purposes of this Agreement, the term "Confidential Information" shall include the following: (1) all documents and other materials including but not limited to the Proposal, memoranda, manuals, handbooks, pamphlets, production books and audio or visual recordings, which contain written information relating to the Inpatient Program (excluding written materials distributed to patients in the Inpatient Program or as promotion for the Inpatient Program), (2) all methods, techniques and procedures utilized in providing psychiatric treatment services to patients in the Inpatient Program at the Medical Center not readily available through sources in the public domain; and (3) all trademarks, trade names and service marks of Manager. 6.2 Medical Center agrees and acknowledges that Confidential Information is disclosed to it in confidence with the understanding that it constitutes valuable business information developed by Manager at great expenditure of time, effort and money. Medical Center agrees it shall not, without the express prior written consent of Manager, use Confidential Information for any purpose other than the performance of this Agreement. Medical Center further agrees to keep strictly confidential and hold in trust all Confidential Information and not disclose or reveal such information to any third party without the express prior written consent of 10 Manager. It is expressly understood that Medical Center will continue to disclose patient information to insurers and governmental agencies as mandated. 6.3 Medical Center acknowledges that the disclosure of Confidential Information to it by Manager is done in reliance upon the Medical Center's representation and covenants in this Agreement. Upon termination of this Agreement by either party for any reason whatsoever, Medical Center shall forthwith return all material constituting or containing Confidential Information and Medical Center will not thereafter use, appropriate, or reproduce such information or disclose such information to any third party, except as mandated by law. 6.4 Non-Disclosure. Manager acknowledges that during the term of this Agreement she may be given access to certain proprietary information and trade secrets of Medical Center ("Trade Secrets"). The Trade Secrets will include information relative to Medical Center and may also include information encompassed in business plans, proposals, marketing and development plans, financial information, costs and other concepts, ideas or know-how related to the business or developments of CHWSC which have not been publicly released by Medical Center or its duly authorized representatives. Manager shall preserve and maintain as confidential all Trade Secrets that have been or may be obtained by her in the courses of her performance of services under this Agreement. Manager also shall not, without the prior written consent of Medical Center, use for her own benefit or purposes, or disclosure to others, either during the term of this Agreement hereunder or thereafter, any Trade Secret. All Trade Secrets shall constitute "trade secrets" under the Uniform Trade Secrets Act contained in California Civil Code Sections 3426 et seq., and Medical Center shall be entitled to all protection and be afforded all remedies available under such Act. 7. Recruitment of Employees and Independent Contractors. 7.1 Medical Center acknowledges that Manager has and will continue to expend substantial time, effort, and money training its employees and independent contractors in the operation of the Program. The employees and independent contractors of manager who will operate the program at the Medical Center will have access to and possess Confidential Information of Manager. Medical Center acknowledges that to employ or contract with former employees or independent contractors of Manager would likely result in the use of Manager's Confidential Information in violation of Section 6 hereof. Medical Center, therefore, agrees that during the term of this Agreement and for one (1) year thereafter, it will not, and it will cause Medical Center, not to employ, solicit the employment of, or in any way retain the services of any employee, former employee, or independent contractor of Manager if such individual has been employed or retained by Manager and has provided services under this Agreement as Medical Center at any time during the immediate preceding one (1) year unless Manager gives Medical Center prior written consent thereto. 7.2 Manager agrees that during the same respective period of time, it will not 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 Medical Center without Medical Center's prior written consent thereto. 11 8. Service Mark License. Medical Center acknowledges that "OptimumCare" and "OptimumCare Unit" are registered service marks belonging exclusively to OptimumCare, and that during the term of this Agreement only, Medical Center is licensed to utilize these service marks in the marketing of professional services for the treatment of adult psychiatric patients in the Program. Medical Center's use of these service marks shall inure to the benefit of OptimumCare, and shall not give Medical Center any right or title therein, and any common law service marks rights acquired as a consequence of Medical Center's use thereof are hereby assigned exclusively to OptimumCare. At the termination of this Agreement, Medical Center shall immediately terminate the use of these service marks unless a separate written service mark license agreement, specifically authorizing continued use of such service marks, is entered into by the parties hereto at that time. Medical Center will not cause any documents to be printed bearing such service marks without an accompanying mark indicating that such service marks are registered service marks. Manager likewise agrees that all publication and information pieces developed or utilized for any purpose involving the Medical Center must first have specific authorization of the Medical Center. 9. Compliance with Regulations. Manager will conduct its activities and operations in strict compliance with all rules and regulations of the Medical Center, its medical staff and applicable state and other government authorities and agencies. Manager's employees and representatives shall comply with and observe such rules and regulations. 10. Jeopardy. Notwithstanding anything to the contrary hereinabove contained, in the event the performance by either party hereto of any term, covenant, condition or provision of this Agreement should jeopardize the licensure of Medical Center, its participation in, or its certification or reimbursement from, Medicare, Medi-Cal, Blue Cross or any other reimbursement or payment program, or its full accreditation by JCAHO or any other state or nationally recognized accreditation, organization, or if for any reason said performance should be in violation or be deemed unethical by any recognized body, agency or association in the Medical or hospital fields, Medical Center may at its option terminate this Agreement forthwith. 11. Miscellaneous. 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 judgement 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. 12 12. Attorney Fees. If any legal action (including arbitration) is necessary to enforce the term 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. Governing Law. The validity of this Agreement, the interpretation of the rights and duties of the parties hereunder and the construction of the terms hereof shall be governed in accordance with the internal laws of the State of California. 14. Federal Government Access. Until the expiration of four (4) years after the furnishing of services pursuant to this Agreement, Manger shall make available, upon request to the Secretary of Health and Human Services, or upon request to the Controller General, or any of their duly authorized representatives, this Agreement, books, documents and records of manager that are necessary to certify the nature and extent of the cost claimed to Medicare with respect to the services provided under this Agreement. 15. Notice. All notices hereunder shall be in writing, delivered personally or by Certified or Registered postal mails, postage prepaid, return receipt requested, and shall be deemed given when delivered personally or when deposited in the United States mail, addressed as below with proper postage affixed, but each may change his address by written notice in accordance with this Paragraph. Medical Center's Address: St. Francis Medical Center 3630 East Imperial Highway Lynwood, CA 90262 Attention: Administrator Copy to: CHW Southern California 790 E. Colorado Blvd., Suite 600 Pasadena, CA 91101 Attention: Corporate Counsel Manager's Address: OptimumCare Corporation 428 Culver Blvd. Playa Del Rey, CA 90293 13 16. Severability. If for any reason any clause or provision of this Agreement, or the application of any such clause or provision in a particular context or to a particular situation, circumstance or person, should be held unenforceable, invalid or in violation of law by any court or other tribunal, then the application of such clause or provision in contexts or to situations, circumstances or persons other than that in or to which it is held unenforceable, invalid or in violation of law shall not be affected thereby, and the remaining clauses and provisions hereof shall nevertheless remain in full force and effect. 17. Captions. Any captions to or headings of the Articles, Paragraphs or subparagraphs of this Agreement are solely for the convenience of the parties, and shall not be interpreted to affect the validity of this Agreement or to limit or affect any rights, obligations, or responsibilities of the parties arising hereunder. 18. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 19. Entire Agreement; Amendment. This Agreement constitutes the full and complete agreement and understanding between the parties hereto and shall supersede all prior written and oral agreements concerning the subject matter contained herein. Unless otherwise provided herein, this Agreement may be modified, amended or waived only by a written instrument executed by all of the parties hereto. 20. Force Majeure. Neither party shall be liable nor deemed to breach this Agreement for any delay or failure in performance or other interruption of service resulting, directly or indirectly, from Acts of God, civil or military authority, acts of the public enemy, riots or civil disobedience, war, accidents, fires, explosions, earthquakes, floods, failure of transportation, machinery or supplies, vandalism, strikes or other work interruptions by the employees of any party, or any other cause beyond the reasonable control of the party affected thereby. However, each party shall utilize its best good faith efforts to perform under this Agreement in the event of any such occurrence or circumstance. 21. Gender and Number. Whenever the context hereof requires, the gender of all terms shall include the masculine, feminine, and neuter, and the number shall include the singular and plural. 14 22. Ambiguities. The general rule that ambiguities are to be construed against the drafter shall not apply to this Agreement. In the event that any provision of this Agreement is found to be ambiguous, each party shall have an opportunity to present evidence as to the actual intent of the parties with respect to such ambiguous provision. 23. Waiver. No failure or delay by a party to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement, or to exercise any right, power or remedy hereunder or under law or consequent upon a breach hereof or thereof shall constitute a waiver of any such term, condition, covenant, agreement, right, power or remedy or of any such breach or preclude such party from exercising any such right, power or remedy at any later time or times. 24. Indemnification. Manager and Medical Center shall each indemnify, defend and hold the other harmless against all claims and liabilities (including reasonable attorney's fees and costs of suit) that may arise as a result of the negligent, intentional or wrongful acts or omissions of the indemnifying party. 25. Independent Contractors. 25.1 In the performance of Manager's duties and obligations arising under this Agreement, Manager is at all times acting and performing as an independent contractor. Nothing in this Agreement is intended nor shall be construed to create between Manager and Medical Center, with respect to their relationship under this Agreement, either an employer/employee, joint venture, partnership, or landlord/tenant (lease) relationship. In the event that a determination is made for any reason that an independent contractor relationship does not exist between Manager and Medical Center, Medical Center may terminate this Agreement immediately upon written notice to Manager. 25.2 Manager shall reimburse Medical Center for the employee portion of all employee-related taxes, charges or levies which may be collected from Medical Center in the event that Manager is determined to be an employee of Medical Center and not an independent contractor. 15 SIGNATURE PAGE TO THE PSYCHIATRIC UNIT MANAGEMENT SERVICES AGREEMENT IN WITNESS WHEREOF, this Agreement has been executed on _________, 1998, at LYNWOOD, California. Manager Medical Center OPTIMUMCARE CORPORATION CHW SOUTHERN CALIFORNIA doing business as ST. FRANCIS MEDICAL CENTER By: /s/ EDWARD A. JOHNSON By: ------------------------------- ---------------------------------- Edward A. Johnson Print name and title Chairman of the Board By: /s/ MULU G. MICHAEL ------------------------------- Mulu G. Michael President & Chief Operating Officer 16 SUPPORT ACTIVITIES OptimumCare Corporation Responsibilities: Patient Handbooks Brochure Reprints of Selected Articles Printing of Business Cards for OptimumCare Program Team Printing of Personalized OptimumCare Program Stationery, is desired Public Service Announcement Campaign - Including Materials Prepared for Television/Radio/Print Public Relations Campaigns Typing of Press Releases Typing of Radio and Television Spots of Medical Center Stationery, Addressing and Mailing of Invitations, Announcements and General Program Correspondence Marketing Expertise Medical Center Responsibilities: Typing of Public Relations and Referral Letters Providing Telephone System for the OptimumCare Program 17 OUTPATIENT PSYCHIATRIC UNIT MANAGEMENT SERVICES AGREEMENT THIS OUTPATIENT PSYCHIATRIC UNIT MANAGEMENT SERVICES AGREEMENT ("Agreement") is made and entered into by and between CATHOLIC HEALTHCARE WEST SOUTHERN CALIFORNIA, a California nonprofit public corporation doing business as St. Francis Medical Center ("Medical Center"), and OPTIMUMCARE CORPORATION, a Delaware corporation ("Manager"). RECITALS A. Medical Center operates a general acute care hospital in which is located a mental health unit which provides an adult partial hospitalization program for outpatient psychiatric services ("Outpatient Program"). B. Manager is in the business of providing management and other services for the treatment of inpatient psychiatric patients in compliance with industry, regulatory, and governmental standards and requirements through its OPTIMUMCARE PSYCH UNIT PROGRAM. C. Medical Center and Manager desire to enter into this Agreement in order to set forth the terms and conditions upon which Manager will provide Outpatient Program management and other services to or for the benefit of Medical Center. NOW, THEREFORE, in consideration of the mutual covenants, conditions, and promises set forth herein, and for such other good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Term and Termination. 1.1 Term: Unless sooner terminated in accordance with the provisions of Sections 10 hereof, this agreement shall commence at 12:01 a.m. on September 15, 1998 and shall remain in full force and effect for a term of two (2) years, expiring at 11:59 p.m. on September 14, 2000. 1.2 Termination: In addition to any other events causing termination under this Agreement, this Agreement may be terminated on the first to occur of any of the following: 1.2.1 Either party, at any time during the term of this Agreement, may terminate this Agreement without cause upon ninety (90) days' prior written notice. 1.2.2 Either party shall have the right to terminate this Agreement on thirty (30) days' prior written notice to the other party if the party to whom such notice is given is in breach of any material provision of this Agreement. The party claiming the right to terminate hereunder shall set forth, in the notice of intended termination required hereby, the facts 18 underlying its claim that the other party is in breach of this Agreement. Notwithstanding the foregoing, this Agreement shall not terminate in the event that the breaching party cures the breach within ten (10) days of the receipt of such notice, or if such breach is not reasonably capable of cure within such period, diligently prosecutes such cure to completion within the thirty (30) day notice period. 1.2.3 In the event there are any changes effected in the California Medical Assistance Program ("Medi-Cal"), Title XVIII of the Federal Social Security Act ("Medicare"), and/or substantial changes under other public or private health and/or hospital care insurance programs or policies which may have a material effect on the operations of Medical Center, Medical Center may elect to renegotiate this Agreement upon written notice of Manager. Medical Center shall indicate the basis upon which it has determined that such a material impact on its operations may result. In any case where such notice is provided, both parties shall negotiate a revised agreement, which, to the extent reasonably practicable, under the circumstances, each party will adequately protect its interests and fulfill its objectives in light of the governmental program or private insurance policy changes which constituted the basis for the exercise of this provision. In the event the parties are unable to negotiate a revised agreement within said period, Medical Center may thereupon elect to terminate this Agreement upon thirty (30) days' prior written notice. 1.3 Subject to the provisions of the sections above, Manager shall immediately cause the removal of any Outpatient Program Director, Medical Director or any physician or licensed professional providing professional services for the Outpatient Program under Manager's employment or contract, who is subject to or under disciplinary action by licensing or other authorities, or whose performance results in disciplinary action by the Medical Staff, and/or whose performance results in a final judgement awarding damages of $100,000 or more against the Medical Center and/or if any such physician(s) loses (or has suspended or modified or placed on probation) his or her Medical Staff membership and/or clinical privileges to practice psychiatry or his or her profession at the Medical Center. If Manager fails to immediately terminate any such professional, then Medical Center may immediately terminate this Agreement. 1.4 If either party to this Agreement should be declared bankrupt or become insolvent or liquidate for any reason, the other party may transmit to the former party written notice of its intention to immediately terminate this Agreement, specifying with particularity the event justifying such notice; provided, that the delay or failure of a party so to transmit written notice shall not constitute a waiver by said party of any default hereunder or of any other or further default under this Agreement by the former party. If the event justifying such notice is the bankruptcy, insolvency or liquidation of the party receiving such notice, this Agreement shall terminate forthwith. 1.5 This Agreement may be terminated by Medical Center immediately on written notice if: 1.5.1 Medical Center gives written notice to Manager (specifying in reasonable detail the reasons and events giving rise to the delivery of such notice) that the 19 Outpatient Program operated by Manager has failed to meet licensing, payor certification, or JCAHO standards of patient care or requirements, or Medical Center's or its Medical Staff's standards, and Manager fails to remedy such deficiencies to Medical Center's absolute satisfaction within thirty (30) days of receipt of such notice. 1.5.2 Manager initiates or undergoes, without Medical Center's prior written approval, (a) any sale or transfer of all or substantially all of its assets other than in the ordinary course of business; (b) any dissolution, merger or reorganization; or (c) any change, individually or through a series of transactions, in a 20% or greater ownership, voting or control interest in Manager or any change in Manager's management with responsibility over the Outpatient Program. 2. Covenants of the Medical Center. Medical Center shall: 2.1 Subject to availability and budgetary constraints, furnish space in Medical Center's outpatient department to the Outpatient program so as to enable the participation of at least forty (40) outpatients per day, as determined by Medical Center to be reasonably necessary for said program. Medical Center shall also provide the services, facilities and support of other Medical Center departments, including without limitation, available diagnostic facilities, as Medical Center determines is reasonably necessary for Program patients and as ordered by said patients' attending physicians. Medical Center shall also provide office space for Manager's Program Director within the Unit as Medical Center reasonably determines is necessary for the operation of the Program, subject to space and budgetary constraints. Manager shall accept such space, facilities, etc. of Medical Center in "as is" condition, and title to such space, facilities, etc. shall remain at all times in Medical Center. Said Unit space shall be used solely for the operation of the Program and for no other purposes. 2.2 Provide the Outpatient Program with qualified nursing personnel, at staffing levels sufficient to meet Outpatient Program needs as determined by Medical Center in its sole discretion, who are trained and experienced in psychiatric nursing and provide other non-physician personnel, such personnel collectively referred to herein as "Medical Center Personnel". Medical Center shall be responsible for employing or engaging such Medical Center Personnel and are solely liable to such personnel for payment of their wages, compensation and employee benefits. Said personnel shall comply with the Outpatient Program policies and procedures as developed by Medical Center. 2.3 Assist Manager in maintaining accreditation of the Outpatient Program by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), Accreditation Council for Psychiatric Facilities, and pay all related application fees, and assist Manager in the preparation of any and all information, data and materials required in connection with application or renewal for such accreditation. Medical Center shall also obtain, with Manager's full cooperation and assistance, any and all certifications or approvals from the Medicare and MediCal Programs and from any other governmental or private payment or reimbursement programs. 20 Medical Center shall also obtain, with Manager's full assistance and cooperation, any consents or approvals to maintain the Program as an Outpatient service under Medical Center's general acute care hospital license. Manager shall be solely liable for any costs or expenses that it incurs in connection with providing assistance to, and cooperating with, Medical Center in obtaining the consents and approvals described in this Section 2.3. 2.4 Acknowledges that the selection, continued employment and termination of employment and overall supervision and direction of Medical Center Personnel for the Outpatient Program shall be at the sole discretion of Medical Center's Administration. However, Medical Center agrees that it shall consult with Manager in the event Manager desires the removal from the Program of any Medical Center Personnel, provided that such request is made in writing specifying with particularity the cause for such request and such request shall not be made unreasonably. 2.5 Provide: (1) maintenance of the patient care areas used for the Outpatient Program as Medical Center determines is necessary upon consultation with Manager; (2) dietary service for Program patients as is normally available to other Medical Center patients; (3) housekeeping services for patients and Manager's offices at the Medical Center as is normally available to other Medical Center patients; (4) telephone and utilities for patient areas and Manager's offices at the Medical Center as is normally available for Medical Center facilities; and (5) other services of Medical Center departments customarily provided in the ordinary course of business to Medical Center patients (e.g. record keeping); all of which as reasonably determined by Medical Center to be necessary for the efficient operation of the Program. 2.6 Provide oversight and supervision for appropriate utilization review ("UR") and quality improvement ("QI") programs and procedures developed and implemented by Manager in cooperation with Medical Center for the Outpatient Program, and integrate such programs and procedures with Medical Center's other such programs and procedures. 2.7 Review and, if acceptable, approve Manager's publicity and marketing plans and advertising, publicity and marketing materials for the Program, from time to time. 2.8 Maintain its general and professional liability insurance, or self-insurance, coverage for Medical Center and Medical Center employees or agents. 3. Covenants of Manager. Manager shall: 3.1 Provide professional and general liability insurance coverage of at least Three Million Dollars ($3,000,000) per occurrence with an aggregate limitation of Five Million Dollars ($5,000,000) with respect to Manager and Manager's employees, agents, and contractors that Manager retains to provide services to the Program. If Manager provides a claims-made policy, Manager shall either maintain such insurance coverage in force following the termination of this Agreement, or provide evidence of adequate "tail" coverage, with such terms and 21 conditions approved in advance by Medical Center. Manager shall also ensure that each physician providing professional services on behalf of the Outpatient Program maintains professional liability insurance in the minimum coverage amounts and subject to the terms specified herein. All insurance policies providing coverage as described above shall provide for at least thirty (30) days' prior written notice to Medical Center prior to any modification, amendment or cancellation of such coverage taking effect. Manager shall provide Medical Center with certificates evidencing the insurance coverage required above immediately upon the execution of this Agreement. 3.2 Subject to Medical Center's approval, Manager shall develop, implement and supervise the Outpatient Program. The Outpatient Program shall include intensive, specialized Outpatient services for the care and treatment of adult psychiatric patients. Manager shall, in general, develop clinical treatment programs that meet the clinical needs and community standards, and are in compliance with the licensure and accreditation requirements for governmental and regulatory agencies and payors. Manager shall provide ongoing management and support services for the Outpatient Program. 3.3 Provide the following personnel for the Outpatient Program: (1) a Medical Director assigned exclusively full-time to the Outpatient Program (who shall be a psychiatrist duly licensed in good standing by the State of California, shall be certified by the Board of Psychiatry, and shall be a member in good standing of the Medical Center's Medical Staff with clinical privileges in Psychiatry); (2) an Outpatient Program Director assigned exclusively full-tine to manage the Outpatient Program and who shall have day-to-day management responsibility for the Outpatient Program and Outpatient Program personnel, (3) clinical psychologist(s) in a number acceptable to Medical Center, one of whom shall be designated as chief therapist; (4) A Partial Hospitalization Program Coordinator, with such licensure and background as shall be approved in advance by Medical Center; and (5) occupational/recreational therapist(s) in numbers sufficient to meet Outpatient Program needs, additional licensed counselors in numbers sufficient to meet Outpatient Program needs, and any other non-physician personnel required for the Outpatient Program who are not provided by Medical Center hereunder. Any and all non-Medical Center personnel employed or contracted for by Manager to render services in the Outpatient Program shall be subject to prior approval by Medical Center and, as applicable, its Medical Staff and shall be compatible with Medical Center's employment standards, and Medical Center shall be furnished a job description and resume of qualifications and work experience with respect to such personnel as well as any completed applications as may be required by Medical Center or its Medical Staff. Such personnel shall not be deemed employees or agents of Medical Center, and Manager shall have full responsibility for wages, vacation pay, sick leave, payroll and other employment taxes, pension and retirement plan contributions, worker's compensation and unemployment insurance, social security, or any other benefits, or other pay or compensation whatsoever (collectively, "employee benefits") for any of Manager's employees or contractors provided hereunder, or providing services under this Agreement, as defined below. 3.4 Consult with the Medical Center for the development of clinical needs for the selection of Program nursing staff. 3.5 Provide, at its sole cost and expense, qualified personnel of Manager to 22 conduct on-site orientation programs, to enable Medical Center to train the Program nursing staff and selective nursing personnel from other units of the Medical Center to act as back-up for the Program nursing staff. 3.6 Consult, manage and support the Outpatient Program treatment team's effort to provide quality psychiatric treatment working collaboratively with Medical Center's Medical Staff, and care management, UR and Discharge Planning personnel. 3.7 Any employee or contractor of Manager who, Medical Center, in its sole discretion, determines is incompatible with the goals, bylaws, rules, regulations, policies or procedures of Medical Center and/or its Medical Staff shall be removed by Manager upon thirty (30) days' prior written notice. Medical Center shall have the right, in its sole discretion, to approve or disapprove in advance in writing any proposed replacement or substitute for any of Manager's personnel hereunder. Any employee or contractor of Manager shall be immediately removed if Medical Center, in its sole discretion, determines that the individual's presence is a threat to patient care or the Medical Center's operations. Professionals provided by Manager shall apply for and maintain in good standing appropriate membership as an allied health professional or physician (as applicable) on Medical Center's Medical Staff with appropriate clinical privileges, as required by the Medical Staff bylaws, rules and regulations and shall not cause any suspension, reduction or termination of such membership or privileges or be placed on probation by the Medical Staff. 3.8 Submit monthly status reports for the Outpatient Program to Medical Center's Administration in a form acceptable to Medical Center that will review Outpatient Program operations during the previous month and outline planned activities for the coming month. 3.9 Initiate a comprehensive public information, education, marketing and referral development program, which shall be reviewed and approved periodically in coordination with other Medical Center public relations and marketing plans. Within thirty (30) days following the commencement date hereof, Manager shall present Medical Center for its review and approval with a detailed publicity and marketing plan, and Manager shall implement such plan within no later than thirty (30) days following Medical Center's approval thereof. Such publicity and marketing activities shall be conducted at Manager's sole cost and expense, which costs and expenses may include, without limitation, development of patient handbooks or brochures; printing of articles, business cards, stationery, and the like; development of public service announcements, advertising campaigns, press releases and radio commercials; preparation of invitations and announcements for educational programs; preparation of referral letters; and hosting seminars and workshops. Medical Center shall have the right and must approve or disapprove in advance all marketing programs, which approval shall not be unreasonably withheld. Manager shall not be permitted to use Medical Center's or Medical Center's name, logo or likeness without Medical Center's prior written approval. 3.10 Develop and implement operational policies and procedures for the Outpatient Program, including, without limitation, UR/QI procedures, in collaboration with 23 Medical Center. Any and all Outpatient Program policies, procedures, programs and activities are subject to prior review and approval by Medical Center's administration and its Medical Staff. 3.11 Use its best efforts to assist Medical Center in working with governmental agencies, third-party payors and others to secure necessary licenses, permits, approvals, accreditation and certifications for the Program. 3.12 Follow admission policies and procedures developed by Medical Center in respect to patients of Outpatient Program, as well as other authorizations for admission of patients to the Program and the provision of services to such patients on behalf of Medical Center as are required by governmental agencies or any other third-payor prior to the patient's admission. Utilize its best efforts to obtain additional Treatment Authorization Record's ("TAR's") and approvals for continued participation in the Outpatient Program and/or services as necessary to promote timely payment. 3.13 Obtain and maintain worker's compensation insurance for its employees and agents as required by California law. If permitted, Medical Center shall be added as an additional insured on such policy. 3.14 Commit no act or omission which adversely affects Medical Center's licensure reimbursement or certification or accreditation in connection with the management and operation of the Outpatient Program. 3.15 Cause patients to be admitted to the Outpatient Program (including but not limited to Medicare and Medi-Cal patients) only if the admission is ordered by a physician who is a member in good standing of the Medical Center Medical Staff with admitting privileges, and strictly in compliance with Medical Center's admission policies and procedures (as described above). 4. Representation and Warranties of Manager. Manager hereby represents and warrants to Medical Center as follows, which representations and warranties shall be true, accurate and complete on the date of this Agreement (as defined herein) and at all other times during the term hereof: 4.1 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. 4.2 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 contravene any governmental license, franchise, permit or other authorization possessed by either party, nor will such execution and performance violate any federal, state or local law, rule or regulation. This Agreement is a legal and binding obligation 24 of Manager, and all corporate actions and approvals have been taken and obtained in order for Manager to enter into this Agreement. No approval, authorization or other action by, or filing with, any governmental authority or any other third party is required in connection with either party performing its duties and obligations hereunder. 4.3 There is no litigation, administrative proceedings or investigation pending or threatened against Manager (nor is it subject to any judgement, order, decree or regulations of any court or other governmental administrative agency) pending or affect Manager which would materially adversely affect the performance of Manager's obligations hereunder. Without limiting the foregoing, Manager represents and warrants that it has strictly complied, is currently in compliance and shall strictly comply with any and all statutes, rules, regulations, decisions and guidelines applicable to the operation, management, reimbursement and/or payment of services provided by Outpatient psychiatry programs which Manager is, has or shall be operating and/or managing, under the Medicare and Medi-Cal Programs and any other public or private third party reimbursement or payment program, and that Manager is not, has not been and shall not be under investigation, audit or challenge by any federal or state agency or authority in connection with any of its operations, policies or procedures. 4.4 Any and all personnel and professionals provided by Manager to the Outpatient Program shall be duly licensed and qualified, as applicable, and shall fulfill each of their terms, duties, obligations covenants, representations, warranties, responsibilities and indemnities applicable to them hereunder at all times while performing services for the Program. 5. Compensation. 5.1 Compensation payable to Manager by Medical Center shall be on a fixed fee basis and shall be the sum of Twenty Eight Thousand Three Hundred Thirty Three Dollars ($28,333) per month for each month of service provided hereunder. On or before the fifth (5th) day of each calendar month Manager will forward to Medical Center an invoice from the previous month for the fees due and payable by Medical Center under this Section 5. Medical Center shall have ten (10) days following receipt of any such invoice to dispute Manager's days of service or claim for reimbursement in writing, which shall set forth the reasons for such dispute. If Medical Center does not dispute an invoice, the payment of the Management Fee is expressly conditioned upon Manager: (1) preparing and submitting to Medical Center on a periodic basis, as determined by Medical Center, complete and accurate time records on such forms specified by Medical Center, and complying with all requirements and supplying all documents necessary to otherwise substantiate claims by Medical Center to third party payors for services of Manager, Medical Director, Outpatient Program Director and Manager's other personnel; and (2) otherwise at all times being in compliance with the terms and conditions of this Agreement. Except as otherwise provided herein, a failure by Medical Center to pay the submitted invoice by the thirtieth (30th) day following receipt of the invoice shall be a material breach of this Agreement by Medical Center, which shall give Manager the right to terminate this Agreement for cause, unless such failure is due to Manager's default under this or any other provision of this Agreement. Any such termination of this Agreement by Manager shall not affect Medical Center's obligation to pay undisputed amounts due Manager under this Agreement, less any applicable credits, withholds or 25 deductions. Should this Agreement terminate for any reason as provided for under this Agreement prior to the end of a calendar month, Manager shall be paid a pro-rata amount for services rendered prior to the termination as payment in full for services provided under this Agreement. 5.2 Medical Center or its duly authorized agents shall have the exclusive and sole right to bill and collect all charges for services rendered by Manager to patients in the Outpatient Program. All amounts collected by Medical Center or its duly authorized agents pursuant to such invoices shall belong to Medical Center, and Manager shall have no right or interest in the same; provided however, this in no way restricts the Medical Director or other members of the Medical Center Medical Staff from billing and collecting fees for professional services rendered to patients in the Outpatient Program. 5.3 Both parties agree to evaluate the impact which HMO, Managed Care, PPO, and other group business opportunities may have on Outpatient Program operations, and to work collaboratively in the strategic planning and marketing processes. 5.4 If Medical Center is denied reimbursement for ten percent (10%) or more of the patient days billed under the Outpatient Program, compensation payable to Manager under Section 5.1 shall be decreased at the rate of One Hundred Dollars ($100.) per day denied in excess of that ten percent (10%). A denied day is defined as reimbursement that is denied by any third party payor, including MediCal, which denial has been appealed through the appropriate appeals process in accordance with Medical Center's regular billing and collection standards and practices. 5.4.1 The percentage of denied days shall be determined as follows: 5.4.1.1 The number of outpatient days billed under the Outpatient Program shall be identified for each six (6) month period of services ("billing period") provided hereunder. At the end of that billing period, the percentage of denied days for that billing period shall equal the sum of the number of denied days for that billing period divided by the total number of patient days billed. 6. Confidential Information. 6.1 For purposes of this Agreement, the term "Confidential Information" shall include the following: (1) all documents and other materials including but not limited to the Proposal, memoranda, manuals, handbooks, pamphlets, production books and audio or visual recordings, which contain written information relating to the Outpatient Program (excluding written materials distributed to patients in the Outpatient Program or as promotion for the Outpatient Program), (2) all methods, techniques and procedures utilized in providing psychiatric treatment services to patients in the Outpatient Program at the Medical Center not readily available through sources in the public domain; and (3) all trademarks, tradenames and service marks of Manager. 6.2 Medical Center agrees and acknowledges that Confidential Information is disclosed to it in confidence with the understanding that it constitutes valuable business 26 information developed by Manager at great expenditure of time, effort and money. Medical Center agrees it shall not, without the express prior written consent of Manager, use Confidential Information for any purpose other than the performance of this Agreement. Medical Center further agrees to keep strictly confidential and hold in trust all Confidential Information and not disclose or reveal such information to any third party without the express prior written consent of Manager. It is expressly understood that Medical Center will continue to disclose patient information to insurers and governmental agencies as mandated. 6.3 Medical Center acknowledges that the disclosure of Confidential Information to it by Manager is done in reliance upon the Medical Center's representation and covenants in this Agreement. Upon termination of this Agreement by either party for any reason whatsoever, Medical Center shall forthwith return all material constituting or containing Confidential Information and Medical Center will not thereafter use, appropriate, or reproduce such information or disclose such information to any third party, except as mandated by law. 6.4 Non-Disclosure. Manager acknowledges that during the term of this Agreement she may be given access to certain proprietary information and trade secrets of Medical Center ("Trade Secrets"). The Trade Secrets will include information relative to Medical Center and may also include information encompassed in business plans, proposals, marketing and development plans, financial information, costs and other concepts, ideas or know-how related to the business or developments of CHWSC which have not been publicly released by Medical Center or its duly authorized representatives. Manager shall preserve and maintain as confidential all Trade Secrets that have been or may be obtained by her in the courses of her performance of services under this Agreement. Manager also shall not, without the prior written consent of Medical Center, use for her own benefit or purposes, or disclosure to others, either during the term of this Agreement hereunder or thereafter, any Trade Secret. All Trade Secrets shall constitute "trade secrets" under the Uniform Trade Secrets Act contained in California Civil Code Sections 3426 et seq., and Medical Center shall be entitled to all protection and be afforded all remedies available under such Act. 7. Recruitment of Employees and Independent Contractors. 7.1 Medical Center acknowledges that Manager has and will continue to expend substantial time, effort, and money training its employees and independent contractors in the operation of the Program. The employees and independent contractors of manager who will operate the program at the Medical Center will have access to and possess Confidential Information of Manager. Medical Center acknowledges that to employ or contract with former employees or independent contractors of Manager would likely result in the use of Manager's Confidential Information in violation of Section 6 hereof. Medical Center, therefore, agrees that during the term of this Agreement and for one (1) year thereafter, it will not, and it will cause Medical Center, not to employ, solicit the employment of, or in any way retain the services of any employee, former employee, or independent contractor of Manager if such individual has been employed or retained by Manager and has provided services under this Agreement as Medical Center at any time during the immediate preceding one (1) year unless Manager gives Medical Center prior written consent thereto. 27 7.2 Manager agrees that during the same respective period of time, it will not 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 Medical Center without Medical Center's prior written consent thereto. 8. Service Mark License. Medical Center acknowledges that "OptimumCare" and "OptimumCare Unit" are registered service marks belonging exclusively to OptimumCare, and that during the term of this Agreement only, Medical Center is licensed to utilize these service marks in the marketing of professional services for the treatment of adult psychiatric patients in the Program. Medical Center's use of these service marks shall inure to the benefit of OptimumCare, and shall not give Medical Center any right or title therein, and any common law service marks rights acquired as a consequence of Medical Center's use thereof are hereby assigned exclusively to OptimumCare. At the termination of this Agreement, Medical Center shall immediately terminate the use of these service marks unless a separate written service mark license agreement, specifically authorizing continued use of such service marks, is entered into by the parties hereto at that time. Medical Center will not cause any documents to be printed bearing such service marks without an accompanying mark indicating that such service marks are registered service marks. Manager likewise agrees that all publication and information pieces developed or utilized for any purpose involving the Medical Center must first have specific authorization of the Medical Center. 9. Compliance with Regulations. Manager will conduct its activities and operations in strict compliance with all rules and regulations of the Medical Center, its medical staff and applicable state and other government authorities and agencies. Manager's employees and representatives shall comply with and observe such rules and regulations. 10. Jeopardy. Notwithstanding anything to the contrary hereinabove contained, in the event the performance by either party hereto of any term, covenant, condition or provision of this Agreement should jeopardize the licensure of Medical Center, its participation in, or its certification or reimbursement from, Medicare, Medi-Cal, Blue Cross or any other reimbursement or payment program, or its full accreditation by JCAHO or any other state or nationally recognized accreditation, organization, or if for any reason said performance should be in violation or be deemed unethical by any recognized body, agency or association in the Medical or hospital fields, Medical Center may at its option terminate this Agreement forthwith. 11. Miscellaneous. 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 judgement on the award rendered may be 28 entered in any court having jurisdiction. However, this shall not apply with respect to any claim for indemnity for bodily injury or death. 12. Attorney Fees. If any legal action (including arbitration) is necessary to enforce the term 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. Governing Law. The validity of this Agreement, the interpretation of the rights and duties of the parties hereunder and the construction of the terms hereof shall be governed in accordance with the internal laws of the State of California. 14. Federal Government Access. Until the expiration of four (4) years after the furnishing of services pursuant to this Agreement, Manager shall make available, upon request to the Secretary of Health and Human Services, or upon request to the Controller General, or any of their duly authorized representatives, this Agreement, books, documents and records of Manager that are necessary to certify the nature and extent of the cost claimed to Medicare with respect to the services provided under this Agreement. 15. Notice. All notices hereunder shall be in writing, delivered personally or by Certified or Registered postal mails, postage prepaid, return receipt requested, and shall be deemed given when delivered personally or when deposited in the United States mail, addressed as below with proper postage affixed, but each may change his address by written notice in accordance with this Paragraph. Medical Center's Address: St. Francis Medical Center 3630 East Imperial Highway Lynwood, CA 90262 Attention: Administrator Copy to: CHW Southern California 790 E. Colorado Blvd., Suite 600 Pasadena, CA 91101 Attention: Corporate Counsel Manager's Address: OptimumCare Corporation 428 Culver Blvd. Playa Del Rey, CA 90293 29 16. Severability. If for any reason any clause or provision of this Agreement, or the application of any such clause or provision in a particular context or to a particular situation, circumstance or person, should be held unenforceable, invalid or in violation of law by any court or other tribunal, then the application of such clause or provision in contexts or to situations, circumstances or persons other than that in or to which it is held unenforceable, invalid or in violation of law shall not be affected thereby, and the remaining clauses and provisions hereof shall nevertheless remain in full force and effect. 17. Captions. Any captions to or headings of the Articles, Paragraphs or subparagraphs of this Agreement are solely for the convenience of the parties, and shall not be interpreted to affect the validity of this Agreement or to limit or affect any rights, obligations, or responsibilities of the parties arising hereunder. 18. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 19. Entire Agreement; Amendment. This Agreement constitutes the full and complete agreement and understanding between the parties hereto and shall supersede all prior written and oral agreements concerning the subject matter contained herein. Unless otherwise provided herein, this Agreement may be modified, amended or waived only by a written instrument executed by all of the parties hereto. 20. Force Majeure. Neither party shall be liable nor deemed to breach this Agreement for any delay or failure in performance or other interruption of service resulting, directly or indirectly, from Acts of God, civil or military authority, acts of the public enemy, riots or civil disobedience, war, accidents, fires, explosions, earthquakes, floods, failure of transportation, machinery or supplies, vandalism, strikes or other work interruptions by the employees of any party, or any other cause beyond the reasonable control of the party affected thereby. However, each party shall utilize its best good faith efforts to perform under this Agreement in the event of any such occurrence or circumstance. 21. Gender and Number. Whenever the context hereof requires, the gender of all terms shall include the masculine, feminine, and neuter, and the number shall include the singular and plural. 30 22. Ambiguities. The general rule that ambiguities are to be construed against the drafter shall not apply to this Agreement. In the event that any provision of this Agreement is found to be ambiguous, each party shall have an opportunity to present evidence as to the actual intent of the parties with respect to such ambiguous provision. 23. Waiver. No failure or delay by a party to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement, or to exercise any right, power or remedy hereunder or under law or consequent upon a breach hereof or thereof shall constitute a waiver of any such term, condition, covenant, agreement, right, power or remedy or of any such breach or preclude such party from exercising any such right, power or remedy at any later time or times. 24. Indemnification. Manager and Medical Center shall each indemnify, defend and hold the other harmless against all claims and liabilities (including reasonable attorney's fees and costs of suit) that may arise as a result of the negligent, intentional or wrongful acts or omissions of the indemnifying party. 25. Independent Contractors. 25.1 In the performance of Manager's duties and obligations arising under this Agreement, Manager is at all times acting and performing as an independent contractor. Nothing in this Agreement is intended nor shall be construed to create between Manager and Medical Center, with respect to their relationship under this Agreement, either an employer/employee, joint venture, partnership, or landlord/tenant (lease) relationship. In the event that a determination is made for any reason that an independent contractor relationship does not exist between Manager and Medical Center, Medical Center may terminate this Agreement immediately upon written notice to Manager. 25.2 Manager shall reimburse Medical Center for the employee portion of all employee-related taxes, charges or levies which may be collected from Medical Center in the event that Manager is determined to be an employee of Medical Center and not an independent contractor. 31 SIGNATURE PAGE TO THE OUTPATIENT PSYCHIATRIC UNIT MANAGEMENT SERVICES AGREEMENT IN WITNESS WHEREOF, this Agreement has been executed on ________, 1998, at LYNWOOD, California. Manager Medical Center OPTIMUMCARE CORPORATION CHW SOUTHERN CALIFORNIA doing business as ST. FRANCIS MEDICAL CENTER By: /s/ EDWARD A. JOHNSON By: ------------------------------- -------------------------------- Edward A. Johnson Print Name and Title Chairman of the Board By: /s/ MULU G. MICHAEL ------------------------------- Mulu G. Michael President & Chief Operating Officer 32 SUPPORT ACTIVITIES OptimumCare Corporation Responsibilities: Patient Handbooks Brochure Reprints of Selected Articles Printing of Business Cards for OptimumCare Program Team Printing of Personalized OptimumCare Program Stationery, is desired Public Service Announcement Campaign - Including Materials Prepared for Television/Radio/Print Public Relations Campaigns Typing of Press Releases Typing of Radio and Television Spots of Medical Center Stationery, Addressing and Mailing of Invitations, Announcements and General Program Correspondence Marketing Expertise Medical Center Responsibilities: Typing of Public Relations and Referral Letters Providing Telephone System for the OptimumCare Program EX-10.111 8 AGREEMENT BETWEEN CITRUS VALLEY & CO. 1 EXHIBIT 10.111 MENTAL HEALTH PARTIAL HOSPITALIZATION SERVICES AGREEMENT THIS AGREEMENT ("Agreement") is entered into for reference purposes only as of the Eighteenth (18th) day of September, 1998, by and between CITRUS VALLEY MEDICAL CENTER, a California nonprofit public benefit corporation ("Hospital") and OPTIMUMCARE CORPORATION, a Delaware corporation ("Manager"). Recitals A. Hospital operates a duly licensed acute care facility located in West Covina, California and desires to develop an outpatient partial hospitalization program (the "Program") for the treatment of psychiatric disorders. B. Manager is in the business of providing management services for the treatment of patients with psychiatric disorders. Manager presently manages a partial hospitalization program pursuant to an affiliation with another acute care hospital at a facility located at 1170 N. Durfee, Suite "E", South El Monte, California ("Facility"), the space for which Manager is the sole lessor. Manager desires to terminate its relationship with said other hospital and desires to continue operating such partial hospitalization program at the Facility pursuant to a relationship with Hospital. C. Manager presently leases the Facility pursuant to a lease ("Lease"). Pursuant to a sublease of even date herewith ("Sublease"), Hospital will sublease the Facility from Manager thereby satisfying Hospital's obligation hereunder to provide space for the Program. D. Hospital desires to establish the Program at the Facility, and Hospital desires to retain Manager, and Manager desires to be retained, to provide management services with respect to the Program. E. Hospital and Manager desire to enter into this Agreement to provide a clear understanding of their respective rights, duties and obligations with respect to the subject matter hereof. 2 Agreement SECTION 1. DEFINITIONS. 1.1 "Confidential Information." "Confidential Information" shall mean all confidential information and trade secrets of Manager, including without limitation financial statements, internal memoranda, reports, patient lists, memoranda, manuals, handbooks, pamphlets, production books and audio and visual recordings, models, techniques, formulations, procedures and other materials or records of a confidential and/or proprietary nature which relate to the Program and which are used by Manager in providing psychiatric services to Program patients. 1.2 "Employee Benefits." "Employee Benefits" shall include, by way of illustration and not limitation, an employer's contribution under the Federal Insurance Contributions Act, unemployment compensation and related insurance, payroll and other employment taxes, pension and retirement plan contributions, workers' compensation and related insurance, group life, health, disability, and accident insurance, severance, and other benefits. 1.3 "Patient Day." A "Patient Day" shall be deemed to exist with respect to each outpatient visit to the Program. SECTION 2. TERM. This Agreement shall commence on such date as Hospital becomes appropriately licensed to operate the Program at the Facility, and shall expire two years from such date, unless earlier terminated in accordance with the provisions of Section 10 of this Agreement. Notwithstanding the provisions of this Section 2, upon the execution of this Agreement, Manager shall be obligated to take all commercially reasonable efforts in accordance with Section 4.3 hereof to assist Hospital in becoming so licensed. In the event Hospital remains unlicensed as of February 1, 1999, this Agreement shall be deemed to have expired. SECTION 3. COVENANTS OF HOSPITAL. 3.1 Ultimate Control. Hospital shall have and maintain throughout the period hereof ultimate control and authority for the operation and administration of the Program. 3.2 Space. Pursuant to the Sublease, Hospital shall lease the Facility from Manager, which consists of approximately Five Thousand Thirty One (5,031) square feet of office space, which Manager agrees is sufficient in size and quality for the proper operation of this Program. 3.3 Hospital's Employees. Hospital shall employ, or shall independently contract with, and shall be financially responsible for staffing the Program with all personnel necessary for the proper and efficient administration and clinical operation of the Program as set forth in Schedule 3.3. All personnel employed or otherwise contracted for (including the office manager) shall be required to 2 3 comply with the Program policies and procedures as mutually developed and agreed upon in writing by Hospital and Manager. 3.4 Diagnostic Facilities. Hospital shall make available to Program patients the Hospital's inpatient, diagnostic, and other facilities as requested from time to time by such patients' attending physicians or by Program staff. 3.5 General Services. Hospital shall provide the following support services for the efficient and proper operation of the Program: 3.5.1 Dietary services for patients of the Program (including one mid-day meal to be served to each patient at the Facility and the part-time services of the Hospital's nutritionist/dietician). 3.5.2 Housekeeping services for the Facility. 3.5.3 Janitorial and physical upkeep of the Facility. 3.5.4 All utilities for the Facility. Manager acknowledges that utilities ultimately will be supplied by the Facility's landlord under the terms of the Lease. 3.5.5 All clerical support, office supplies and general supplies necessary for the proper operation of the Program. 3.5.6 Record keeping services, in accordance with state and federal laws and regulations. 3.5.7 Daily transportation of all patients from their homes to the Facility in the morning, and from the Facility to patients' homes in the evenings, but only for such patients who reside within twenty five (25) miles of Hospital. Nothing in this Agreement is intended to or shall be construed to limit or restrict the Hospital's ability to outsource the provision of the goods and services contemplated in this Section 3.5. 3.6 Policies and Procedures. Hospital shall provide all Program staff (including employees and independent contractors of Manager) with copies of all relevant hospital and Program policies and procedures, as amended from time to time. 3.7 Health Screenings. Hospital shall provide to all Program staff (including employees and independent contractors of Manager) such appropriate pre-employment and periodic diagnostic and health screening procedures as are customarily provided by Hospital for Hospital employees. 3 4 3.8 Accreditation. Hospital shall maintain accreditation by the Joint Commission on the Accreditation of Health Care Organizations, and shall be financially responsible for paying all such fees related to such accreditation. 3.9 Quality Improvement Review. Hospital shall provide appropriate utilization review and quality improvement services with respect to services provided by the Program. 3.10 Insurance. Hospital shall procure and maintain, at its sole cost and expense, throughout the term hereof, a policy or policies of comprehensive general liability insurance covering itself and its employees for patient care services from an insurance carrier licensed and authorized to sell or approved to place liability insurance policies of this nature in this State with limits of not less than Five Million Dollars ($5,000,000.00) per occurrence. Hospital shall cause to be issued to Manager, by the insurance carriers issuing such coverage, certificates of insurance evidencing that the foregoing covenants of this Agreement have been complied with and stating that said insurance carriers shall provide ten (10) calendar days prior written notice to Manager of any cancellation or material modification of the policy or coverage described herein, or, if any such carrier shall not agree to provide such notice, then Hospital shall agree to provide notice to Manager of any such cancellation or modification immediately upon their receipt of notice of same from the carrier. Any deductible, co-insurance, or aggregate limits shall be subject to Manager's approval, which shall not be unreasonably withheld. Manager agrees that co-insurance or deductible amounts of $100,000 or less, per occurrence, is an acceptable co-insurance or deductible. 3.10.1 Extended Reporting Period. If any liability insurance policy procured pursuant to Section 3.10 is on a "claims made" rather than "occurrence" basis, then such policy shall include an option to purchase a "tail" or an extended reporting period, which option shall be exercisable upon termination or cancellation of said policy or upon any material modification of said policy that has the effect of causing the coverage of said policy to fail, in any respect, to meet the requirements of Section 3.10, regardless of whether such termination, cancellation or modification shall occur during the term hereof or thereafter. The tail or extended reporting period shall provide coverage meeting all of the requirements set forth in Section 3.10, for a period of at least seven (7) years after termination, cancellation or modification of the underlying policy. Such policy shall provide that the carrier shall give Hospital or Manager thirty (30) calendar days advance written notice of the date upon which the option may be exercised regardless of whether such date shall occur during the term hereof or thereafter and shall specifically provide that Manager shall be permitted to exercise the option upon the failure of Hospital to do so. Upon such notice, Hospital shall take all steps, including the payment of money, necessary to exercise such option, and if Hospital shall fail to effectively exercise such option, then Manager may do so, and Hospital shall fully and immediately reimburse Manager, within ten (10) calendar days notice thereof by Manager, for all monies expended by Manager in connection therewith. 3.11 Billing and Collections. Hospital has in effect a schedule of fees and patient charges for the administrative and technical component of all services rendered by the Program. Said fees and charges may be modified by Hospital from time to time in its sole and absolute discretion, but 4 5 Hospital shall give prior notice of such modification to Manager. Hospital shall bill all patients and third party payors for Hospital's fees and charges with reference to services provided by the Program in accordance with such schedule. 3.12 Indemnification by Hospital. Hospital shall protect, indemnify, hold harmless, and defend Manager, its legal representatives, employees, agents, officers, trustees, affiliates and assigns, and each of them, from and against any and all claims, actions, demands, proceedings, losses, damages, costs, expenses and liabilities (including reasonable attorneys' fees) arising out of or related to the performance or nonperformance by Hospital of any obligations to be performed or services to be provided hereunder. This indemnification obligation shall survive the expiration or termination of this Agreement. SECTION 4. COVENANTS OF MANAGER. 4.1 Clinical Management. Subject to Hospital's ultimate retention of control and authority, Hospital hereby appoints Manager as its sole and exclusive manager of the clinical operation of the Program and Manager accepts such appointment. Manager shall have full responsibility for the efficient and proper administration of the Program and for the care and treatment of Program patients while at the Facility. Manager shall have overall authority and responsibility to conduct, supervise, manage, and direct the day-to-day clinical operation of the Program. 4.2 Manager's Employees. Manager shall employ and/or independently contract with, and shall be financially responsible for staffing the Program with, the full-time equivalent of (a) one program director, (b) one licensed clinical social worker, (c) Marriage, Family and Child Counselors (or, alternatively, social workers who have been awarded a Master's Degree in clinical social work, or a combination thereof), (d) activity therapists, and (e) one medical director ("Medical Director") in accordance with Schedule 4.2, based upon the anticipated Program census for each day of operation. Manager shall not, without Hospital's prior written consent, which shall not be unreasonably withheld, deviate from, change, or decrease the agreed staffing as set forth in Schedule 4.2. In addition, Manager shall be financially responsible for staffing the Program with all such additional professional counseling staff and therapists as may be reasonably necessary for the proper operation of the Program and as may be ordered by patients' attending physicians. 4.2.1 Medical Director Qualifications. Manager represents, warrants, covenants and agrees that Medical Director shall be a physician duly licensed to practice medicine in the State of California, shall be a member of the Hospital's Active Medical Staff with clinical privileges sufficient to permit Medical Director to perform all services reasonably required of him/her as Medical Director of the Program, and shall be in legitimate possession of all customary narcotics and controlled substances numbers and licenses. Manager represents, warrants, covenants and agrees that Medical Director's license to practice medicine in any state has never been suspended, revoked, or restricted, that Medical Director has never been reprimanded, sanctioned or disciplined by any licensing board or state or local medical society or specialty board, and Medical Director has never 5 6 been denied membership or reappointment of membership on the medical staff of any hospital and no hospital medical staff membership or clinical privileges of Medical Director have ever been suspended, curtailed or revoked for a medical disciplinary cause or reason. 4.2.2 Medical Director Duties. Manager shall provide the professional services of Medical Director as an independent management consultant and advisor to perform certain administrative functions as hereafter set forth. The Medical Director shall furnish the following for the operation of the Program: 4.2.2.1 Medical Director shall serve as Medical Director of the Program. Medical Director shall, during the entire term of this Agreement, supervise the clinical, medical and psychiatric operation of the Program and shall devote such time as necessary to carry out such duties and ensure efficient and effective medical administration of the Program. The primary objective is to provide optimal utilization of the Program's facilities, equipment and staff and to provide quality services to all patients. 4.2.2.2 Manager shall assure that Medical Director shall be available at reasonable times for consultation with the Board of Directors, the Chief Operational Officer ("C.O.O.")/Administrator, the Chief of Staff, individual members of the medical staff, committees of the professional staff and nursing and administrative employees of Hospital. Medical Director shall be available by electronic pager for emergency consultation during all hours that the Program is in operation and Medical Director is offsite, provided, however, that Medical Director may arrange for coverage of this on-call obligation, which coverage shall be provided by a physician licensed to practice medicine in the State of California and shall be at Manager's or Medical Director's sole cost and expense. Medical Director shall actively participate in the affairs of the professional staff of the Hospital and shall perform such tasks and provide such services as the professional staff or any committee may from time to time appropriately request. Manager acknowledges and agrees that the Hospital's medical staff committees shall conduct at regular intervals ongoing monitoring and reviewing of the professional performance of Medical Director and that the results of these reviews shall be transmitted to Hospital administration. 4.2.3 Acceptability of Staff Members. Manager shall use reasonable efforts to resolve any issues regarding the acceptability to Hospital of Program staff employed or otherwise contracted for by Manager. 4.2.4 Removal of Staff Member. At the request of Hospital, in its sole and absolute discretion, Manager shall immediately remove any employee or independent contractor of Manager providing services at the Facility or to the Program. 4.3 Licensure. With the cooperation assistance of the Hospital and its administration, Manager shall be responsible for and shall undertake all activities necessary to obtain and maintain all necessary licenses and approvals from governmental and accrediting agencies, including without limitation the California Department of Health Services, and shall be responsible for and shall 6 7 undertake all activities necessary to obtain and maintain all certifications and approvals necessary to participate in the Medi-Cal and Medicare programs. Manager shall prepare, file and supplement all regulatory applications, reports, and forms required by any local, state or federal regulatory agency and shall prepare the Facility for, and monitor, regulatory surveys and inspections. Manager shall use its best efforts to remedy any deficiencies identified in such surveys and inspections to the extent such deficiencies are within Manager's control. Manager shall use its best efforts to ensure that the Program and the Facility are operated and maintained in compliance with all applicable federal, state, and local laws, rules, and regulations. 4.4 Policies and Procedures. Manager shall, in conjunction with the Hospital's administration, develop and implement all policies and procedures necessary for the safe and efficient operation of the Program and the Facility, and shall educate Program staff on such policies and procedures. Manager shall provide orientation and training for all Program staff, irrespective of whether such staff members are employees or independent contractors of Hospital or of Manager. Manager shall as reasonably necessary provide program of ongoing in-service training such as to assure that Program staff have the requisite knowledge and skill required to deliver quality health care services at the Facility and through the Program. 4.4.1 Hospital Approval. The implementation of the policies and procedures required under Section 4.4 shall be subject to prior approval by the Hospital's administration and, where appropriate, the Hospital's medical staff. 4.5 Indemnification by Manager. Manager shall protect, indemnify, hold harmless, and defend Hospital, its legal representatives, employees, agents, officers, trustees, affiliates and assigns, and each of them, from and against any and all claims, actions, demands, proceedings, losses, damages, costs, expenses and liabilities (including reasonable attorneys' fees) arising out of or related to the performance or nonperformance by Manager of any obligations to be performed or services to be provided hereunder. This indemnification obligation shall survive the expiration or termination of this Agreement. 4.6 Insurance. Manager shall procure and maintain, at its sole cost and expense, throughout the term hereof, a policy or policies of comprehensive general liability insurance covering itself and its employees from an insurance carrier licensed and authorized to sell or approved to place liability insurance policies of this nature in this State with limits of not less than Five Million Dollars ($5,000,000.00) per occurrence. Manager shall cause to be issued to Hospital, by the insurance carriers issuing such coverage, certificates of insurance evidencing that the foregoing covenants of this Agreement have been complied with and stating that said insurance carriers shall provide ten (10) calendar days prior written notice to Hospital of any cancellation or material modification of the policy or coverage described herein, or, if any such carrier shall not agree to provide such notice, then Manager shall provide notice to Hospital of any such cancellation or modification immediately upon their receipt of notice of same from the carrier. Any deductible, co-insurance, or aggregate limits shall be subject to Hospital's approval, which shall not be unreasonably withheld. Hospital agrees that co-insurance or deductible amounts of $100,000 or less, per occurrence, is an acceptable co- 7 8 insurance or deductible. 4.6.1 Extended Reporting Period. If any liability insurance policy procured pursuant to Section 4.6 is on a "claims made" rather than "occurrence" basis, then such policy shall include an option to purchase a "tail" or an extended reporting period, which option shall be exercisable upon termination or cancellation of said policy or upon any material modification of said policy that has the effect of causing the coverage of said policy to fail, in any respect, to meet the requirements of Section 4.6, regardless of whether such termination, cancellation or modification shall occur during the term hereof or thereafter. The tail or extended reporting period shall provide coverage meeting all of the requirements set forth in Section 4.6, for a period of at least seven (7) years after termination, cancellation or modification of the underlying policy. Such policy shall provide that the carrier shall give Hospital or Manager thirty (30) calendar days advance written notice of the date upon which the option may be exercised regardless of whether such date shall occur during the term hereof or thereafter and shall specifically provide that Hospital shall be permitted to exercise the option upon the failure of Manager to do so. Upon such notice, Manager shall take all steps, including the payment of money, necessary to exercise such option, and if Manager shall fail to effectively exercise such option, then Hospital may do so, and Manager shall fully and immediately reimburse Hospital, within ten (10) calendar days notice thereof by Hospital, for all monies expended by Hospital in connection therewith. 4.7 Access to Documents. For the purpose of implementing Section 1861 (v) (1) (I) of the Social Security Act, as amended, and any regulations promulgated pursuant thereto, Manager agrees to comply with the following statutory requirements governing the maintenance of documentation to verify the cost of services rendered under this Agreement: "(i) until the expiration of four years after the furnishing of such services pursuant to such contract, [Manager] shall make available, upon written request to the Secretary [of the U.S. Department of Health and Human Services] or upon request to the Comptroller General, or any of their duly authorized representatives, the contract and books, documents, and records of such costs, and" "(ii) if [Manager] carries out any of the duties of the contract through a subcontract with a value or cost of $10,000 or more over a twelve-month period, with a related organization, such subcontract shall contain a clause to the effect that until the expiration of four years after the furnishing of such services pursuant to such subcontract, the related organization shall make available, upon written request to the Secretary, or upon request to the Comptroller General, or any of their duly authorized representatives, the subcontract and books, documents, and records of such organization that are necessary to verify the nature and extent of such costs." 4.8 Audit Disclosure. If Manager is requested to disclose books, documents, or records for purpose of an audit, Manager shall notify Hospital of the nature and scope of such request and Manager shall make available, upon written request of Hospital, all such books, documents, or 8 9 records, during regular business hours of Manager. The provisions of this Section 4.8 shall survive the expiration or earlier termination hereof. 4.9 Reports. Manager shall provide monthly written reports to Hospital administration regarding all aspects of the operation of the Program. Such reports shall accompany Manager's invoice as required pursuant to Section 7.1 of this Agreement, and the submission of a report which meets with Hospital's approval, which shall not be unreasonably withheld, shall be an express condition precedent to Hospital obligation to pay to Manager the Management Fee as required by Section 7.2 of this Agreement. Such report shall address, among other things, the therapies provided to patients, any notable therapeutic successes or failures experienced by patients of the Program, any changes in Program staff, any complaints received by Manager regarding the operation and administration of the Program and the Facility, Program census, and any other items or issues significant to the administration of the Program. 4.10 Adverse Actions. Manager shall commit no act or omission which adversely affects any licensure or certification of the Hospital. 4.11 Admissions. Manager shall admit patients to the Program only where such admission is ordered by a physician member of the Hospital's medical staff with admitting privileges. SECTION 5. REPRESENTATIONS AND WARRANTIES OF HOSPITAL. 5.1 Corporate Status. Hospital is a nonprofit public benefit corporation duly organized and validly existing in good standing under the laws of the State of California with the power and authority to carry on the activities in which it is engaged and to perform its obligations hereunder subject to licensure by the California Department of Health Services. 5.2 Execution of Agreement. The execution of this Agreement and the performance of the obligations of the Hospital hereunder will not result in any breach of any of the terms, conditions, or provisions of any agreement or other instrument to which Hospital is a party or by which it may be bound or affected, or any governmental license, franchise, permit or other authorization possessed by the Hospital, nor will such execution and performance violate any federal, state or local law, rule, or regulation. The Hospital is accredited by the Joint Commission on the Accreditation of Health Care Organizations. 5.3 Litigation. There is no litigation, administrative proceeding or investigation pending or threatened against Hospital, nor is the Hospital subject to any judgment, order, decree or regulation of any court or other governmental or administrative agency which would materially adversely affect the performance of Hospital's obligations hereunder. 5.4 Certificate of Need. No Certificate of Need is required by Hospital from any state regulatory agency for the operation of the Program. 9 10 SECTION 6. REPRESENTATIONS BY MANAGER. 6.1 Corporate Status. Manager is a corporation duly organized and existing under the laws of the State of Delaware, is authorized and qualified to conduct business in the State of California, and has the power and authority to carry on the activities in which it is engaged and to perform its obligations hereunder. 6.2 Execution of Agreement. 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 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. 6.3 Litigation. There is no litigation, administrative proceeding or investigation pending or threatened against Manager, nor is the Manager subject to any judgment, order, decree or regulation of any court or other governmental or administrative agency, which would materially adversely affect the performance of Hospital's obligations hereunder. SECTION 7. MANAGEMENT FEE. 7.1 Invoice. Manager shall prepare and submit to Hospital on a monthly basis an invoice for its services rendered hereunder. Said invoice shall indicate the name of each patient of the Program and the dates on which each patient attended the Program and shall reflect each such patient's social security number, admitting diagnosis, and patient identification number. Within twenty (20) days of Hospital's receipt thereof, and upon Hospital's approval thereof, which approval shall not be unreasonably withheld, and subject to the provisions of Section 4.9, Hospital shall make payment to Manager of all sums owing hereunder. 7.2 Per Capita Fee. Hospital shall be obligated to pay to Manager a fee of Ninety Five Dollars and Fifty Cents ($95.50) per patient day for each patient attending the Program. 7.3 Payments Declined. Hospital shall be entitled to a credit of Ninety Five Dollars and Fifty Cents ($95.50) per patient day for all Patient Days in excess of five percent (5%) per day for which payment was denied for clinical reasons. SECTION 8. CONFIDENTIAL AND PROPRIETARY INFORMATION. 8.1 Acknowledgment. Hospital acknowledges and agrees that Confidential Information may be disclosed to it in confidence with the understanding that it constitutes business information developed by Manager. Hospital further agrees that it shall not use such Confidential Information for any purpose other than in connection with the Program. Hospital further agrees not to disclose such Confidential Information to any third party except as required by law or regulation or in order 10 11 to serve the purposes of the Program or as permitted by written authorization of Manager. 8.2 License. Manager hereby grants to Hospital for the term of this Agreement a non-exclusive license to use the registered service marks of Manager when identifying the Program. These service marks are to remain the exclusive property of Manager. 8.3 Nondisclosure. Manager agrees not to disclose confidential information pertaining to the Hospital's business or affairs or the Program or Program patients except as required by law or regulation or as permitted by written authorization of the Hospital or the respective Program patients, as the case may be. SECTION 9. RECRUITMENT OF EMPLOYEES AND AGENTS. 9.1 Recruitment by Hospital. Hospital acknowledges that it has expended and will continue to expend substantial time, effort, and money to train its employees and contracted personnel in the operation of the Program. The employees and contracted personnel of Manager who will operate the Program will have access to and possess Confidential Information of Manager. Hospital agrees that for the earlier of two (2) years after the cessation of the employment or agency relationship between the Manager and an employee 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 by or retained by Manager in the Program unless Manager gives Hospital express written consent thereto or unless this Agreement is terminated by Hospital pursuant to Section 10 of this Agreement. 9.2 Recruitment by Manager. Manager acknowledges that it has expended and will continue to expend substantial time, effort, and money to train its employees and contracted personnel in the operation of the Program and the Hospital. The employees and contracted personnel of Manager who will operate the Program will have access to and possess Confidential Information of Hospital. Manager agrees that for the earlier of two (2) years after the cessation of the employment, independent contractual or agency relationship between the Hospital and an employee 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 Hospital if such individual has been employed by or retained by Hospital in the Program unless Hospital gives Manager express written consent thereto or unless this Agreement is terminated by Manager pursuant to Section 10 of this Agreement. SECTION 10. TERMINATION. 10.1 Termination by Manager. 10.1.1 Manager may terminate this Agreement by written notice to Hospital, if 11 12 Hospital should have a bankruptcy, reorganization, or similar action filed by or against it, or become insolvent, or sell all or substantially all of its assets. 10.1.2 In the event Hospital fails to comply with the terms of this Agreement in any material respect, Manager may notify Hospital of such breach, in writing, and Hospital shall have thirty (30) days to cure such breach. In the event Hospital fails to cure such breach with said period, the Agreement may be terminated by Manager. 10.1.3 Manager may terminate this Agreement by written notice to Hospital in the event Hospital fails to maintain accreditation by the Joint Commission on the Accreditation of Health Care Organizations, or in the event Hospital fails to maintain any license or certification granted to it by a regulatory agency without which the Program would be materially and adversely affected, unless the responsibility to maintain such license or certification is a responsibility of Manager pursuant to Section 4.3. 10.1.4 Manager may terminate this Agreement by written notice to Hospital in the event Hospital fails to maintain commercial general liability insurance in accordance with the requirements of Section 3.10. 10.2 Termination by Hospital. 10.2.1 Hospital may terminate this Agreement by written notice to Manager, if Manager should have a bankruptcy, reorganization, or similar action filed by or against it, or become insolvent, or sell all or substantially all of its assets. 10.2.2 In the event Manager fails to comply with the terms of this Agreement in any material respect, Hospital may notify Manager of such breach, in writing, and Hospital shall have thirty (30) days to cure such breach. In the event Manager fails to cure such breach with said period, the Agreement may be terminated by Hospital. 10.2.3 Hospital may terminate this Agreement by written notice to Manager in the event Hospital fails to maintain accreditation by the Joint Commission on the Accreditation of Health Care Organizations, or in the event Hospital fails to maintain any license or certification necessary for the operation of the Program or the Facility. 10.2.4 Hospital may terminate this Agreement by written notice to Manager in the event Manager fails to maintain insurance in accordance with the requirements of Section 4.6. 10.2.5 In the event Hospital terminates this Agreement for any reason, the Sublease shall be deemed to also have been terminated. 10.3 Termination Without Cause. Either party may terminate this Agreement without penalty or cause by giving written notice to the other party. Such termination shall take place upon 12 13 the expiration of one hundred eighty (180) calendar days after the giving of such written notice. SECTION 11. COMPLIANCE WITH LAW. 11.1 Applicable Laws. In addition to the obligations of the parties to comply with applicable federal, state and local laws respecting the use of the Unit and the conduct of their respective businesses and professions, Hospital and Manager each acknowledge that they are subject to certain federal and California laws governing the referral of patients which are in effect or will become effective during the term of this Agreement. These laws include prohibitions on: 11.1.1 Payments for referral or to induce the referral of patients (Social Security Act Section 1128; Cal. Business and Professions Code Section 650; and Cal. Labor Code Section 3215); and 11.1.2 The referral of patients by a physician for certain designated health care services to an entity with which a physician (or his/her immediate family) has a financial relationship (Cal. Labor Code Sections 139.3 and 139.31, applicable to referrals for workers' compensation services; Cal. Business and Professions Code Sections 650.01 and 650.02, applicable to all other patient referrals within the State; and Section 1877 of the Social Security Act, applicable to referrals of Medicare and MediCal patients). 11.2 Acknowledgments. As consideration for each party hereto to enter into this Agreement, the parties: 11.2.1 Acknowledge that (i) each has had the opportunity to engage independent counsel of her/its choice for advice as to the requirements of the anti-referral laws referred to in this Section 11; and (ii) each has had the opportunity to consult with legal counsel or other experts as each deems appropriate to assist in the determination by each party that the terms of this Agreement are commercially reasonable. 11.2.2 Represent to the other that it is the intent that the terms of this Agreement shall be commercially reasonable. 11.2.3 Represent to the other that it is the intent that compensation for each of the services which are provided under this Agreement shall be based on the air market value of such services, including a fair rate of return. 11.3 No Referral Requirement. Nothing in this Agreement is intended or shall require any party to violate the California or federal prohibitions on payments for referrals, and this Agreement shall not be interpreted to: 11.3.1 Require the Medical Director to make referrals to Hospital, be in a position to make or influence referrals to Hospital, or otherwise generate business for Hospital. 13 14 11.3.2 Restrict Medical Director from establishing staff privileges at, referring any service to, or otherwise generating any business for any other entity of his/her choosing. 11.3.3 To interfere in any way with Medical Director's professional prerogatives and medical decisions. 11.4 No Gifts to Beneficiaries. As part of its administrative obligations hereunder, Manager may market the Program to the Hospital's community. Under no circumstances whatsoever shall Manager offer or make any gift or payment to any individual as a means of encouraging such person to seek medical or psychiatric attention from Hospital, Manager, or through the Program, or from any other provider of health care. 11.5 Audits. Hospital shall have the right, but not the obligation, to interview patients who receive services through the Program, and to conduct audits of all types of the Program, for the purpose of determining whether Manager is in compliance with all applicable federal, state, and local laws, regulations, and ordinances, as well as Hospital rules, regulations, bylaws, policies, and procedures and this Agreement. SECTION 12. MISCELLANEOUS PROVISIONS. 12.1 Compulsory Arbitration. Any controversy, dispute or claim arising out of or relating to this Agreement, or the breach or alleged breach thereof, shall be settled by binding arbitration in accordance with the rules of the American Arbitration Association, and judgment on the award may be entered in any court having jurisdiction. The provisions of this Section 12.1 shall not apply with respect to any claim arising out of or relating to bodily injury or death. 12.2 Attorneys' Fees. If any legal action, including arbitration, is necessary to enforce the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs awarded against the other party in addition to any other relief to which the prevailing party may be entitled. 12.3 Governing Law. The validity of this Agreement and of 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 governed in accordance with the laws of the State of California. 12.4 Force Majeure. If either of the parties hereto is delayed or prevented from fulfilling any of its obligations hereunder by force majeure, said party shall not be liable for said delay or failure. "Force Majeure" shall mean any cause beyond the reasonable control of a party, including but not limited to an act of God, act or omission of civil or military authorities, fire, strike, flood, riot, war, delay of transportation, or inability due to the aforementioned causes to obtain necessary labor, materials or facilities. 14 15 12.5 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, unless the severed part contains an essential economic term. 12.6 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 waiver unless in writing signed by the party against whom the waiver is sought to be enforced. 12.7 Binding Effect. This Agreement shall be binding on the successors and assigns of the respective parties, provided however that neither party may assign or otherwise transfer this Agreement or delegate obligations hereunder without the other's written consent. 12.8 Complete Agreement. Except for the Sublease, this Agreement constitutes the complete understanding of 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 hereof unless such amendment is in writing and is signed by both parties. 12.9 No Agency or Partnership. The relationship between Manager and Hospital 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. 12.10 Notices. All notices hereunder shall be in writing, delivered personally or by U.S. Certified or Registered postal 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 its address by written notice in accordance with this Section. If to Hospital: Citrus Valley Medical Center 1115 South Sunset West Covina, California 91790 Attn: C.O.O./Administrator If to Manager: OptimumCare Corporation 30011 Ivy Glenn Drive, Suite 219 Laguna Niguel, California 92677-5018 Attn: Ed Johnson 12.11 Captions. Any captions to or headings of the articles, sections, subsections, paragraphs, or subparagraphs of this Agreement are solely for the convenience of the parties, are not a part of this Agreement and shall not be used for the interpretation or determination of validity of 15 16 this Agreement or any provision hereof. 12.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 12.13 Assistance in Litigation. Manager and Medical Director shall, at no charge, provide information and testimony and otherwise assist Hospital in defending against litigation brought against Hospital, its directors, officers, shareholders, members or employees based upon a claim of negligence, malpractice or any other cause of action, arising under this Agreement, except where Manager and/or Medical Director is a named adverse party. 12.14 Tax Exempt Financing. In the event Hospital intends to seek tax-exempt financing, Manager agrees to amend this Agreement as may be reasonably necessary in order for Hospital to obtain such financing. Immediately upon request by Hospital, Manager shall execute any and all such amendments reasonably presented by Hospital and shall return promptly said fully executed original amendments to Hospital. 12.15 Gender and Number. Whenever the context hereof requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and plural. 12.16 Legal Counsel. Each party understands the advisability of seeking legal counsel and has exercised its own judgment in this regard. 12.17 Interpretation. No provision of this Agreement shall be interpreted or construed for or against either party because that party's legal representatives drafted such provision. 12.18 Facilitation. Each party agrees promptly to perform further acts and to execute, acknowledge and deliver any provisions of this Agreement or effect its purposes. 16 17 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "HOSPITAL": CITRUS VALLEY MEDICAL CENTER, a California Nonprofit public benefit corporation By: ---------------------------------------------------- Its: Administrator --------------------------------------------------- (Title) "MANAGER": OPTIMUMCARE CORPORATION, a Delaware Corporation By: /s/ Edward A. Johnson ---------------------------------------------------- Its: CEO --------------------------------------------------- (Title) 17 18 SCHEDULE 3.3 STAFFING TO BE PROVIDED BY HOSPITAL
FTE CATEGORY CENSUS CENSUS CENSUS CENSUS CENSUS 10-16 17-20 21-25 26-30 31-40 - --------------------------------------------------------------------------------------------------------- Office Manager 1 1 1 1 1 Registered Nurse 1 1 1 1 1 Licensed Vocational 0 0 0.5 1 1 Nurse/LPT Mental Health Worker 1 1 1 1 2 TOTAL 3 3 3.5 4 5
18 19 SCHEDULE 4.2 STAFFING TO BE PROVIDED BY MANAGER
FTE CATEGORY CENSUS CENSUS CENSUS CENSUS CENSUS 10-15 16-20 21-25 26-30 31-40 - ------------------------------------------------------------------------------------------------------------------------- Program Director 1 1 1 1 1 Clinical Social Worker 1 1 1 1 1 Master/Social Worker or Marriage, 0 0.5 1 1 1.5 Family, Child Counselor Activity Therapist 1 1.5 1.5 2 2 Corporate Clinical Director/Corporate 0.5 0.5 0.5 0.5 0.5 UR-Educational Director Medical Director 0.25 0.25 0.25 0.25 0.25 TOTAL FTE/DAY 3.75 4.75 5.25 5.75 6.25
19 EX-10.112 9 SUBLEASE AGREEMENT BETWEEN CITRUS VALLEY & CO. 1 EXHIBIT 10.112 SUBLEASE OPTIMUMCARE CORPORATION (OptimumCare) and CITRUS VALLEY HEALTH PARTNERS agree that Citrus Valley Health Partners shall sublet the property at 1170 Durfee Avenue, South El Monte, California from OptimumCare under the following conditions: 1. Citrus Valley Health Partners shall rent the 5,031 square feet at the above mentioned location at a rate of $5,785.65 per month. 2. Citrus Valley Health Partners shall pay a security deposit equal to one month's rent. 3. The sublease shall have an initial term beginning with the commencement date of the Mental Health Partial Hospitalization Services Agreement and shall run concurrently with that Agreement and thereafter shall continue at will, cancelable by either party on 180 days notice or in accordance with provision 10.2 or 10.3 of the Agreement. 4. Rent is due on the 1st day of the month, except for the first payment due with submission of the signed sublease. 5. Citrus Valley Health Partners shall pay any proportionate share of lessors "Excess Expenses". /s/ Edward A. Johnson - ---------------------------------- ------------------------------------- OptimumCare Corporation Citrus Valley Health Partners Edward A. Johnson Chairman of the Board 9/27/91 - ---------------------------------- ------------------------------------- Date Date Landlord's Consent: /s/ Adam Milstein 9/23/98 - ---------------------------------- ------------------------------------- Whittier Narrows Business Park c/o Liberty West, Inc. Adam Milstein, President EX-10.113 10 LEASE AGREEMENT BETWEEN CO. & COLDWELL BANKER 1 EXHIBIT 10.113 COLDWELL BANKER JON DOUGLAS COMPANY RESIDENTIAL LEASE AGREEMENT This is more than a receipt for money. This is intended to be a legally binding contract. Do not sign until you have thoroughly read and understood each provision. This Residential Lease Agreement ("Agreement") is entered into at Marina Del Rey, State of California, this 10th day of Sept., 1998, by and between ___________________________________ ("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 Venice, County of LA, State of California, and more particularly described as follows: 420 Howland Canal ("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 part of this Agreement: ________ ______________________________________________________________________________. 1. RENT AND TERM. Lessee agrees to pay Lessor rent at the rate of $ 2,800.00 per month, in advance, on the 1st day of each calendar month. The term of this Agreement shall begin on November, 1998 ("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 [x] b. A lease with the Commencement Date as stated above and an ending date of October 30, 1998, with a total rental for the full term of $33,600.00, payable in monthly installments as defined above; or [ ] c. Other________________________________________________________. 2. DEPOSITS AND PREPAID RENTAL. a. Lessee has given Coldwell Banker/Jon Douglas Company ("Broker") an Earnest Money Deposit in the amount of.....................$2,800.00 In the form of [ ] cashier's check, [ ] certified check, [x] 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 7 days of Lessor's acceptance of this Agreement. b. Lessee shall pay to Lessor the first month's rent, in the amount of ...........................................................$2,800.00 c. Lessee shall pay to Lessor a Security Deposit, in the amount of ...........................................................$2,800.00 d. Lessee shall pay to Lessor additional sums for______________________ _______________________________________ in the amount of.........................................................$________ e. Lessee agrees to pay to Broker, if Lessee is represented by Coldwell Banker/Jon Douglas Company, the sum of One Hundred Dollars ($100.00) representing reimbursement to Broker's administrative and clerical costs, including the cost of document preparation and processing, Said sum shall only be payable to Broker in full upon execution of this Agreement by Lessor and Lessee.........................$ 100.00 Total Deposits, Prepaid Rent and Fees due (2a through 2e)........................................................$5,700.00 Less (Item 2a) any Deposits received with this offer....................................................($2,800.00) Balance due, in the form of a cashier's check, on or before ____________________, 19____...............................$2,900.00 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 5 calendar days from the date of 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 Lessee and Lessor acknowledge receipt of copy of this page, which constitutes Page _____ of _____ Pages. Lessees' Initials (______________)(______________) Lessors' Initials (_______________)(______________) 2 PROPERTY ADDRESS 420 HOLLAND CANAL 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 arrearages 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 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. 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 names persons only: EDWARD JOHNSON AND GUESTS and no animals EXCEPT: 0 . 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: ________________________ ________________________________________________________________________. 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 not in a habitable and good condition EXCEPT: _______________ ____________________________________. 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, wall paper, 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 to Property to prospective purchasers or tenants. Verbal or written Lessee and Lessor acknowledge receipt of copy of this page, which constitutes Page _____ Of _____ Pages. Lessee's Initials (________)(________) 3 PROPERTY ADDRESS 420 HOWLAND CANAL notice at least twenty-four (24) hours in advance of entry shall be deemed reasonable notice. No notice shall be requited 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 guest 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 of 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 breach 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 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 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. 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. Of the commissions referred to in this Agreement, ____% shall be paid to Coldwell Banker/Jon Douglas Company and 6% to __________________________________________________________ (other broker). 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 ____% 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. Lessee and Lessor acknowledge receipt of copy of this page, which constitutes Page _____ of _____ Pages. Lessees' Initials (________)(________) Lessors' Initials (________)(________) 4 PROPERTY ADDRESS 420 HOWLAND CANAL 24. LEASE PROCESSING FEE. Lessor agrees to pay to Broker, if represented by Coldwell Banker/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. Lessees' Initials Lessors' Initial 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. Lessees' Initials Lessors' Initial 27. __________/__________ __________/__________ RENT CONTROL. By initialing this paragraph, Lessor and Lessee acknowledge that this Agreement is 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 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 as 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 their 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 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. Lessee and Lessor acknowledge receipt of copy of this page, which constitutes Page _____ of _____ Pages. Lessee's Initials (________)(________) 5 PROPERTY ADDRESS 420 HOWLAND CANAL 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 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 UNDERSTAND 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._________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 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 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 and 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 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 _____ of _____ Pages. Lessee's Initials (________)(________) Lessors' Initials (___)(___) 6 CALIFORNIA COUNTER OFFER NO. 1 ASSOCIATION (FOR USE BY SELLER OR BUYER. MAY BE USED FOR MULTIPLE COUNTER OFFER) OF REALTORS This is a counter offer to the [x] Offer, [ ] Counter Offer, [ ] Other Lease, dated 9-10-98, regarding (property address): 420 Howland Canal between OptimumCare Corp., "Buyer", and Mark Galanty, "Lessor". 1. TERMS: The terms and conditions of the above referenced document are ACCEPTED SUBJECT TO THE FOLLOWING: A. PARAGRAPHS IN THE PURCHASE CONTRACT (OFFER) WHICH REQUIRE INITIALS BY ALL PARTIES, BUT ARE NOT INITIALED BY ALL PARTIES, ARE EXCLUDED FROM THE FINAL AGREEMENT UNLESS SPECIFICALLY REFERENCED FOR INCLUSION IN PARAGRAPH 1C OF THIS OR ANOTHER COUNTER OFFER. B. UNLESS OTHERWISE SPECIFIED IN WRITING, DOWN PAYMENT AND LOAN AMOUNT(S) WILL BE ADJUSTED IN THE SAME PROPORTION AS IN THE ORIGINAL OFFER. C. LEASE TO START ON OCTOBER 15, 1998 AND TERMINATE ON OCTOBER 14, 1999. D. SECURITY DEPOSIT SHALL BE $5,600.00. E. DELETE ITEM # E OF LEASE AGREEMENT. F. TOTAL DUE PRIOR TO MOVE IN SHALL BE $8,400.00. G. COMMISSION IS 5% OF THE TOTAL LEASE. H. LESSEE IS AWARE THIS LEASE IS FOR THE FRONT UNIT ONLY WITH 1 CAR GARAGE. I. LESSOR SHALL CLEAN CARPET IN LIVING AND DINING ROOM OR REPLACE IF NECESSARY. PAINT ENTIRE UNIT & FINISH CEILING IN KITCHEN. D. THE FOLLOWING ATTACHED SUPPLEMENTS ARE INCORPORATED IN THIS COUNTER OFFER: [ ] _______________________________ [ ]_____________________________ [ ] _______________________________ [ ]_____________________________ 2. [ ] (If checked:) MULTIPLE COUNTER OFFER: Seller is making a Counter Offer(s) to another prospective buyer(s) on terms which may or may not be the same as in this Counter Offer. Acceptance of this Counter Offer by Buyer shall NOT be binding unless and until it is subsequently re-signed by Seller in paragraph 7 below. Prior to the completion of all of these events, Buyer and Seller shall have no duties or obligations for the purchase or sale of the Property. 3. RIGHT TO ACCEPT OTHER OFFERS: Seller reserves the right to continue to offer the Property for sale or for other transaction, and to accept any other offer at any time prior to communication of acceptance, as described in paragraph 4. Seller's acceptance of another offer prior to Buyer's acceptance and communication of acceptance of this Counter Offer shall revoke this Counter Offer. 4. EXPIRATION: Unless acceptance of this Counter Offer is signed by the person receiving it, and communication of acceptance is made by delivering a signed copy in person, by mail, or by facsimile which is personally received, to the person making this Counter Offer or to SANDY BERENS , by 5:00PM on the third calendar day after this Counter Offer is written (or, if checked, [ ] date: _________________, time _________ AM/PM), this Counter Offer shall be deemed revoked and the deposit shall be returned to Buyer. This Counter Offer may be executed in counterparts. AS THE PERSON(S) MAKING THIS COUNTER OFFER ON THE TERMS ABOVE, RECEIPT OF A COPY IS ACKNOWLEDGED. _________________________________________ Date: 9/25/98 Time: 11:53 AM/PM _________________________________________ Date: _______ Time: _____ AM/PM 5. ACCEPTANCE: I/WE accept the above Counter Offer (IF CHECKED: [ ] SUBJECT TO THE ATTACHED COUNTER OFFER) and acknowledge receipt of a copy. _________________________________________ Date: 9/25/98 Time: _____ AM/PM _________________________________________ Date: _______ Time: _____ AM/PM 6. ACKNOWLEDGMENT OF RECEIPT: Receipt of signed acceptance on (date) ___________________________________, at _____ AM/PM, by the maker of the Counter Offer, or other person designated in paragraph 4, is acknowledged. (_______/_______) (Initials) 7 7. MULTIPLE COUNTER OFFER SIGNATURE LINE: (PARAGRAPH 7 APPLIES ONLY IF PARAGRAPH 2 IS CHECKED.) By signing below, Seller accepts this Multiple Counter Offer, and creates a binding contract. (NOTE TO SELLER: Do NOT sign in this paragraph until after Buyer signs the acceptance in paragraph 5, and returns to Seller for re-signing.) _________________________________________ Date: _______ Time: _____ AM/PM _________________________________________ Date: _______ Time: _____ AM/PM THIS FORM HAS BEEN APPROVED BY THE CALIFORNIA ASSOCIATION OF REALTORS (C.A.R.). NO REPRESENTATION IS MADE AS TO THE LEGAL VALIDITY OR ADEQUACY OF ANY PROVISION IN ANY SPECIFIC TRANSACTION. A REAL ESTATE BROKER IS THE PERSON QUALIFIED TO ADVISE ON REAL ESTATE TRANSACTIONS. IF YOU DESIRE LEGAL OR TAX ADVICE, CONSULT AN APPROPRIATE PROFESSIONAL. This form is available for use by the entire real estate industry. It is not intended to identify the user as a REALTOR. REALTOR is a registered collective membership mark which may be used only by members of the NATIONAL ASSOCIATION OF REALTORS who subscribe to its Code of Ethics. The copyright laws of the United States (17 U.S. Code) forbid the unauthorized reproduction of this form by any means, including facsimile or computerized formats Copyright 1986-1997 CALIFORNIA ASSOCIATION OF REALTORS EX-10.114 11 AMENDMENT TO THE AGREEMENT DATED JUNE 25, 1997 1 EXHIBIT 10.114 October 1, 1998 Mr. Steven Nelson, Administrator Friendship Community Mental Health Center 3201 N. 16th Street #6 Phoenix, AZ 85016 Dear Steve: This letter shall serve as an amendment to the Agreement dated June 25, 1997 between Friendship Community Mental Health Center (CMHC) and OptimumCare Corporation extending the term of the Agreement from April 30, 1999 to April 30, 2002. OptimumCare Corporation agrees to evaluate and assess the impact of any prospective payment system reimbursement changes such that Manager and CMHC shall in theory receive the same proportionate reimbursement as currently exists between the two parties. In addition, both parties agree to proportionately adjust fees, for any expenses currently designated as their responsibility in the Agreement dated June 25, 1997 which are ultimately paid by the other party. Please sign and return this letter as evidence of your acceptance at your earliest convenience. Sincerely, Edward A. Johnson Chairman of the Board & CEO Steven Nelson 11/12/98 - ------------------------------------------- -------------------------- Steven Nelson - Administrator Date Friendship Community Mental Health Center Mulu G. Michael 11/6/98 - ------------------------------------------- -------------------------- Mulu G. Michael - President & COO Date OptimumCare Corporation Edward A. Johnson 11/6/98 - ------------------------------------------- -------------------------- Edward A. Johnson - Chairman of the Board Date OptimumCare Corporation EX-23 12 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 No. 33-78340) pertaining to the 1987 and 1994 Stock Option Plans of OptimumCare Corporation of our report dated March 5, 1999, with respect to the consolidated financial statements and schedule of OptimumCare Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Orange County, California March 29, 1999 EX-27 13 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 188,636 0 2,293,583 0 0 2,652,044 59,527 131,062 3,154,744 429,375 0 0 0 5,920 2,431,761 3,154,744 11,409,690 11,434,426 8,977,538 10,819,672 1,505,169 334,564 2,401 614,754 237,621 377,133 0 0 0 377,133 .06 .06
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