UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the period ended March 31, 1996
OR
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transaction period from to
Commission file number: 1-14022
STERLING HOUSE CORPORATION
__________________________
(Exact name of registrant as specified in its charter)
KANSAS 48-1097141
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
453 S. WEBB ROAD, SUITE 500
WICHITA, KANSAS 67207
_____________________________
(Address of principal executive offices)
(316) 684-8300
_____________
(Registrant's telephone number, including area code)
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___
As of May 15, 1996 there were 5,035,000 shares of the Registrant's
Common Stock outstanding.
<PAGE>
STERLING HOUSE CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION
PAGE NO.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at March 31,
1996 and December 31, 1995. 3-4
Consolidated Statements of Operations
Three Months ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 10-16
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 17
Signature Page 18
Part I. Financial Information
<PAGE>
<TABLE>
<CAPTION>
Item 1. Consolidated Financial Statements
Sterling House Corporation
Consolidated Balance Sheets
Assets
(Unaudited)
March 31, 1996 December 31, 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $15,393,524 $17,396,355
Advances to affiliates 1,858 ---
Accounts receivable:
Trade 2,287,115 157,616
Affiliates 64,567 90,785
Other 64,810 309,652
Prerental costs 310,401 242,285
Deferred income taxes 160,276 161,713
Principal and interest funds in trust 412,394 299,671
Other 163,394 283,274
----------- -----------
Total current assets 18,858,339 18,941,351
Property and equipment:
Land and improvements 3,039,900 3,714,642
Buildings 8,076,782 14,977,356
Vehicles and equipment 363,004 393,599
Furniture, fixtures and office equipment 1,047,842 1,273,480
Construction in progress 4,114,181 3,102,364
Deferred lease costs and improvements 2,814,044 511,996
----------- -----------
19,455,753 23,973,437
----------- -----------
Less accumulated depreciation (814,235) (406,353)
------------ -----------
Net property and equipment 18,641,518 23,567,084
Other assets:
Deferred income taxes 287,647 447,901
Other 696,547 608,104
----------- -----------
Total other assets 984,194 1,056,005
----------- -----------
Total assets $38,484,051 $43,564,440
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
Sterling House Corporation
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
(Unaudited)
March 31, 1996 December 31, 1995
<S> <C> <C>
Current liabilities:
Short-term borrowings $2,353,173 $6,726,428
Accounts payable 3,400,725 1,832,100
Accrued expenses:
Salaries and benefits 300,334 255,316
Other 447,324 418,204
Deferred income taxes 3,221 23,475
Unearned rent and refundable deposits 131,724 189,509
Current maturities of long-term debt --- 4,217
Current maturities of bonds payable 170,000 251,000
Current maturities of capital
lease obligation 22,749 22,749
----------- ---------
Total current liabilities 6,829,250 9,722,998
Long-term debt 61,173 59,189
Bonds payable 4,705,000 6,466,500
Capital lease payable 30,746 36,119
Deferred income taxes 1,438,728 1,662,471
Deferred compensation 412,550 412,550
Deferred Rent 57,685 ---
Stockholders' equity:
Preferred stock; no par value
20,000,000 shares authorized,
none issued and outstanding --- ---
Common stock; no par value; 75,000,000 shares
authorized, 5,035,000 shares
issued and outstanding 28,172,798 28,184,228
Accumulated deficit (3,223,879) (2,979,615)
---------- -----------
Total stockholders' equity 24,948,919 25,204,613
---------- ------------
Total liabilities and stockholders' equity $38,484,051 $43,564,440
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sterling House Corporation
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,
1996 1995
____________________________________
<S> <C> <C>
Revenues:
Residence rental $2,493,428 $ 91,064
Development fees:
Affiliates --- 100,762
Initial franchise and royalty fees:
Affiliates 12,602 25,277
Other 30,183 36,146
Management and service fees:
Affiliates --- 94,410
Other 36,354 24,352
Construction services:
Affiliates --- 62,748O
Other 8,322 146,413
__________ _________
Total Revenue 2,580,889 581,172
Operating expenses:
Residence operating expenses 1,661,826 58,257
General and administrative 594,192 381,208
Construction costs 10,659 183,621
Building rentals 385,057 ---
Depreciation and amortization 227,724 37,141
Equity in net loss from investments
in unconsolidated affiliates --- 79,758
---------- ----------
Total operating expenses 2,879,458 739,985
Loss from operations (298,569) (158,813)
Other income (expenses)
Interest income 211,004 903
Interest expense (226,787) (32,737)
Minority interest in (income)
loss of subsidiaries --- 1,554
Gain on sale of assets --- 4,750
Trustee fees (17,346) ---
Other 5,128 14,692
---------- --------
Total other expense (28,001) (10,838)
----------- ---------
Loss before income taxes (326,570) (169,651)
----------- ---------
Benefit for income taxes 82,306 ---
------------ ---------
Net loss $(244,264) $(169,651)
========== ===========
Net loss per share (.05) (.07)
========== ===========
Average shares outstanding during the period 5,035,000 2,281,416
========= ==========
See accompanying notes.
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
Sterling House Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
1996 1995
<S> <C> <C>
Operating Activities
Net loss $ (244,264) $ (169,651)
Adjustments to reconcile net loss to net
cash provide by/(used in) operating activities
Depreciation and amortization 227,724 37,141
Deferred Income Taxes (82,306) ---
Amortization of deferred loss on sale/leaseback 18,582 ---
Equity in net loss from unconsolidated affiliates --- 79,758
Net change in operating assets and liabilities
Advance to affiliates (1,858) 21,818
Accounts receivable (1,858,439) (471,135)
Prerental costs (68,116) (11,474)
Other current assets 119,880 (21,611)
Other assets 5,533 (137,626)
Accrued expenses 74,138 (21,646)
Unearned rent and refundable deposits (57,785) 855
Accounts payable (496,371) 520,539
Deferred revenue --- (54,142)
Deferred lease costs 57,685 ---
---------- ----------
Net cash provided by/(used in) operating
activities (2,305,597) (227,174)
Investing Activities
Purchase of property and equipment (2,636,135) (1,104,116)
Proceeds from sale/leaseback transactions 9,380,391 ---
Proceeds from sale of property and equipment --- 8,700
Investment in unconsolidated affiliates --- 16,033
Minority Interest --- (21,604)
Other (93,976) ---
----------- ----------
Net cash provided by/(used in) investing
activities 6,650,280 (1,100,987)
Financing Activities
Proceeds from short-term borrowings 1,412,477 870,058
Principal payments on short-term borrowings (5,785,732) (23,200)
Principal payments on long-term debt
and lease obligations (68,779) (60,764)
Proceeds from issuance of long-term debt 61,173 196,055
Bond payments (1,842,500) ---
Net change in bond reserve funds (112,723) ---
Other (11,430) ---
--------- --------
Net cash provided by/(used in)
financing activities (6,347,514) 982,149
----------- --------
Net decrease in cash (2,002,831) (346,012)
Cash at beginning of quarter 17,396,355 585,089
___________ __________
Cash at end of quarter $15,393,524 $ 239,077
=========== ==========
See accompanying notes.
</TABLE>
<PAGE>
[FN]
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) GENERAL
The accompanying unaudited interim financial statements of
Sterling House Corporation (the "Company") have been prepared
pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and note
disclosures normally included in annual financial statements have
been condensed or omitted pursuant to those rules and regulations.
In the opinion of management, all adjustments, consisting of
normal, recurring adjustments considered necessary for a fair
presentation, have been included. Although Management believes
that the disclosures made are adequate to ensure that the
information presented is not misleading, it is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
The results of the three months ended March 31, 1996 and 1995 are
not necessarily indicative of the results of operations for the
entire year.
2) ACCOUNTS RECEIVABLE
Accounts Receivable - Trade includes residence billings,
franchise fees, and other fee receivables which totaled
approximately $114,000 and $388,000 at March 31, 1996 and 1995,
respectively. Also included in trade receivables is a receivable
from Health Care REIT, Inc. ("HCRI") for construction draws on
residences that are currently under construction and leased to the
Company. This receivable represents payments that the Company has
made for construction costs during the construction phase. These
payments will be reimbursed to the Company by HCRI throughout the
construction phase of the facility, which is generally eight
months. At March 31, 1996 and 1995 the balances for such
receivables from HCRI totaled approximately $2,165,000 and $0,
respectively.
3) ACQUISITIONS AND DISPOSITION OF ASSETS
On February 29, 1996, the Company entered into a
sale/leaseback transaction with HCRI for its Bartlesville, Midwest
City, Enid, Stillwater, and Shawnee, Oklahoma residences. The
Company received approximately $7.4 million for the five residences
which had a book value at the date of sale of approximately $7.6
million, resulting in a $200,000 loss which is being deferred and
amortized over the initial term of the lease. The terms of the transaction are
similar to those as described under "Sales-Leaseback Agreement," in note 10 to
the audited consolidated financial statements included in the Company's 1995
Annual Report on Form 10-K, and also as described in Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in the Company's 1995 Annual Report on Form 10-K. The annual lease
expense to be incurred by the Company under the terms of the agreement will
total approximately $832,000.
<PAGE>
On March 26, 1996, the Company entered into an agreement with
Meditrust to lease three assisted living residences previously
owned by franchisees of the Company, as well as entering into
sale/leaseback transactions for two Company-owned properties
located in Wichita, Kansas and Bethany, Oklahoma. The total
aggregate amount financed with Meditrust for the five residences
was approximately $7.5 million. Concurrently with this
transaction, the franchisees, Masters Associates, L.L.C., the owner
of the Derby, Kansas residence, Hays Assisted Living, L.L.C., the
owner of the Hays, Kansas residence, and Wellington Partners,
L.L.C., the owner of the Wellington, Kansas residence,
contemporaneously sold all of their assets (principly consisting of
their real property, building, improvements, furniture and
equipment) to Meditrust. Reference is made herein to the Company's
Report filed on Form 8-K dated March 26, 1996 (filed April 8,
1996). The lease terms for this agreement are similar to those
described under "Liquity and Capital Resources" reported herein.
The annual lease expense to be incurred by the Company under the
terms of the agreement will total approximately $952,000.
The following supplemental proforma information presents the
combined results of operations of the Company and the franchised
units as though the acquisition occurred at the beginning of the
periods shown.
For the three months
ended March 31,
_____________________
[S] [C] [C]
1996 1995
----- ----
Revenues $2,856,251 $731,689
Net Loss (275,016) (241,723)
Earnings per share (0.05) (0.11)
Number of shares of common
stock outstanding 5,035,000 2,281,416
These proforma amounts represent the historical operating
results of the Derby, Hays and Wellington, Kansas residences
combined with those of the Company with appropriate adjustments
which give effect to interest expense, depreciation and
amortization, lease expense and intercompany balances. These proforma amounts
are not necessarily indicative of operating results which would have occurred
if the acquisition had occurred at the beginning of the periods presented.
<PAGE>
4) SUBSEQUENT EVENTS
Subsequent to the end of the first quarter, the Company
entered into an agreement with HCRI providing an additional $43.1
million of development, construction, and permanent financing for
up to 24 additional residences in the states of Kansas, Oklahoma,
Texas and Ohio. The residences will be financed in two phases:
Phase IV and V (Phases I, II and III are included in the original
financing commitment). Phase IV and V will proceed only after
Phases I, II and III of the original HCRI residences have
commenced. The terms and conditions of the additional financing
commitment are identical to those originally entered into with
HCRI, principally sale/leaseback transactions as described under
"Liquidity and Capital Resources" reported herein under Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL. During the first quarter of 1996, the Company
continued it efforts to expand its market share in the assisted
living residence segment of the long-term care industry through
development, construction, and acquisition of assisted living
residences. On March 26, 1996, the Company acquired three
franchise residences located in Derby, Wellington, and Hays,
Kansas. The Company managed these residences prior to the
acquisition. The three residences had an average occupancy rate of
94% through March 31, 1996. The Company completed construction and
opened two new residences in Oklahoma, that were under development
at December 31, 1995. The acquisition and opening of the new
residences brings the total number of residences open and operating
at March 31, 1996, to 29, of which 7 are franchised. The company
also opened two more residences in Oklahoma on April 20th and 25th,
with another 7 residences scheduled to open by the end of the
second quarter of 1996.
The following table presents the number of residences under
construction or development, by state, as of May 6, 1996:
[S] [C] [C]
Under Under
Residences by State: Construction Development
Oklahoma 8 3
Texas 9 13
Florida 4 5
Colorado 0 3
Ohio 0 6
--- ---
Total 21 30
Units 790 1,110
The Company continues to finance its development and
construction of new residences primarily through the use of
financing agreements involving the sale and immediate lease of the
land, building and equipment used by the residences. Since the
leases are accounted for as operating leases, the result of these
sale/leaseback transactions is a reduction on the balance sheet of
the land, building and equipment of the residences sold, and any
corresponding debt relating to that residence that is retired at
the time of the sale. Thus, during the first quarter of 1996, the
Company's total assets decreased by approximately $5 million due to
the sale and immediate leaseback of several existing residences
previously owned by the Company. There was also an offsetting decrease in
liabilities due to the retirement of approximately $4.4 million in short-term
construction loans.
<PAGE>
The following table sets forth, for the periods presented, the
number of residences owned/leased and managed or franchised, the
number of units in each category, the stabilized occupancy percentages, the
percentage of private pay residents, and the average monthly rent per unit:
December 31, March 31,
___________________ _________
1993 1994 1995 1996
[S] [C] [C] [C] [C]
Residence (end of period)
Owned/Leased (1) 3 9 17 22 (3)
Managed/Franchised 1 6 10 7
--- --- --- ---
Total 4 15 27 29
Units
Owned/Leased 73 250 516 667
Managed/Franchised 37 207 358 268
--- --- --- ---
Total 110 457 874 935
Stabilized Occupancy
percentage (2) 100% 95% 96% 95%
Private pay 100% 100% 100% 100%
Average monthly rent/unit $1,355 $1,505 $1,618 $1,646
(1) Prior to Reorganization Transaction described below, residences were owned
by limited partnerships, limited liability companies, or a corporation.
(2) Stabilized occupancy percentage represents the occupancy at the periods
presented and only includes those residences that have been operating in excess
of nine months or that have reached an occupancy rate of 95%.
(3) Includes the franchise residences that were purchased on March 26, 1996.
In connection with the Company's initial public offering,
filed on Form S-1 dated October 26, 1995, the Company entered into
reorganization transactions with various individuals, limited
liability companies and limited partnerships of which the Company
owned majority or minority interests, whereby the Company acquired
all the stock of Sterling House of Augusta, Inc. and all of the
assets of such limited liability companies and limited partnerships
(Sterling House of Abilene, L.P., Sterling House of Wichita, L.P.,
Sterling House of Bethany, L.L.C., Sterling Group, L.L.C., Scotia,
L.L.C. and Corridor Properties, L.L.C.) (the "Reorganization
Transaction").
Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations are forward looking statements that involve risks
and uncertainties that could cause actual results to differ materially,
including, without limitation, risks associated with the Company's ability to
develop, construct, acquire or franchise additional assisted living residences
in accordance with the Company's development schedule, management of quarter
to quarter results, and other risks detailed from time to time in the Company's
SEC reports. The risk factors and information set forth in "Risk Factors" in
the Company's S-1 registration statement dated October 26, 1995, along with
information contained in the Company's 1995 Form 10-K, should be carefully
considered in the evaluation of the Company, its business and its investment
value. Updated information will be periodically provided by the Company as
required by the Securities Exchange Act of 1934.
<PAGE>
RESULTS OF OPERATIONS
REVENUES. Total revenue for the quarter ended March 31, 1996
increased to $2,581,000 compared to $581,000 for the quarter ended
March 31, 1995, an increase of $2,000,000 or 344%. This increase
was primarily attributable to an increase of $2,402,000 in
residence rentals as a result of the residences acquired in the
Reorganization Transaction and the new residences that have been
opened by the Company since March 31, 1995. Other revenues
decreased $403,000 from the first quarter of 1995 to $87,000 for
the first quarter of the current fiscal year. These decreases were
attributable to decreases in development fees of $101,000 to $0 in
the first quarter of 1996, initial franchise and royalty fees
decreased to $43,000, a decrease of $18,000 or 30%, management and
services fees decreased to $36,000, a decrease of $83,000 or 69%,
and construction services fees dropped to $8,000, a decline of
$201,000 or 96%. The overall decrease in other revenues is
primarily due to the Company's efforts to further develop company
owned residences, primarily through new construction and
acquisitions, and less emphasis on developing, managing, and
constructing franchise residences.
RESIDENCE OPERATING EXPENSES. The increase in residence
operating expense of $1,604,000 to $1,662,000 for the first quarter
of 1996 is attributable to the increase in residence operations
previously described.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses increased to $594,000 in the first quarter
of 1996 from $381,000 during the same period last year, an increase
of $213,000 or 56%. The increase is primarily attributable to the
increase in payroll and associated costs relating to the expansion
in the number of management and support personnel to facilitate the
Company's increase in residences and growing development program.
Other increases came in the areas of marketing, advertising and
overall increases in other general corporate expenses incurred to
support the growth in personnel and residences.
<PAGE>
COST OF CONSTRUCTION SERVICES. Cost of construction services
decreased to $11,000 from $184,000 during the same period in 1995.
The decrease was attributable to a decrease in such services to
franchisees.
BUILDING RENTALS. Building rental increased to $385,000 in
the first quarter of 1996, up from $0 during the same period in
1995. Such costs reflect the operating leases entered into during
the third and fourth quarter of 1995 and additional operating
leases entered into during the first quarter of 1996. The Company
had 5 residences under such operating leases at the end of 1995,
and entered into an additional 10 operating leases during the first
quarter of 1996, resulting in a total of 15 residences currently
operating under an operating lease agreement.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased $191,000 to $228,000 during the first quarter of 1996, up
from $37,000 during the first quarter of 1995. The increase was
attributable to the residences acquired in the Reorganization Transaction and
the depreciation related to property and equipment acquired since
March 31, 1995.
EQUITY IN NET LOSS FROM INVESTMENTS IN UNCONSOLIDATED
AFFILIATES. Equity in net loss from investments in unconsolidated
affiliates decreased to $0 in the first quarter of 1996 from
$80,000 during the first quarter of 1995. The Company's
investments in its unconsolidated affiliates were terminated on
October 26, 1995, as the minority interests were acquired in the
Reorganization Transaction.
INTEREST INCOME. Interest income increased to $211,000 during
the first quarter of 1996 up from $900 during the first quarter of
1995. The increase was attributable to the investment of excess
public offering proceeds in U.S. Treasury Securities.
INTEREST EXPENSE. Interest expense increased to $227,000
during the first quarter of 1996, up from $33,000 during the first
quarter of 1995. The increase was attributable to the assumption
of debt associated with the residences acquired in the
Reorganization Transaction.
INCOME TAXES. In the first quarter of 1996, the Company
recorded a tax benefit of $82,000 compared to $0 during the same
period in 1995. This benefit recognizes the effect of the
residences acquired in the Reorganization Transaction, whereby the
Company accounted for the acquisition under the purchase method of
accounting, and, as required by FAS 109, the basis differences
between the allocated fair value for book purposes and the assumed
historical tax basis required the Company to establish the
necessary deferred tax liabilities for these temporary differences.
As such, the Company's deferred tax liability position allowed the
Company to recognize a tax benefit for the pre-tax operating losses
generated in the subsequent periods. During the first quarter of
1995, the pre-tax losses incurred by the Company were not tax
benefited because the Company was in a net deferred tax asset
position which required such benefits to be reduced by valuation
allowances.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1996 was $12,029,000 up
$2,811,000 from $9,218,000 at December 31, 1995. Net cash used in
operating activities totaled $2,306,000 which was primarily due to
an increase in receivables from HCRI for construction costs that
the Company has paid and will subsequently be reimbursed by HCRI.
Net cash provided from investing activities of $6,650,000 was due
to the proceeds from the sale of residences totaling $9,307,000.
These proceeds were offset by $2,636,000 used in the acquisition of
new assets during the quarter. Net cash used in financing
activities totaled $6,348,000, which was primarily the result of
paying of the debt associated with the residences that were sold
during the quarter.
In August 1995, the Company entered into a financing
commitment with HCRI providing for up to $37 million of
development, construction and permanent financing available for up
to 24 residences. Through April 30, 1996, the Company had used
$4.8 million to finance the ongoing construction of 10 residences,
and approximately $12 million in connection with the sale/leaseback
financing of 8 residences. Under the terms of the financing
commitment, the Company enters into a series of sales/leaseback
transactions, whereby the Company sells residences at negotiated
values and concurrently enters into a lease agreement for each
residence for an initial period of 11 to 13 years with three five-year
renewal options. Under the terms of the leases, the Company
is responsible for all operating costs, including, but not limited
to, repairs, property taxes and insurance. Under the financing
commitment, the Company pays initial annual base rental during the
initial term of each lease as determined by multiplying the total
consideration by an amount equal to 3.75% over the yield of the
most actively traded U.S. Treasury Note with a maturity comparable
to the initial term of the lease in effect at the time of each transaction.
The annual base rent will increase 20 basis points
each year thereafter. All leases are being accounted for as
operating leases. The financing commitment expires on May 1, 1998.
The Company is obligated to finance 24 residences with HCRI prior
to the expiration of the financing commitment, including any
residences the construction of which is financed by HCRI.
<PAGE>
On October 5, 1995, the Company entered into a financing
commitment with LTC Properties, Inc. providing for up to $15
million of sale/leaseback financing relating to nine residences.
As of April 30, 1996, the Company had used approximately $6.7
million in connection with the sale/leaseback financing for 4
residences. Each lease will be for a term of 10 to 13 years and
the Company will have two five-year renewal options. The leases
require the Company to be responsible for all operating costs,
including, but not limited to, repairs, property taxes and
insurance. The annual base rent for the initial term of each lease
was determined by multiplying the purchase price to be paid by the
sum of 3.75% plus the effective yield of the ten-year U.S. Treasury
Notes prevailing at the time of each transaction. The annual base
rent will increase by 2% each year thereafter. All residences
leased will be subject to cross-default provisions. All leases are
being accounted for as operating leases.
On December 1, 1995, the Company entered into a $43 million
financing commitment with Meditrust to provide construction and
sale/leaseback financing relating to twenty-five assisted living
residences. The commitment with respect to construction loans
expires in two years, and the commitment with respect to
sale/leaseback financing in three years, following the closing of
the first construction loan. Each lease will be for a term of 10
to 15 years and the Company will have two five-year renewal
options. The leases will generally require the Company to be
responsible for all operating costs, including, but not limited to,
repairs, property taxes and insurance. The annual base rent for
the initial term of each lease will be determined by multiplying
the purchase price to be paid by Meditrust by the sum of 3.5 % plus
the effective yield of the ten year U.S. Treasury Notes prevailing
at the time of each transaction. The annual base rent will
increase by 2% each year thereafter. All residences financed with
Meditrust will be subject to cross-default provisions. All leases
are being accounted for as operating leases. Through April 30,
1996, the Company had used $7.5 million to finance five residences,
three of which were acquired March 26, 1996, from franchisees.
<APGE>
As of March 31, 1996, the Company had invested excess cash
balances in U.S. Treasury Securities. The Company intends to
satisfy future capital requirements for its development activities
by various means, including financing obtained from sale/leaseback
transactions, construction financing and, to the extent available,
cash generated from operations. The Company does not anticipate
any significant capital expenditures within the foreseeable future
with respect to its existing residences. It is expected that cash
generated from operations will be sufficient to fund any
expenditures the Company may be required to make with respect to
these existing residences.
SUBSEQUENT EVENTS
On April 3, 1996, the Company entered into an additional
financing commitment with HCRI providing an additional $43.1
million of development, construction, and permanent financing for
up to 24 residences in the states of Kansas, Oklahoma, Texas and
Ohio. The residences will be financed in two phases: Phase IV and
Phase V (Phases I, II and III are included in the original
financing commitment). Phase IV and V will proceed only after
Phases I, II and III of the original HCRI residences have
commenced. The terms and conditions of the additional financing
commitment are identical to the original HCRI, sale/leaseback
transactions previously described.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
See Exhibit Index
B. Report on form 8-K
During the first Quarter of 1996, the Company filed the
following reports on Form 8-K:
(I) Current Report on Form 8-K dated March 26, 1996 (filed
April 8, 1996) reporting under Item 2, among other
things, the Company's acquisition of the operations of
three franchisees, Masters Associates, L.L.C., Hays
Assisted Living, L.L.C., and Wellington Partners, L.L.C.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated May 15, 1996
STERLING HOUSE CORPORATION
(Registrant)
/s/Timothy J. Buchanan
________________________
Timothy J. Buchanan
Chief Executive Officer
/s/R. Gail Knott
_______________________
R. Gail Knott
Chief Financial Officer
<PAGE>
STERLING HOUSE CORPORATION
INDEX TO EXHIBITS
Exhibit Number Description
__________________________________________________________________
10.1 Franchise Agreement, dated September 21, 1995, by and between
Sterling House Corporation and Brooks Development Co., L.L.C.
10.2 Amendment to Franchise Agreement, dated April 11, 1996, by and
between Sterling House Corporation and Brooks Development
Co., L.L.C.
10.3 Letter of Agreement, dated February 3, 1996, by and between
Sterling House Corporation and Robert A. Brooks
10.4 Letter of Intent dated April 3, 1996, by and between Sterling
House Corporation and Health Care REIT, Inc.
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and not filed.
April 3 1996
Mr. Timothy J. Buchanan
Chief Executive Officer
Sterling House Corporation
453 S. Webb Road, Suite 500
Wichita, Kansas 67207
Dear Mr. Buchanan:
We understand that Sterling House Corporation ("Lessee") would
like Health Care REIT, Inc. ("Lessor") to provide lease financing
for up to an additional twenty-four (24) assisted living
facilities (individually, a "Facility" and collectively, the
"Facilities") in the states of Kansas, Oklahoma, Texas and Ohio.
The Facilities shall be financed in two phases: Phase IV and
Phase V. This letter outlines the terms and conditions pursuant
to which the Lessor would agree to provide financing.
BASIC FINANCING TERMS
1. Lessee and Guarantor: Sterling House Corporation.
2. Lease Amount: Phase IV: Up to $21,555,000 for
twelve prototypical properties at $47,000 to $52,000
per unit. Lease amount to be determined by size of
facility and whether it was constructed by the Lessee
or an outside contractor. The sources/uses statement
for the prototypical facilities are included herein
as Exhibit A. Subject to the fulfillment of all
conditions, including the approval of the Investment
Committee of HCRI for Phase V: Up to $21,555,000 for
twelve prototypical properties at $47,000 to $52,000
per unit.
<PAGE>
3. Use of Proceeds: To provide Construction, Initial
Term and Renewal Term Lease Financing for the
Facilities, the land on which the Facilities are
located and costs and expenses of the Lease
Financing.
4. Phasing of Construction and Funding: In addition to
the other terms and conditions hereof, including
Paragraph 23, in order to avoid unexpected working
capital and manpower shortages, Phase IV and V shall
proceed only after Phases I, II and III of the
Original HCRI Facilities have commenced. The
following requirements and conditions for Phases IV
and V will be adhered to:
a. Phase IV: Phase IV consists of twelve (12)
Facilities with construction to commence and continue
only so long as the following requirements are met:
(i) The First 15 Properties, as described on
Exhibit B(1) hereto, cover all costs and debt
service, collectively, and have a combined
unit occupancy percentage of at least 85%;
(ii) The rent-up of Phases I, II, and III are
proceeding at a pace at least equal to the
Anticipated Rent-up Schedule included on
Exhibit C;
(iii) There shall be no defaults relating to the
Facilities, the First 15 Properties, or any
assisted living facilities owned or operated by
Lessee or affiliates and financed by MMR, HCRI
or other parties, including those facilities
described on Exhibit B(2); b. Phase V:
Phase V consists of the second set of twelve
(12) Facilities with construction to commence
and continue only for so long as the
requirements of Paragraph 5a (as modified to
include the Phase IV Facilities) have been met.
c. Developers Fee: No Developers Fee will be funded.
d. Conveyance: At the Closing of each Lease, the real
property will be conveyed to HCRI and leased to
Lessee. Upon completion of the construction, all
tangible personal property financed by HCRI used in
the operation of the Facility will be transferred to
HCRI by bill of sale and then leased to Lessee.
<PAGE>
e. Lessee's Obligation: At the option of Lessee,
Lessee, its affiliates and successors will proceed
with the construction of some or all of the 24
Facilities as described herein. If Lessee elects to
proceed with Phase IV, Lessee shall proceed with
Phase IV by July 1, 1996 and complete such Phase by
January 1, 1998, and if Lessee elects to proceed with
Phase V, then Lessee shall proceed with Phase V by
July 1, 1997 and complete such Phase by August 1,
1999. The Phase V commencement date shall be subject
to Phase IV commencing on a timely basis as
determined by Lessor. Each of the Facilities
developed with HCRI financing shall be substantially
similar and of no lower quality than the First 15
Properties and other facilities described in Exhibits
B(1) and B(2).
5. Term: Per Facility: Up to eight-month Construction
Period; an Initial Term, followed by three five-year
Renewal Terms at Lessee's option. The length of the
Initial Term for each bundle shall be approximately
equal to the maximum term calculated consistent with
operating lease treatment but in no event less than
eleven (11) years.
Credit: Unless the construction of each Facility in a
particular Phase of the overall credit commences within
at least eighteen (18) months of the commencement of
that Phase and is continuing substantially in accordance
with a six- to eight-month construction schedule subject
to Force Majeure, the remaining credit for the
particular Phase and all subsequent Phases are subject
to suspension or cancellation by HCRI.
6. Lease Rate:
a. Construction Period: Base rate announced from time
to time by National City Bank (Cleveland) plus 2.75%
paid monthly. In the event the Construction Period
exceeds eight (8) months for any Facility for any
reason other than Force Majeure, the lease rate for
<PAGE>
that facility shall be increased by 50 basis points
for each month beyond the eight-month Construction
Period until construction is completed.
b. Initial Term: 3.70% plus yield for the most actively
traded United States Treasury Notes having the term
that most nearly approximates the Initial Term.
c. Renewal Terms: The Lease rate during the renewal
terms shall be calculated identically to the
calculation thereof set forth in the operating leases
previously executed by the parties.
d. Inflation Adjustment: Rate during second and all
subsequent years of the Initial and Renewal Terms
will be increased by 20.0 basis points.
e. Calculation Method: 365/360.
7. Purchase Option: For the Phase IV and Phase V
Facilities, the terms and conditions of the purchase
option shall be identical to the terms and conditions
contained in the operating leases previously executed by
the parties during the last sixty (60) days of the Initial
Term and each of the Renewal Terms. The Facilities may be
purchased from the Lessor for an amount equal to the
greater of i) the fair market value of the Facility or ii)
the Lease Amount(being the total amount advanced by HCRI
for the Facility).
8. Bundled Terms and Option Exercises: The financings for
Phase IV and Phase V will each be considered a separate
bundle and each will be coterminous and will have
identical renewal dates and option exercise periods so
that, subject to the operating lease, Lessee's decision to
abandon or renew any of the Lease Financing or acquire any
of the Facilities will be the same for all Facilities
within a bundle. Accordingly, at the time each Lease
Financing in a bundle is closed, the term, Renewal Date
and option exercise periods for prior financings within
such bundle will be automatically extended to be
coterminous with the most recently closed financing.
<PAGE>
9. Security: Lessor will require the following security for
the Lease Financing from the Lessee and its affiliates:
(i) first lien on Facility personal property financed by
HCRI, including receivables; (ii) assignment of leases and
rents of the Facility; (iii) Letters of Credit for Phases
I, II and III will remain in place and provide security
for all phases (Phases I, II, III, IV and V);.(iv)
subordination, attornment and nondisturbance agreement
with any sublessee of the Facilities; (v) a nondisturbance
agreement with any equipment lender/lessor for a Facility;
(vi) assignment and estoppel agreement for any Facility
material contracts; and (vii) assignment of Facility
licenses and permits.
10. Triple Net: The Lessee shall be responsible for all costs
associated with insurance, utilities, maintenance and
taxes.
11. Subordination of Payments: In the event of default,
distributions and payments, including management fees, to
Lessee, Affiliates or any affiliate of either of these
parties shall be subordinated to all obligations owed to
HCRI. The Management Fees shall be subject to the same
conditions and limitations as existed under the current
financing arrangements.
12. Equity Contributions: Letter evidencing Marketing/Startup
and the Working Capital as defined in Exhibit A.
13. Late Payment Charge: 5% of amount due, if not paid within
ten (10) days of the due date.
14. Default Rate of Interest: The greater of 18.0% or 2.5%
plus the then applicable rate.
<PAGE>
15. Events of Default: Continuing and uncured breaches of any
financial, affirmative and negative covenants or any other
terms of this Commitment Letter and lease documentation
shall constitute Events of Default. There shall be 10-day
and 30-day grace periods for monetary and nonmonetary
defaults, respectively. For so long as Lessee is
diligently and in good faith attempting to cure
nonmonetary defaults, Lessee shall have up to an
additional 60-day grace period. Such covenants and other
terms shall be identical to those included in the
leases entered into between Lessor and Lessee in Phases I,
II and III.
16. Financial Covenants: The following financial covenants
will be included: (i) each Facility must attain a debt
service coverage ratio of at least 1.25 to 1 (after
management fees equal to 8% of gross revenues and a
replacement reserve equal to $300 per unit per year)
during at least one month during the 8-month period
following issuance of the occupancy permit and operating
license; (ii) during the second full year of operations,
the Facility must attain debt service coverage ratio (as
described above) of at least 1.25 to 1.00; provided,
however, that once two or more Facilities have entered the
second full year of operation, the debt service coverage
for lagging facilities may be as low as 1.15 to 1 if the
collective debt service coverage for such Facilities over
one year old is at least 1.25 to 1; (iii) Sterling House
Corporation shall provide annual audited financial
statements and quarterly/unaudited financial statements;
(iv) each Facility shall provide annual and quarterly
unaudited financial statements; and (v) Sterling House
Corporation shall maintain a minimum net worth of
$17,500,000, with minimum cash or cash equivalents of
$2,000,000. Such covenants and other terms shall be
identical to those included in the leases entered into
between Lessor and Lessee in Phases I, II and III.
17. Affirmative Covenants: Lessee covenants that Lessee shall
manage the Facilities during the terms of the leases. Any
change in management contracts shall be subject to
approval by Lessor, which approval shall not be
unreasonably withheld.
<PAGE>
18. Negative Covenants: The following will be prohibited
without the consent of Lessor: (i) transfer of
Facilities; (ii) management fees for a Facility in excess
of 8% of Facility gross revenues, (iii) creation of other
indebtedness on the Facilities; and (iv) modification of
any material contracts. Lessee certifies that no real
estate investment trust ("REIT") or other financier
prohibits Lessee, without their consent, from mergers,
consolidations, or other similar substantive changes in
Lessee, or mergers, consolidations, sales, exchanges or
the issuance of any notes or securities which would have
an adverse material impact on the condition or performance
of Lessee or any Facility.
19. Governing Law: The Leases will be governed by the laws of
the states in which the Facilities are located.
20. Due Diligence Review: HCRI's customary due diligence
review including, but not limited to, review and approval
of site location and market study, review and approval of
the foregoing items, the title policy through Stanley R.
Day of Lawyers Title Insurance Corporation, survey,
certificate of need, zoning matters, environmental
assessment, property inspection, pest inspection, "as-
built" appraisal indicating a valuation for each Facility
in excess of at least 1.20 times the Lease Amount,
licensure and reimbursement requirements, compliance with
laws, financial condition and creditworthiness of Lessee
and affiliates, five-year proforma operating statements,
property and liability insurance and legal opinion. All
due diligence items will be subject to meeting Lessor's
underwriting requirements.
21. Special Terms for Each Construction Financing:
a. Disbursements: Not more than once a month in
accordance with a construction draw schedule.
Disbursements will be subject to customary conditions
including title updates, and certificate by Lessor's
consulting architect.
b. Retainage: 10% of subcontractors.
c. List of Contractors and Vendors: Supplied to HCRI.
d. Budget: Architect's Agreement and Contractor's
Contracts: Approved by HCRI.
e. Collateral Assignment of Architect's and Contractor's
Agreement: Required.
f. Consulting Engineer's Fee: $500.00 per day, plus
expenses.
g. Commencement of Construction: If Lessee elects to
proceed with Phase IV, Lessee shall be required to
commence development of the first Facility by July 1,
1996 and for all subsequent Facilities within ninety
days of closing of the land.
<PAGE>
22. Conditions to Closing each Lease Financing: HCRI's
obligation to close will be conditioned upon the
following: (i) approval of the due diligence review that
will include, in addition to items set forth in Paragraph
21, the approval of the site location and market
demographics for each Facility; (ii) the availability of
funding to HCRI; (iii) approval of Lease documentation;
and (iv) no default under any existing loan or lease
documentation relating to any of the Facilities, any of
the First 15 Properties, or any other assisted living
facilities owned or operated by Lessee or affiliates and
financed for Lessee by MMR, Lessor or any other party.
These conditions shall be satisfied for each Facility and
financing thereof.
23. Commitment Fee: 2% paid at Closing of each Facility, of
which 1% is allocable to the construction financing and 1%
to the permanent financing.
24. Deposit: $50,000 applied to Commitment Fee.
25. Commitment Expiration Date: This Commitment will expire
if not accepted and returned to Lessor by 3:00 p.m.
Eastern time on April 4, 1996.
26. Standard Terms: The Standard Terms of Commitment are
attached hereto and incorporated herein. Lessee
acknowledges that it has read and agrees to the Standard
Terms of Commitment.
27. Acceptance of Commitment: This Commitment Letter will
expire unless accepted by Lessee and returned to HCRI not
later than the Commitment Expiration Date. Once accepted,
Lessee shall be obligated as described herein. Lessee may
only accept this commitment by executing the enclosed copy
of this agreement and returning the executed agreement to
Health Care REIT, Inc.
<PAGE>
In compliance with the Fair Credit Reporting Act, this notice is to inform
the undersigned that in connection with this transaction, an investigation
may be made as to Lessee's financial history, character, general reputation,
personal characteristics and mode of living. Lessee may request from Lessor
a complete disclosure of the nature and scope of the investigation.
Sincerely, Accepted By:
HEALTH CARE REIT, INC. STERLING HOUSE CORPORATION
A Kansas Corporation
Bruce G. Thompson By:_____________________
Chairman
Title:___________________
Dated: ___________________
<PAGE>
EXHIBIT A
SOURCES AND USES OF FUNDS
Using Outside Contractor
[S] [C] [C] [C]
Sources:
Square Feet 18,500 21,500 25,600
Units 33 37 42
HCRI Lease $1,710,000 $1,857,500 2,069,000
Equity Contribution $98,000 $107,000 $117,000
Total Sources $1,808,000 $1,964,500 $2,186,000
Uses:
Building Costs $1,300,000 $1,400,000 $1,500,000
Land $150,000 $175,000 $250,000
FF&E $105,000 $115,000 $125,000
Construction Period Rent $55,000 $65,000 $75,000
Architect/Engineer $35,000 $35,000 $42,000
Financing Fee $35,000 $37,500 $42,000
Closing Costs $30,000 $30,000 $35,000
Letter of Credit $43,000 $47,000 $52,000
Working Capital $25,000 $30,000 $35,000
Marketing $30,000 $30,000 $30,000
Total Uses $1,808,000 $1,964,500 $2,186,000
Lease Amount Per Unit $51,818 $50,203 $49,262
<PAGE>
EXHIBIT A (CONTINUED)
Using BCI Construction Company
[S] [C] [C] [C]
Sources:
Square Feet 18,500 21,500 25,600
Units 33 37 42
HCRI Lease $1,562,000 $1,735,000 $1,952,000
Equity Contribution $94,000 $103,000 $114,000
Total Sources $1,656,000 $1,838,000 $2,066,000
Uses:
Building Costs $1,160,000 $1,290,000 $1,400,000
Land $150,000 $175,000 $250,000
FF&E $105,000 $115,000 $125,000
Construction Period Rent $50,000 $55,000 $60,000
Architect/Engineer $35,000 $35,000 $42,000
Financing Fee $32,000 $35,000 $40,000
Closing Costs $30,000 $30,000 $35,000
Letter of Credit $39,000 $43,000 $49,000
Working Capital $25,000 $30,000 $35,000
Marketing $30,000 $30,000 $30,000
Total Uses $1,656,000 $1,838,000 $2,066,000
Lease Amount Per Unit $47,333 $46,892 $46,476<PAGE>
<PAGE>
EXHIBIT B(1)
FIRST 15 PROPERTIES
(Note: Census reported 2/96)
[S] [C] [C] [C]
Location Number of Units Date Opened Census
Augusta, KS 21 10/91 100%
Olathe, KS 37 12/92 100%
Wichita, KS 26 09/93 100%
Abilene, KS 26 11/93 100%
Bethany, OK 26 01/94 100%
Topeka, KS 37 05/94 100%
Junction City, KS 26 05/94 100%
Derby, KS 26 05/94 100%
McPherson, KS 33 06/94 100%
Emporia, KS 26 07/94 100%
Saline, KS 33 08/94 100%
Wellington, KS 26 09/94 96.2%
Arkansas City, KS 33 09/94 60.6%
Parkwood, KS (?) 44 09/94 100.0%
Lenexa, KS 37 11/94 91.9%
<PAGE>
EXHIBIT B(2)
STERLING PROPERTIES
(Note: Census reported 2/96)
Location Number of Units Date Opened Census
Augusta, KS 21 10/91 100%
Olathe, KS 37 12/92 100%
Wichita, KS 26 09/93 100%
Abilene, KS 26 11/93 100%
Bethany, OK 26 01/94 100%
Topeka, KS 37 05/94 100%
Junction City, KS 26 05/94 100%
Derby, KS 26 05/94 100%
McPherson, KS 33 06/94 100%
Emporia, KS 26 07/94 100%
Saline, KS 33 08/94 100%
Wellington, KS 26 09/94 96.2%
Arkansas City, KS 33 09/94 60.6%
Parkwood, KS (?) 44 09/94 100.0%
Lenexa, KS 37 11/94 91.9%
Great Bend, KS 33 01/95 100.0%
Ponca City, OK 33 03/95 78.8%
Lawrence, KS 37 04/95 84.8%
Hays, KS 33 06/95 97.0%
Dodge City, KS 35 07/95 77.1%
Bartlesville, OK 33 08/95 100.0%
Leawood, KS 37 10/95 54.1%
Midwest City, OK 33 10/95 100.0%
Enid, OK 33 10/95 78.8%
Shawnee, OK 33 12/95 42.4%
Stillwater, OK 33 12/95 48.5%
Olathe II, KS 38 12/95 42.1%
Oklahoma City S.W., OK 33
Chickasha, OK 33
<PAGE>
EXHIBIT C
ANTICIPATED RENT-UP SCHEDULE
NET OF MOVE-OUTS
10 Units per Facility during first 45 days
4 Additional Units per 30-day period thereafter
<PAGE>
STANDARD TERMS OF COMMITMENT
1. Commitment Fee and Deposit. The Commitment Fee will be
deemed earned and nonrefundable upon execution by
Customer of this Commitment Letter unless i) the Board
of Directors of Health Care REIT, Inc. fails to provide
the Financing in accordance with this Commitment Letter;
ii) Health Care REIT, Inc. defaults under this
Commitment Letter; or iii) Health Care REIT, Inc. fails
to approve all due diligence and other items required to
be submitted to Health Care REIT, Inc. including but not
limited to the title insurance policy, survey,
environmental assessment and appraisal. The Deposit will
be nonrefundable; provided, however, that if the
Commitment Fee is refundable pursuant to this paragraph,
then Health Care REIT, Inc. will refund to Customer the
Deposit less, in the case of iii) hereof, any costs and
expenses incurred by Health Care REIT, Inc. The
Commitment Fee constitutes the bargained-for
consideration for Health Care REIT, Inc.'s issuance of
this Commitment Letter and does not constitute
liquidated damages for any damages arising from
Customer's breach hereunder.
2. Expenses. In addition to the Commitment Fee and upon
the acceptance of this Commitment Letter, Customer
agrees to pay, or reimburse Health Care REIT, Inc., for
all costs and expenses in connection with this
transaction (whether or not a closing occurs), including
but not limited to the following: i) title insurance
premiums, search fees, commitment fees, and cancellation
fees; ii) survey fees and expenses; iii) environmental
assessment fees and expenses; vi) inspection fees and
expenses including fees of consulting architects or
engineers and reimbursement of expenses for inspection
by Health Care REIT, Inc.'s representatives; v)appraisal
fees and expenses; vi) pest inspection fees and
expenses; vii) UCC search fees and expenses; viii) costs
and expenses incurred by Health Care REIT, Inc. in
investigating and negotiating this transaction including
travel, meals, and lodging; and ix) attorneys' fees and
expenses for Health Care REIT, Inc.'s counsel, both
outside and in-house counsel, in connection with this
transaction.
<PAGE>
3. Reliance by Health Care REIT, Inc. This Commitment
Letter has been issued in reliance upon the accuracy of
the information furnished to Health Care REIT, Inc. by
or on behalf of Customer and any guarantor and,
notwithstanding any investigation by Health Care REIT,
Inc., all such information is deemed to be material.
Health Care REIT, Inc. intends to notify Customer's
auditors of its reliance on the audited financial
statements of Customer and any guarantor in making the
Financing. Health Care REIT, Inc.'s obligation to close
is conditional upon no material adverse change in the
financial condition of Customer, any guarantor, or the
Facility.
4. Compliance with Law. If any law or regulation affecting
Health Care REIT, Inc.'s entering into this transaction
imposes upon Health Care REIT, Inc. any material
obligation, fee, liability, loss, cost, expense or
damage which is not contemplated by this Commitment
Letter, the commitment evidenced hereby maybe terminated
by Health Care REIT, Inc. without any obligation of
Health Care REIT, Inc. hereunder.
5. Assignment. Health Care REIT, Inc. may assign all or a
part of this Commitment Letter of the Financing to
another institutional investor. This Commitment Letter
and the Financing Documents are not assignable by
Customer by operation of law or otherwise.
6. Applicable Law. This Commitment Letter shall be
governed in all respects by the internal laws (as
opposed to the conflicts of laws provisions) of the
State of Ohio. Customer and any guarantor i) submit to
the jurisdiction of any state or federal court located
in Lucas County, Ohio over any action or proceeding to
<PAGE>
enforce or defend any matter arising from or related to
the Commitment Letter; ii) waive the defense of an
inconvenient forum to the maintenance of any such action
or proceeding; iii) agree that a final judgment in any
such action or proceeding shall be conclusive and may be
enforced in any other jurisdiction by suit on the
judgment or in any other manner provided by law; and
iv) agree not to institute any legal action or
proceeding against Health Care REIT, Inc. or any
director, officer, employee, agent or property of Health
Care REIT, Inc., concerning any matter arising out of or
relating to the financing in any court other than one
located in Lucas County, Ohio. Nothing in this section
shall affect or impair Health Care REIT, Inc.'s rights
to serve legal process in any manner permitted by law,
or Health Care REIT, Inc.'s right to bring any action or
proceeding against Customer or guarantor or the property
of Customer or guarantor in the courts of any other
jurisdiction.
7. Entire Agreement. This Commitment Letter sets forth the
entire agreement of the parties hereto with respect to
the subject matter hereof and supersedes all other prior
written or oral understandings with respect thereto;
provided, however, that all written and oral represen-
tations made by or on behalf of Customer with respect to
the subject matter hereof shall survive this Commitment
Letter.
8. Modification. No modification or waiver of any
provision of this Commitment Letter shall be effective
unless the same shall be in writing, signed by the
parties hereto.
9. Notices. Any notice required hereunder shall be in
writing delivered personally, or by a nationally
recognized overnight courier service, or by certified
mail, return receipt requested, postage prepaid,
addressed to the party to be notified of the address set
forth in the Commitment Letter or to such other address
as each party may designate for itself by like notice.
<PAGE>
When personally delivered, all notices shall be deemed
to be given when actually received. When mailed, all
notices shall be deemed to be given when deposited with
the overnight courier or with the U.S. mail.
10. Announcements. Health Care REIT, Inc. has the right to
make public announcements regarding this Financing.
11. No Brokers. Customer represents and warrants that no
financing brokers were used in connection with this
transaction.
12. Customer's Obligations. Upon acceptance of this
Commitment Letter, Customer shall be obligated to
provide all due diligence items required by this
Commitment Letter and to close this transaction.
Customer acknowledges that Customer's failure to close
this transaction shall cause irreparable injury to
Health Care REIT, Inc. for which there is no adequate
remedy at law and Health Care REIT, Inc. shall be
entitled to obtain the remedy of specific performance
(except where the failure to close is due to Health Care
REIT, Inc.'s objection to title, survey, zoning,
environmental or appraisal matters). Customer
irrevocably waives all defenses based on the adequacy of
a remedy at law that might be asserted as a bar to the
remedy of specific performance.
<PAGE>
AMENDMENT TO
FRANCHISE AGREEMENT
THIS AMENDMENT TO FRANCHISE AGREEMENT (hereinafter referred
to as "Amendment") is made and entered into this 11th day of April, 1996,
BY AND BETWEEN STERLING HOUSE CORPORATION,
a Kansas corporation,
hereinafter referred to as
"Company,"
AND Colorado Springs Assisted Living, L.L.C.
hereinafter referred to as
"Franchisee."
W I T N E S S E T H:
WHEREAS, Company and Franchisee are parties to a certain
Franchise Agreement dated the 21st day of September, 1995
(hereinafter referred to as "Franchise Agreement"), whereby
Franchisee is granted the license to operate a "Sterling House"
assisted living Residence (hereinafter referred to as the
"Residence"); and
WHEREAS, the parties desire to amend the Franchise Agreement
in order to reflect the results of their previous negotiations
regarding their respective rights, duties and responsibilities
under said Franchise Agreement as reflected in a certain letter
agreement dated February 3, 1996.
NOW, THEREFORE, in consideration of the mutual promises
contained herein, the parties hereto do hereby agree as follows:
1. Amendment No. 1. ARTICLE XII of the Franchise
Agreement is hereby amended, modified and supplemented to include
the following:
<PAGE>
In the event Company shall disapprove any reasonably
qualified purchaser of the Residence to whom Franchisee intends
to sell such Residence, Company, upon notice from Franchisee,
shall execute its right of first refusal and shall then purchase
the Residence in the manner set forth in Section 12.08.
2. Amendment No. 2. Section 7.02 of the Franchise
Agreement is hereby amended, modified and supplemented to include
the following:
Robert A. Brooks does hereby agree to be subject to the
terms and conditions of this Section 7.02 and
accordingly shall not divulge any Confidential
Information to any passive (i.e., someone who does not
have substantial involvement in the day-to-day
management of the business operations or development
activities of Franchisee) investor of Franchisee, it
being understood that in consideration for such
undertaking, no such passive investor shall be required
to execute any manner of non-competition agreement,
including any that might otherwise be required under
Subsection 12.04(X).
3. Amendment No. 3. Section 7.04 of the Franchise
Agreement is hereby amended, modified and altered to read as
follows:
7.04 Non-Competition covenant. During the term
of this Agreement and any extension thereof, as the case may be,
Franchisee, Robert A. Brooks, or any spouse or unemancipated
child of Robert A. Brooks, shall not have any interest as an
owner, investor, partner, lender, director, officer, manager,
member, employee, consultant, representative, or agent, or in any
other similar material capacity shall not directly or indirectly
enter into the employ, or work in concert with or serve as
consultant for, any person, partnership, corporation, limited
liability company, association, organization or other entity
engaged in the operation of any facility providing assisted
living services for the elderly (hereinafter referred to as a
"Competitive Business") and which is located within a radius of
twenty-five (25) miles from any Residence (operated wherever by
whomsoever) then open or under construction or under lease or
purchase commitment for future construction. Further, for a
period of two (2) years after the termination or non-renewal of
this Agreement, Franchisee, Robert A. Brooks, or any spouse or
<PAGE>
unemancipated child of Robert A. Brooks, shall not have any
interest as an owner, investor, partner, lender, director,
officer, manager, member, employee, consultant, representative,
or agent, or in any other similar material capacity shall not
directly or indirectly enter into the employ, or work in concert
with or serve as consultant for, any person, partnership,
corporation, association, organization or other entity engaged in
the operation of any other business or commercial enterprise
engaged in a Competitive Business and which has in operation or
is planning to open a business or commercial enterprise within a
radius of twenty-five (25) miles from any Residence (operated
wherever by whomsoever) then in operation, under construction, or
under lease or purchase commitment on the effective date of
termination or expiration. Provided, the ownership of a class of
securities listed on a stock exchange or traded on the over-the-
counter market that represents five percent (5%) or less of the
number of shares of such class of securities then issued and
outstanding shall not constitute a violation of this Section
7.04.
4. Other Provisions. All other terms and conditions
contained in the Franchise Agreement shall remain unchanged and
nothing contained herein shall otherwise effect the rights and obligations
of the parties hereto under the Franchise Agreement. Provided, to the
extent that any inconsistency exists between this Amendment and the
Franchise Agreement, this Amendment shall control.
5. Modification. This constitutes the entire agreement
of the parties, and no additions, modifications or amendments may
be made hereto, except in writing and signed by all parties to
this Amendment.
<PAGE>
6. Governing Law. This Amendment shall be governed by
and construed in accordance with the laws of the State of Kansas.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Amendment as of the day and year first above
written.
ATTEST: STERLING HOUSE CORPORATION
By /s/ R. Gial Knott, Secretary By /s/ Steven L. Vick
R. Gail Knott, Secretary Steven L. Vick, President
"Company"
/s/ Robert A. Brooks, Managing Member
Colorado Springs Assisted Living, L.L.C.
"Franchisee"
February 3, 1996
Mr. Robert A. Brooks
646 Edgewater Road
Wichita, KS 67230
Dear Bob:
This letter agreement sets forth the intent of Sterling
House Corporation ("Sterling") whereby, subject to the terms and
conditions herein, Sterling grants to Robert A. Brooks ("Brooks")
the option to develop as a franchisee up to three (3) independent
and assisted living facilities (collectively, the "Facilities")
utilizing the trade and service marks and the proprietary
operating system of Sterling (collectively, the "System"). The
right to use the System at each of the Facilities shall be
expressly set forth in a franchise agreement which must be
executed between Brooks and Sterling at the time when the
proposed location of same has been approved.
The option granted herein to develop the Facilities shall be
exercisable by Brooks for a limited period of time commencing on
the date of this letter agreement. The Facilities subject to
this option agreement shall be located within the city of
Colorado Springs, Colorado. In order for the development option
for the city of Colorado Springs, Colorado to thereafter remain
in effect, Brooks must have commenced development of the first of
the Facilities by February 29, 1996, the second must have
commenced development by September 1, 1996 and the third by
September 1, 1997. The term "commenced development" shall be
defined as being when Brooks has executed the then current
version of Sterling's standard franchise agreement, which may be
amended from time to time by Sterling House from current
agreement only with respect to changing legal requirements, or
with respect to competition radiuses in varying markets,
(including the payment of any initial franchise fee) for each
respective Facility and actual physical construction has occurred
on the site.
<PAGE>
Bob Brooks
February 3, 1996
Page 2
Sterling House further agrees to amend section 12 of the
franchise document to provide that in the event the Company
disapproves of any reasonably qualified purchaser of the
franchised location from franchisee, that Sterling House will
purchase the propertie(s) under equal terms and conditions as had
been accepted by franchisee.
Exercise of the option to develop the Facilities granted
herein is conditioned at the time of exercise upon (i) Brooks and
any franchisee in which he has any beneficial interest then being
in good standing at the time of such exercise under all franchise
or similar license or development agreements currently in effect
between Brooks (such franchisee) and Sterling; and (ii) there
then being no breach by Brooks of any provision of this letter
agreement.
Sterling further agrees to amend the franchise document to
delete any provisions relating to the requirement of Brooks'
passive investors to execute or be bound by the non-competition
requirements set forth therein. Brooks agrees not to divulge any
confidential information of Sterling to such passive investors.
Brooks agrees that during the period of time that Brooks is
himself a franchisee or has any interest in whether as an owner,
investor, partner, lender, director, officer, manager, employee,
consultant, representative, or agent of, any company that is a
developer or franchisee of Sterling House assisted living
residences, and for two years after such termination neither
Brooks nor his spouse nor any unemancipated child of Brooks shall
directly or indirectly enter into the employ, or work in concert
with or serve as a consultant for any person, partnership,
corporation, association, organization or other entity engaged in
the operation of any facility providing assisted living services
for the elderly anywhere within 25 miles of a Sterling Residence
then in operation, under construction or under lease or purchase
commitment. In addition to the aforesaid geographical
restriction, Brooks shall not disclose any confidential
information of Sterling including but not limited to operating
procedures and architectural plans of Sterling.
It is understood that this letter agreement shall be binding
<PAGE>
Bob Brooks
February 3, 1996
Page 3
upon the heirs, personal representatives, successors and assigns
of the parties hereto as the case may be.
The parties hereto acknowledge and agree this letter
agreement constitutes the entire agreement of the parties with
respect to development by Brooks of Sterling franchised assisted
living facilities in the state of Colorado and supersedes all
prior understandings or agreements, whether written or oral
concerning the same.
If the above terms are acceptable to you, please sign and
date one (1) of the two (2) originals of this letter agreement
and immediately return it to Sterling.
Sincerely,
/s/ Timothy J. Buchanan
Timothy J. Buchanan
Chairman of the Board and
Chief Executive Officer
Sterling House Corporation
AGREED AND ACCEPTED:
/s/ Robert A. Brooks
Robert A. Brooks
February 3, 1996
Date
STERLING HOUSE
FRANCHISE AGREEMENT
Colorado Springs Assisted Living, L.L.C.
Franchisee
September 21, 1995
Date of Agreement STERLING HOUSE
<PAGE> FRANCHISE AGREEMENT
TABLE OF CONTENTS
I. GRANT OF FRANCHISE
1.01 Grant of License 3
1.02 Retention of Certain Rights 3
1.03 Improvements to System 4
1.04 Agreement to Operate 4
II. DEVELOPMENT AND OPENING OF THE RESIDENCE
2.01 Architectural Plans 4
2.02 Site Plan Approval: Construction 5
2.03 Residence Development 7
2.04 Residence Opening 7
2.05 Furnishings, Fixtures, Signs and Equipment 8
III. TRAINING AND GUIDANCE
3.01 Management Training 8
3.02 Supplemental Management 9
3.03 Residence Managers - Generally 9
3.04 Interference with Employment Relations 10
3.05 Guidance 10
3.06 Operations Manual 11
IV. MARKS
4.01 Ownership of Goodwill and Marks 12
4.02 Limitations on Franchisee's Use of Marks 12
4.03 Infringement 13
4.04 Discontinuance of Use of Marks 13
V. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION
5.01 Independent Status 14
5.02 Additional Limitations on Franchisee's Use of Marks 14
5.03 Limitations on Liability 14
5.04 Indemnification 15
VI. FEES
6.01 Initial Franchisee Fee 15
6.02 Royalty and Service Fee 15
6.03 Definition of Net Revenues 16
6.04 Interest on Late Payments 16
6.05 Application of Payments 17
6.06 Retention of Fees by the Company 17
<PAGE>
VII. CONFIDENTIAL INFORMATION
7.01 Limitation on Interest in Confidential Information 18
7.02 Confidential Use of Confidential Information 18
7.03 Exception to Restrictions on Confidential
Information 19
7.04 Non-Competition Covenant 19
7.05 Improper Disclosure 20
VIII. RESIDENCE IMAGE AND OPERATING STANDARDS
8.01 Condition and Appearance of the Residence 21
8.02 Alterations to the Premises by Company 22
8.03 Alterations to the Premises by Franchisee 22
8.04 Service Providers, Distributors and Suppliers 22
8.05 Resident Offerings 23
8.06 Specifications, Standards and Procedures 23
8.07 Operation of the Residence 24
8.08 Compliance with Laws and Good Business Practices 24
8.09 Employees 25
8.10 Insurance 25
IX. MARKETING
9.01 By Company 27
9.02 By Franchisee 29
X. ACCOUNTING, REPORTS, AND FINANCIAL STATEMENT 29
XI. ANNUAL REVIEWS, INSPECTIONS, AND AUDITS
11.01 Annual Review 30
11.02 Company's Right to Inspect the Residence 30
11.03 Company's Right to Audit 31
XII. TRANSFER
12.01 By Company 32
12.02 Franchisee May Not Transfer Without Approval of
Company 32
12.03 Definition of "Transfer" 32
12.04 Conditions for Approval of Transfer 33
12.05 Excepted Transfers 34
12.06 Death or Disability of Franchisee 34
12.07 Effect of Consent to Transfer 35
12.08 Company's Right of First Refusal 35
12.09 Public or Private Offerings 36
XIII. RENEWAL OF FRANCHISE
13.01 Franchisee's Right to Renew 37
13.02 Renewal Agreement/Releases 37
<PAGE>
XIV. TERMINATION OF AGREEMENT BY FRANCHISEE
ORCESSATION OF RESIDENCE OPERATION
14.01 Termination for Good Cause 38
14.02 Economic Out Provision 39
XV. TERMINATION OF THE FRANCHISE
15.01 Grounds of Termination 39
15.02 Efforts to Resolve Termination Disputes Other Than
by Termination 42
XVI. RIGHTS AND OBLIGATIONS OF COMPANY AND FRANCHISEE
UPONTERMINATION OR EXPIRATION OF THE FRANCHISE
16.01 Payment of Amounts Owned to Company 42
16.02 Marks 42
16.03 Modification of Residence Design and Decor 43
16.04 Cessation of Use of Confidential Information 44
16.05 Company has Right to Purchase the Residence 44
16.06 Continuing Obligations 46
XVII. TEMPORARY DE-IDENTIFICATION OF THE RESIDENCE 46
XVIII. CASUALTY LOSS OR CONDEMNATION
18.01 Casualty Loss 47
18.02 Condemnation Proceedings 48
XIX. ENFORCEMENT
19.01 Severability and Substitution of Valid Provisions 48
19.02 Waiver of Obligations 49
19.03 Limitations on Liability 50
19.04 Specific Performance/Injunctive Relief 51
19.05 Rights of Parties are Cumulative 51
19.06 Governing Law/Consent to Jurisdiction 51
19.07 Binding Effect/Modification 52
19.08 Construction 52
19.09 Definitions 52
19.10 Counterparts 53
19.11 Consent 53
XX. NOTICES AND PAYMENTS
SCHEDULE "1" 55
EXHIBIT "A" A-1
EXHIBIT "B" B-1
EXHIBIT "C" C-1
<PAGE>
FRANCHISE AGREEMENT
NOW, on this 21st day of September, 1995 , Agreement is made,
BY AND BETWEEN STERLING HOUSE CORPORATION
a Kansas corporation
hereinafter referred to as
"Company"
AND Colorado Springs Assisted Living, L.L.C.
hereinafter referred to as
"Franchisee"
WITNESSETH:
WHEREAS, Company owns certain confidential information
relating to, and has designed, instituted, developed and promoted
a unique assisted living residential concept for which
substantial goodwill has been created. Such facilities are
intended to provide frail elderly with privacy and companionship
in a comfortable, moderately-priced, non-institutional living
environment, are operated under the trade name STERLING HOUSE,
and are operated with uniform formats, systems, methods,
specifications, standards, procedures and trade dress
(hereinafter referred to as the "System"), all of which may be
improved, further developed, or otherwise modified by Company
from time to time. Company uses, promotes, and licenses the
proprietary service mark STERLING HOUSE (and associated designs)
and other trademarks, service marks, logos, and commercial
symbols in connection therewith (hereinafter referred to as the
"Marks"); and
WHEREAS, Company grants to persons to meet Company's
<PAGE>
qualifications and are willing to undertake the requisite
investment and effort to establish and develop STERLING HOUSE
assisted living facilities (hereinafter referred to as
"Residence" or "Residences"), franchises to operate Residences
utilizing the System and the Marks; and
WHEREAS, Franchisee acknowledges that he has read this
Agreement and Company's Uniform Franchise Offering Circular and
that Franchisee understands and accepts the terms, conditions and
covenants contained herein as being reasonably necessary to
maintain Company's high standards of quality and service and the
uniformity of those standards at all Residences in order to
protect and preserve the goodwill of the Marks; and
WHEREAS, Franchisee acknowledges that other franchise
agreements have been or may be granted by Company at different
times and in different situations and further acknowledges that
the terms and conditions of such agreements may vary from those
contained in this Agreement; and
WHEREAS, Franchisee acknowledges that he has conducted an
independent investigation of the business venture contemplated by
this Agreement and recognizes that, like any other business, it
involves business risks and the success of the venture is largely
dependent upon the business abilities of Franchisee; and
WHEREAS, Company expressly disclaims the making of, and
Franchisee acknowledges that it has not received or relied upon,
any guaranty, express or implied, as to the revenues, profits, or
success of the business venture contemplated by this Agreement;
and
WHEREAS, Franchisee acknowledges that he has not received or
relied on any representations about the franchise granted herein
by Company, or its officers, directors, employees, or agents,
that are contrary to the statements made in Company's Uniform
Franchise Offering Circular or to the terms herein and that in
all of their dealings with Franchisee, the officers, directors,
employees, and agents of the Company act only in a representative
capacity and not in an individual capacity; and
WHEREAS, Franchisee further acknowledges that this
Agreement, and all business dealings between Franchisee and such
individuals as a result of this Agreement, are solely between
Franchisee and Company; and
<PAGE>
WHEREAS, Franchisee further represents to the Company, as an
inducement to its execution of this Agreement, that Franchisee
has made no misrepresentations in obtaining the franchise grated
herein. NOW, THEREFORE, in consideration of the mutual covenants
and promises contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
I.
GRANT OF FRANCHISE
1.01 Grant of License. Franchisee has applied for a franchise
to own and operate one (1) Residence to be located at/in 615
South Pointe Court, Colorado Springs, Colorado (the actual
physical location of said Residence wherever situated hereinafter
referred to as the "Premises") and such application has been
approved by Company in reliance upon all of the representations
made herein. Subject to the provisions of this Agreement,
Company hereby grants to Franchisee, subject to all of the terms,
provisions, and conditions contained herein, a non-exclusive
franchise (the "Franchise") to operate a Residence solely at the
Premises, and to use the System and Marks in the operation
thereof, for a term of fifteen (15) years commencing on the
opening of the Residence unless sooner terminated, as provided in
ARTICLES XIV and XV, herein. Termination or expiration of this
Agreement shall constitute a termination or expiration of the
Franchise.
Provided, Franchisee is in substantial compliance with this
Agreement, Company shall not operate or grant a franchise for the
operation of another Residence within a two and one-half (2.5)
mile radius of the above Premises (hereinafter referred to as
"Exclusive Area") nor, without first offering the opportunity to
develop same to Franchisee in a manner comparable to that
provided to Company in ARTICLE XII of this Agreement, will
Company itself operate or grant a franchise for the operation of
any other congregate living facility primarily designed for
rental to the elderly.
1.02 Retention of Certain Rights. Notwithstanding anything
to the contrary, Company retains, for itself and its affiliates,
the right in its sole discretion to:
A) subject only to the territorial rights granted to
Franchisee by this Agreement, itself either directly
or through the actions of its affiliates operate
Residences at such locations as Company, in its sole
discretion, deems appropriate;
B) to utilize the System, or any portions thereof, in
the operation of other assisted living facilities,
nursing homes, residential care facilities, and other
forms of congregate housing wherever located and
operated by whomsoever, as determined by Company in
its sole discretion; and
<PAGE>
C) subject only to the territorial rights granted to
Franchisee by this Agreement, grant other franchises for
licensed Residences at such locations as Company, in its
sole discretion, deems appropriate.
1.03 Improvements to System. Notwithstanding anything herein
to the contrary, any and all improvements to the System developed
by Franchisee (including any and all Plans), Company or other
franchisees, shall be and become the sole and absolute property
of Company, and Company may incorporate the same into the System
and shall have the sole and exclusive right to copyright,
register and protect such improvements in Company's own name to
the exclusion of Franchisee. Franchisee's rights and
obligations toward the use of such improvements shall be limited
to its rights and obligations regarding Confidential Information
as provided for in ARTICLE VII, herein.
1.04 Agreement to Operate. Franchisee agrees that it will
at all times faithfully, honestly and diligently perform its
obligations hereunder, that it will continuously exert its best
efforts to promote and enhance the business of the Residence,
and that Franchisee will not engage in the operation of any same
or similar business or activity that may conflict with its
obligations hereunder.
II.
DEVELOPMENT AND OPENING OF
THE RESIDENCE
2.01 Architectural Plans. Company shall furnish its
copyrighted plans, specifications and drawings, including,
without limitation, architectural, mechanical, electrical,
structural, civil engineering, and landscape, for a prototype
Residence reflecting Company's requirements for its design,
materials, layout, equipment, fixtures, furniture, furnishings,
signage and decoration (the "Plans").
<PAGE>
The Plans and all modifications thereof, additions and/or
deletions thereto are and shall remain the proprietary property
of the Company regardless of the use of the Plans by the
Franchisee or Franchisee's agents.
2.02 Site Plan Approval: Construction. Franchisee shall
not commit to purchase or lease any real property, and Franchisee
shall not commence any construction thereon, unless and until the
Company has specifically accepted in writing the site location of
the Residence proposed by Franchisee and the site plan and other
plans and specifications in accordance with which such Residence
is to be constructed and equipped. Before commencing any
construction of the Residence, Franchisee, at its expense, shall
comply, to Company's satisfaction, with all of the following
requirements:
A) Franchisee shall employ, subject to Company's approval,
a qualified architect, design firm or engineer to provide the
necessary completed working drawings. Franchisee shall submit to
Company a statement identifying and describing the qualifications
of the architect, design firm or engineer, as the case may be,
accompanied by such written assurances as Company may reasonably
require whereby the architect, design firm and/or engineer
acknowledge and agree that the Plans are and shall be the sole
and exclusive property of Company and that no claim of ownership
or other beneficial interest, direct or indirect, shall accrue to
such person or firms by virtue of any services that may be
rendered with regard to the Plans. It shall be the sole
obligation of Franchisee to engage such architect to supplement
and modify Company's Plans to the extent necessary to comply with
the physical terrain and location of the Premises and all
applicable ordinances, building codes, permit requirements, lease
requirements and restrictions and market considerations;
provided, all such supplements and modifications are hereby
deemed incorporated into the Plans and therefore, are proprietary
property of the Company;
B) At least sixty (60) days prior to the commencement of
construction, Franchisee shall submit to Company the adaptation
of Company's Plans to Franchisee's location<PAGE>
and to local and state laws,
regulations and ordinances for Company's approval. (It being understood and
agreed that such review and approval by Company shall not constitute any
warranty whatsoever, express or implied, as to the suitability,
habitability, or otherwise of the Plans.) The Plans shall not thereafter
be changed or modified without the prior written consent of Company;
<PAGE>
C) Franchisee shall employ, subject to Company's approval,
a qualified general contractor to supervise construction of the
Residence and completion of all improvements, and Franchisee
shall submit to Company a statement identifying the general
contractor and describing the general contractor's qualifications
and financial responsibility.
D) Franchisee shall obtain all permits and certifications
required for lawful construction and operation of the Residence
including, without limitation, zoning, access, sign, and fire
requirements and shall certify in writing to Company, that all
such permits and certifications have been obtained; and
E) Franchisee shall obtain adequate financing for
construction and furnishing of the Residence, the terms and
conditions of the financing to be evidenced as Company may
require from time to time.
Franchisee shall cause all construction and equipping of
the Residence licensed hereunder to be done in strict compliance
with the Plans, and no deviations therefrom shall be made by
Franchisee or its contractor(s) without the express written
approval of the Company. The Company shall have the right to
supervise and to inspect all construction to insure its
compliance with approved plans and specifications. In this
regard, during the course of construction, Franchisee shall, and
shall cause its architect, engineer, contractors and
subcontractors to, cooperate fully with Company for the purpose
of permitting Company to inspect the Premises and construction of
the Residence in order to determine whether construction is
proceeding in accordance with Company's standards and
specifications and the approved Plans. Franchisee acknowledges
that Company's exercise of its rights to approve the Plans and to
inspect the construction of the Residence shall be solely for the
purpose of assuring compliance with the terms and conditions of
this Agreement, and Company shall have no liability or obligation
with respect to the construction of the Residence. After completion
<PAGE>
of construction, Franchisee shall not alter, add to, eliminate or
modify the interior or exterior of such Residence or any equipment,
furnishings or fixtures therein without the prior approval of the Company.
2.03 Residence Development. Franchisee agrees at its
expense to do or cause to be done the following within three
hundred sixty-five (365) days after the date of this Agreement,
each item to be accomplished by no later than the respective
deadlines set forth in Schedule "1" of this Agreement:
A) Secure a suitable site for the Residence in accordance
with the provisions of Section 2.01;
B) Secure all financing required to fully develop the
Residence;
C) Obtain all required building, utility, sign, health,
sanitation, business permits and residential care licenses, and
any other required permits and licenses and commence
construction;
D) Construct the Residence in compliance with the Plans;
E) Purchase and install all required fixtures, equipment,
furniture, furnishings, supplies, signs, and other items
necessary for completion and opening of the Residence as
specified in the Plans and the Operations Manual;
F) Commence initial marketing activities as required by
the Operations Manual;
G) The Director and the staff successfully complete all
training; and
H) Open the Residence for business in accordance with the
provisions of Section 1.04.
In the event Franchisee fails to do or cause to be done any
of the above within the time periods specified above, Franchisee
shall pay to Company weekly, as liquidated damages, the amount of
One Hundred Dollars ($100) per day (i) until such time as
Franchisee is in compliance with this Section 2.03 or (ii) until
such time as Company shall notify Franchisee that Company has
elected to exercise its rights to terminate this Agreement in
accordance with the terms and conditions of ARTICLE XV.
Franchisee and Company each acknowledge and agree that time is of
the essence.
2.04 Residence Opening. Franchisee shall notify Company not less
than sixty (60) days prior to the date when Franchisee reasonably believes
that construction of the Residence will be completed. Further, Franchisee
shall immediately notify Company when construction of the Facility has been
completed. Issuance of an operating license, occupancy permit, or comparable
governmental authorization shall presumptively evidence that construction has
<PAGE>
been completed. Company shall inspect the Residence within thirty (30) days
of receipt of Franchisee's notice that the construction thereof has been
completed. The operation of the Residence and the use of the System may only
commence if and when Company gives Franchisee written notification that
Franchisee has satisfactorily complied with the provisions of this ARTICLE II,
which requirements include, but are not limited to, completed construction of
the Residence, installation of all required signs, furnishings, furniture,
equipment, supplies and other prescribed items, obtaining all requisite
licenses, employment of the necessary qualified staff, and payment of all
amounts due to Company and its affiliates.
2.05 Furnishings, Fixtures, Signs and Equipment. Franchisee
agrees to use in the development and operation of the Residence
only those brands, types, or models of equipment, fixtures,
furniture, furnishings and signs, which Company has approved as
meeting its specifications and standards for quality, design,
appearance, warranties, and function. All such items, if any,
designated by Company from time to time, shall be purchased only
from vendors, contractors, and suppliers approved by Company.
III.
TRAINING AND GUIDANCE
3.01 Management Training. Company shall furnish to
Franchisee or its Director, as the case may be, such training
programs, conferences and seminars as Company deems appropriate
from time to time. Provided, the training may be furnished at
one (1) or more locations, including Company's principal offices,
another Residence (including one [1] operated by Franchisee),
and/or the Residence licensed hereunder or any other location
which Company may select in good faith. Franchisee or, if other
than Franchisee, the individual/company designated by Franchisee
for being responsible for the on site day-to-day operation of the
Residence (said person employed by whomsoever hereinafter
referred to as "Director") must successfully complete Company's
training program to the satisfaction of Company and devote fully
his/her time and energy to the operation of the Residence.
Franchisee or the Director, as the case may be, must be employed
at least sixty (60) days prior to the proposed opening of the
Residence and successfully undergo training as prescribed by the
Company at least forty-five (45) days prior to the proposed
opening of the Residence. Subsequently hired Directors must also
successfully complete Company's training program and the cost of
training all subsequently hired Directors shall be borned solely
by Franchisee.
<PAGE>
3.02 Supplemental Management. If it is reasonably
necessary, Company may furnish personnel , who may be provided in
Company's discretion on or off-site by teleconference, written
communication or otherwise, for a period not exceeding forty (40)
man-hours to consult with the Director and the initial staff and
assist with the supervision of the operation of the Residence
until the Residence 's staff 's initial training is completed.
All supervision of the operation of the Residence during any
such period shall be for and on behalf of Franchisee, provided
that Company shall only have a duty to utilize its best efforts
and shall not be liable to Franchisee or its owners for any
debts, losses, or obligations incurred by the Residence, or to
any creditor of Franchisee for any products, materials,
equipment, fixtures, furnishings, supplies, or services purchased
for the benefit of the Residence during such period.
3.03 Residence Managers - Generally. No later than ninety
(90) days prior to the scheduled opening of the franchised
Residence, Franchisee shall nominate an individual who shall, as
Director, be responsible for the day-to-day operations of the
Residence. Each proposed Director for Franchisee's business
must meet the criteria periodically established by Company as
then set forth in the Operations Manual and be approved by
Company, which approval shall be at the sole discretion of
Company. Franchisee shall furnish Company with proper background
information concerning each proposed Director in order that
Company may determine whether she/he is qualified to act in such
capacity along with a copy of any and all employment agreements,
joint venture, stock buy/sell, or other agreements relating to
Director's equity interest in (if any), and employment by,
Franchisee. Each Director shall devote her/his full time and
vocation to and have direct responsibility for, all Residence
operations on a day-to-day basis. If Company does not approve a
proposed Director, then another person or persons shall be
nominated by Franchisee until such time as a person acceptable
to Company is found. Any change in the Director shall also
require the approval of Company and any successor Director must
satisfy all of the requirements of this provision. Further,
Franchisee shall replace any Director who Company shall require
Franchisee to replace if and when Company is seriously
dissatisfied with the performance of such Director. Non-compliance by
Franchisee with this Section 3.03 shall be deemed to be a material violation
of this Agreement.
In addition to the rights established hereunder, including
those in ARTICLE XI, herein, Company and its representatives
<PAGE>
shall have the right to communicate directly with Franchisee's Directors
concerning all matters of an operational nature. Company may require Franchisee
and/or previously trained and experienced Directors to attend periodic
refresher courses at locations designated by Company. Franchisee shall be
responsible for all travel and living expenses which Franchisee and/or its
Directors incur in connection with initial training and any subsequent refresher
training programs.
3.04 Interference with Employment Relations. During the
term of this Agreement, neither Company nor Franchisee shall
employ, directly or indirectly, any person serving in a
managerial position who is at the time or was at any time during
the prior six (6) months employed by the other party, its
subsidiaries, or by any franchise holder within Company's
franchise system. Provided, this Section shall not be violated
if, at the time Company or Franchisee employ or seek to employ
such person, the then current or former employer, as the case may
be, has given written consent. The parties hereto do acknowledge
and agree that in the event this Section is violated, that
notwithstanding Section 15.01, the former employer shall be
entitled to liquidated damages in the amount of Five Thousand
Dollars ($5,000) plus reimbursement of all costs and attorney
fees incurred. For purposes of this Section 3.04, "managerial
position" includes all employees at the pay grade of "assistant
director" and above.
3.05 Guidance. Company may advise Franchisee from time
to time of operating problems of the Residence disclosed by
reports submitted to or inspections made by Company or by
independent persons engaged by Company and may furnish to
Franchisee guidance (which guidance shall be to the extent of
Company's sole discretion) in connection with:
A) Methods, standards, and operating procedures to be
utilized at the Residences;
B) Purchasing approved equipment, furnishings, fixtures,
furniture, signs, products, and supplies;
C) Advertising and marketing programs;
D) Employee training; and
E) Administrative, bookkeeping, accounting, and general
operating and management procedures.
Such advice and guidance shall be at the sole discretion of
Company and may be furnished in the form of the Company's
confidential operations manual (hereinafter referred to as the
"Operations Manual"), bulletins, other written materials, and/or
telephonic consultations or consultations at the offices of
Company or at the Residence. If reasonably requested by
Franchisee, Company may, on an "as available basis", furnish additional guidance
and assistance.
<PAGE>
3.06 Operations Manual. Upon Company's receipt of
Franchisee's notification of the construction status of the
Residence pursuant to Section 2.04, Company will then transmit
and loan to Franchisee for use during the term of the Franchisee
(1) copy of the Operations Manual. The Operations Manual shall
contain mandatory and suggested policy statements,
specifications, standards, and operating procedures prescribed
from time to time by Company for the Residence and information
relative to other obligations of the Franchisee hereunder and
in the operation of the Residence. The Operations Manual may be
modified from time to time to reflect changes in the image,
decor, design, format, appearance, policies, methods, standards,
specifications, operating procedures, and services approved
and/or required for the Residences. Franchisee shall keep
her/his copy of the Operations Manual current, making only the
amendments and deletions to the Operations Manual as Company may
direct. In the event of a dispute relative to the contents of
the Operations Manual, the master copy maintained by the Company
at its principal office shall be controlling. Franchisee shall
not at any time without the written consent of Company, copy,
duplicate, record or otherwise reproduce any part of the
Operations Manual, nor otherwise make the same available to any
unauthorized person. Franchisee shall maintain the Operations
Manual in a safe and secure location and shall immediately report
the theft or loss of Operations Manual, or any portion thereof,
to Company.
IV.
MARKS
4.01 Ownership of Goodwill and Marks. Franchisee
acknowledges that Franchisee's right to use the Marks is derived
solely from this Agreement and is limited to the conduct of
business of Franchisee pursuant to and in compliance with this
Agreement and all applicable standards, specifications, and
operating procedures prescribed by Company from time to time
during the term of this Agreement. Any unauthorized use of the
Marks by Franchisee shall constitute a breach of this Agreement
and an infringement of the rights of Company in and to the
Marks. Franchisee acknowledges and agrees that all usage of the
Marks by Franchisee and any goodwill established thereby shall
inure to the exclusive benefit of Company and that this
Agreement does not confer any goodwill or other interests in the
Marks upon Franchisee other than the right to operate a Residence
at the Premises in compliance with this Agreement. All
provisions of this Agreement applicable to the Marks shall apply
to any additional proprietary, trade and service marks, and
commercial symbols hereafter authorized for use by and licensed
to Franchisee by Company.
<PAGE>
4.02 Limitations on Franchisee's Use of Marks.
Franchisee shall use the Marks as the sole identification of the
Residence, provided that Franchisee shall identify itself as the
independent owner thereof in the manner prescribed by Company.
Franchisee shall not use any Mark as part of any corporate or
trade name or with any prefix, suffix, or other modifying words,
terms, designs, or symbols (other than logos licensed to
Franchisee hereunder), or in any modified form, nor may
Franchisee use any Mark in connection with the performance or
sale of any unauthorized services or products or in any other
manner not expressly authorized in writing by Company.
Franchisee agrees to prominently display the Marks at the
Residence on all signage, displays, and/or materials as may be
designated by Company from time to time, and in connection with
any and all advertising and marketing materials, as may be
designated by Company. All Marks shall only be displayed and/or
utilized in the manner prescribed by Company. Franchisee agrees
to give all notices of trade and service mark registrations as
Company specifies and to obtain all fictitious or assumed name
registrations as may be required under applicable law.
4.03 Infringement. Franchisee shall immediately notify
Company in writing of any apparent infringement of, or challenge
to Franchisee's use of any Mark, or claim by any person of any
rights in any Mark or similar trade name, trademark, or service
mark of which Franchisee becomes aware. Franchisee shall not
communicate with any person other than Company, its counsel, or
Franchisee's counsel in connection with any infringement,
challenge, or claim. Company shall have sole discretion to take
such action as it deems appropriate and the right to exclusively
control any litigation, U.S. Patent and Trademark Office
proceeding, or other administrative proceeding arising out of any
infringement, challenge, or claim or otherwise relating to any
Mark of the System. Franchisee shall make no claim against
Company and shall hold Company harmless from any and all direct
or indirect, costs, damages, demands, expenses, losses or
liabilities suffered by Franchisee as a result of any
modification of the System necessitated by any claim or challenge
relating to the Marks or the System, including the costs of
altering the appearance, design, or formate of the Residence, or
any reduction in sales revenues or profits, or increased capital
expenditures or operating costs resulting from such modification
and occasioned by any litigation arising out of any claim or
challenge relating to Franchisee's use of any Mark or right to
use the System, or any part thereof. Franchisee agrees to and
shall execute any and all instruments and documents, render such
assistance and do such acts and things as may, in the opinion of
Company's counsel, be reasonably necessary or advisable to
protect and maintain the interests of Company in any litigation,
U.S. Patent and Trademark Office proceeding, other administrative
proceeding, or to otherwise protect and maintain the interests of
Company in the Marks and the System.
<PAGE>
4.04 Discontinuance of Use of Marks. If it becomes
advisable at any time in Company's sole discretion for Company
and/or Franchisee to modify or discontinue use of any Mark,
and/or to use one (1) or more additional or substitute trade or
service marks, Franchisee agrees to and shall comply with
Company's direction to modify or otherwise discontinue the use of
such Mark within a reasonable time after notice by Company.
V. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION
5.01 Independent Status. It is understood and agreed by
the parties hereto that this Agreement does not create a
fiduciary relationship between them, that Company and Franchisee
shall be independent contractors, and that nothing in this
Agreement is intended to make either party a general or special
agent, joint venturer, partner, or employee of the other for any
purpose. Franchisee, consistent with the requirements of Section
4.02, shall conspicuously identify himself in all dealings with
tenants/residents, suppliers, public officials, and others as the
owner of the Residence under a franchise with Company and shall
place such other notices of independent ownership on such forms,
documents, business cards, comment cards, stationery,
advertising, and other materials as Company may require from time
to time.
5.02 Additional Limitations on Franchisee's Use of Marks.
Company has not authorized or empowered Franchisee to use the
Marks except as provided by this Agreement and Franchisee shall
not employ any of the Marks in signing any contract, check,
purchase agreement, negotiable instrument, legal obligation,
application for any license or permit, or in a manner that may
result in liability of Company for any indebtedness or
obligation of Franchisee. Except as expressly authorized by
this Agreement, neither Company nor Franchisee shall make any
express or implied agreements, warranties, guarantees or
representations, or incur any debt, in the name of or on behalf
of the other or represent that their relationship is other than
franchisor and franchisee, respectively.
5.03 Limitations on Liability. Neither Company or
Franchisee shall be obligated by or have any liability under any
agreements or for any representations made by the other that are
not expressly authorized hereunder, nor shall Company be
obligated for any damages to any person or property directly or
indirectly arising out of the operation of the Residence, or
Franchisee's business authorized by or conducted pursuant to the
Franchise, whether caused by Franchisee's negligent or willful
action or failure to act to the relative extent such damages do
not arise out of Company's negligence, wrongful act or improper
failure to act. Company shall have no liability for any sales,
use, occupation, excise, gross receipts, income, property or
other taxes, whether levied upon Franchisee, the Residence, or Franchisee's
property, or upon Company, in connection with the business conducted by
Franchisee or payments to Company remitted pursuant to this Agreement.
<PAGE>
5.04 Indemnification. Franchisee shall indemnify and hold
harmless Company, Company's affiliates, and their shareholders,
directors, officers, employees, agents, and assignees against any
liability for any claims, including those specified in Section
5.03, herein, arising out of the operation of the Residence. For
purposes of this indemnification, "claims" shall mean and include
all obligations, actual and consequential damages, taxes, and
costs reasonably incurred by Company in the defense of any claim
against Company or in any action in which Company is named as a
party, including without limitation reasonable accountants',
attorneys' and expert witness fees, costs of investigation and
proof of facts, court costs, and other litigation expenses,
including travel and living expenses. Company shall have the
right to defend any claim asserted against it or the persons
delineated herein. Provided, Company shall use its best efforts
to cooperate with Franchisee in any litigation or judicial or
administrative proceeding to avoid duplication of time, effort or
expenditure to the greatest extent possible without compromising
Company's interest in such matter. This indemnity shall
continue in full force and effect subsequent to and
notwithstanding the expiration or earlier termination of this
Agreement.
VI.
FEES
6.01 Initial Franchisee Fee. Contemporaneously herewith,
Franchisee shall pay to the Company an initial franchisee fee for
the Residence licensed under this Agreement (hereinafter referred
to as "Initial Franchise Fee") in the amount of Twenty-Five
Thousand Dollars ($25,000).
6.02 Royalty and Service Fee. Franchisee shall pay to
Company during the terms of this Agreement on or before the
twentieth (20th) day of each calendar month a royalty and
service fee in the amount of three percent (3%) of the "Net
Revenues" derived from the operation of the
Residence licensed under this Agreement for the proceeding
calendar month (hereinafter referred to as "Continuing
Royalties").
<PAGE>
6.03 Definition of Net Revenues. As used in this
Agreement, the term "Net Revenues" shall mean the total aggregate
of all monies and receipts received by Franchisee and derived
from (i) all services performed and the rental of
rooms/apartments by tenants/residents residing at the Residence
licensed hereunder, (ii) entrance, and community, other fees
charged/assessed to any resident/tenant, (iii) vending and
laundry machine income, (iv) all proceeds received by Franchisee
from the payment of claims made under any policy of business
interruption insurance which provides for payment of lost
royalties, and (v) all other business whatsoever conducted or
transacted at or from the Premises, and whether the Net Revenues
are evidenced by cash, credit, check, services, property or other
means of exchange. Provided further, Net Revenues shall also be
deemed to mean the total aggregate of all monies and receipts
received by Franchisee from any other business operated upon or
from the Premises. However, there shall be excluded from Net
Revenues (i) all sales and use taxes (if any) imposed by
governmental authorities directly on rental or sales and actually
collected from residents, provided such taxes are added to the
selling price and are, in fact, paid by Franchisee to the
appropriate governmental authority and (ii) refundable deposits
to the extent such funds are actually refunded to resident/tenant
(in which event, the refund[s] shall be deducted from Net
Revenues in the month the refund is actually remitted). Net
Revenues shall be deemed to be realized by Franchisee at the
earlier of the time of the sale or delivery of the services, or
the time when Franchisee actually receives payment, whether
partial or full, therefor. Net Revenues consisting of property
or services shall be valued at their fair market value at the
time such property or services were received by or for the
account of Franchisee.
6.04 Interest on Late Payments. All Continuing Royalties
and marketing contributions due hereunder, amounts due for
purchases by Franchisee from Company or its affiliates, and other
amounts which Franchisee owes to Company or its affiliates shall
be paid punctually, without the necessity for invoice by Company,
and shall bear interest after the due date at the highest
applicable legal rate for open account business credit, not to
exceed two percent (2%) per month. Franchisee acknowledges that
this Section 6.04 shall not constitute Company's agreement to
accept any payments after same are due or a commitment by Company
to extend credit to, or otherwise finance Franchisee's operation
of the Residence licensed under this Agreement. Further,
Franchisee acknowledges that its failure to pay all amounts when due shall
constitute grounds for termination of this Agreement, as provided in
ARTICLE XV, herein, notwithstanding the provisions of this Section 6.04.
Provided, Franchisee may deposit with the escrow department of a federally-
insured bank any amount, the payment of which is in good faith disputed by
Franchisee, upon giving written notice to Company of Franchisee's actions
within three (3) days thereafter, and upon Franchisee filing an action in court
of property jurisdiction to determine the amount properly due and owing to
Company. If Company prevails in any proceeding, then Franchisee shall owe
interest on the disputed amount from the original due date in compliance with
the provisions of this Section 6.04.
<PAGE>
6.05 Application of Payments. Notwithstanding any
designation by Franchisee, Company shall have sole discretion to
apply any payments by Franchisee to any past due indebtedness of
Franchisee for Continuing Royalties or marketing contributions
due hereunder, purchases from Company or its affiliates, interest
or any other indebtedness.
6.06 Retention of Fees by the Company. Franchisee
acknowledges and agrees that in the event of the termination of
the Franchise granted hereby for any reason whatsoever, the
Company shall be entitled to retain for its own account any and
all Initial Franchise Fee and Continuing Royalty payments
previously remitted by Franchisee, and Franchisee agrees that
such payments shall be deemed fully earned by the Company as of
the date of payment, and whether the Residence licensed
hereunder is ever opened for business by Franchisee for any
period of time in the Exclusive Area.
VII.
CONFIDENTIAL INFORMATION
Company possesses certain types of confidential information,
including, but not limited to, architectural plans, designs, and
layouts, as well as the methods, techniques, formats,
specifications, procedures, information, systems, and knowledge
of and experience in the operation and franchising of Residences
(hereinafter referred to as "Confidential Information").
Company will disclose the Confidential Information to
Franchisee when rendering guidance and assistance to Franchisee
under the terms of this Agreement, including by way of example,
furnishing the Operations Manual and the Plans.<PAGE>
<PAGE>
7.01 Limitation on Interest in Confidential Information.
Franchisee acknowledges and agrees that, although Franchisee has
the right to use same, Franchisee shall not acquire any interest
in the Confidential Information, other than the right to utilize
it in the operation of the Residence at the Premises (and other
Residences, if any, developed under other agreements with
Company) during the term of this Agreement, and that the use or
duplication of the Confidential Information in the operation of
any other business or commercial enterprises would constitute an
unfair method of competition.
7.02 Confidential Use of Confidential Information.
Franchisee acknowledges and agrees that the Confidential
Information is proprietary, may involve trade secrets of
Company, and is disclosed to Franchisee solely on the express
condition that Franchisee agrees, and Franchisee does hereby
agree, that Franchisee:
A) Shall not use the Confidential Information in the
operation of any other business, commercial enterprise,
or capacity (including any other business or commercial
enterprises engaged in providing housing and/or care to
the frail elderly);
B) Shall maintain the absolute confidentiality of the
Confidential Information during and after the term of
this Agreement;
C) Shall not make any unauthorized copy, duplicate, record,
or otherwise reproduce all or any portion of the
Confidential Information disclosed by Company in
written, electronic, other tangible or verbal form;
D) Shall never contest the validity of Company's exclusive
ownership of and rights to the System or the
Confidential Information; and
E) Shall adopt and implement all reasonable procedures
prescribed from time to time by Company to prevent
unauthorized use or disclosure of the Confidential
Information, including without limitation, restrictions
on disclosure thereof to employees, officers, and
directors of Franchisee and the use of non-disclosure
and non-competition clauses as prescribed by Company in
any agreements with any persons who may hereafter have
access to the Confidential Information.
<PAGE>
7.03 Exception to Restrictions on Confidential Information.
Notwithstanding anything to the contrary contained in this
Agreement, the restrictions on Franchisee's disclosure and use of
the Confidential Information shall not apply to the following:
A) Information, processes, or techniques which, in the
opinion of Company, are or become generally known and
used in the frailer elderly housing and/or care
industry, other than through disclosure (whether
deliberate or inadvertent) by Franchisee;
B) Disclosure of the Confidential Information in judicial
or administrative proceedings to the extent that
Franchisee is legally compelled to disclose such
information, provided Franchisee shall have used its
best efforts and shall have afforded Company the
opportunity to obtain an appropriate protective order,
for other assurance satisfactory to Company, of
confidential treatment of the information required to
be so disclosed; and
C) Disclosure to Franchisee's employees to the extent
necessary for the proper operation of the Residence.
7.04 Non-Competition Covenant. Franchisee acknowledges and
agrees that Company would be unable to protect the Confidential
Information against authorized use or disclosure and Company
would also be unable to encourage a free exchange of ideas and
information among operators of Residences if franchised owners
of Residences were permitted to hold interests in any
competitive or similar businesses, as described herein.
Franchisee also acknowledges that Company has granted the
franchise rights to Franchisee herein set forth in part in
consideration of, and in reliance upon, Franchisee's agreement to
deal exclusively with Company. Accordingly, during the term of
this Agreement and any extension thereof, as the case may be,
Franchisee, any shareholder, manager, member of partner (in the
event Franchisee is, respectively, a corporation, limited
liability company or partnership), or any member of the immediate
family of Franchisee or of any shareholder, manager, member or
partner of Franchisee, shall not have any interest as an owner,
investor, partner, lender, director, officer, manager, employee,
consultant, representative, or agent, or in any other capacity
shall not directly or indirectly enter into the employ, or work
in concert with or serve as consultant for, any person,
partnership, corporation, limited liability company, association,
organization or other entity engaged in the operation of any
other business or commercial enterprise engaged in business,
whether or not intended to be operated for profit, of providing housing and/or
care to senior adults, whether or not they are frail elderly, including, but
not limited to, the operation of any home health care provider service, nursing
home, congregate living facility, personal care facility or continuing care
retirement community (hereinafter referred to as a "Competitive Business")
(wherever situated and operated by whomsoever) then open or under construction
or under lease or purchase commitment for future construction. Further, for
<PAGE>
a period of three (3) years after the termination or non-renewal of this
Agreement, Franchisee, any shareholder, manager, member or partner (in the
event Franchisee is, respectively, a corporation, limited liability company
or partnership), or any member of the immediate family of Franchisee, or of
any shareholder, manager, member or partner of Franchisee, shall not have any
interest as an owner, investor, partner, lender, director, officer, manager,
employee, consultant, representative, or agent, or in any other capacity
shall not directly or indirectly enter into the employ, or work in concert with
or serve as consultant for, any person, partnership, corporation, association,
organization or other entity engaged in the operation of any other business or
commercial enterprise engaged in a Competitive Business and which has in
operation or is planning to open a business or commercial enterprise within a
radius of twenty-five (25) miles from any Residence (operated wherever by
whomsoever) then in operation, under construction, or under lease or purchase
commitment on the effective date of termination or expiration. Provided, the
ownership of a class of securities listed on a stock exchange or traded on the
over-the-counter market that represents five percent (5%) or less of the number
of shares of such class of securities then issued and outstanding shall not
constitute a violation of this Section 7.04.
7.05 Improper Disclosure. In the event Franchisee
discovers that any of its current or former officers, directors,
partners, Directors, shareholders, members, limited liability
company managers, related parties thereto or their employees, are
violating, have violated, or are commencing to violate the
prohibitions on disclosure or reproduction of Confidential
Information provided for herein, Franchisee shall immediately
notify Company of such violation. Company shall seek such legal
and equitable relief, including seeking monetary damages, as it
deems necessary in its sole discretion. Any and all damages
recovered by Company pursuant to any such cause of action shall
be the exclusive property of Company. In the event it is
determined that any of the inquiry or damages have been caused by
the willful or negligent behavior of Franchisee or due to the failure of
Franchisee to properly supervise the actions of the individual found to
be in violation of this Agreement, Company shall be reimbursed by Franchisee
for all costs and expenses, including attorneys' fees, that were incurred
by Company in pursuing the cause of action.
<PAGE>
VIII.
RESIDENCE IMAGE AND
OPERATING STANDARDS
8.01 Condition and Appearance of the Residence.
Franchisee shall:
A) Not use the Residence licensed under this Agreement or
the Premises for any purpose other than the operation of a
STERLING HOUSE assisted living facility in compliance with this
Agreement;
B) Maintain the condition and appearance of the Residence
licensed under this Agreement and the Premises in accordance with
the standards of Company and consistent with the image of a
Residence as an attractive, comfortable, secure and non-institutional
residential living environment for the frail elderly;
C) Affect such maintenance of the Residence licensed under
this Agreement and the Premises as may be required by Company
from time to time to maintain the condition, appearance and
efficient operation thereof, including without limitation:
1) continuous and thorough cleaning and sanitation of the
interior and exterior of the Premises;
2) continuous and workmanlike interior and exterior repair
of the Premises;
3) maintenance of all equipment at peak efficiency;
4) replacement of worn out or obsolete improvements,
fixtures, furniture, furnishings, equipment, and signs,
with duly approved improvements or replacements
thereof;
5) periodic painting and redecorating; and
6) continuously maintain, repair, or replace (as needed)
all life safety systems and components thereof.
D) Upgrade and/or remodel the Residence licensed under this
Agreement (i) to keep same in compliance with all applicable laws
and regulations, and (ii) provided Franchisee will have a
reasonable time period remaining under the term of this Agreement
to amortize the costs of such improvements at reasonable
intervals determined by Company, to reflect changes in the image,
<PAGE>
design, format, or operation of Residences introduced by
Company, and required of new franchisees; all such upgrading and
remodeling resulting from whatever reason to be subject to
approval by the Company of detailed plans and specifications for
all construction, repair, or refixturing in connection with such
upgrading or remodeling; and
E) Place or display at the Premises (interior and exterior)
only such signs, emblems, lettering, logos, and display and
marketing materials that are from time to time approved in
writing by Company.
8.02 Alterations to the Premises by Company. In the event
Franchisee fails to maintain the condition and appearance of the
Residence licensed under this Agreement and Premises as herein
required, Company may, upon not less than ten (10) days written
notice to Franchisee:
A) Arrange for the necessary cleaning or sanitation, repair,
remodeling, upgrading, painting, or decorating; and
B) Replace the necessary leasehold improvements, fixtures,
equipment, and signs. Franchisee shall pay the entire cost
thereof as additional Continuing Royalties on the due date for
the next payment of Continuing Royalties.
8.03 Alterations to the Premises by Franchisee. Franchisee
shall not make any material replacements of or alterations to the
Premises, improvements, layout, fixtures, furniture and
furnishings, signs, equipment, or appearance of the Residence
licensed under this Agreement as originally developed without the
prior written approval by Company.
8.04 Service Providers, Distributors and Suppliers. The
reputation and goodwill of Residences is based upon, and can be
maintained only by, the rental of distinctive, high quality
rental units, and the providing of competent services in a
residential environment that is perceived by the residents to be
comfortable, secure, moderately-priced and non-institutional.
Franchisee therefore shall conform the Residence to Company's
specifications and quality standards and shall only engage
service providers and purchase from distributors and suppliers
approved by Company.
In approving service providers, distributors and suppliers
for the Residence licensed under this Agreement, Company may take
into consideration such factors as governmental licensing/permit
requirements, price and quality of services, products or supplies
and reliability of the proposed provider, distributor or
supplier. Company may concentrate contract/purchases with one
(1) or more providers, distributors and/or other suppliers to
obtain the lowest prices and/or the best marketing support and/or
services for any group of Residences, whether franchised and/or
<PAGE>
operated by Company. Further, approval of a provider,
distributor or supplier may be conditioned on requirements
relating to the frequency of delivery, standards of service,
including prompt attention to complaints, and concentration of
purchases, as set forth above, and may be temporary, pending a
further evaluation by Company of such provider, distributor or
other supplier.
If Franchisee proposes to retain, engage, or to purchase
any services or goods from a service provider, vendor,
distributor, or other supplier who has not been previously
approved by Company, Franchisee shall first notify Company and
submit to Company such information, specifications, and samples
as Company requests. Company shall within a reasonable time
determine whether such proposed services or item meets its
specifications and quality standards and/or whether Company
approves such service provider, distributor or other supplier and
shall then notify Franchisee whether the Residence is authorized
to engage, utilize, sell, or rent such item and/or purchase from
such distributor or other supplier.
8.05 Resident Offerings. Franchisee shall continuously
offer all facilities, accommodations, goods and services
prescribed by Company. If Franchisee desires to add or delete
any of same, it must first obtain the prior written approval of
Company. Franchisee acknowledges that Company requires prior
approval to assure itself that such accommodations, services, and
items are of the type and quality consistent with the image and
format of the Residences. Franchisee agrees that it will not,
without the prior written approval of Company, offer any
products or any services that are not then authorized by Company
for Residences.
8.06 Specifications, Standards and Procedures.
Franchisee acknowledges that each and every detail of the
appearance, layout, decor, products, materials, and supplies
utilized, services offered, and operation of the Residence is
important to Company's and other franchisees' Residences.
Company shall endeavor to maintain the high standards of quality
and service at all Residences franchised or operated by
Franchisee. To this end, Franchisee shall cooperate with Company
by maintaining these high standards in the operation of the
Residence licensed under this Agreement. Company shall have the
right to rely on responses of independent persons/business
engaged by Company therefor in evaluating Franchisee's
performance under this Agreement. Franchisee shall comply with
all mandatory specifications, standards and operating procedures of Company
including, but not limited to, those relating to:
<PAGE>
A) Methods, standards, and operating procedures to be
utilized at the Residence licensed under this Agreement;
B) Appearance, cleanliness, sanitation, standards of
service, and operation of the Residence licensed under
this Agreement;
C) Requests for approval of service providers, distributors
and suppliers;
D) Development and construction of the Residence licensed
under this Agreement; and
E) Marketing, advertising and promotional programs.
Further, Franchisee agrees that all mandatory
specifications, standards, and operating procedures
prescribed from time to time by Company in the
Operations Manual, or otherwise communicated to
Franchisee in writing, shall constitute provisions of
this Agreement as if fully set forth herein.
Accordingly, all references herein to Franchisee's
obligations under this Agreement shall include all such
mandatory specifications, standards, and operating
procedures.
8.07 Operation of the Residence. Unless otherwise agreed
upon by Company and Franchisee, Franchisee agrees to operate the
Residence for three hundred sixty-five (365)days each calendar
year, except such days as the location is closed for acts of God,
repairs and casualty loss or loss by eminent domain, as provided
for in ARTICLE XVIII, herein. Each day, the Residence shall be
appropriately staffed on a twenty-four (24) hour basis as prescribed
by Company in the Operations Manual and as required by applicable govern-
mental law and regulation.
8.08 Compliance with Laws and Good Business Practices.
Franchisee shall secure and maintain in force in its name all
required licenses, permits, and certificates relating to the
operation of the Residence licensed under this Agreement.
Franchisee shall operate the Residence in full compliance with
all applicable laws, ordinances, and regulations, including,
without limitation, all governmental regulations relating to the
operation of residential care facilities, occupational hazards,
health, and workers' compensation insurance, unemployment
insurance and the withholding and payment of federal and state
income taxes, social security taxes and sales taxes. All
marketing by Franchisee shall be completely factual, in good
taste as determined in the sole judgement of Company, and shall
conform to the highest standards of ethical advertising. Franchisee shall
in all dealings with its tenants/residents, service providers, suppliers,
and the public adhere to the highest standards of honesty, integrity,
fair dealing, and ethical conduct. Franchisee agrees to refrain from any
business or advertising practice which may be injurious to the business of
Company and the goodwill associated with the Marks and other Residences.
Franchisee shall notify Company in writing within five (5) days of the
commencement of any action, suit or proceeding, and of the issuance of any
order, writ, injunction, award or decree of any court, agency, or other
governmental instrumentality, which may adversely affect the operation or
financial condition of Franchisee or the Residence or of any
notice of violation of any law, ordinance, or regulation relating
to the operation or marketing of the Residence licensed under this Agreement.
<PAGE>
8.09 Employees. Franchisee shall hire all employees of
the Residence, be exclusively responsible for the terms of their
employment, their compensation and, except as set forth in ARTICLE III,
herein, for the proper training of all employees in the operation of the
Residence. Franchisee shall require all employees to maintain a neat
and clean appearance and to conform to the standards of dress and grooming
specified by Company from time to time for all Residences.
8.10 Insurance. During the terms of this Agreement,
Franchisee shall maintain in full force under policies of
insurance issued by carriers approved by Company:
A) Comprehensive public and product liability insurance
against claims for bodily and personal injury, death,
and property damage caused by or occurring in
conjunction with the operation of the Residence or
otherwise in conjunction with the conduct of business by
Franchisee pursuant to the Franchise;
B) Broad form fire and extended coverage, vandalism, and
malicious mischief insurance on the Residence licensed
under this Agreement and its contents;
C) Workers' compensation and employer's liability insurance
as well as such other insurance as may be required by
statute or rule of the state or locality in which the
Premises are located; and
D) Automobile liability insurance, where applicable.
Such insurance coverage shall be maintained in such
amounts as Company determines periodically to be
necessary. Not less than ten (10) days prior to each
anniversary date for each policy, Franchisee shall
provide Company with certificates of insurance
evidencing that the insurance has been secured and paid
for the then ensuing year. Company may periodically
increase the amounts of coverage required under any
insurance policies and require different or additional
kinds of insurance at any time, including excess
liability insurance, to reflect inflation,
identification of new risks, changes in law or standards
of liability, higher damage awards, or other relevant
changes in circumstances. All insurance policies shall
insure Franchisee and Company and shall provide for
thirty (30)days prior written notice to Company of any
material modification, cancellation, or expiration of a
policy.
<PAGE>
In connection with any construction, renovation,
refurbishing, or remodeling of the Residence licensed under this
Agreement, Franchisee shall cause the general contractor to
maintain with a reputable insurer (i) comprehensive general
liability insurance (with comprehensive automobile liability
coverage for vehicles used by the franchised business for both
owned and non-owned vehicles, builder's risk, product liability,
completed operations and independent contractors coverage) in
such amounts as Company determines periodically to be necessary
and with Company named as an additional insured , (ii) workers'
compensation insurance, ( iii) employer's liability insurance, as
well as (iv) such other insurance as may be required by law.
If Franchisee fails or refuses to maintain any required
insurance coverage, or to furnish satisfactory evidence thereof,
Company, at its option and in addition to its other rights and
remedies hereunder, may obtain such insurance coverage on behalf
of Franchisee and Franchisee shall fully cooperate with Company
in its efforts to obtain and maintain such insurance policies,
promptly execute all forms or instruments required to obtain any
such insurance, allow any inspections of the Residence licensed
under this Agreement which are required to obtain or maintain
such insurance and pay to Company, on demand, any costs and
premiums incurred by Company therefor.
Franchisee's obligations to maintain insurance coverage as
herein described shall not be affected in any manner by reason of
any separate insurance maintained by Company, nor shall the
maintenance of such insurance relieve Franchisee of any
obligations under ARTICLE V of this Agreement.
<PAGE>
IX.
MARKETING
9.01 By Company. Recognizing the value of marketing to
the goodwill and public image of the Residences, past and future,
Company may, now or hereafter, elect to maintain and administer a
marketing fund (hereinafter referred to as the "Marketing Fund")
for such marketing (including advertising, promotion, public
relations and other marketing programs) as Company may deem
necessary or appropriate, in its sole discretion. Franchisee
shall contribute to the Marketing Fund an amount designated by
Company from time to time, but not exceeding three percent (3%)
of the Net Revenues of the Residence licensed under this
Agreement, which shall be payable monthly together with the
Continuing Royalties due hereunder. Residences owned by Company
and its affiliates shall contribute to the Marketing Fund on the
same basis as Franchisee. Company shall have the right at any
<PAGE>
time, upon ninety (90) days written notice to Franchisee, to
increase or decrease the amount of such marketing contribution
payable by Franchisee, provided that Franchisee's contributions
to the Marketing Fund provided hereunder will not, during any
calendar year occurring during the term of this Agreement, or any
extension thereof, exceed three percent (3%) of the Net Revenues
of the Residence licensed under this Agreement.
Company shall exclusively direct all marketing programs
financed by the Marketing Fund. While Company may from time to
time solicit the input of ideas from franchisees, Company shall
nevertheless retain sole discretion over the creative concepts,
materials, and endorsements used therein, and the geographic,
market, and media placement and allocation thereof. Franchisee
agrees that the Marketing Fund may be used to pay the costs of
conducting marketing surveys and research; employing public
relations firms; preparing and producing video, audio, and
<PAGE>
written marketing materials; administering multiregional
marketing programs, including, without limitations, purchasing
television, radio, magazine, billboard, newspaper, and other
media advertising, and employing advertising agencies to assist
therewith; and providing marketing materials to Residence
franchisees. Provided, in determining the distribution of the
benefits of the Marketing Fund, Company shall use its best
efforts to balance its interest in promoting the System with each
Residence's proportionate contribution to the Marketing Fund,
whether Company or franchisee-owned. The Marketing Fund shall
furnish Franchisee, provided Franchisee is in good standing, with
approved marketing materials on the same terms and conditions as
such materials are furnished to other Residence franchisees.
<PAGE>
The Marketing Fund shall be accounted for separately from
the other funds of Company. Further, Company and Franchisee acknowledge
and hereby agree that all sums remitted hereunder by Franchisee shall be
held in trust by Company for the mutual benefit of Franchisee, all other
operators of Residences and Company as herein provided. Company shall not
use such funds to defray any of Company's general operating expenses, except
for such reasonable salaries, administrative costs, and overhead as
Company may incur in activities reasonably related to the administration
of the Marketing Fund and its marketing programs (including, without
limitation, preparing marketing materials and collecting and accounting
for contributions to the Marketing Fund). Company may spend in any fiscal
year an amount greater or less than the aggregate contribution of all
Residences to the Marketing Fund in that year and the Marketing Fund may also
borrow from Company or others to cover temporary deficits in the
Marketing Fund or cause the Marketing Fund to invest any surplus
for future use by the Marketing Fund. All interest earned on
monies contributed to the Marketing Fund will be used to pay
marketing costs of the Marketing Fund before other asserts of the
Marketing Fund are expended. A statement of monies collected and
expenditures made by the Marketing Fund shall be prepared
annually by Company and shall be made available to Franchisee
upon request.
<PAGE>
Franchisee understands and acknowledges that the Marketing
Fund is intended to maximize general public recognition of the
Marks and patronage of Residences for the benefit of all
Residences. Company undertakes no obligation to insure that
expenditures by the Marketing Fund in or affecting any geographic
area are proportionate or equivalent to contributions to the
Marketing Fund by Residences operating in any geographic area or
that any Residence will benefit directly or in proportion to its
contribution to the Marketing Fund from the conduct of marketing
programs or the placement of advertising. Except as expressly
provided in this Section 9.01, Company assumes no direct or
indirect liability or obligations to Franchisee with respect to
the maintenance, direction or administration of the Marketing
Fund.
9.02 By Franchisee. Franchisee agrees to spend annually
for local media marketing of the Residence licensed under this
Agreement such amounts as Company requires provided that the
aggregate amounts of required local marketing expenditures for
the Residence plus Franchisee's Marketing Fund contribution will
not, following the implementation of the initial marketing plan
during the first year of operation of the Residence, exceed three
percent (3%) of the Residence's Net Revenues for any respective
calendar year. Franchisee shall submit annually, in form satisfactory
to Company, verification of its local marketing expenditures.
Prior to their use by Franchisee, samples of all local
marketing materials (whether new or revised) not prepared or
previously approved by Company shall be submitted to Company for
approval. If written disapproval is not received by Franchisee
within thirty (30) days from the date of receipt by Company of
such materials, Company shall be deemed to have given the
required approval. Franchisee shall not use any marketing
materials that Company has disapproved, it being understood that
the risk of disapproval shall be borne solely by Franchisee.
<PAGE>
Franchisee acknowledges that Residences operated by Company
and other franchisees may be located outside of the Exclusive
Area but within ADI's or other identifiable marketing areas which
include all or a portion of the Exclusive Area in which the
Residence is located. In such instances, Franchisee shall use
its best efforts to cooperate and coordinate with Company or
other franchisees, as the case may be, to maximize the
effectiveness of their respective marketing efforts.
X.
ACCOUNTING, REPORTS, AND FINANCIAL STATEMENTS
Franchisee shall establish and maintain at its own expense a
bookkeeping, accounting, and record keeping system conforming to
the requirements prescribed by Company from time to time,
including, without limitation, the preparation and retention of
books and records. With respect to the operation and financial
condition of the Residence licensed under this Agreement,
Franchisee shall furnish to Company in the form prescribed by
Company the following:
A) By the tenth (10th) day following each of Franchisee's
monthly accounting periods, a report of the gross and
Net Revenues of the Residence for the preceding
accounting period and such other data, information, and
supporting records as Company from time to time
requires;
B) By the last day of each month, a profit and loss
statement for the preceding calendar month and a year to
date profit and loss statement and balance sheet;
<PAGE>
C) Within one hundred twenty (120) days after the end
of Franchisee's fiscal year, a balance sheet and an
annual profit and loss statement reflecting all year end
adjustments for the Residence;
D) Within thirty (30) days of their filing, exact copies of
all state sales tax returns, and state financial
reports; and
E) Upon request, the portions of Franchisee's federal and
state income tax returns which reflect the operation of
the Residence.
Each report and financial statement shall be verified and
signed by Franchisee in the manner prescribed by Company.
Company reserves the right to require Franchisee to have annual
financial statements audited, prepared, or reviewed by certified
public accountants.
XI.
ANNUAL REVIEWS, INSPECTIONS, AND AUDITS
11.01 Annual Review. At the discretion of Company, once
each calendar year, at a time designated by Company, Franchisee
and its Director shall be obligated to meet with representatives
of Company at a location specified by Franchisee, for the
purpose of discussing and reviewing the licensed Residence's
operations, status, and financial performance.
11.02 Company's Right to Inspect the Residence. To
determine whether Franchisee and the Residence licensed under
this Agreement are complying with this Agreement, and with all
specifications, standards, and operating procedures prescribed by
Company for the operation of the Residence, Company or its
designated agents shall have the right at any reasonable time and
without prior notice to Franchisee to:
A) Inspect the Premises;
B) Observe Franchisee, the Director and other employees of
the Residence;
C) Interview or survey the Director and other employees of
the Residence; and
D) Interview tenants/residents of the Residence.
Franchisee shall present to its tenants/residents all
residents evaluation forms as are periodically prescribed by
Company and shall participate and/or request that its
tenants/residents participate in all marketing surveys performed
by or on behalf of Company.
<PAGE>
11.03 Company's Right to Audit. Company shall have the
right at any time during business hours, and without prior notice
to Franchisee, to inspect and audit, or cause to be inspected and
audited, the business records, bookkeeping and accounting records,
sales and income tax records and returns which relate to
the operation of the Franchise, and other records of the
Residence licensed under this Agreement and the books and records
of any corporation or partnership which holds the Franchise.
Franchisee shall fully cooperate with representatives of Company
and independent accountants hired by Company to conduct any such
inspection or audit. In the event any such inspection or audit
shall disclose an understatement of the Net Revenues of the
Residence licensed under this Agreement, Franchisee shall pay to
Company within three (3) days after receipt of the inspection or
audit report, the Continuing Royalties and/or marketing
contributions due on the amount of such understatement, plus
interest, at the rate and on the terms provided in Sections 6.03
and 6.04, herein, from the date originally due until the date of
payment. Further, in the event any inspection or audit is made
necessary by the failure of Franchisee to furnish reports,
supporting records or other information, as herein required, or
to furnish any reports, records or information on a timely basis,
or if an understatement of Net Revenues for the period of any
audit, which shall not be less than four (4) weeks, is
determined by any such audit or inspection to be greater than two
percent (2%), Franchisee shall reimburse Company for the cost of
such audit or inspection, including, without limitation, the
charges of any independent accountants and the travel expenses,
room and board and compensation of employees and/or agents of
Company. The foregoing remedies shall be in addition to and not
in lieu of all other remedies and rights of Company hereunder or
under applicable law.
XII.
TRANSFER
12.01 By Company. This Agreement and the Franchise are fully
transferable by Company and shall inure to the benefit of any
transferee or other legal successor to the interest of Company
herein.
12.02 Franchisee May Not Transfer Without Approval of
Company. Franchisee understands and acknowledges that the
rights and duties created by this Agreement are personal to
Franchisee or its owner and that Company has granted the rights
set forth herein to Franchisee in reliance upon the individual or
collective character, skill, aptitude, attitude, business
ability, and financial capacity of Franchisee or its owner(s).
Any Residence developed pursuant to this Agreement (or any
interest therein), or any Franchise (or any interest therein)
granted pursuant to this Agreement, may not be transferred without the prior
written approval of Company, and any such transfer without such approval
shall constitute a breach hereof and convey no rights to or interests in this
Agreement, Franchisee, the Residence licensed under this Agreement or the
Franchise.
<PAGE>
12.03 Definition of "Transfer". As used in this
Agreement, the term "transfer" shall mean and include the
voluntary, involuntary, direct or indirect assignment, sale or
other transfer by Franchisee or its owner of any interest in this
Agreement, any part or all of the ownership of Franchisee, the
Residence licensed under this Agreement or any interest in the
Residence, or the Franchise or any interest herein granted
pursuant to this Agreement, including, without limitation: (i)
the transfer of ownership of capital stock or partnership
interest; (ii) merger or consolidation, or issuance of additional
securities representing an ownership interest in Franchisee;
(iii) sale of common stock, limited liability company interests,
or partnership interests, of Franchisee sold pursuant to a
private placement or registered public offering; (iv) transfer of
interest in Franchisee, the Franchise granted pursuant hereto, or
the Residence licensed under this Agreement, in a divorce
proceeding or otherwise by operation of law; or (v) transfer of
any interest in Franchisee, the Franchise granted pursuant
hereto, or the Residence licensed under this Agreement, in the
event of the death of Franchisee or an owner of Franchisee by
will, declaration of or transfer in trust, or under the laws of
intestate succession.
12.04 Conditions for Approval of Transfer. If Franchisee
and its owners are in full compliance with this Agreement,
Company shall not unreasonably withhold its approval of a
transfer that meets all the applicable requirements of this
Section 12.04. The proposed transferee or its owner must be an
individual of good moral character and otherwise meet Company's
then applicable standards for franchisees. A transfer of
ownership in the Residence licensed under this Agreement may only
be made in conjunction with a transfer of this Agreement. If the
transfer is of a controlling interest in Franchisee, or is one
(1) of a series of transfers which in the aggregate constitute
the transfer of a controlling interest in Franchisee, as a bare
minimum, and without in any way limiting its discretion, Company
may require prior to its consent that all of the following
conditions must be satisfied prior to, or concurrently with, the
effective date of the transfer: (i) the transferee must have
sufficient business experience, aptitude, and financial resources
to develop the Premises and operate the Residence; (ii) all obligations
of Franchisee and its owner incurred in connection
with this Agreement and the Franchise granted hereby must be
assumed by the transferee; (iii) Franchisee must pay all
Continuing Royalties, marketing contributions, termination
<PAGE>
payments, amounts owed for purchases by Franchisee from Company
and its affiliates, and any other amounts of whatever nature owed
to Company or its affiliates which are then due and unpaid; (iv)
the transferee or its designated Directors and all new Directors
as specified in ARTICLE III of this Agreement must have
successfully completed Company's training program; (v) the
lessors of the Premises must have consented to the assignment or
sublease of the Premises to the transferee; (vi) the transferee
must agree to bound by all terms and conditions of this
Agreement; (vii) Franchisee or the transferee must reimburse
Company for all training and other expenses (including legal
fees) reasonably incurred by Company in connection with the
transfer; (viii) Franchisee and its transferring owner must
execute a general release, in form satisfactory to Company, of
any and all claims against Company, its affiliates and their
officers, directors, employees and agents; (ix) Company must
approve the material terms and conditions of the transfer,
including, without limitation, a determination that the price and
terms of payment are not so burdensome as to adversely affect the
future development and operation of the Residence licensed under
this Agreement by the transferee; (x) Franchisee and its
transferring owner shall execute a non-competition covenant in
favor of Company and the transferee agreeing that for a period
of not less than three (3) years, commencing on the effective
date of the transfer, it and/or they in strict accordance with
provisions of Section 7.04 shall not have any interest as an
owner, investor, lender, partner, director, officer, manager,
employee, consultant, representative, or agent, or in any other
capacity, in any business or commercial enterprise engaged in a
Competitive Business located (a) within the Exclusive Area or (b)
within a radius of twenty-five (25) miles from any other
Residence (wherever situated and operated by whomsoever) then in
operation, under construction, or under lease or purchase
commitment on the effective date of such transfer; (xi)
Franchisee and its owner must enter into an agreement with
Company providing that all obligations of the transferee to make
installment payments of the purchase price or interest thereon on
Franchisee or its owner shall be subordinate to the obligations
of the transferee to pay Continuing Royalties, marketing
contributions, termination payments and obligations for purchases
from Company or its affiliate; and (xii) the Premises be refurbished
and/or redecorated to comply with then current standards.
<PAGE>
12.05 Excepted Transfers. If the proposed transfer will
not result in a change of control and is to or among owners of
Franchisee or to or among the immediate family members of
Franchisee, Sub-Sections (i), (ii), (iv), and (v) of Section
12.04 shall not apply and Sub-Section (xi) of Section 12.04
shall not apply to good faith transfers by gift, bequest, or
inheritance.
12.06 Death or Disability of Franchisee. Upon the
death or permanent disability of Franchisee or, if Franchisee is
a corporation, limited liability company, or partnership, the
owner of a controlling interest in Franchisee, the executor,
administrator, conservator, or other personal representative of
such person shall transfer its interest in this Agreement or
such interest in Franchisee to either a fellow shareholder,
member or partner, as the case may be, or a third party upon
approval of such transferee by Company. The disposition of this
Agreement or such interest in Franchisee (including, without
limitation, transfer by bequest or inheritance) shall be
completed within a reasonable time, not to exceed twelve (12)
months from the date of death or permanent disability and shall
be subject to all the terms and conditions applicable to
transfers contained in Section 12.04, herein. Failure to dispose
of this Agreement or the interest in Franchisee within said
period of time shall constitute a breach of this Agreement.
12.07 Effect of Consent to Transfer. Company's consent
to a transfer of this Agreement or any interest in Franchisee
subject to the restrictions of this ARTICLE XII shall not
constitute a waiver of any claims it may have against Franchisee,
nor shall it be deemed a waiver of Company's rights to demand
exact compliance with any of the terms or conditions of this
Agreement by any transferee. Further, Franchisee for itself and
on behalf of its transferee does acknowledge and agree that
Company's approval shall not be deemed to constitute a guaranty
or warranty as to transferee's success in conducting the business
contemplated herein.
12.08 Company's Right of First Refusal. During the term
of this Agreement and for a period of one (1) year after its
termination or if Franchisee has closed the Residence whether
with or without the consent of Company, if Franchisee or its
owner shall at any time determine to sell an interest in this
Agreement or any part or all of the ownership of Franchisee,
any interest in the Residence licensed under this Agreement
(including all or substantially all of the assets constituting the
<PAGE>
Residence), or the Franchise, or its owner obtains a bona
fide, executed written offer from a responsible and fully
disclosed purchaser, Franchisee shall promptly submit an exact
copy of such offer to Company. Company shall have the right,
exercisable by written notice delivered to Franchisee or its
owner within thirty (30) days from the date of delivery of an
exact copy of the offer to Company, to purchase the interest for
the price and on the terms and conditions contained in the offer.
In the event all or any part of the consideration offered to
Franchisee for such interest shall consist of common or preferred
stock or debt securities of any tendering entity, and in the
event Company is either a "public company" or a "public reporting
company" as those terms are defined under the federal securities
laws, Company shall be deemed to have matched any such offer by
offering the number of its common or preferred stock or debt
securities with a market value equivalent to the market value of
the securities of the entity making the offer to Franchisee or at
Company's election, tendering cash in an amount equal to the
market value of the securities of the entity making the offer to
Franchisee. In the event Company is privately-owned, Company may
substitute cash for any form of payment proposed in any offer.
In the event all or any portion of the consideration offered to
Franchisee consists of unique assets, Company shall be deemed to
have matched any offer by offering cash in an amount equivalent
to the market value of the unique assets tendered by the entity
making the offer to Franchisee. Further, in the event payment
includes any form of indebtedness, Company's creditworthiness
shall be deemed equal to the credit rating of any proposed
purchaser. Company shall have not less than ninety (90) days to
prepare for closing and shall be entitled to all customary
representations and warranties as set forth in Exhibits "A" and
"B" of this Agreement. If Company does not exercise its right
of first refusal, Franchisee or its owner may complete the sale
to the proposed purchaser pursuant to and on the terms of such
offer, subject to the Company's approval of the purchaser as
provided in Sections 12.02 and 12.04 of this ARTICLE XII.
Provided, if the sale to any purchaser is not completed within
ninety (90) days after delivery of the offer to Company, or there
is a material change in the terms and conditions of the sale,
Company shall then again have the right of first refusal herein
provided.
12.09 Public or Private Offerings. In the event
Franchisee shall attempt to raise or secure funds by the sale of
securities (including, without limitation, common or preferred
capital stock, bonds, debentures, limited liability company or
<PAGE>
partnership interests), Franchisee, recognizing that the
literature used with respect thereto may reflect upon Company,
agrees to submit all such sales literature or prospectuses to
Company and to obtain the written approval of Company of the
method of financing prior to any offering or sale of any
securities.
Each prospectus, circular, or other sales literature
utilized in any securities offering shall, at Company's
discretion, contain the following language in bold-face type on
the first textual page thereof:
"STERLING HOUSE CORPORATION and its affiliates have not
passed upon the accuracy or adequacy of the statements made
herein nor are they nor will they be responsible for the
inaccuracy or inadequacy of the same. Neither STERLING HOUSE
CORPORATION nor its affiliates will share in any of the proceeds
of this offering and make no recommendation respecting the
advisability of purchasing the investment contemplated by this
offering." Franchisee agrees to indemnify and hold Company, its affiliates,
and their officers, directors, employees and agents harmless from
any and all claims, demands or liabilities arising from the offer
or sale of any securities, whether asserted by a purchaser of
any of the securities or by a governmental agency. Company shall
have the right to defend all claims asserted against it or the
persons delineated herein.
XIII.
RENEWAL OF FRANCHISE
13.01 Franchisee's Right to Renew. Upon expiration of
the initial term of this Agreement, if:
A) Company elects to continue to maintain a Residence at
the Premises;
B) Franchisee maintains possession of and agrees to
refurbish and redecorate the Premises, replace
fixtures, furnishings, furniture, and equipment, and
signs and otherwise modify the Residence to be in
compliance with all specifications and standards then
applicable under new or renewal franchises for
Residences; or if Franchisee is unable to maintain
possession of the Premises, or in the judgement of
Company the Residence should be relocated, and
<PAGE>
Franchisee secures substitute premises approved by
Company and agrees to develop such substitute premises
in compliance with all specifications and standards
then applicable under new or renewal franchises for
Residences; and
C) Franchisee has been in substantial compliance with all
of the terms and conditions of this Agreement during
the initial term and continues to be in substantial
compliance up to the expiration hereof;
Franchisee shall have the right to renew this Agreement for three
(3) terms of five (5) years each or for such other period as may
be agreed to by Company and Franchisee. Each renewal shall be
without payment of an Initial Franchise Fee, except that Company
shall have the right to charge Franchisee reasonable charges for
services it renders to Franchisee or expenses it incurs in
conjunction with any renewal.
13.02 Renewal Agreement/Releases. To renew the Franchise,
Company, Franchisee and its owner(s) shall execute the then
standard form of franchise agreement and any ancillary agreements
then customarily used by Company in the granting or renewal of
franchises for the operation of Residences with appropriate
modifications to reflect the fact that the agreement relates to
the grant of a renewal franchise. Franchisee and its owners
shall also execute a general release, in form satisfactory to
Company, of any and all claims against Company, its affiliates
and their officers, directors, employees, and agents. Failure by
Franchisee and its owner(s) to sign all agreements and releases
within sixty (60) days after delivery thereof to Franchisee shall
be deemed an election by Franchisee not to renew this Agreement.
XIV.
TERMINATION OF AGREEMENT BY FRANCHISEE OR
CESSATION OF RESIDENCE OPERATION
Franchisee understands and acknowledges that a material
inducement to Company for entering into this Agreement is
Franchisee's representation that it will diligently develop the
Premises and the Residence thereon for the full term of this
Agreement and Franchisee agrees that this Agreement shall not be
terminated by Franchisee without good cause. For purposes
hereof, "terminated by Franchisee" shall mean (i) the
discontinuance of business at the Residence operated by
Franchisee, (ii) changing or threatening to change the Residence
operated by Franchisee to a different name, format, style, or
use, (iii) willful disregard by Franchisee of the terms and provisions
<PAGE>
of this Agreement, or (iv) transferring or threatening
to transfer any of Franchisee's rights under this Agreement or
to the Residence licensed hereunder and operated by Franchisee,
to a person or entity not approved by the Company in
accordance with the provisions of ARTICLE XII hereof.
14.01 Termination for Good Cause. Nothing herein shall be
construed to prevent Franchisee from terminating this Agreement
for good cause. For purposes hereof, the term "good cause" shall
be deemed to mean a material breach of this Agreement by the
Company which is not cured within thirty (30) days after the
Company actually receives written notice required hereunder from
Franchisee, or in the event such default cannot be cured within
such thirty (30) day period, the Company shall not have commenced
to cure such default within thirty (30) days and diligently
continued thereafter to attempt to cure such default. If any
material breach consists of the failure by the Company to provide
any service or training assistance required hereunder, then the
breach shall be deemed fully cured upon the tendering of
performance by the Company of the services or assistance within
(30) days after receiving notice thereof, but the Company shall
not be under any obligation to compensate Franchisee for any lack
or deficiency in past services or assistance.
14.02. Economic Out Provision. In the event that in
accordance with generally accepted accounting principles
reasonably applied in a consistent manner by Franchisee, and with
the concurrence of the Company which shall not be unreasonably
withheld, it is determined that the Residence licensed hereunder
has not been, for two (2) consecutive years, operated at a profit
(profit being defined as generating sufficient revenue to cover
all direct cash operating costs incurred in the ordinary course
of business at the Residence level), then Franchisee may, at its
option, terminate this Agreement. In such event, Franchisee
shall immediately comply with the provisions of ARTICLE XVI,
hereof, and for a period of two (2) years thereafter, the
Premises may not be utilized by Franchisee or any business
entity, organization, or venture in which Franchisee or its
owners have a direct or indirect interest who shall operate the
Premises and facility as a Competitive Business. Provided, the
subsequent sale, transfer or assignment of the Premises or closed
facility shall be subject to the terms and conditions set forth
in Section 12.08, herein, for a period of one (1) year commencing
with the last day the facility is operated as a STERLING HOUSE
assisted living facility.
<PAGE>
XV.
TERMINATION OF THE FRANCHISE
15.01 Grounds of Termination. This Agreement shall
terminate automatically upon delivery of notice of termination to
Franchisee, if Franchisee or its owners (or any shareholder,
member or partner, if Franchisee is a corporation, limited
liability company or partnership):
A) Abandons or fails to actively operate the Residence
licensed under this Agreement;
B) Surrenders or transfers control of the operation of the
Residence licensed under this Agreement;
C) Has made any material misrepresentation or omission in
its application for the Franchise;
D) (or any shareholder, manager, member or partner, if
Franchisee is a corporation, limited liability company,
or partnership, and if Franchisee fails to terminate
such owner's interest in Franchisee, as the case may
be, within ninety (90) days thereof) is convicted of
or pleads nolo contendere or the equivalent thereof to
a felony or other crime or offense or is subject to any
administrative injunction, order, or decree that is
likely to adversely affect the System, the Marks, the
goodwill associated therewith, Company's interest
therein, or the reputation of Franchisee or the
Residence licensed under this Agreement;
E) Makes a general assignment for the benefit of its
creditors, applies for or consents to the appointment
of a receiver, trustee, or liquidator of all or a
substantial part of its assets, files a voluntary
petition in bankruptcy, has an involuntary petition in
bankruptcy filed against it (which is not released
within ninety [90] days), or fails to pay its debts
and obligations as they mature in accordance with
normal business practices;
F) Makes an unauthorized assignment or transfer of this
Agreement, the Franchise, the Premises, the Residence
licensed under this Agreement, or an ownership interest
in Franchisee;
G) Is a party to any other franchise agreement with
Company for which Company has delivered to Franchisee a
notice of termination in accordance with its terms and
conditions for cause (except for a termination based
upon a failure to satisfy an area development quota);
<PAGE>
H) Makes any unauthorized use of the Marks or unauthorized
use or disclosure of the Confidential Information or
any portion thereof;
I) Fails or refuses to comply with any mandatory
specification, standard, or operating policy or
procedure prescribed by Company relating to the
operation of the Residence licensed under this
Agreement, violates any health, safety, housing or
sanitation law, ordinance, or regulation and does not
correct such failure or refusal within seventy-two (72)
hours after written notice thereof is delivered to
Franchisee or fails to notify Company in writing within
five (5) days of the commencement of any action, suit
or proceeding, and of the issuance of any order, writ,
injunction, award, or decree of any court, agency, or
other governmental instrumentality, which may adversely
affect the operation or financial condition of
Franchisee or the Residence or of any notice of
violation of any law, ordinance, or regulation
relating to unfair or deceptive trade practice, housing
or care for the elderly, or health or sanitation at or
in conjunction with the Residence;
J) Employs or attempts to employ, either directly or
indirectly, in violation of Section 3.04, any person
who Franchisee knows or should have known was employed
or at such time is employed by Company or any other
franchisee of Company without first obtaining the
written consent of Company or other franchisee of
Company; or
K) Fails on three (3) or more separate occasions, within
any period of twelve (12) consecutive months, to submit
when due any reports or other data, information or
supporting records; to pay when due the Continuing
Royalties, marketing contributions, or other payments
due hereunder to Company or its affiliates; or otherwise
fails to comply with this Agreement, whether or not such
failures to comply are corrected after notice thereof is
delivered to Franchisee.
This Agreement shall terminate without further action by
Company or notice to Franchisee, if Franchisee or its owner:
<PAGE>
A) Fails to accurately report the Net Revenues of the
Residence licensed under this Agreement or fails to
remit payments of any amounts due Company for
Continuing Royalties, marketing contributions, or any
other amounts due to Company or its affiliates
hereunder, and does not correct such failure within ten
(10) days after written notice of such failure is
delivered to Franchisee; or
B) Fails to timely meet any of the development,
construction and/or pre-opening obligations set forth in
Schedule "1" (hereinafter referred to as a "Development
Default") or to comply with any other provision of this
Agreement or mandatory specification, standard, or
operating policy or procedure prescribed by Company and
does not:
1) correct such failure within fifteen (15) days
after written notice of such failure to comply is delivered to
Franchisee; or
2) if such failure (other than Development Default)
cannot reasonably be corrected within fifteen (15) days after
written notice of such failure to comply is delivered to
Franchisee, undertake efforts to bring the Residence licensed
under this Agreement into full compliance, and furnish proof
acceptable to Company of such efforts and the date of their
expected completion, within ten (10) days after written notice is
delivered to Franchisee.
15.02 Efforts to Resolve Termination Disputes Other
Than by Termination. Any acts of Company undertaken in the
course of efforts to resolve a termination dispute, or a dispute
for which termination is a possible remedy, shall be deemed to
have been undertaken without prejudice to the rights asserted by
Company and shall not constitute a waiver or relinquishment of
those rights. In the event Franchisee continues to engage in
franchised operations while a dispute is pending, that fact,
and/or the receipt of monthly payments and/or the furnishing by
Company of information and service essential to such operations,
shall not constitute a waiver or relinquishment of Company's
rights. Company may, at its option and without waiving its right
to terminate, seek any form of relief or remedy available to it
under common law or statute for any breach of this Agreement
including, but not limited to, the right to damages, injunctive
relief, declaratory orders or specific performance.
<PAGE>
XVI.
RIGHTS AND OBLIGATIONS OF COMPANY AND FRANCHISEE UPON
TERMINATION OR EXPIRATION OF THE FRANCHISE
16.01 Payment of Amounts Owned to Company. Franchisee
shall pay to Company within fifteen (15) days after the effective
date of termination or expiration of this Agreement, or such
later date when the amounts due to Company are determined, such
Continuing Royalties, marketing contributions, amounts owed for
purchases by Franchisee from Company or its affiliates, interest
due on any of the foregoing and all other amounts owed to Company
or its affiliates which are then unpaid.
16.02 Marks. After the termination or expiration of
this Agreement, Franchisee shall:
A) Not directly or indirectly at any time or in any manner
identify itself or any business as a current or former Residence
operator, or as a franchisee or licensee of or as otherwise
associated with Company (other than under other franchise
agreements with Company), or use any of the Marks, any colorable
imitation thereof, or other indicia of a Residence in any manner
or for any purpose, or utilize for any purpose any trade dress,
trade name, trade or service mark or other commercial symbol that
suggests or indicates a connection or association with Company;
<PAGE>
B) Remove all signs, sign faces, and deliver to Company
all marketing materials, and other materials containing
any Mark or otherwise identifying or relating to a
Residence;
C) Remove all Marks, if any, affixed to uniforms;
D) Take all action as may be required to cancel all
fictitious or assumed name or equivalent registrations
relating to Franchisee's use of any Mark;
E) Notify the telephone company and all listing agencies
of the termination or expiration of Franchisee's
right to use any telephone number and any regular,
classified or other telephone directory listings
associated with any Mark and authorize transfer of
same to or at the direction of Company. Franchisee
acknowledges that as between Company and Franchisee,
Company has the sole right to and interest in all
telephone numbers and directory listings associated
with any Mark and Franchisee authorizes Company, and
hereby appoints Company and any officer designated by
Company as its attorney-in-fact, should Franchisee fail
or refuse to do so, to direct the telephone company and
all listing agencies to transfer the same to Company or
at its direction, and the telephone company and all
listing agencies may accept such direction or this
Agreement as conclusive of the exclusive rights of
Company in such telephone numbers and directory
listings and its authority to direct their transfer,
and
F) Furnish to Company, within thirty (30) days after the
effective date of termination or expiration, evidence
satisfactory to Company of Franchisee's compliance
with the foregoing obligations.
<PAGE>
16.03 Modification of Residence Design and Decor. Upon
expiration or termination of this Agreement without renewal,
Franchisee shall modify the interior and exterior design (which
may include removal of the building's cupola), decor, and color
scheme of the Residence licensed under this Agreement in a manner
acceptable to Company so that it no longer suggests or indicates
a connection with the System or any rights and privileges granted
by this Agreement.
16.04 Cessation of Use of Confidential Information.
Upon termination or expiration of this Agreement, Franchisee will
immediately cease to use any Confidential Information disclosed
to Franchisee pursuant to this Agreement in the operation of the
Residence licensed under this Agreement, or any business or
commercial enterprise engaged in any Competitive Business, or
other similar business, or capacity and shall return to Company
all copies of the Operations Manual and any other confidential
materials which may have been loaned to Franchisee by Company.
<PAGE>
16.05 Company has Right to Purchase the Residence. In
addition to the rights provided to Company under Section 12.08,
upon termination of this Agreement, other than in accordance with
Section 14.01, Company shall have the option, exercisable by
giving written notice thereof within thirty (30) days from the
date of such termination to purchase from Franchisee all the
assets of the Residence licensed under this Agreement. Assets
shall include, without limitation and as the case may be, land,
building, fixtures, inventories of saleable merchandise,
materials, supplies, leasehold improvements, fixtures, furniture,
furnishings, equipment, signs and Franchisee's lease for the
Premises. Company shall have the option to purchase the capital
stock of Franchisee instead of the assets of the Residence. In
the event Franchisee owns the Premises, Franchisee shall grant
to Company or its assignee a standard commercial lease at fair
market rental for an initial term of ten (10) years with not less
than two (2) five (5) year renewal options. Company shall have
the unrestricted right to assign its option to purchase. Company
or its assignee shall be entitled to all customary warranties and
representations in connection with its asset or stock purchase as
set forth in Exhibits "A" and "B" of this Agreement. The purchase price
for the assets of the Residence (or the capital stock of the Franchisee)
shall be determined as follows: Company shall appoint one (1) qualified
individual as an appraiser and Franchisee shall appoint one (1) qualified
individual as an appraiser. The appraisers so appointed shall determine
the fair market value of the assets of the Residence or the capital stock of
Franchisee, as the case may be. In the event these two (2) appraisers are
unable to agree upon the fair market value of the assets or capital stock,
as the case may be, within thirty (30) days after their appointment, they
shall mutually select and designate one (1) additional appraiser for this
purpose whose appointment and determination shall be binding upon all parties.
In the event any appraiser should become unable or unwilling to serve, a
substitute shall be appointed by the party originally selecting him.
In the event that the two (2) appraisers first appointed shall be unable
to agree upon a third appraiser, such appraiser shall be appointed by the
most senior federal judge presiding at the federal district court located
in Wichita, Kansas.
<PAGE>
The purchase price may be paid, at the option of Company,
in cash, a promissory note, Company's capital stock, or by any
combination of cash, notes, and capital stock. Franchisee
acknowledges and agrees that any capital stock delivered by
Company in partial or complete payment of the purchase price may
not thereafter be freely transferable by Franchisee without
registration of the capital stock, the obtaining of an exemption
from registration, and/or the rendering of an opinion of counsel
satisfactory to Company's counsel that the capital stock may
subsequently be transferred without registration. Accordingly,
any capital stock issued in full or partial payment of the
purchase price shall bear a legend setting forth this
restriction.
The closing shall take place no later than ninety (90) days
after receipt by Franchisee of Company's notice of exercise of
this option to purchase, at which time Franchisee shall deliver
instruments transferring to Company or its assignee:
A) Good and merchantable title to the assets purchased,
free and clear of all liens and encumbrances (other than liens
and security interests acceptable to Company or its assignee)
with all sales and other transfer taxes paid by Franchisee; and
B) All licenses and permits for the Residence which may
validly be assigned or transferred.
In the event that Franchisee cannot deliver clear title to
all of such purchased assets, or in the event there shall be
other unresolved issues, the closing of the sale shall be
accomplished by means of an escrow. Further, Franchisee and
Company shall, prior to closing, comply with the applicable Bulk
Sales provisions of the Uniform Commercial Code of the state
where the Residence is located. Company shall have the right to
set off against and reduce the purchase price by any and all
amounts owed by Franchisee to Company. If Company exercises its
option to purchase, then pending the closing of such purchase as
hereinabove provided, Company shall have the right to appoint its
own Director to maintain the operation of such purchased
Residence. Alternatively, Company may require Franchisee to
close the Residence during such time period without removing any assets
therefrom.
<PAGE>
16.06 Continuing Obligations. All obligations of
Company and Franchisee which expressly or by their nature survive
the expiration or termination of this Agreement (for example,
the non-competition covenant provided for in Section 7.04,
herein) shall continue in full force and effect subsequent to and
notwithstanding this Agreement's expiration or termination and
until they are satisfied in full or by their nature expire.
XVII.
TEMPORARY DE-IDENTIFICATION OF THE RESIDENCE
In lieu of immediately exercising its rights to terminate
this Agreement, as set forth in ARTICLE XV, herein, and in
Company's sole discretion, Company may execute an agreement with
Franchisee calling for the temporary de-identification of the
Residence licensed under this Agreement as a franchised Residence
(hereinafter referred to as the "De-Identification Agreement").
The De-Identification Agreement shall be in a form prescribed by
Company, shall set forth all required licensing, repair,
replacement, refurbishing, remodeling, and/or additions and/or
deletions in the accommodations, goods or services offered, which
must then be completed by Franchisee and shall prescribe a
timetable in which Franchisee must cure all defaults under this
Agreement, and complete such repair, replacement, refurbishing,
and/or remodeling.
<PAGE>
During the term of the De-Identification Agreement, the
Franchisee shall:
A) Cover all of the Residence's signs containing the Marks,
whether located on the exterior or in the interior of the
Premises of the Residence;
B) Cease all marketing of the Residence as a STERLING HOUSE
assisted living facility;
C) Cease all representations to the public and its
tenants/residents that the Residence is a STERLING HOUSE
assisted living facility; and
D) Prominently display signs and notices in the Residence
in such manner and in a form as may be prescribed by Company
indicating that the Residence is temporarily not affiliated with
the STERLING HOUSE franchise system while Franchisee is
undertaking improvements to bring it into compliance with the
standards and specifications required of all STERLING HOUSE
assisted living facilities. During the term of the De-Identification
Agreement, Franchisee may continue to use all expendable supplies containing
the Marks.
<PAGE>
During the term of the De-Identification Agreement, Franchisee shall not
be required to make Continuing Royalty payments and marketing contributions
required hereunder, except for any amounts already due at the time of execution
of the De-Identification Agreement. The term of this Agreement shall continue
to run during, and shall not be extended by, the term of the De-Identification
Agreement. In the event Franchisee fails to comply with all of the terms and
conditions of the De-Identification Agreement, or if upon expiration of the
De-Identification Agreement, if Franchisee has not completed all required
licensing, repairs, replacement, refurbishing, remodeling, and/or additions
and/or deletions in the accommodations, goods or services offered, Company
may proceed to terminate this Agreement as set forth in ARTICLE XV, herein.
<PAGE>
XVIII.
CASUALTY LOSS OR CONDEMNATION
18.01 Casualty Loss. If the Residence licensed hereunder
is damaged by fire or other casualty, Franchisee shall, at its
cost, expeditiously repair the damage as soon as possible after
the occurrence thereof. In the event the casualty loss requires
the closing of the Residence for more than three (3) consecutive
months, then, unless repair and reconstruction work has commenced
in earnest within the three (3) month period and unless the
Residence is re-opened in full operation no later than one (1)
year after the date of the casualty loss, this Agreement shall
terminate automatically without necessity of notice to
Franchisee. Provided that, in lieu of reconstructing and re-opening the
damaged Residence as required hereby, Franchisee may construct and open a
different Residence within the Exclusive Area within one (1) year after the
date of such casualty loss. The substituted Residence shall be exempt from
the Initial Franchise Fee requirement otherwise provided for in this Agreement.
<PAGE>
18.02 Condemnation Proceedings. Franchisee shall give
Company written notice as soon as it receives any knowledge of
any condemnation or exercise of the power of eminent domain, or
threat thereof, by any governmental agency or authority. If, in
the reasonable opinion of Company, a substantial part of the
Residence licensed under this Agreement is to be condemned or
taken under eminent domain and the portion not so taken or
condemned could not be operated practicably and profitably as a
Residence, Company shall give good faith consideration to
transferring the Franchise granted hereunder to another location
reasonably near the condemned Residence which decision shall be
made by Company not more than four (4) months after Company's
determination of the impact of the condemnation. If a transfer
of the Franchise is authorized by Company and Franchisee opens
for business at another location within one (1) year of the
closing of the condemned or taken Residence, the substituted
Residence shall be deemed to be open under this Agreement in the
same manner and for the same term as was the previous Residence.
In the event Franchisee has used its best efforts to vigorously
replace a condemned location but has been unable to do so on
account of its failure to obtain the requisite licenses and
permits for another location, Company may, but shall not be
required to, grant additional time for Franchisee to open another
location. If any condemnation or eminent domain proceeding
takes place and no new location, for any reason, whatsoever,
becomes franchised in strict accordance with this Section 18.02,
then this Agreement shall terminate automatically without notice
to Franchisee.
<PAGE>
XIX.
ENFORCEMENT
19.01. Severability and Substitution of Valid Provisions.
Except as expressly provided to the contrary herein, each part,
section, term and provision of this Agreement, and any portion
thereof, shall be considered severable and if, for any reason,
any provision of this Agreement is held to be invalid, contrary
to, or in conflict with any applicable present or future law or
regulation in a final ruling issued by any court, agency, or
tribunal with competent jurisdiction in a proceeding to which
Company is a party, that ruling shall not impair the operation
of, or have any other effect upon, such other portions of this
Agreement as may remain otherwise intelligible, which shall then
continue to be given full force and effect and bind the parties hereto.
Provided, any portion held to be invalid shall be deemed not to be a
part of this Agreement from the date the time for appeal expires, if
Franchisee is a party thereto, or otherwise upon Franchisee's receipt
of a notice of non-enforcement thereof from Company. To the extent
that ARTICLE VII, or any section, or portion, or clause thereof, is
deemed unenforceable by virtue of its scope in terms of area, business
activity prohibited and/or length of time, but same may be made enforceable
by reducing any or all thereof, Franchisee and Company agree that
same shall be enforced to the fullest extent permissible under
the laws and public policies applied in the jurisdiction in which
enforcement is sought.
<PAGE>
If any applicable and binding law or rule of any
jurisdiction requires a greater prior notice of the termination
of or non-renewal of this Agreement than is required hereunder,
or the taking of some other action not required hereunder, or if
under any applicable and binding law or rule of any jurisdiction,
any provision of this Agreement or any specification, standard,
or operating procedure prescribed by Company is invalid or
unenforceable, the prior notice and/or other action required by
such law or rule shall be substituted for the comparable
provisions hereof, and Company shall have the right, in its sole
discretion, to modify such invalid or unenforceable provisions,
specification, standard, or operating procedure to the extent
required to be valid and enforceable. Franchisee agrees to and
shall be bound by any promise or covenant imposing the maximum
duty permitted by law which is subsumed within the terms of any
provision hereof, as though it were separately articulated in and
made a part of this Agreement, that may result from striking from
any of the provisions hereof, or any specification, standard or
operating procedure prescribed by Company, any portion or
portions which a court may hold to be unenforceable in a final
decision to which Company is a party, or from reducing the scope
of any promise or covenant to the extent required to comply with
any court order. All modifications to this Agreement shall be
effective only in such jurisdiction, unless Company elects to
give them greater applicability, and this Agreement shall be
enforced as originally made and entered into in all other
jurisdictions.
<PAGE>
19.02 Waiver of Obligations. Company and Franchisee may by written
instrument unilaterally waive or reduce any obligation of or restriction
imposed upon the other under this Agreement, effective upon delivery of
written notice thereof to the other or such other effective date stated
in the notice of waiver. Whenever this Agreement requires Company's prior
approval or consent, Franchisee shall make a timely written request therefor,
and such approval shall be obtained in writing. Company makes no warranties
or guaranties upon which Franchisee may rely, and assumes no liability or
obligation to Franchisee, by granting any waiver, approval, or consent to
Franchisee or by reason of any neglect, delay, or denial of any request
therefor. Any waiver granted by Company shall be without prejudice to any
other rights Company may have, will be subject to continuing review by
Company, and may be revoked, in Company's sole discretion, at any time and
for any reason, effective upon delivery to Franchisee of written notice of
the revocation.
<PAGE>?
Company and Franchisee shall not be deemed to have waived or
impaired any right, power, or option reserved by this Agreement
(including, without limitation, the right to demand exact
compliance with every term, condition, and covenant herein, or to
declare any breach thereof to be a default and to terminate this
Agreement prior to the expiration of its term), by virtue of any
custom or practice of the parties at variance with the terms
hereof; any failure, refusal, or neglect of Company or Franchisee
to exercise any right under this Agreement or to insist upon
exact compliance by the other with its obligations hereunder,
including, without limitation, any mandatory specification,
standard, or operating procedure; any waiver, forbearance, delay,
failure, or omission by Company to exercise any right, power or
option, whether of the same, similar or a different nature, with
respect to the Residence licensed under this Agreement; or the
acceptance by Company of any payments due from Franchisee after
any breach of this Agreement.
<PAGE>
19.03 Limitations on Liability. Unless stated to the
contrary elsewhere herein, neither Company nor Franchisee shall
be liable for any loss or damage nor deemed to be in breach of
this Agreement if its failure to perform its obligations results
from:
A) Transportation shortages, inadequate supply of
equipment, merchandise, supplies, labor, material, or energy, or
the voluntary foregoing of the right to acquire or use any of the
foregoing in order to accommodate or comply with the orders,
requests, regulations, recommendations, or instructions of any
federal, state, or municipal government or any department or
agency thereof;
B) Acts of God;
C) Acts of omissions of the other party;
D) Fires, strikes, embargoes, war, or riot; or
E) Any other similar event or cause.
Any delay resulting from any of the above causes shall extend
performance accordingly or excuse performance, in whole or in
part, as may be reasonable, except that these causes shall not
excuse payments of amounts owed at the time of any occurrence or
payment of Continuing Royalties due on any revenues arising from
the operation of the Residence thereafter.
<PAGE>
19.04 Specific Performance/Injunctive Relief. Nothing
herein contained shall bar Company's or Franchisee's right to
obtain specific performance of the provisions of this Agreement
and to obtain injunctive relief against threatened conduct that
will cause it loss or damages, under customary equity rules,
including applicable rules for obtaining restraining orders and
preliminary injunctions. Franchisee agrees that Company may
obtain injunctive relief, without bond, but upon due notice, in
addition to all further and other relief as may be available at
equity or law. Franchisee further agrees that its sole remedy in
the event of the entry of an injunction, shall be the dissolution
of the injunction, if warranted, upon hearing duly had and all
claims for damages by reason of the wrongful issuance of any
injunction are expressly waived hereby unless the waiver of
damages is against the public policy of the forum in which the
proceeding was brought.
19.05 Rights of Parties are Cumulative. The rights of
Company and Franchisee hereunder are cumulative and no exercise
nor enforcement by Company or Franchisee of any right or remedy
hereunder shall preclude the exercise or enforcement by Company
or Franchisee of any other right or remedy hereunder or which
Company or Franchisee is entitled by law or equity to enforce.
<PAGE>
19.06 Governing Law/Consent to Jurisdiction. Except to
the extent governed by the United States Trademark Act of 1946
(Lanham Act, 15 U.S.C. Sections 1051, et seq.), this Agreement
and the Franchise shall be governed by the laws of the State of
Kansas. Franchisee acknowledges that it has and will continue to
develop a substantial and continuing relationship with Company
at its principal offices in Kansas, where Company's decision-making
authority is vested and franchise operations are conducted
and supervised. Franchisee further agrees that Company may
institute any action against Franchisee and that Franchisee shall
be required to institute any and all legal proceedings arising
out of or relating to this Agreement in the state or federal
courts having jurisdiction therefor in the State of Kansas,
located in Wichita, Kansas, and Franchisee irrevocably submits to
the jurisdiction of such courts and waives any objection it may
have to either the jurisdiction or venue of that court.
19.07 Binding Effect/Modification. This Agreement is
binding upon the parties hereto and their respective executors,
administrators, heirs, assigns and successors in interest, and
shall not be modified except by written agreement signed by both
Franchisee and Company.
19.08 Construction. The preambles and Exhibit(s) are a
part of this Agreement which constitutes the entire agreement of
the parties, and there are no other oral or written
understandings or agreements between Company and Franchisee
relating to the subject matter of this Agreement. Nothing in
this Agreement is intended, nor shall be deemed, to confer any
rights or remedies upon any person or legal entity not a party
hereto.
The headings of the several articles and sections hereof
are for convenience only and do not define, limit, or construe
the contents of any articles or sections.
19.09 Definitions. In addition to the words and terms
defined in the recitals and elsewhere in this Agreement, the
words and terms defined as follows in this Section 19.09 shall,
for all purposes of this Agreement, have the meanings herein
specified, except as otherwise expressly provided or unless the
context otherwise requires:
<PAGE>
A) The term "affiliate" as used herein is applicable to any
company directly or indirectly owned or controlled by Company
that sells or rents products, renders services, or otherwise
transacts business with Franchisee.
B) The term "Franchisee" as used herein is applicable to
one (1) or more persons, a corporation, a limited liability
company, a limited partnership, or a general partnership, as the
case may be, and the singular usage includes the plural and the
masculine and neuter usages include the other and the feminine.
If two (2) or more persons are at any time the Franchisee
hereunder, whether or not as partners or joint ventures, their
obligations and liabilities to Company shall be joint and
several. References to "Franchisee," "owner" and "transferee"
which are applicable to an individual or individuals shall mean,
unless expressly made applicable to all shareholders, members and
partners, the owners of Franchisee or the transferee (i.e., any
person owning of record or beneficially five percent [5%] or more
the equity or control of Franchisee) if Franchisee or the
transferee is a corporation, limited liability company or
partnership.
19.10 Counterparts. This Agreement may be executed in
multiple copies, each of which shall be deemed an original.
19.11 Consent. Company shall have the absolute right to
refuse any request by Franchisee or to withhold its approval of
any action by Franchisee for any reason whatsoever, provided
such discretion shall not be exercised in an arbitrary or
capricious manner.
<PAGE>
XX.
NOTICES AND PAYMENTS
All written notices and reports permitted or required to be
delivered by the provisions of this Agreement or of the
Operations Manual shall be deemed to be delivered at the time
delivered by hand, one (1) business day after transmission by
telegraph or comparable electronic system, or three (3) business
days after being placed in the United States Mail by Registered
or Certified Mail, Return Receipt Requested, postage prepaid and
in any event until notified in writing to the contrary addressed
to the respective parties as follows:
If to Company: President
STERLING HOUSE CORPORATION
Suite 500
453 S. Webb Road
Wichita, KS 67207
If to Franchisee: Colorado Springs Assisted Living, L.L. C.
260 N. Rock Road #260
Wichita, KS 67206
All payments and reports required by this Agreement shall be
directed to Company at the address notified to the Franchisee
from time to time, or to such other persons and places as the
Company may direct from time to time. Any required payment or
report not actually received by Company during regular business
hours on the date due (or postmarked by postal authorities as of
the due date) shall be deemed delinquent.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed,
sealed, and delivered this Agreement in one (1) or more
counterparts on the day and year first above written.
STERLING HOUSE CORPORATION
By: /s/ Steven L. Vick
-----------------------
Title:/s/ President
"Company"
If an individual:
"Franchisee"
If a Partnership, Limited Liability
Company or Corporation:
WITNESS Colorado Springs Assisted Living, L.L.C.
(Name of Entity)
By: /s/ R. Gail Knott By: /s/Robert A. Brooks
Title: CFO Title: Managing Member
<PAGE>
"Franchisee"
SCHEDULE "1"
TO FRANCHISE AGREEMENT BY AND BETWEEN
STERLING HOUSE CORPORATION
AND Colorado Springs Assisted Living, L.L.C.
DATED April 11, 1996
The respective Residence development deadlines referred to
in Section 2.03 of the above captioned Agreement shall be:
Date Requirement Shall
Requirement be Completed by:
A) Secure a suitable site for the Residence
in accordance with the provisions of
Section 2.01; Completed
B) Secure all financing required to fully
develop the Residence; Completed
C) Obtain all required building, utility,
sign, health, sanitation, business permits
and residential care licenses, and any
other required permits and licenses and
commence construction; Completed
D) Construct the Residence in compliance
with the Plans; 4/11/97
E) Purchase and install all required fixtures,
equipment, furniture, furnishings, supplies,
signs, and other items necessary for completion
and opening of the Residence as specified in
the Plans and the Operations Manual; 4/11/97
F) Commence initial marketing activities as
required by the Operations Manual; 4/11/97
G) The Director and the staff successfully
complete all training; and 4/11/97
H) Open the Residence for business in accordance
with the provisions of Section 1.04. 4/11/97
<PAGE>
ACKNOWLEDGED:
STERLING HOUSE CORPORATION: FRANCHISEE:
Colorado Springs Assisted Living, L. L. C.
By R. Gail Knott By Robert A. Brooks
Title: CFO Title: Managing Member
<PAGE>
EXHIBIT "A"
MINIMUM ASSET PURCHASE WARRANTIES
Except as expressly set forth on the attached schedule,
Seller does represent and warrant that:
A) Seller is a duly organized and validly existing (insert
form of business entity) in good standing under the laws of the
State of _____________.
B) Seller is duly authorized to execute and deliver this
Agreement, perform the covenants on its part herein contained,
consummate the transactions contemplated hereby, and execute,
deliver, and perform all documents and instruments to be executed
and delivered by it pursuant hereto, an all required action in
respect to the foregoing has been taken. Owners (the partners,
members, etc.) are the sole owners of Seller. Neither Seller nor
owners are subject to any restriction, agreement, law, judgment,
or decree which would prohibit or be violated by the execution,
delivery, and performance of this Agreement.
C) Seller has, and on the closing date will have, good and
marketable title to all of the purchased assets free and clear of
all liens, encumbrances, and restrictions of every kind and
description. Immediately following closing and delivery of the
closing documents provided for in this Agreement, good and
marketable title to all of the purchased assets shall vest in
Purchaser, free and clear of all liens, encumbrances, and
restrictions except such as may be created by Purchaser.
D) There are no contracts, agreements, or continuing
obligations of Seller or owners, or threatened or contingent
liabilities of any nature whatsoever in respect to the
Residence(s), the business therein conducted, or purchased assets
which will survive the closing and in any manner bind or affect
Purchaser or the purchased assets.
<PAGE>
E) There are no judgments of record, nor any litigation or
administrative proceedings pending, or to Seller's or owners'
knowledge, threatened against or relating to owners, Seller, or
the purchased assets nor does Seller or owners know or have
reasonable grounds to know any basis for any such action which
have not been disclosed in an exhibit hereto.
F) All representations, warranties, indemnities, and
covenants by Seller and owners herein or in any document
delivered hereunder shall, except as affected by the transactions
contemplated hereby, be true and in effect as the closing date as
though same were remade as of such time, and all shall survive
the closing hereof.
G) All of the fixed or tangible purchased assets
(including, but not limited to, equipment, furniture,
furnishings, signs, fixtures, and leasehold improvements) are in
good condition, repair, and working order as of the date hereof,
subject to ordinary wear and tear.
H) The Bulk Sales Affidavit attached hereto as Exhibit
"____" contains a true, correct, and complete list of all
creditors of Seller as of the date thereof within the purview of
Article 6 (Bulk Transfers) of the Uniform Commercial Code as
adopted in the State of ___________________________.
I) Neither this Agreement nor the transaction contemplated
by this Agreement was induced or procured through any person,
firm, corporation, or other entity acting on behalf of, or
representing Seller or owners as broker, finder, investment
banker, financial advisor, or in any similar capacity.
<PAGE>
J) Seller/Franchisee is not aware of any conditions
existing or resulting from activities associated with
Seller/Franchisee or any predecessor's activities, including,
without limitation, matters relating to air, soil contamination
and water pollution, solid wastes, toxic substances, occupational
health studies, matters relating to waste disposal practices,
ground water and soil monitoring, written communications with
federal, state and local environmental agencies and all existing,
pending or anticipated violations, citations, claims, and
complaints relating to or resulting from activities associated
with the business of Seller/Franchisee or conditions existing on
the real property ("Environmental Matters"). To the best of
Seller/Franchisee's knowledge and belief:
1) The real property and the improvements thereon and the
use and operation thereof are currently in compliance with all
applicable federal, state and local laws, regulations, ordinances
and requirements relating to health, safety, and protection of
the environment, and Seller/Franchisee possesses and is in
compliance with all permits required thereby;
2) There has been no spillage or leaks associated with the
filling, draining, or use of any underground storage tanks;
3) Seller/Franchisee has never generated, transported,
treated, stored or disposed of, nor in any manner, arranged for
disposal or treatment of any Hazardous Substances (as hereinafter
defined) on the real property and there is no Hazardous
Substances present on, in or under the real property. "Hazardous
Substances" for purposes of this Agreement shall include, without
limitation: (i) hazardous substances or hazardous wastes, as
<PAGE>
those terms are defined by the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Subsection
9601, et seq.; the Resource Conservation and Recovery Act, 42
U.S.C. Subsection 6901, et seq.; and/or any other applicable
federal, state or local law, regulation, ordinance or
requirement, all as amended or hereafter amended; (ii) petroleum,
including, but not limited to, crude oil or any fraction thereof;
(iii) asbestos in any form or condition; and (iv) any radioactive
material, including, but not limited to, any source, special
nuclear or byproduct material as defined at 42 U.S.C. Subsection
2011, et.seq., as amended or hereafter amended;
4) Seller/Franchisee is not and has not been subject to, or
received any notice of, any private, administrative or judicial
action, relating to the presence or alleged present of Hazardous
Substances in, under, upon or emanating from the real property
and does not know and has no reason to know of any basis for any
such notice or action; and there are no pending or known or
suspected threatened actions or proceedings (or notices of
potential actions or proceedings) from any governmental agency or
any other person or entity regarding any matter relating to
health, safety, or protection of the environment;
<PAGE>
5) There has not been and there is not any known or
suspected past or present events, conditions, circumstances,
activities, practices, incidents or actions which could
reasonably be expected to interfere with or prevent continued
compliance with any federal, state or local law, regulation,
ordinance or requirement relating to health, safety or protection
of the environment or which may give rise to any legal liability,
or otherwise form the basis of any claim, action, suit,
proceeding, hearing or investigation against or involving the
real property based on any federal, state or local law,
regulation, ordinance or requirement relating to health, safety
or protection of the environment or violation or alleged
violation thereof;
6) Seller/Franchisee does not own, possess, or control any
polychlorinated biphenyls ("PCB" ) or PCB contaminated fluids or
equipment, nor does any facility owned or operated by
Seller/Franchisee contain in or on its premises any waste, scrap,
raw material, work-in-progress, inventory, product, residue or
other material or substance containing PCB;
7) Seller/Franchisee does not own, possess, or control any
asbestos or any materials containing asbestos at the real
property, nor does such facility contain in or on its premises
any waste, scrap, raw material, work-in-progress, inventory,
product, residue, structural members, insulation, roofing
material, building component, or other material or substance
containing asbestos; and Seller/Franchisee hereby waives,
releases and agrees not to make any claim or bring any cost
recovery action against Company/Purchaser under the
Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. Subsection 9601, et seq. or any state equivalent
or any similar law now existing or hereafter enacted, except to
the extent that the condition or circumstance giving rise to such
claim or action was in no manner related to any condition or
circumstance existing (to the extent determined by a court of
competent jurisdiction) as of or prior to the closing date. The
parties agree that the burden of proving that such a condition or
circumstance did not exist at or prior to the closing date shall
be on Seller/Franchisee.
<PAGE>
EXHIBIT "B"
MINIMUM STOCK PURCHASE WARRANTIES
Except as expressly set forth on the attached schedule,
Seller does not represent and warrant:
A) Seller/Franchisee is a duly organized and validity
existing __________ (insert form of business entity) under the
laws of the State of ___________, of which there are
_________________________ issued and outstanding
____________________________ (shares/interests).
B) Seller/Franchisee has no subsidiaries. [Alternatively,
the subsidiaries should be listed and all representations and
warranties should apply to such subsidiaries.]
C) Seller/Franchisee has the legal capacity to execute and
deliver this Agreement, perform the covenants on his part herein
contained, consummate the transaction contemplated hereby, and
execute and deliver and perform all documents and instruments to
be executed and delivered by him pursuant hereto. When executed
and delivered, this Agreement and all such documents and
instruments will constitute valid and binding obligations of
Seller/Franchisee, enforceable against him in accordance with
their respective terms.
D) The ___________________ shares/interests are duly issued
and outstanding, fully paid, are non-assessable and comprise all
of the issued and outstanding equity ownership interests of
Seller/Franchisee. There are no warrants, options, conversion
rights or privileges, or any other rights (whether at equity or
law) as to equity ownership interests of Seller/Franchisee.
E) True, correct, and complete copies of the Corporate
Charter or Certificate of Incorporation and the Bylaws or
Certificates of Limited Partnership or Limited Liability
Company, as applicable, of Seller/Franchisee, and all amendments
thereto have been furnished by Seller/Franchisee to
Company/Purchaser. The meeting minutes and ownership interests
transfer ledger of Seller/Franchisee have been exhibited to
Company/Purchaser, and the same constitute a complete and
accurate record of all proceedings taken by the owners and
directors/managers and a complete and accurate record of all
issuances and transfers of ownership interests.
<PAGE>
F) Seller/Franchisee has been and is operated in compliance
with all applicable federal, state, and local laws, ordinances,
and license requirements.
G) The transaction contemplated by this Agreement will not
result in the revocation, suspension, or limitation of any license
issued to Seller/Franchisee.
H) Seller/Franchisee is the sole legal and beneficial owner
of the ownership interests and has good and marketable title to
the ownership interests, free and clear of all liens, security
interests, charges, covenants, conditions, agreements,
encumbrances, pledges, restrictions, adverse claims and defenses
of every kind and description. Immediately following delivery of
the closing documents provided for herein, good and marketable
title to the ownership interests shall vest in Company/Purchaser,
free and clear of all liens, security interests, charges,
covenants, conditions, agreements, encumbrances, pledges,
restrictions, adverse claims and defenses, except such as may be
created by Company/Purchaser.
(i) The financial statements attached hereto as Exhibit
"______" fairly and accurately present the financial position of
Seller/Franchisee as of the dates set forth in such financial
statements and the results of operation of Seller/Franchisee for
the periods covered by such financial statements except as shown
in Exhibit "_____" hereto. Since ___________ (date): (i) there
has been no material adverse change in the financial condition,
assets or liabilities or business of Seller/Franchisee; (ii)
there have been no liabilities or obligations incurred by
Seller/Franchisee other than in the ordinary course of business;
(iii) no dividends or other distributions in respect of the
equity ownership of Seller/Franchisee have been declared, set
aside, or paid; and (iv) no indebtedness for borrowed money has
been incurred by Seller/Franchisee.
J) There are no unfulfilled or executory contracts,
agreements, or commitments of Seller/Franchisee which are not
described in an exhibit attached hereto.
<PAGE>
K) The execution and delivery of this Agreement and the
performance of or compliance with the terms and provisions of
this Agreement and all documents and instruments contemplated
hereby will not violate, conflict with, or result in a breach of,
any of the terms, conditions, or provisions of the Articles of
Incorporation or Bylaws or other applicable organizational
documents of Seller/Franchisee or any law, statute, regulation or
order, or any agreement, or any other restrictions of any kind or
character, to which Seller/Franchisee is a party or by which it
may be bound, and will not constitute a default thereunder or
permit acceleration of performance thereunder or result in the
declaration or imposition of any lien, charge, or encumbrance of
any nature whatsoever upon any of the assets of
Seller/Franchisee.
L) Exhibit "_____" sets forth a true and complete copy of
all leases and subleases to the Residence(s). Each lease is
valid, subsisting, and enforceable in accordance with its terms,
and neither Seller/Franchisee nor any other party to any of the
leases is in default or in arrears in the performance or
satisfaction of any agreement or condition on its part to be
performed or satisfied under any such lease, nor has
Seller/Franchisee given or received any notice of any claimed
default.
M) Neither this Agreement nor the transaction contemplated
by this Agreement was induced or procured through any person,
firm, corporation, or other entity acting on behalf of, or
representing Seller/Franchisee or Company/Purchaser as broker,
finder, investment banker, financial advisor, or in any similar
capacity.
N) Seller/Franchisee has good and marketable title to all
of the assets used in the Residence(s), free and clear of all
liens, security interests, charges, covenants, conditions,
agreements, encumbrances, restrictions, adverse claims and
defenses of every kind and description, except
[______________________________________]. All such assets are
located at the following locations
[____________________________________________________________].
O) The Residence, including the interior and exterior of
the building, all equipment, furniture, furnishings, signs,
fixtures, leasehold improvements, and other personal property of
Seller/Franchisee are in good operating condition and repair,
subject to normal wear and tear. All such assets are fully
insured and Seller/Franchisee has maintained and is maintaining
adequate general liability, product liability, and statutory
workers' and unemployment compensation insurance coverages.
P) There are no contracts, agreements, or continuing
obligations or threatened or contingent liabilities of any nature
whatsoever (including, without limitation, liabilities which have
not yet accrued, but which resulted from acts or omissions prior
to the date hereof) in respect to Seller/Franchisee which will
survive the closing, except as shown in Exhibit "_____."
Q) There are no judgments of record, nor any litigation or
administrative proceedings pending, or the best knowledge,
information, and belief of Seller/Franchisee, threatened against
or relating to Seller/Franchisee, or the ownership interests of
Seller/Franchisee. Seller/Franchisee does not know or have
reasonable grounds to know of any basis for any such action, or
any governmental investigation, relating to Seller/Franchisee, or
the ownership interests of Seller/Franchisee.
R) All material facts known to Seller/Franchisee relating to
the businesses and financial condition of Seller/Franchisee
and the sale of the ownership interests have been disclosed to
Company/Purchaser. No statement contained in this Agreement or
in any of the exhibits attached hereto or in any document or
instrument delivered or to be delivered by Seller/Franchisee
pursuant hereto or in connection with the transaction
contemplated hereby contains or will contain any untrue
statement of a material fact, or omit or will omit to state a
material fact, necessary to make the statements contained therein
not misleading. A "material fact" for purposes hereof includes
such fact or facts which would influence a reasonable man's
decision to purchase or sell the shares.
S) Seller/Franchisee is not aware of any conditions
existing or resulting from activities associated with
Seller/Franchisee or any predecessor's activities, including,
without limitation, matters relating to air, soil contamination
and water pollution, solid wastes, toxic substances, occupational
health studies, matters relating to waste disposal practices,
ground water and soil monitoring, written communications with
federal, state and local environmental agencies and all existing,
pending or anticipated violations, citations, claims, and
complaints relating to or resulting from activities associated
with the business of Seller/Franchisee or conditions existing on
the real property ("Environmental Matters"). To the best of
Seller/Franchisee's knowledge and belief:
1) The real property and the improvements thereon and
the use and operation thereof are currently in compliance with
all applicable federal, state and local laws, regulations,
ordinances and requirements relating to health, safety, and
protection of the environment, and Seller/Franchisee possesses
and is in compliance with all permits required thereby;
2) There has been no spillage or leaks associated with
the filling, draining, or use of any underground storage tanks;
3) Seller/Franchisee has never generated, transported,
treated, stored or disposed of, nor in any manner, arranged for
disposal or treatment of any Hazardous Substances (as hereinafter
defined) on the real property and there is no Hazardous
Substances present on, in or under the real property. "Hazardous
Substances" for purposes of this Agreement shall include,
without limitation: (i) hazardous substances or hazardous
wastes, as those terms are defined by the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C.
Subsection 9601, et seq.; the Resource Conservation and Recovery
Act, 42 U.S.C. Subsection 6901, et seq.; and/or any other
applicable federal, state or local law, regulation, ordinance or
requirement, all as amended or hereafter amended; (ii) petroleum,
including, but not limited to, crude oil or any fraction thereof;
(iii) asbestos in any form or condition; and (iv) any radioactive
material, including, but not limited to, any source, special
nuclear or byproduct material as defined at 42 U.S.C. Subsection
2011, et seq., as amended or hereafter amended;
<PAGE>
4) Seller/Franchisee is not and has not been subject
to, or received any notice of, any private, administrative or
judicial action, relating to the presence or alleged present of
Hazardous Substances in, under, upon or emanating from the real
property and does not know and has no reason to know of any basis
for any such notice or action; and there are no pending or known
or suspected threatened actions or proceedings (or notices of
potential actions or proceedings) from any governmental agency or
any other person or entity regarding any matter relating to
health, safety, or protection of the environment;
5) There has not been and there is not any known or suspected past or
present events, conditions, circumstances, activities, practices, incidents
or actions which could reasonably be expected to interfere with or prevent
continued compliance with any federal, state or local law, regulation,
ordinance or requirement relating to health, safety or protection of the
environment or which may give rise to any legal liability, or otherwise form
the basis of any claim, action, suit, proceeding, hearing or investigation
against or involving the real property based on any federal, state or local
law, regulation, ordinance or requirement relating to health, safety
or protection of the environment or violation or alleged violation thereof;
6) Seller/Franchisee does not own, possess, or control any
polychlorinated biphenyls ("PCB") or PCB contaminated fluids or equipment,
nor does any facility owned or operated by Seller/Franchisee contain in or on
its premises any waste, scrap, raw material, work-in-progress, inventory,
product, residue or other material or substance containing PCB;
7) Seller/Franchisee does not own, possess, or control any asbestos
or any materials containing asbestos at the real property, nor does such
facility contain in or on its premises any waste, scrap, raw material,
work-in-progress, inventory, product, residue, structural members, insulation,
roofing material, building component, or other material or substance
containing asbestos; and Seller/Franchisee hereby waives, releases and agrees
not to make any claim or bring any cost recovery action against Company/
Purchaser under the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Subsection 9601, et seq., or any state equivalent or
any similar law now existing or hereafter enacted, except to the extent that
the condition or circumstance giving rise to such claim or action was in no
manner related to any condition or circumstance existing (to the extent
determined by a court of competent jurisdiction) as of or prior to the closing
date. The parties agree that the burden of proving that such a condition or
circumstance did not exist at or prior to the closing date shall be on Seller/
Franchisee.
<PAGE>
EXHIBIT "C"
LIMITED GUARANTY AND ASSUMPTION OF OBLIGATIONS
THIS, LIMITED GUARANTY AND ASSUMPTION OF OBLIGATIONS is
given this _____ day of _______________________, 19___, by
_______________________________________________ (the
"Guarantor").
In consideration of, and as inducement to, the execution of
that certain Franchise Agreement of even date herewith (the
"Agreement") by STERLING HOUSE CORPORATION (the "Company"), and
subject to the provisions of Section 19.03 of the Agreement,
the undersigned hereby personally unconditionally (i) guaranties
to Company, and its successors and assigns, for the term of the
Agreement and thereafter as provided in the Agreement, the
performance by ___________________________ (the "Franchisee") of
each and every undertaking, agreement and covenant set forth in
the Agreement other than the payments required by Sections 6.02
and 16.01 and Article IX of the Agreement; and (ii) further
agrees to be personally bound by, and personally liable for the
breach of, each and every provision in the Agreement, except as
herein provided, including all obligations to take or refrain
from taking specific actions or to engage or refrain from
engaging in specific activities, including, without limitation,
the provisions of Sections 7.02 and 7.04 of ARTICLE VII and the
provisions of ARTICLE XII of the Agreement. Provided, that the
undersigned shall have no personal liability hereunder to the
extent of any breach ofthe Agreement, including any breach of
Sections 7.02 or 7.04 or any breach of ARTICLE XII of the
Agreement caused by any other shareholder, officer, director,
manager, general partner, investor or their respective spouse or
unemancipated child which arises solely from such other person's
wrongful or improper act or failure to act and which does not
involve any wrongful or improper act or failure to act by the
undersigned.
<PAGE>
The undersigned waives: (i) acceptance and notice of
acceptance by Company of the foregoing undertakings; (ii) notice
of demand of non-performance of any obligations hereby
guaranteed;
(iii) protest and/or non-performance of any obligations hereby
guaranteed; (iv) any right it may have to require that an action
be brought against Franchisee or any other person as a condition
of liability; and (v) any and all other notices and legal or
equitable defenses to which it may be entitled.
The undersigned consents and agrees that: (i) he shall render
any performance required under the Agreement upon demand
if Franchisee fails or refuses punctually to do so; (ii) such
liability shall not be contingent or conditioned upon pursuit by
Company of any remedies against Franchisee or any other person;
and (iii) such liability shall not be diminished, relieved or
otherwise affected by any extension of time, or other indulgence
which Company may from time to time grant to Franchisee or to any
other person, including, without limitation, the acceptance of
any partial performance, or the compromise or release of any
claims, none of which shall in any way modify or amend this
guaranty, which shall be continuing and irrevocable during the
term of the Agreement, or any extension thereof. Any and all
obligations which expressly or by their nature survive the
expiration or termination of the Agreement, and consistent with
the provisions of Section 16.06 of the Agreement, shall continue
and be irrevocable until they are satisfied in full or by their
nature expire.
IN WITNESS WHEREOF, the undersigned has hereunto affixed
his/her signature on the same day and year above referenced.
___________________________________
___________________________________
___________________________________
___________________________________
"GUARANTOR(S)"
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains information extracted from the consolidated Balance
Sheet and the consolidated statement of operations filed as a part of the
annual report on Form 10-Q and is qualified in its entirety by reference to
such annual report on Form 10-Q.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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0
0
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</TABLE>
