UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended December 31, 1996
OR
[ ]Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [no fee required]
For the transition period from ___________to___________
Commission file number 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 Identification No.)
incorporation or organization)
453 S. Webb Road, Suite 500
Wichita, KS 67207
(316) 684-8300
(Address and phone number of Registrant's principal executive office and zip
code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock, no par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 at least the past 90 days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [X]
As of March 25, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant, (For purposes of calculating the preceding
amount only, all directors, executive officers and shareholders holding 5% or
greater of the registrant's Common Stock are assumed to be affiliates) was
$15,366,244. The number of shares of Common Stock of the registrant
outstanding as of March 25, 1997, was 5,038,836.
Part III incorporates by reference the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on May 23, 1996. The
registrant intends to file such Proxy Statement no later than 120 days after
the end of the fiscal year covered by this form 10-K.
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STERLING HOUSE CORPORATION
Index to Annual Report on Form 10-K
For the fiscal year ended December 31, 1996
Page
Part I
Item 1: Business 3
Item 2: Properties 15
Item 3: Legal Proceedings 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Part II
Item 5: Market for Registrant's Common Equity and
Related Stockholder Matters 17
Item 6: Selected Financial Data 18
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 8: Financial Statements and Supplementary Data 25
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
Part III
Item 10: Directors and Executive Officers of the Registrant 26
Item 11: Executive Compensation 26
Item 12: Security Ownership of Certain Beneficial Owners and
Management 26
Item 13: Certain Relationships and Related Transactions 26
Part IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 26
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PART I
ITEM 1. Business
General
Sterling House Corporation (the "Company") constructs, owns, operates,
manages and franchises Sterling House assisted living residences, providing
a wide range of assisted living care and services to the frail elderly.
Assisted living care is an emerging segment of the long-term care industry
serving the rapidly growing elderly population who may require assistance
with the activities of daily living ("ADLs"), such as dressing, bathing and
eating, or routine skilled nursing services. In addition, the Company owns
and operates Sterling Cottage, a conceptspecifically designed for the care of
those affected by Alzheimers and other cognitive impairments. The Company's
operations provide elderly residents with a broad range of cost-effective
health care and personal support services on a 24-hour basis, enabling them
to maintain an independent and dignified lifestyle in a residential home like
setting.
The Company was co-founded in 1991 by Timothy J. Buchanan, Chief Executive
Officer, and Steven L. Vick, President, and has actively expanded its
assisted living operations through the development, operation and selective
franchising of Sterling House residences. In connection with the Company's
initial public offering, on October 26, 1995, the Company entered into a
reorganization transaction with various individuals, limited liability
companies and limited partnerships of which the Company owned majority or
minority interests, whereby the Company acquired all of 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"). Following the completion of the Offering the Company owned
or leased 14 residences containing 417 units and managed/franchised an
additional nine residences with 315 units, for a total of 23 residences,
with 732 units in Kansas and Oklahoma.
In May 1996, the Company completed a private placement offering for $35,000
,000 in 6.75% Convertible Subordinated Debentures ("Debentures") due June 30,
2006. The debentures and underlying securities were registered with the
Securities and Exchange Commission on November 19, 1996. The net proceeds of
$33,398,000 are being used primarily to fund construction in progress.
At December 31, 1996, the Company had in operation 58 assisted living
residences with 2,035 units located in Kansas, Oklahoma, Texas and Florida.
The Company also had 68 residences with 2,886 units under development or
construction in Oklahoma, Texas, Florida, Ohio, Colorado, and three other
states that, for competitive reasons, will not be announced until all
sites are secured. Sterling House residences are located primarily in
select affluent suburban areas, as well as small to medium sized communities
with populations in excess of 10,000.
The Company is following its plan to construct, develop, manage, and, to a
lesser extent, acquire additional assisted living residences in states which
the Company believes possess attractive demographic and favorable regulatory
environments. In support of continued expansion, the Company has opened
regional operations offices in Stuart, Florida, and Dayton, Ohio. At March
25, 1997, the Company had 70 operating residences, containing 2,515 units,
as well as 28 residences under construction with 1,192 units and 38
residences under development.
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The Company is a Kansas corporation, with its principal executive office
located at 453 S. Webb Road, Suite 500, Wichita, Kansas 67207.
Industry
The long-term care industry encompasses a broad range of accommodations
and health care services that are provided primarily to seniors. Home-based
care, congregate living or retirement centers and care in family member's
homes provide viable options for those seniors needing limited services on
an as-needed basis. However, services in congregate or retirement centers
are often limited to meals and housekeeping.
As people age, their need for assistance often increases, and care in the
residential type setting of an assisted living residence may be preferable
and more cost effective than home based or nursing home care options.
Assisted living services typically include assistance with supportive
services such as housekeeping, meals and laundry, as well as personal care
such as bathing, dressing and mobility, and routine nursing services such as
medication assistance and health monitoring. Generally, residents of
assisted living residences require higher levels of care than residents in
congregate or retirement settings, but require lower levels of care than skilled
nursing home patients. For seniors in need of continuous unschedulable 24
hours a day attendance by a skilled nurse or practitioner, a skilled nursing
facility may be required. The typical age of an assisted living resident is
83 - 85 years old.
The aging of the U.S. population as well as other social trends contribute
to the growth of the assisted living industry. Those seniors age 85 and over
are considered the prime market for assisted living facilities. The U.S.
Census Bureau estimates that the number of these individuals will increase
from 3.1 million in 1990, to over 4.3 million by the year 2000. According to
the U.S. General Accounting Office, in 1991 there were over 7.0 million
people in the U.S. who needed assistance with ADLs, and the number of people
needing such assistance is expected to double by the year 2020.
Historically, the philosophy and structure of the long-term care industry
have focused on meeting the medical needs of seniors in a clinical setting,
and the government reimbursement structure, through Medicaid and Medicare,
has primarily been based on the more expensive "medical-model" of care. As
the population of seniors and the cost of health care continues to
dramatically increase, and the demand for cost-containment of long-term
health care intensifies, both public and private payors will actively seek
alternatives. The Company believes that these and other pressures and trends
will increase the demand for the assisted living model of care and housing,
and that seniors will find the home-like residential setting a more favorable
alternative.
Sterling House Services
Sterling House provides a broad range of health-care and support services
to residents on an individualized basis in a comfortable home-like
atmosphere. With building features such as residentially scaled spaces,
private apartments including locking doors, living area, bedroom area,
private bath, individual temperature controls and kitchenettes, the
residents' apartments are viewed as their home, in which they receive
services. The broad range of services offered by the Company include, but
are not limited to, personal care, support services, supplemental services,
and nursing services, all available 24 hours a day and designed to respond to
the residents' individual needs, enabling them to maintain a dignified more
independent lifestyle. Services are delivered in an "unbundled" manner
through the Sterling House "Personalized Service Plans" targeted
specifically at each resident's individual needs and preferences.
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In designing each resident's Personalized Service Plan, the Company
periodically assesses the needs and desires of a resident by conducting
interviews with the resident and, if appropriate, family members and other
medical personnel. A service assessment matrix is utilized to establish a
point score which represents the resident's position within the Company's
range of care and services, and thereby determining the resulting charge for
services within the Company's three levels of pricing. Additionally, the
Company offers a variety of apartment layouts including studio, one bedroom
and one bedroom deluxe designs. The resulting combination of apartment types
and service pricing determines each resident's total monthly charge for
housing and services.
Sterling House Operations
Each Sterling House residence is managed by a Director who is responsible
for the overall day-to-day operations including oversight of the quality of
care, compliance with state regulations and corporate policies, marketing and
community relations, and financial and budgetary performance. The Director
is responsible for all professional and non-professional staff employed on
either a full or part-time basis, as well as independent contractors.
Routine nursing services are provided by nurses who are typically employed by
the Company. On occasion, certain nursing services may be delegated by the
nurse to trained members of the staff. The company consults with outside
providers, such as pharmacists and dieticians, to assist residents through
services such as medication review and menu planning to meet special dietary
needs. Personal care, dietary services, housekeeping and laundry services are
performed primarily by staff members who are either full or part-time and are
trained to perform a variety of services.
The Company's residences are divided into regional operating districts.
There are currently three in Kansas, four in Oklahoma, four in Texas, two in
Florida and one in Ohio, each of which is supervised by a District Manager.
The Company maintains regional offices in Florida, Ohio and Oklahoma in
addition to its headquarters in Wichita, Kansas. Additional districts as
well as regional offices will be added as additional locations are developed.
The District Manager is responsible for the overall operations of the
Sterling House residences within his or her district, as well as monitoring
and supervising Directors in his or her district to assure continued
compliance with quality of care, financial performance, state regulations
and corporate policies and procedures. They also work in conjunction with
the Company's Regional Marketing Representatives to assist and oversee the
directors in developing and maintaining an active and effective marketing
program.
Regional Marketing Representatives implement corporate marketing plans from
residence start-up to stabilization and provide training, direction and
assistance to Directors and staff for community relations marketing, and
census retention. The Marketing Representative makes presentations to groups
and organizations on the Sterling House philosophy and develops working
relationships with local and regional administrative and health care related
professionals. Corporate direction and support in all areas of operations
for Directors, Regional Marketing Representatives and District Managers are
provided by the executive and support staffs who work out of the Company's
headquarters. Accounting services, data processing, accounts payable,
payroll services and human resources are all provided at the Company's
headquarters.
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Competition
The Company competes with numerous other companies and long-term care
providers offering similar services such as other assisted living providers,
home health agencies, life care at home, community based service programs,
retirement communities and convalescent centers. The long-term care
industry, generally, is highly competitive and the Company expects that
assisted living in particular will become increasingly competitive. While
the Company believes that presently there is generally an inadequate number
of assisted living facilities in the markets where the Company intends to
operate, as assisted living receives increased attention, more states
include assisted living in their Medicaid Waiver Program, and additional
sources of capital and financing become available, competition will grow from
new market entrants, as well as other existing providers focusing on assisted
living.
Competition for residents among assisted living providers is typically
based on the quality of service, pricing, population, living environment,
range of services and location. In addition, some of the Company's
competitors are larger than the Company and have or may obtain greater
resources than those of the Company. The Company's competitors primarily are
long-term care providers operating in similar geographic areas. The Company
believes that there is moderate competition for the middle to less expensive
portions of the private pay market the Company serves.
Funding for Assisted Living Care
Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an
individual's health insurance program or long-term care insurance policy,
the individual may receive reimbursement for costs for care under an
"alternative care benefit." Government payments for assisted living have
been limited. Some state and local governments offer subsidies for rent or
services for low income elders. Others may provide subsidies in the form of
additional payments for those who receive Supplemental Security Income (SSI).
Medicaid provides coverage for certain financially or medically needy
persons, regardless of age, and is funded jointly by federal, state and local
governments. Medicaid reimbursement varies from state to state. Although a
majority of the Company's revenue at December 31, 1996 came from private
payors (99.4%), the cost structure of the residences has historically been,
and is expected to continue to be, sufficiently low so that the residences
are able to operate and compete in the Medicaid reimbursement market. The
Company expects that state Medicaid reimbursement programs will constitute a
larger percentage of total revenue in the future.
Government Regulation
Currently, assisted living residences are not specifically regulated as
such by the federal government. However, the Company's assisted living
residences are subject to certain state regulations and licensing require-
ments. For example, residences located in the State of Kansas are licensed
by the Kansas Department of Health and Environment as assisted living
facilities, residences located in the State of Oklahoma are licensed by the
Oklahoma State Department of Health as residential care facilities,
residences in Texas are licensed as Personal Care Facilities, residences in
Florida are licensed as Adult Congregate Living Facilities, and Extended
Congregate Care Facilities, and residences in Ohio are licensed as Rest
Homes. Assisted living is a relatively new concept as compared to other
forms of long-term care (e.g., nursing homes) and, as a result, its regula-
tion by government is still evolving and is currently less encompassing in
comparison with regulations imposed upon skilled nursing home operators.
While regulations and licensing requirements vary significantly from state to
state, they generally include requirements relating to matters such as
licensure, fire safety, sanitation, staff training, staffing levels, and
living accommodations such as size of rooms, number of bathrooms and
ventilation, as well as other regulatory requirements related more
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specifically to certain of the health care services provided by the Company.
The success of the Company will be dependent, in part, upon its ability to
satisfy applicable regulations and requirements and to maintain any required
licenses. The Company's operations could also be adversely affected by,
among other things, regulatory changes such as mandatory increases in the
scope and quality of care to be provided to residents and revisions in
licensing and certification standards.
The Company believes that its residences are in substantial compliance with
all applicable regulatory requirements. However, in the ordinary course of
business, a residence could be cited for deficiencies. In such cases, the
Company expects to take appropriate and timely corrective action to eliminate
such deficiencies.
Medicaid provides insurance for certain financially or medically needy
persons, regardless of age, and is funded jointly by federal, state and local
governments. However, without a Medicaid Waiver Program, states can only use
federal Medicaid funds for long-term nursing facilities. Under the Medicaid
Waiver Program, states apply to the Health Care Financing Administration for
a waiver to use Medicaid funds to support community-based options for the low
income elderly that need long-term care. These waivers permit states to
reallocate a portion of Medicaid funding from nursing facility care to other
forms of care such as assisted living. The Company has elected to admit, on a
very limited basis, residents eligible for reimbursement under the Texas
Medicaid Waiver Program and is subject to the related laws and regulations.
At December 31, 1996, the Company's revenues from private payors was 99.4%.
In order to comply with the terms of the revenue bonds used to finance
eight of the Company's residences, the Company is required to lease a minimum
of 20% of the apartments in each such residence to low or moderate income
persons as defined pursuant to the Internal Revenue Codeof 1986, as amended.
The Company is subject to the Fair Labor Standards Act, which governs such
matters as minimum wage, overtime and other working conditions. A portion of
the Company's personnel is paid at rates related to the federal minimum wage
and accordingly, increases in the minimum wage will result in an increase in
the Company's labor costs.
The sale of franchises is regulated by the Federal Trade Commission and by
certain state agencies located in jurisdictions other than those states where
the Company currently operates. Principally, these regulations require that
certain written disclosures be made prior to the offer for sale of a
franchise. The disclosure documents are subject to state review and
registration requirements and must be periodically updated, not less
frequently than annually. In addition, some states have relationship laws
which prescribe the basis for terminating a franchisee's rights and regulate
both the Company's and its franchisee's post-termination rights and
obligations.
Expansion
Consistent with its strategy of rapidly developing new locations, the
Company is currently developing new residences in Oklahoma, Texas, Florida,
Ohio, Colorado and three other states that, for competitive reasons, will not
be announced until all sites are secured. As of March 25, 1997, the Company
had under construction 30 residences containing 1,278 units; one in Oklahoma
with 46 units, four in Texas with 166 units, and eight in Florida with 344
units, ten in Ohio with 410 unit, four in Colorado with 184 units and three
in other states with 128 units. Additionally, the Company has under
development and land purchase commitments a total of 38 residences; 1 in
Oklahoma, 9 in Florida, 2 in Ohio, 6 in Colorado and 20 in other states.
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Sterling House residences generally range in size from 33 to 50 apartments
and are carefully designed to minimize walking distance in a comfortable and
easy to navigate layout. Each residence provides a distinctive residential
home-like atmosphere, unlike the "institutional" or "hotel" feel common to
many traditional skilled nursing and large congregate care facilities, yet
is designed to be an efficient, economical health care delivery setting. The
Company locates residences in a variety of markets ranging from select
suburban communities, as well as small to medium size towns with populations
of 10,000 and more.
The Company develops and constructs residences utilizing a combination of
its in-house construction subsidiary (BCI Construction, Inc.), joint ventures
and outside developers and contractors. Currently the Company has retained
outside developers and contractors and has also retained outside general
contractors for construction of properties in Florida, Ohio and Texas.
The Company also entered into joint ventures with regional real estate
development partners for the construction, development and ownership of
Sterling House assisted living residences in targeted geographic areas.
As of March 25, 1997, only one facility was being constructed using a
joint venture. The Company anticipates that the total number of residences
constructed and developed using joint ventures in 1997 will increase. The
Company will continue to use this combination of joint ventures, in-house
construction and outside developers and contractors to facilitate its
continued expansion. All aspects relating to development, including site
selection, plans, specifications, costs, architect selection, bonding issues
and budget compliance are approved by the Company and are typically managed
from its headquarters. The Company estimates construction time for a new
residence to be approximately six to nine months, and, once opened, estimates
that it will take approximately nine months to achieve a stabilized occupancy
level of 95% or higher.
There can be no assurance that the Company or its joint venture partners
will be successful in identifying sites for future residences, securing
necessary permits and licenses for the construction of new residences and
supervising the construction of new residences on time and within budget.
Trademarks, Patents, Copyrights and Proprietary Information
The Company is the registered owner of the service mark "Sterling House "
(Reg. No. 1,827,828) as recorded on the principal register of the United
States Patent and Trademark Office. The service mark registration will
expire on March 22, 2004. The Company expects that it will renew its service
mark at that time. The Company also claims a copyright in all policy and
procedures notebooks, operations manuals, architectural plans, advertisements
and other similar materials developed for use in and promotion of the
residence system and in the trade dress protection of the physical
residences.
Risk Factors
Except for the historical information contained herein, the matters
discussed by management 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 in these "Risk
Factors." Updated information will be periodically provided by the Company
as required by the Securities Act and the Exchange Act.
History of, and Anticipated, Losses. Newly opened residences typically
operate at a loss during the first six months of operations. In addition,
the development and construction of residences involves substantial capital
expenditures over a typical six-to-nine month construction period. As a
result of the Company's development, construction and management start-up
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activities, the Company has experienced net losses in each year since its
inception. For the years ended December 31, 1993, 1994, 1995 and 1996, the
company incurred net losses of approximately $162,000, $494,000, $2,183,000,
$726,000, respectively. The success of the Company's future operations is
directly tied to the expansion of its operational base. There can be no
assurance that the Company will not experience unforeseen expenses,
difficulties, complications and delays which could result in greater than
anticipated operating losses or otherwise materially adversely affect the
Company's financial condition and results of operations.
Ability to Develop, Construct, Acquire or Franchise Additional Living
Residences. As of March 25, 1997, the Company's operations consisted of 70
residences which were either managed and/or franchised by the Company. The
Company's prospects for growth are directly affected by its ability to
develop, construct and, to a lesser extent, acquire and franchise additional
assisted living residences. As part of the Company's overall development
plan, the Company has 28 residences under construction. In addition, the
Company has purchase commitments for an additional 38 parcels of real estate
for residences under development. The success of the Company's growth
strategy will also depend upon, among other factors, the Company's ability
to obtain governmental licenses and approvals, and the competitive
environment for development and acquisitions. The nature of such licenses
and approvals and the timing and likelihood of obtaining them vary widely by
location and by the types of services to be offered at the residence. The
Company has developed and constructed 59 company-owned residences and 8 of
the franchised residences using its own construction management resources.
However, to satisfy its future development and construction plans, the
Company may recruit third party developers and general contractors. There is
no assurance that the Company will be able to recruit a sufficient number of
such persons or that the Company will be able to effectively monitor and
administer their development and construction activities. As a result of
these various risks, there can be no assurance that the Company will be
successful in developing, constructing, acquiring or franchising any
additional residences or that any developed or acquired residences will, if
completed, be successful. Moreover, there can be no assurance that the
Company will be able to successfully manage its anticipated rapid expansion
or that such rapid expansion will not have a material adverse effect on the
Company's financial condition or results of operations. See "Item 1. -
Expansion and Item 2. - Properties."
Need for Additional Financing. The Company estimates that its existing
working capital and financing commitments will provide adequate capital to
fund the Company's development, construction and, to a lesser extent,
acquisition of additional assisted living residences over the next twelve
months, including, as part of its overall development plan, the 30 residences
under construction and the 38 residences to be developed on the sites for
which the Company has purchase commitments. However, additional financing
may be necessary in order to meet the Company's development plan if such
plan is modified or if certain assumptions of the development plan prove to
be inaccurate. There can be no assurance that the Company will generate
sufficient cash flow to fund its future working capital and debt service
requirements or growth. In such event, the Company would have to seek
additional financing through debt or equity offerings, bank borrowings,
sale/leaseback transactions with real estate investment trusts or otherwise.
There can be no assurance that any future financing will be available to the
Company or, if available, that the terms will be acceptable to the Company.
The Company's fixed payment obligations will significantly increase as the
Company pursues its development plan. Failure to meet these obligations may
result in the Company being in default of its financing agreements and, as a
consequence, the Company may lose its ability to operate any individual
residence or other residences which may be cross-collateralized. There can
be no assurance that the Company will generate sufficient cash flow to meet
its obligations. In addition, the Company anticipates that future
development of residences may be financed with construction loans and,
therefore, there is a risk that, upon completion of construction, permanent
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financing for newly developed residences may not be available or may be
available only on terms that are unfavorable or unacceptable to the Company.
Geographic Concentration of Residences. Substantially all of the
residences, including residences under construction and development, are
located in Kansas, Oklahoma, Texas, Florida, Ohio and Colorado. Until the
Company's operations become more geographically dispersed, the Company will
be more susceptible to downturns in local and regional economies and changes
in state or local regulations because such conditions and events could affect a
relatively high percentage of the total number of residences currently in
operation or under construction and development. As a result of such
factors, there can be no assurance that such geographic concentration will
not have material adverse effect on the Company's financial condition or
results of operations. See "Item 2. - Properties."
Construction Risks. Delays are common in the construction industry.
Disruptive events may include shortages of, or inability to obtain, labor or
materials, the inability of the general contractor or subcontractors to
perform under their contracts, strikes, adverse weather conditions, changes
in federal, state or local laws or regulations, and other factors or
circumstances presently unknown to or unanticipated by the Company. The
Company may have little control over such events, and such events may
adversely affect the cost and completion time of any development project,
including the risk that development opportunities may become uneconomical or
may be abandoned. Any of these or other factors could result in cost
overruns and could delay, or even prevent, completion of one or more
additional residences.
Environmental Liability Risks Associated with Real Property. Under
various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or
petroleum product releases at such property, and may be held liable to a
governmental entity or to third parties for property damage and for investiga-
tion and cleanup costs incurred by such parties in connection with the
contamination. Such laws typically impose cleanup responsibility and
liability without regard to whether the owner knew of or caused the presence
of the contaminants, and the liability under such laws has been interpreted
to be joint and several unless the harm is divisible and there is a
reasonable basis for allocation of responsibility. The costs of investiga-
tion, remediation or removal of such substances may be substantial, and the
presence of such substances, or the failure to properly remediate such
property, may adversely affect the owner's ability to sell or lease such
property or to borrow using such property as collateral. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the
contamination. Persons who arrange for the disposal or treatment of
hazardous or toxic substances also may be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether
or not such facility is owned or operated by such person. Finally, the owner
of a site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from a
site.
The Company has conducted, or its in the process of conducting,
environmental assessments of all of the undeveloped sites and sites currently
under construction as well as 59 of the Company's current residences. The
completed assessments have not revealed any environmental liability that the
Company believes would have a material adverse effect on the Company's
business, assets or results of operations, nor is the Company aware of any
such environmental liability. The Company has not conducted environmental
assessments with respect to four of the Company's present residences. It is
possible that there are material environmental liabilities of which the
Company is unaware. The Company believes that the residences are in
compliance in all material respects with all federal, state and local laws,
ordinances and regulations regarding hazardous or toxic substances or
petroleum products. The Company has not been notified by any governmental
authority, and is not otherwise aware, of any material non-compliance,
liability or claim relating to hazardous or toxic substances or petroleum
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products in connection with any of the present residences.
Dependence on Senior Management. The Company depends, and will continue
to depend, upon the services of Mr. Timothy J. Buchanan, its Chief Executive
Officer and Chairman of the Board, and Mr. Steven L. Vick, its President.
The Company has entered into employment agreements with these two executives
and has obtained key employee insurance policies covering the lives of
Messrs. Buchanan and Vick in the amounts of $1.0 million each. The loss
of the services of either or both of such officers or the Company's inability
to attract additional management personnel in the future could have a
material adverse effect on the Company's financial condition or results of
operations.
Staffing and Labor Costs. The Company competes with other providers of
long-term care with respect to attracting and retaining qualified or skilled
personnel. The Company is dependent upon its ability to continue to attract
and retain management personnel who will be responsible for the day-to-day
operations of each residence. The Company is also dependent upon the
available labor pool of low wage employees. The Company is also subject to
the Fair Labor Standards Act, which governs such matters as minimum wage,
overtime and other working conditions. A shortage of nurses and/or trained
personnel, or other general inflationary pressures, may require the Company
to enhance its wage and benefits package in order to compete. No assurance
can be given that the Company's labor costs will not increase, or that, if
they do increase, they can be matched by corresponding increases in resident
revenues.
Government Regulation. Health care is an area of extensive and frequent
regulatory change. The assisted living industry for long-term care is
relatively new, and, accordingly, the manner and extent to which it is
regulated at the federal, state and local levels is evolving. Changes in
the laws or new interpretations of existing laws may have a significant
effect on methods and costs of doing business, and the amount of
reimbursement from governmental and other third party payors. The Company
will be subject to varying degrees of regulations and licensing by health or
social service agencies and other regulatory authorities in the various
states and localities where it operates or intends to operate.
The success of the Company will depend in part upon its ability to satisfy
the applicable regulations and requirements and to procure and maintain
required licenses as the regulatory environment for assisted living evolves.
The Company's operations could also be adversely affected by, among other
things, regulatory developments such as mandatory increases in the scope and
quality of care to be offered to residents and revisions in licensing and
certification standards. However, there can be no assurance that federal,
state or local laws or regulatory procedures which might adversely impact the
Company's business, financial condition, results of operations or prospects
will not be imposed or expanded.
The sale of franchises is regulated by the Federal Trade Commission and by
certain state agencies located in jurisdictions other than those states where
the Company currently conducts franchise operations. Principally, these
regulations require that certain written disclosures be made prior to the
sale of a franchise. In addition, some states have relationship laws which
prescribe the basis for terminating a franchisee's rights and regulate both
the franchisor's and its franchisees' post-termination rights and
obligations. There can be no assurance that changes in such regulations will
not have an adverse impact upon the ability of the Company to continue its
franchising activities.
The Company and its activities are subject to zoning, health and other
state and local government regulations. Zoning variances or use permits are
often required for construction. Severely restrictive regulations could
impair the ability of the Company to open additional residences at desired
locations or could result in costly delays. Several residences have been
11
<PAGE>
financed by assisted living residence revenue bonds. In order to continue to
qualify for favorable tax treatment of the interest payable on such bonds,
the residences must comply with certain federal income tax requirements,
principally pertaining to the maximum income level of a specified portion of
the residents. Failure to satisfy these requirements constitutes an event of
default under the bonds, thereby accelerating their maturity.
Certain states provide for Medicaid reimbursement for assisted living
services pursuant to Medicaid Waiver Programs permitted by the federal
government. Historically, the Company has not provided services in states
with a Medicaid Waiver Program; however, effective September 25, 1996, the
Company became certified as a Medicaid provider in the state of Texas. As a
provider of services under the Medicaid Waiver Program, the Company is
subject to all of the requirements of such program, including the fraud and
abuse laws, violations of which may result in civil and criminal penalties
and exclusions from further participation in the Medicaid Waiver Program.
The Company intends to comply with all applicable laws, including the fraud
and abuse laws; however, there can be no assurance that administrative or
judicial interpretation of existing laws or regulations will not have a
material adverse impact on the Company's results of operations or financial
condition. See "Item 1. - Government Regulation."
Dependence on Attracting Seniors with Sufficient Resources to Pay. The
Company currently, and for the foreseeable future, expects to rely primarily
on the ability of its residents to pay for the Company's charges from their
own and their families' financial resources. Inflation or other circumstances
which adversely affect the ability of seniors to pay for assisted living
services could have an adverse effect on the Company. In the event that the
Company encounters difficulty in attracting seniors with adequate resources
to pay for the Company's services, the Company would be adversely affected.
Competition. The Company competes principally on the basis of price,
quality, level and range of services offered, as well as the appearance and
design of its residences. While the Company believes that its residences are
distinctive in design and operating concept, it is aware of other companies
with similar or competitive concepts. The long-term care industry is highly
competitive and the Company expects that the assisted living industry, in
particular, will become more competitive in the future. The Company competes
with numerous companies providing similar long-term care alternatives, such
as home health agencies, life care at home, community-based service programs,
retirement communities and convalescent centers. While there presently
are few assisted living residences existing in the markets the Company
serves, the Company<PAGE>
expects that, as assisted living becomes increasingly
recognized as an alternative form of long-term care, competition will grow
from new market entrants focusing primarily on assisted living. Nursing
facilities that provide long-term care services are also a potential source
of competition to the Company. Moreover, in the implementation of the
Company's expansion program, the Company expects to face competition for
development sites and potential acquisition of existing assisted living
residences. Some of the Company's present and potential competitors are
significantly larger and have, or may obtain, greater financial resources
than those of the Company. Consequently, there can be no assurance that the
Company will not encounter increased competition in the future which could
limit its ability to attract residents or expand its business and could have
a material adverse effect on the Company's financial condition, results
of operations and prospects. See "Item 1. - Competition."
Disruption of Franchise Activities. Historically, the Company has
franchised two franchisee groups with respect to residences. As of March 25,
1997, these franchisee groups had ten residences under development or
construction. For the foreseeable future, the Company intends to continue to
offer franchises to a select number of qualified franchisees. The success of
the Company's franchise activities is dependent upon the individual
development and operational efforts of these franchisees and a continuing
cooperative relationship between the Company and its franchisees. If any of
the franchisees are unsuccessful in their operations or commit acts that are
detrimental to the reputation of the Sterling House concept or if the
Company's business relationship with any one
12
<PAGE>
or more of the franchisees should deteriorate, then there could be a
disruption in additional franchising activity, a decrease in franchise
related revenues or an increase in the Company's related franchise costs,
which could have a material adverse effect on the Company's results of
operations or financial condition.
Liabilities and Insurance. The business of providing health care services
entails an inherent risk of liability. In recent years, long-term care
providers have become subject to an increasing number of lawsuits alleging
negligence or similar legal theories. Such lawsuits generally involve
large claims and are expensive to defend. The Company maintains liability
insurance intended to cover such claims and the Company believes that its
insurance is in keeping with industry standards. There can be no assurance,
however, that any particular claim against the Company will be covered by its
insurance or that claims in excess of the Company's insurance coverage
will not be brought against the Company. A successful uninsured claim or a
successful claim which exceeds the Company's coverage could have a material
adverse effect upon the Company's financial condition or results of
operations. Claims against the Company, regardless of their merit or
eventual outcome, may also have a material adverse effect upon the Company's
ability to attract residents or expand its business and would require
management to devote time to matters unrelated to the operation of the
Company's business. In addition, the Company's insurance policies must be
renewed annually. There can be no assurance that the Company will
be able to obtain liability insurance coverage in the future or that, if such
coverage is available, it will be available on acceptable terms.
Control by Insiders. Messrs. Buchanan and Vick, the Chief Executive
Officer and Chairman of the Board and President, respectively and Dr. D. Ray
Cook and Mr. Ronald L. Mercer, directors of the Company, beneficially own an
aggregate of approximately 46% of the outstanding Common Stock of the Company
(36% if all of the Debentures Are converted into Common Stock). Accordingly,
they may be in a position to control the election of the Company's directors,
to thereby control the policies and operations of the Company, and to
determine the outcome of corporate transactions, or other matters submitted
for stockholder approval. These matters include, without limitation, mergers,
consolidations, the sale of all or substantially all of the Company's assets
and other changes in control of the Company. In addition, the company's 1995
Stock Option Plan (the "1995 Stock Option Plan") authorizes the issuance of
options to purchase up to 237,000 shares of Common Stock to employees and
directors of the Company. The Company has granted options to purchase 186,450
shares of Common Stock under the 1995 Stock Option Plan, of which options to
purchase 3,886 shares of Common Stock have been exercised and 13,150 options
have been forfeited. The Company has also granted an aggregate of 72,000
options to certain directors of the Company outside of the 1995 Stock Option
Plan. The issuance of additional shares of Common Stock to management
pursuant to the exercise of options granted under the 1995 Stock Option Plan
or to directors pursuant to the exercise of options granted outside of the
1995 Stock Option Plan would further increase the number of shares held by
present management and principal stockholders.
Anti-Takeover Provisions. The Company's Articles of Incorporation and
Bylaws contain, among other things, provisions establishing a classified
Board of Directors, authorizing shares of preferred stock with respect to
which the Board of Directors has the power to fix the rights, preferences
privileges and restrictions without any further vote or action by the
stockholders, and requiring a super-majority vote of stockholders in order
to remove directors in certain instances, amend the Articles of Incorporation
and approve certain business combinations with respect to a "related person."
The Company is also subject to the Kansas Control Acquisition Act (the
"Control Act") which is intended to discourage hostile takeovers of Kansas
based corporations primarily through the imposition of procedural hurdles
that prevent certain types of acquiring stockholders from gaining immediate
voting power over shares acquired in significant amounts. The application of
the Control Act and/or the provisions of the Company's Articles of
Incorporation and bylaws could delay, deter or prevent a merger,
consolidation, tender offer, or other business combination or change of
control involving the Company that some or a majority of the Company's
13
<PAGE>
stockholders might consider to be in their personal best interests, including
offers or attempted takeovers that might otherwise result in such
stockholders receiving a premium over the market price for the Common Stock,
and may adversely affect the market price of, and the voting and other rights
of, the holders of Common Stock. The Company has not issued, and currently
has no plans to issue, shares of preferred stock.
Shares Eligible for Future Sale. The Company presently has a total of
5,038,836 shares of Common Stock outstanding. Of these shares, 2,205,836
shares are freely tradeable without restriction or limitation under the
Securities Act, except for shares owned by "affiliates" (as that term is
defined under the rules and regulations under the Securities Act) of the
Company. The remaining 2,833,000 shares are "restricted" securities within
the meaning of Rule 144 under the Securities Act. Unless registered under
the Securities Act prior thereto, these restricted shares will not be
eligible to be sold publicly until approximately April 29, 1997. There are
also 237,000 shares of Common Stock issuable pursuant to the Company's 1995
Stock Option Plan, of which the Company has made a one-time grant of non-
qualified options to purchase 37,000 shares of Common Stock at $0.10 per
share to certain executive officers and key employees (excluding Messrs.
Buchanan and Vick). These options vested immediately and are exercisable
in three 20% increments at the end of each six-month period subsequent to
October 26, 1995 and the remaining 40% will become exercisable on October 26,
1997. As of September 30, 1996, options to purchase 3,886 shares of Common
Stock have been exercised. There are also 72,000 shares of Common Stock
issuable pursuant to options granted to the Company's four outside
directors on November 20, 1995. These options vested immediately and are
exercisable in three 33.33% increments commencing on November 20, 1996 and
on each of the next two anniversaries of the date of grant. No prediction
can be made as to the effect, if any that future sales of shares, or the
availability of shares for future sales, will have on the market price of the
Common Stock from time to time. The sale of substantial amounts of Common
Stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock.
Employees
As of December 31, 1996, the Company had approximately 869 employees,
approximately 408 of whom were employed in full-time positions. The Company
has no collective bargaining agreements with any of its employees.
The Company believes that its labor relations are good.
14
<PAGE>
ITEM 2. Properties
The following chart sets forth, as of March 25, 1997, the location, number of
units, ownership and the date on which operations commenced for the Company's
residences and the number of units and residences under construction or
development:
Commenced
Location Units Ownership Operations
Owned or Leased ------ --------- ----------
- ---------------------
Augusta, KS 21 Owned October 1991
Wichita, KS 26 Leased September 1993
Abilene, KS 26 Owned November 1993
Bethany, OK 26 Leased January 1994
Junction City, KS 26 Owned March 1994
Derby, KS 26 Leased April 1994
McPherson, KS 33 Leased June 1994
Emporia, KS 26 Owned July 1994
Salina, KS 33 Leased August 1994
Wellington, KS 26 Leased September 1994
Arkansas City, KS 33 Owned October 1994
Great Bend, KS 33 Leased January 1995
Ponca City, OK 33 Leased March 1995
Hays, KS 33 Leased June 1995
Dodge City, KS 35 Leased July 1995
Bartlesville, OK 33 Leased July 1995
Midwest City, OK 33 Leased October 1995
Enid, OK 33 Leased October 1995
Shawnee, OK 33 Leased December 1995
Stillwater, OK 33 Leased December 1995
SW Oklahoma City, OK 33 Leased January 1996
Chickasha, OK 33 Leased February 1996
Edmond, OK 37 Leased April 1996
Norman, OK 33 Leased April 1996
Duncan, OK 33 Leased May 1996
Lawton, OK 37 Leased June 1996
Broken Arrow, OK 37 Leased June 1996
Denton, TX 37 Leased July 1996
Ennis, TX 33 Leased July 1996
Corsicana, TX 33 Leased July 1996
Waxahachie, TX 37 Leased August 1996
Palestine, TX 37 Leased August 1996
Muskogee, OK 37 Leased August 1996
Claremore, OK 37 Leased August 1996
Liberal, KS 45 Owned August 1996
Paris, TX 37 Leased September 1996
NW OK City, OK 37 Leased September 1996
Stuart, FL 42 Leased September 1996
Vero Beach, FL 42 Leased September 1996
Ada, OK 37 Leased October 1996
Owasso, OK 37 Leased October 1996
West Melbourne, FL 42 Leased November 1996
Texarkana, TX 37 Leased November 1996
OK City Hefner, OK 37 Leased December 1996
Tequesta, FL 42 Leased December 1996
Leesburg, FL 42 Owned December 1996
Coffeyville, KS 37 Leased December 1996
Wichita Falls, TX 42 Leased December 1996
Tyler, TX 42 Leased December 1996
DeSoto, TX 37 Leased December 1996
Salina II, KS 37 Leased December 1996
Mansfield, TX 37 Leased December 1996
Jacksonville, St. Aug., FL 42 Owned December 1996
Richland Hills, TX 37 Leased December 1996
Weatherford, TX 37 Owned December 1996
Kerrville, TX 42 Owned December 1996
Cedar Hill, TX 37 Leased December 1996
Lancaster, TX 37 Owned December 1996
15
<PAGE>
Commenced
Location Units Ownership Operations
Owned or Leased (continued) ------ ------------- -------------
- ---------------------------
Tulsa Mingo, OK 37 Leased January 1997
Temple, TX 42 Owned January 1997
Carrollton, TX 37 Owned January 1997
Lewisville, TX 42 Owned January 1997
Durant, OK 37 Owned February 1997
San Antonio, Nac., TX 37 Owned March 1997
Tavares, FL 42 Owned March 1997
Findlay, OH(1) 37 Owned March 1997
Georgetown, TX(2) 42 Owned March 1997
Port Orange, FL(2) 42 Owned March 1997
Ocala, FL(2) 42 Owned March 1997
Troy, OH(2) 37 Owned March 1997
------
Total Units 2,515
Managed or Franchised
- ----------------------------
Olathe, KS 37 Franchised November 1992
Topeka, KS 37 Franchised April 1994
Pratt, KS 44 Managed September 1994
Lenexa, KS 38 Franchised November 1994
Lawrence, KS 37 Franchised April 1995
Leawood, KS 37 Franchised September 1995
Olathe, KS II 42 Franchised December 1995
Colorado Springs, CO 37 Franchised September 1995
---
Total Units 309
Under Construction Units Residences
- ------------------------ ------ -------------
Colorado 184 4
Florida 386 9
Ohio 410 10
Oklahoma 46 1
Texas 166 4
------- ---
Total Units 1,192 28
Under Development Units Residences
- ------------------------- ------- --------------
Colorado 100 2
Florida 378 9
Ohio 255 6
Oklahoma 33 1
Other States 842 20
------- --
Total Units 1,608 38
(1) Minority interest owned by J. V. partner.
(2) Certificate of Occupancy received but not fully licensed.
As of March 25, 1997, the Company had a total of 66 residences under
construction, development or purchase commitment. The Company's executive
offices are located in leased office space in Wichita, Kansas. The Company
also leases office space in Texas, Florida, Ohio, North Carolina and
Oklahoma for its District Managers and construction Project Managers.
ITEM 3. Legal Proceedings
As of March 25, 1997, there are no material pending legal proceedings to
which the Company or its property is subject.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
16
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Market Information
The Company's common stock is listed and traded on the American Stock
Exchange under the symbol "SGH."
Year Ended December 31, 1996
Quarter Ended: High Low
- ------------------ -------- --------
December 31 $17 $8 1/2
September 30 $19 1/8 $15
June 30 $19 3/4 $17
March 31 $19 3/8 $9 3/8
For the period commencing on October 26, 1995 (the date of the Company's
initial public offering) through December 31, 1995, high and low closing sale
prices for the common stock as reported by the American Stock Exchange were
$13 and $9 7/16 respectively. Prior to the initial public offering, there
was no public market for the Company's common stock.
According to the records of the Company's transfer agent, the Company had
75 holders of record of the common stock as of March 18, 1997. The Company
believes that a substantially larger number of beneficial owners hold such
shares in depository or nominee form.
Dividend Policy
The Company has never paid any cash dividends and, for the foreseeable
future, the Company expects to retain all earnings to finance the future
expansion and development of its business. Any future payment of cash
dividends will depend, among other factors, upon the earnings, capital
requirements, operating and financial condition of the Company, other
relevant factors, and, more importantly, upon compliance with various
financial covenants contained in future financing agreements to which the
Company may become a party, the effect of which is to make the payment of
dividends unlikely during the foreseeable future.
17
<PAGE>
ITEM 6. Selected Financial Data
The following table presents selected consolidated historical financial
data for the Company. The selected financial data for the year ended December
31, 1992, has been derived from unaudited consolidated Financial Statements
of the Company. The selected financial data for the years ended December 31,
1993, 1994, 1995, and 1996, and as of December 31, 1993, 1994, 1995 and 1996,
have been derived from audited consolidated Financial Statements of the
Company. Information set forth below is not necessarily indicative of
results of future operations. This data should be read in conjunction with,
and is qualified in its entirety by, the "Management's Discussions and
Analysis of Financial Condition and Results of Operations," and the Company's
Consolidated Financial Statements and the Notes thereto, which appears in this
Form 10-K.
Year ended December 31,
Historical
1992 1993 1994 1995 1996
------ ----- ------ ----- -----
(In thousands, except per share data)
Statements of Operations
Revenue $306 $676 $2,272 $4,598 $16,038
Operating expenses:
Residence operating expenses 197 213 251 1,553 10,267
General and administrative 88 504 1,162 1,766 3,147
Stock Compensation Expenses(1) --- --- --- 413 ---
Cost of construction services --- --- 870 1,069 62
Building rentals --- --- --- 55 2,982
Depreciation and amortization 23 25 88 460 1,229
Equity in net loss from
unconsolidated affiliates --- 10 298 279 ---
--- --- ------ ------ ------
Total operating expenses 308 752 2,669 5,595 17,687
--- --- ------ ------ ------
Loss from operations (2) (76) (397) ( 997) (1,649)
Loss before taxes and
extraordinary loss (55) (147) (494) (1,082) (1,136)
Loss before extraordinary loss (62) (162) (494) (1,007) (726)
Loss per share before
extraordinary loss $(0.03) $(0.07) $(0.22) $(0.36) $(0.14)
Weighted average number of
common shares outstanding 2,281 2,281 2,281 2,787 5,037
December 31,
(in thousands)
1992 1993 1994 1995 1996
------ ----- ------ ----- -----
Balance sheet data:
Working capital (deficit) $(137) $(134) $(511) $9,218 $7,116
Total assets 697 798 3,736 43,093 77,818
Long-term debt, excluding
current portion 576 621 1,009 6,562 39,589
Stockholders' equity (138) (300) (794) 25,205 24,510
(1) Reflects a nonrecurring charge to compensation expense related to a
one-time grant of options to purchase 37,000 shares of the Company's Common
Stock at $0.10 per share, which were granted to certain officers and key
employees, excluding Messrs. Buchanan and Vick, at the time of the Offering.
18
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General. The Company was formed in 1991 and, prior to its initial public
offering in October 1995, used a series of limited partnerships and limited
liability companies to finance the development and construction of residences
in which it retained certain minority and majority interests. In January
1994, the Company acquired BCI Construction, Inc. (formerly Buchanan Homes,
Inc.), a construction management company, which previously constructed all
of the residences developed by the Company. During 1994, the Company secured
a significant financing commitment from Health Care REIT, Inc. ("HCRI") and,
as a result, initiated the development of a series of residences through
Corridor Properties, L.L.C., which at that time was a 60% owned affiliate.
On October 26, 1995, the Company issued 2,185,000 shares in a public
offering realizing net proceeds of approximately $21,786,000. The Company
utilized approximately $1,480,000 of the net proceeds to repay certain long-
term debt and to pay a $500,000 termination fee to HCRI in connection with
the termination of the Company's loan agreement. The Company used the
remaining net proceeds to finance development. Also, in connection with the
Company's initial public offering, the Company entered into the
Reorganization Transaction. (See Note 1 to Consolidated Financial Statements.)
During 1996, the Company has continued its 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, Assisted Living Properties Inc. ("ALP"), a wholly-owned
subsidiary of the Company, entered into an operating lease agreement with
Meditrust to lease three assisted living residences previously owned by
franchisees of the Company. Concurrently with this transaction the
franchisees, Masters Associates, L.L.C. ("Masters"), the owner of the Derby,
Kansas residence, Hays Assisted Living, L.L.C. ("HAL"), the owner of the
Hays, Kansas residence, and Wellington Partners, L.L.C. ("WPL"), 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. The Company previously managed the
Derby, Hays and Wellington residences for the franchisees. On March 26, 1996,
the Management and Franchise Agreements with Masters, HAL and WPL were
terminated and ALP assumed all the operations and residents' lease
agreements. The sale price of each facility was the result of negotiations
among the Company, Meditrust and the three franchisees. Mr. Bushee, a
director of the Company, is the Chief Operating Officer of Meditrust. D. Ray
Cook, M.D., a director and principal shareholder of the Company, was a
passive investor in Masters and WPL.
On May 23, 1996, the Company increased its funds available for development,
construction and acquisitions of assisted living residences by selling, in a
private placement, at par $35,000,000 of 6.75% convertible subordinated
debentures due June 30, 2006 ("the Debentures"). The Debentures, noncallable
for three years, are convertible into shares of common stock of the Company
at the conversion price of $22.42 per share, which equates in aggregate to
approximately 1,561,106 shares. The Company is using the net proceeds of
$33,398,000 to finance future development. The Debentures and underlying
securities were registered on Form S-3 with the Securities and Exchange
Commission on November 19, 1996.
On August 1, 1996, the Company acquired the land, building, and other fixed
assets of Woodland Terrace, a 45 unit retirement and assisted living
residence located in Liberal, Kansas. The Company also acquired an operating
lease on a 37 unit retirement and assisted living residence located in
Coffeyville, Kansas on December 31, 1996. The Company had managed the
property since September 1, 1996.
19
<PAGE>
The acquisition and opening of new residences brings the total number of
company owned/leased residences open at December 31, 1996, to 58 in addition
to eight franchised or managed residences for a total of 66. The Company
began operations in the State of Texas in the second quarter of 1996, in the
State of Florida in the third quarter of 1996 and has now begun operations
in the State of Ohio by opening the Findlay location in the first quarter of
1997. The Company opened 17 residences containing 663 units during the three
months ended December 31, 1996, and 41 residences containing 1,519 units
during the year ended December 31, 1996.
The following table presents the number of owned/leased, managed or
franchised residences and the number of residences under construction and
under development, by state, as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Owned/Leased Managed/Franchised Under Construction Under Development
------------ ------------------ ------------------ -----------------
1995 1996 1995 1996 1995 1996 1995 1996
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residences by state
Kansas 11 16 10 7 0 0 0 0
Oklahoma 6 19 0 0 7 3 7 0
Texas 0 18 0 0 4 9 13 0
Florida 0 5 0 0 0 7 6 12
Colorado 0 0 0 1 0 3 0 4
Ohio 0 0 0 0 0 10 0 8
Other States 0 0 0 0 0 0 0 12
----- ---- ---- ---- ----- ---- ----- ----
Total Residences 17 58 10 8 11 32 26 26
==== ==== === === ==== === ==== ====
Total Units
516 2,035 358 309 387 1,340 1,007 1,498
==== ===== === === === ===== ===== =====
</TABLE>
The Company plans to finance its development and construction of new
residences primarily through the proceeds of the Debentures and through the
use of financing agreements involving the sale and immediate lease back of
the land, building and equipment used at the residences.
The Company has experienced recurring net losses since its inception
resulting from the expenses incurred to establish the infrastructure
necessary to support its aggressive residence development program, as well as
operating losses incurred on newly opened residences during the lease-up
period.
The following table sets forth the number of residences and units owned/
leased or managed/franchised and the stabilized occupancy and private pay
percentages as of December 31, 1993, 1994, 1995, and 1996.
At December 31,
1993 1994 1995 1996
----- ----- ----- -----
Residences
Owned/Leased(1) 3 9 17 58
Managed/Franchised 1 6 10 8
--- --- --- ---
Total 4 15 27 66
Units
Owned/Leased 73 250 516 2,035
Managed/Franchised 37 207 358 309
---- ---- ---- -----
Total 110 457 874 2,344
Stabilized Occupancy percentage(2)
100% 95% 96% 97%
Units private pay 100% 100% 100% 99%
Average monthly rent/unit $1,355 $1,505 $1,618 $1,688
Average monthly rent/unit
including community fees --- --- $1,705 $1,753
(1) Prior to the Reorganization Transaction, residences were owned by
limited partnerships, limited liability companies, or a corporation.
(2) Stabilized occupancy percentage represents the occupancy at the dates
presented and only includes those residences that have been operating in
excess of nine months or that have reached an occupancy rate of 95% (does not
include Managed/Franchised units).
20
<PAGE>
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 and the Company's S-3 Registration Statement dated November 1, 1996,
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.
Results of Operations
Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995
Revenues. Total revenues increased to $16,038,000 in 1996 compared to
$4,598,000 in 1995, an increase of $11,440,000 or 249%. This increase is
primarily attributable to an increase of $13,279,000 in residence rentals as
a result of the 1,519 new rental units that have been developed and acquired
by the Company since December 31, 1995, and the 330 rental units acquired in
the Reorganization Transaction. The overall decrease in other revenues is
primarily due to the Company's efforts to rapidly develop Company owned
residences, primarily through new construction and acquisitions, and the
Company's decreasing emphasis on revenue from developing, managing and
constructing franchise residences. The Company expects that franchise and
royalty fee revenues, which have historically produced higher margins than
rental revenue, will continue to decline as a percentage of the Company's
total revenue.
Residence Operating Expenses. Residence operating expenses increased to
$10,267,000 compared to $1,510,000 for the same period in 1995, an increase
of $8,757,000 or 580%. The increase is attributable to the increase in the
number of new residences as described above. Additionally in 1996, the
Company opened residences with a greater number of rental units per
building, resulting in higher fixed property expenses, during the lease-up
period than experienced in 1995. The Company does not allocate general and
administrative overhead charges to the residences.
General and Administrative Expenses. General and administrative expenses
increased to $3,147,000 in 1996 from $1,810,000 during the same period in
1995, an increase of $1,337,00 or 74%. The increase is primarily
attributable to the increase in payroll costs 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,
professional fees, and other expenses related to being a publicly traded
company.
Cost of Construction Services. Cost of construction services decreased to
$63,000 in 1996 from $1,069,000 during the same period in 1995. The decrease
is attributable to a decrease in such services to franchisees.
Building Rentals. Building rental increased to $2,982,000 in 1996, up from
$55,000 during the same period in 1995. Such costs reflect the operating
leases entered into during 1996. The Company had 5 residences under
operating leases at the end of 1995, and entered into an additional 41
operating leases during 1996, resulting in a total of 46 residences operating
under an operating lease agreements at December 31, 1996.
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Depreciation and Amortization. Depreciation and amortization increased to
$1,229,000 in 1996, compared to $460,000 in 1995, an increase of $769,000 or
167%. This increase is primarily attributable to the increase in prerental
cost amortization during the current period. Prerental cost amortization was
$631,000 in 1996, compared to $169,000 in 1995, an increase of $462,000.
Prerental costs represent preopening marketing, employee recruitment and
training, and other start-up expenditures necessary to prepare the residence
for rent. These prerental costs are amortized over a 12 month period
commencing in the month the residence opens. Prerental costs (net of
amortization) was approximately $1,339,000 at December 31, 1996, compared to
approximately $242,000 at December 31, 1995, an increase of approximately
$1,097,000. The increase in prerental costs is primarily attributable to two
factors. First, the Company opened 36 residences during 1996 compared to 8
residences opened in 1995, an increase of 28 residences. Second, the Company
has experienced higher prerental costs on a per residence basis as it has
begun operations in the markets of Florida and Texas. The Company incurred
prerental costs averaging approximately $51,000 per residence in 1996
($42,000 for the first ten residences in 1997), which represents a
significant increase over expenditures incurred per residence during
the same period in 1995. Management anticipates that prerental costs per
residence will continue to be higher than the amounts incurred in 1995, as a
result of the higher costs in the new markets the Company is entering, and
that the amortization of these prerental costs will continue to impact the
Company's results of operations.
Depreciation was $598,000 in 1996, compared to $291,000 in 1995, an
increase of $307,000 or 105%. The increase is attributable to the residences
acquired in the Reorganization Transaction and the depreciation related to
the property and equipment acquired since December 31, 1995.
Equity In Net Loss From Investments in Unconsolidated Affiliates. Equity
in net loss from investments in unconsolidated affiliates decreased to $0 in
1996 from $279,000 in 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 $1,042,000 in 1996 up from
$204,000 in 1995. The increase is attributable to the investment of excess
cash balances in U.S. Treasury Securities.
Interest Expense. Interest expense increased to $534,000 in 1996, up from
$375,000 in 1995. The increase is attributable to the assumption of debt
associated with the residences acquired in the Reorganization Transaction and
the interest incurred relating to the Debentures.
Income Taxes. In 1996, the Company recorded a tax benefit of $409,000
compared to $75,000 in 1995. This benefit recognized 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.
Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994
Revenues. Total Revenues increased to $4,598,000 in 1995 from $2,272,000
in 1994, an increase of $2,326,000 or 102%. This increase was primarily
attributable to an increase of $1,936,000 in residence rentals as a result of
the residences acquired in the Reorganization Transaction, rentals from six
new Company owned residences and rentals from the Abilene residence which has
been included in the Company's operations since May 31, 1995. Additionally,
other revenues increased to $2,301,000 from $1,911,000 in 1994, an increase of
$390,000 or 20%. Such increase was attributable to an increase in initial
franchise and royalty fees of $55,000, a 23% increase from $236,000 in 1994,
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an increase in management and service fees of $184,000, a 60% increase from
$306,000 in 1994, and an increase in construction services of $161,000, a 15%
increase from $1,056,000 in 1994. Such increases were primarily a result of
the development and operation of additional franchise residences which opened
during 1995 and 1994. The overall increase in other revenues was partially
offset by a reduction in developmentfees of $10,000, a 3% reduction from
$313,000 in 1994, attributable to the Company's increased focus on
development and construction of its own residences and the reduction of fees
from the residences that were acquired as part of the Reorganization
Transaction.
Residence Operating Expenses. Residence operating expenses increased to
$1,510,000 in 1995 from $251,000 in 1994, a 502% increase, reflecting the
expenses associated with the operation of the residences previously described.
General and Administrative Expenses. General and administrative expenses
increased to $1,810,000 in 1995 from $1,162,000 in 1994, an increase of
$648,000 or 56%. The increase was primarily the result of additional payroll
and associated costs of approximately $557,000 relating to the expansion in
the number of management and support personnel to facilitate the Company's
growing development program. The remaining increase of $91,000 was
attributable to an increase in marketing, advertising costs and overall
increases in other general corporate expenses incurred to support the growth
in personnel.
Stock Compensation Expenses. Stock compensation expense increased to
$413,000 in 1995 from $0 in 1994. Such costs represent a one-time grant of
non-qualified stock options on October 26, 1995 to purchase 37,000 shares of
common stock at $0.10 per share to certain executive officers and key
employees (excluding Messrs. Buchanan and Vick). The options vested
immediately and will be exercisable in three 20% increments at the end of
each six-month period subsequent to October 26, 1995, with the remaining 40%
balance becoming exercisable on October 26, 1997.
Cost of Construction Services. Cost of construction services increased to
$1,069,000 in 1995 from $869,000 in 1994, a 23% increase. Such an increase
was attributable to an increase in such services provided to franchisees.
Building Rental. Building rental increased to $55,000 in 1995 from $0 in
1994. Such costs reflect the operating leases entered into for the Ponca
City residence in September 1995, and the Dodge City, Great Bend, McPherson
and Salina residences in December 1995.
Depreciation and Amortization. Depreciation and amortization increased to
$460,000 in 1995 from $88,000 in 1994, an increase of $372,000. The increase
was attributable to the residences acquired in the Reorganization Transaction
and the depreciation related to property and equipment acquired during 1995.
Equity in Net Loss from Investments in Unconsolidated Affiliates. Equity
in net loss from investments in unconsolidated affiliates decreased to
$278,000 in 1995, from $298,000 in 1994, a decrease of $20,000 or 7%. The
decrease was attributable to the residences opened in 1994 reaching
stabilized occupancy during 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 $204,000 in 1995, from
$7,000 in 1994, an increase of $197,000. The increase was attributable to
the investment of excess public offering proceeds in U.S. Treasury Securities.
Interest Expense. Interest expense increased to $375,000 in 1995, from
$103,000 in 1994, an increase of $272,000 or 264%. The increase was
attributable to the assumption of debt associated with the residences
acquired in the Reorganization Transaction and the cost of financing the
Ponca City, Bartlesville, Midwest City and Enid residences.
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Income Taxes. For 1995, the Company recorded a tax benefit of $75,000
compared to $0 in 1994. 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 bases required the Company to
established the necessary deferred tax liabilities for these temporary
differences. As such, the Company's deferred net tax liability position
allowed the Company to recognize a tax benefit for the pre-tax operating
losses generated in the period subsequent to the date of the Reorganization
Transaction. During 1995 and 1994, the pre-tax losses incurred by the
Company prior to the date of the Reorganization Transaction 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.
Loss before Extraordinary Item. Loss before extraordinary item increased
to $1,007,000 in 1995 from $494,000 in 1994, an increase of $513,000 or 104%.
The increase was primarily attributable to increases in operating expenses
resulting from the addition of overhead and the recognition of start-up
losses from the opening of additional residences.
Extraordinary Item. In 1995, the Company incurred an extraordinary pre-tax
loss of $1,923,000 attributable to (i) the issuance of 87,823 shares of
Common Stock and $500,000 paid in cash to HCRI as a termination fee in
connection with the termination of the Company's loan commitment, and (ii)
to the write-off of all unamortized financing costs incurred by the
Company pursuant to the terminated loan commitment.
Liquidity and Capital Resources
Working capital at December 31, 1996, was approximately $7,116,000, a
decrease of $2,102,000 from $9,218,000 at December 31, 1995. Net cash used
in operating activities totaled $201,000 which was primarily due to the
prerental costs and higher operating expenses during the stabilization period
associated with the development and opening of new residences. Net cash
used in investing activities was $28,036,000, resulting primarily from the
addition of $59,363,000 in property and equipment and offsetting proceeds of
$39,038,000 from sale/leaseback transactions during 1996. Net cash provided
from financing activities totaled $24,499,000 which was primarily the result
of paying off the debt associated with the residences that were sold during
the year and the net proceeds of approximately $33,400,000 received from
the issuance of the Debentures.
The Company has entered into sale/leaseback agreements with certain REITs
providing for up to $200,000,000 as a source of financing the development,
construction and, to a lesser extent, acquisitions of assisted living
residences. Under such agreements, the Company enters into a series of sale/
leaseback transactions, whereby the Company sells residences at negotiated
values and concurrently enters into a lease agreement for each residence.
The initial terms of the leases vary from 10 to 15 years and include
aggregate renewal options ranging from 15 to 40 years. The Company is
responsible for all operating costs, including repairs, property taxes, and
insurance. All of these lease arrangements provide the Company with a right
of first refusal if the REIT were to seek to sell the property. The annual
minimum lease payments are based upon a percentage of the negotiated sales
value of each Residence. Such percentages are typically equal to 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 the transaction plus
rates ranging from 3.25% to 3.75%. The minimum lease payments are adjusted
annually by a percentage multiplier that is contingent upon changes in the
Consumer Price Index. Through March 25, 1997, the Company had used
$78,000,000. These leases are being accounted for as operating leases.
As of December 31, 1996, the Company had invested excess cash balances in
U.S. Treasury Securities. Capital expenditures for 1997 are estimated to
total approximately $110,000,000 to $120,000,000, related primarily to the
development of additional residences, which will be financed primarily with
sale/leaseback transactions. The Company intends to satisfy future capital
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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
residences.
Subsequent Events
In February 1997, the Company formed a wholly owned subsidiary, Coventry
Corporation (Coventry), to enter into joint venture agreements with the
Company's development partners. Pursuant to the joint venture agreements,
Coventry will hold majority interests in various limited liability
corporations and limited partnerships formed to develop Sterling House
residences (the "J.V.'s"). The J.V.'s, are being entered into to facilitate
the Company's development strategy by forming strategic alliances with
regional real estate development partners which are anticipated to enable
the Company to develop and construct additional residences while reducing
the investment of, and associated risk to, the Company. The Company's
development partners will generally provide construction management
experience, access to existing relationships with local contractors,
suppliers and municipal authorities, knowledge of local and state building
codes and zoning laws and assistance with site location for new residences.
The Company, through Coventry, will assist in financing residences,
contribute operational and industry expertise and will have management
responsibility for the residences. The Company has both the option, at its
election, and an obligation, at the election of its J.V. partners, to acquire
the equity interests of the other partners at predetermined prices and times.
At March 25, 1997, Coventry held an interest in Austin Development, Limited
.On February 21, 1997, the Company transferred ownership of a site under
construction in Findlay, Ohio to Austin Development, Limited for $2,500,000,
evidenced by a promissory note for the same amount. Concurrently with this
transaction, Austin Development, Limited entered into a management
agreement and a license agreement with the Company.
In January 1997, the Company formed North Central Assisted Living, L.L.C.,
("NCAL") with Eby Development, a franchisee since 1992. NCAL will develop,
construct and manage Sterling House residences. The Company holds a
minority interest in NCAL.
Impact of Inflation
Since the Reorganization Transaction, the Company's principal source of
revenues is from resident rentals. The operations of the residences are
affected by rental rates which are dependent upon market conditions and the
competitive environment in the areas where the residences are located.
Compensation to employees is the principal cost element relative to the
operations of the residences. Although the Company has not historically
experienced any adverse effects of inflation on salaries or other operating
expenses, there can be no assurance that such trends will continue or that
should inflationary issues arise that the Company will be able to offset such
costs by increasing rental rates.
ITEM 8. Financial Statements and Supplementary Data
See the Consolidated Financial Statements listed in the accompanying Index
to Financial Statements on Page F-1 herein. Information required for
financial schedules under Regulation S-X is either not applicable or is
included in the financial statements or notes thereto.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
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ITEM 10. Directors and Executive Officers of Registrant
Information required by this Item 10 is incorporated herein by reference to
"Directors and Executive Officers of the Company," in the Company's Proxy
Statement.
ITEM 11. Executive Compensation
Information required by this Item 11 is incorporated herein by reference to
"Executive Compensation-Summary Compensation Table, Stock Option Grant Table,
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year- End Option
Values Table, Employment Arrangements, Compensation of Directors, 1995
Incentive Plan and Non-Plan Options" in the Company's Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item 12 is incorporated herein by reference to
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
Information required by this Item 13 is incorporated herein by reference to
"Certain Transactions" in the Company's Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
A) Documents Filed as Part of this Report
1) Financial Statements
See "Index to Financial Statements and Schedules" on Page F-1 of this Report
2) Exhibits
See Item 14C
B) Reports on Form 8-K
The Company filed no report on Form 8-K during the quarter ended December
31, 1996.
C) Exhibits
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STERLING HOUSE CORPORATION
Index to Exhibits
Exhibit No. Exhibit Description
- ------------------------------------------------------------------------------
2.1 Section 351 Agreement dated as of August 26, 1995, by and among the
Company and its related entities. Filed as Exhibit 2 in the Company's
Registration Statement on Form S-1 dated October 26, 1995, Registration
Number 33-96283 (the "Registration Statement").
2.2 Purchase agreement dated June 6, 1996, by and between Sterling House
Corporation and High Plains Senior Living, Inc. Filed as Exhibit 2.1 on
Form 8-K dated August 1, 1996.
3.1 Articles of Incorporation of the Company. Filed as Exhibit 3.1 to the
Registration Statement.
3.2 Bylaws of the Company. Filed as Exhibit 3.2 to the Registration Statement.
4.1 Specimen of Common Stock Certificate. Filed as Exhibit 4.1 to the
Registration Statement.
4.2 Form of Sterling House Corporation Grant of Incentive Stock Options.
Filed as Exhibit 4.2 to the Registration Statement.
4.3 Form of Sterling House Corporation Non-Qualified Stock Options
Agreement. Filed as Exhibit 4.3 to the Registration Statement.
4.4 Schedule of Employees Receiving Stock Options Grants. Filed as Exhibit
4.4 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 10-K").
4.5 Form of Sterling House Corporation Director's Stock Option Agreement.
Filed as Exhibit 4.5 to the 1995 10-K.
4.6 Schedule of Directors Receiving Stock Option Grants. Filed as Exhibit
4.6 to the 1995 10-K.
4.7 Form of Registration Rights Agreement, dated as of May 17, 1996, between
the Company and the initial purchasers of its 6.75% Convertible
Subordinated Debentures due 2006. Filed as Exhibit 4.9 to the Form S-3
dated November 1, 1996, Registration Number 333-15329 (the "Form S-3").
4.8 Form of 6.75% Convertible Subordinated Debenture due 2006. Filed as
Exhibit 4.10 to the Form S-3.
4.9 Indenture, dated as of May 23, 1996, between the Company and Fleet
National Bank, as Trustee, in respect of the Company's 6.75% Convertible
Subordinated Debentures due 2006. Filed as Exhibit 4.11 to the Form S-3.
10.1 Sterling House Corporation 1995 Stock Option Plan. Filed as Exhibit 10
.1 to the Registration Statement.
10.2 Franchise Agreement, dated November 1, 1995, by and between Sterling
House Corporation and Great Plains Assisted Living, L.L.C.-Omaha,
Nebraska. Filed as Exhibit 10.2 to the 1995 10-K.
10.3 Franchise Agreement, dated November 1, 1995, by and between Sterling
House Corporation and Colorado Springs Assisted Living, L.L.C. - 615
South Pointe Court, Colorado Springs, Colorado. Filed as Exhibit 10.3
to the 1995 10-K.
10.4 Trust Indenture dated July 23, 1993 by and between Sterling House of
Bethany, L.L.C., and Colonial Trust Company, Phoenix, Arizona for
serial bond in the amount of $950,000. Filed as Exhibit 10.5 to the
Registration Statement.
10.5 Trust Indenture, dated July 29, 1993, by and between Sterling House of
Wichita, L.P. and Colonial Trust Company, Phoenix, Arizona for serial
bonds in the amount of $950,000. Filed as Exhibit 10.6 to the
Registration Statement.
10.6 License Agreement by and between Sterling Holdings, Inc. and Sterling
House of Olathe, L.L.C. Filed as Exhibit 10.7 to the Registration
Statement.
10.7 Franchise Agreement, dated July 15, 1994, by and between Sterling House
Corporation and Capital Assisted Living, L.L.C. Filed as Exhibit 10.8
to the Registration Statement.
10.8 Franchise Agreement, dated November 1, 1995, by and between Sterling
House Corporation and Sterling House of Olathe II, L.L.C, Kansas.
Filed as Exhibit 10.8 to the 1995 10-K.
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10.9 Franchise Agreement, dated August 25, 1994, by and between Sterling
House Corporation and Great Plains Assisted Living, L.L.C. - Lenexa,
Kansas. Filed as Exhibit 10.10 to the Registration Statement.
10.10 Franchise Agreement, dated August 25, 1994, by and between Sterling
House Corporation and Great Plains Assisted Living, L.L.C. - Lawrence,
Kansas. Filed as Exhibit 10.11 to the Registration Statement.
10.11 Franchise Agreement, dated April 4, 1995, by and between Sterling
House Corporation and Great Plains Assisted Living, L.L.C. -Leawood,
Kansas. Filed as Exhibit 10.12 to the Registration Statement.
10.12 Termination of Franchise Agreement, dated March 26, 1996, by and
between Sterling House Corporation and Masters Associates, L.L.C.
Filed as Exhibit 10.12 to the 1995 10-K.
10.13 Termination of Management Agreement, dated March 22, 1996, by and
between Sterling House Corporation and Masters Associates, L.L.C.
Filed as Exhibit 10.13 to the 1995 10-K.
10.14 Termination of Franchise Agreement, dated March 26, 1996, by and
between Sterling House Corporation and Hays Assisted Living, L.L.C.
Filed as Exhibit 10.14 to the 1995 10-K.
10.15 Termination of Management Agreement, dated March 22, 1996, by and
between Sterling House Corporation and Hays Assisted Living, L.L.C.
Filed as Exhibit 10.15 to the 1995 10-K.
10.16 Termination of Franchise Agreement, dated March 26, 1996, by and
between Sterling House Corporation and Wellington Partners, L.L.C.
Filed as Exhibit 10.16 to the 1995 10-K.
10.17 Termination of Management Agreement, dated March 22, 1996, by and
between Sterling House Corporation and Wellington Partners, L.L.C.
Filed as Exhibit 10.17 to the 1995 10-K.
10.18 Management Agreement, dated September 23, 1994, by and between
Covenant Housing Corporation and Sterling Management Company, Inc.
Filed as Exhibit 10.19 to the Registration Statement.
10.19 Lease, dated May 1, 1993, by and between the City of Abilene, Kansas,
as Issuer and Sterling House of Abilene Limited Partnership, as
Tenant, for the issuance of Assisted Living Revenue Bonds. Filed as
Exhibit 10.20 to the Registration Statement.
10.20 Lease, dated June 1, 1993, by and between the City of Junction City,
Kansas, as Issuer and Sterling Group, L.L.C., as Tenant, for the
issuance of Assisted Living Revenue Bonds. Filed as Exhibit 10.22 to
the Registration Statement.
10.21 Lease, dated March 1, 1994, by and between the City of Arkansas City,
Kansas, as Issuer and Sterling Group, L.L.C., as Tenant, for the
issuance of Assisted Living Revenue Bonds. Filed as Exhibit 10.23 to
the Registration Statement.
10.22 Lease, dated December 1, 1993, by and between the City of Salina,
Kansas, as Issuer and Sterling Group, L.L.C., as Tenant, for the
issuance of Assisted Living Revenue Bonds. Filed as Exhibit 10.24 to
the Registration Statement.
10.23 Lease, dated August 1, 1993, by and between the City of Emporia,
Kansas, as Issuer and Sterling Group, L.L.C., as Tenant for the
issuance of Assisted Living Revenue Bonds. Filed as Exhibit 10.25 to
the Registration Statement.
10.24 Lease, dated May 1, 1994, by and between the City of Great Bend,
Kansas, as Issuer and Sterling Group, L.L.C., as Tenant, for the
issuance of Assisted Living Residence Revenue Bonds. Filed as
Exhibit 10.26 to the Registration Statement.
10.25 Lease, dated November 1, 1994, by and between the City of Dodge City,
Kansas, as Issuer and Sterling Group, L.L.C., as Tenant, for the
issuance of Assisted Living Residence Revenue Bonds. Filed as
Exhibit 10.27 to the Registration Statement.
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10.26 Lease, dated November 1, 1993, by and between the City of McPherson,
Kansas, as Issuer and Scotia, L.L.C., as Tenant, for the issuance of
Assisted Living Residence Revenue Bonds. Filed as Exhibit 10.28 to the
Registration Statement.
10.27 Commitment Letter, dated October 5, 1995, by and between LTC
Properties, Inc. and Sterling House Corporation. Filed as Exhibit
10.27 to the 1995 10-K.
10.28 Commitment Letter, dated June 9, 1994, by and between Health Care
REIT, Inc. and Corridor Properties, L.L.C. for the financing of
assisted living facilities. Filed as Exhibit 10.30 to the
Registration Statement.
10.29 Commitment Letter, dated August 29, 1995, by and between Health Care
REIT, Inc. and Corridor Properties, L.L.C. for the financing of
assisted living facilities. Filed as Exhibit 10.31 to the
Registration Statement.
10.30 Form of Lease by and between Sterling House Corporation and Health
Care REIT, Inc. Filed as Exhibit 10.30 to the 1995 10-K.
10.31 Form of Lease, by and between Assisted Living Properties, Inc. and
Meditrust of Kansas Inc. for residences located in Wichita, Derby,
Wellington and Hays, Kansas, and Bethany, Oklahoma. Filed as Exhibit
10.31 to the 1995 10-K.
10.32 Form of Lease Agreement, by and between Sterling House Corporation
and Coronado Corporation. Filed as Exhibit 10.32 to the 1995 10-K.
10.33 Schedule of executed Lease Agreements by and between Sterling House
Corporation and Coronado Corporation. Filed as Exhibit 10.33 to the
1995 10-K.
10.34 Schedule of executed lease agreements by and between Sterling House
Corporation and Health Care REIT, Inc. Filed as Exhibit 10.34 to the
1995 10-K.
10.35 Consulting Agreement, dated December 31, 1993, by and between Timothy
J. Buchanan and the Company. Filed as Exhibit 10.39 to the
Registration Statement.
10.36 Form of Employment Agreement between the Company and Timothy J.
Buchanan. Filed as Exhibit 10.40 to the Registration Statement.
10.37 Form of Employment Agreement between the Company and Steven L. Vick.
Filed as Exhibit 10.41 to the Registration Statement.
10.38 Form of Management Employment Agreement. Filed as Exhibit 10.42 to
the Registration Statement.
10.39 Schedule of persons executing Management Employment Agreements. Filed
as Exhibit 10.43 to the Registration Statement.
10.40 Form of Indemnity Agreement Among the Company, Timothy J. Buchanan and
Steven L. Vick. Filed as Exhibit 10.44 to the Registration Statement.
10.41 Form of Stock Pledge Agreement between the Company and Timothy J.
Buchanan. Filed as Exhibit 10.45 to the Registration Statement.
10.42 Form of Stock Pledge Agreement between the Company and Steven L. Vick.
Filed as Exhibit 10.46 to the Registration Statement.
10.43 Letter of Intent, dated November 21,1995, by and between Sterling
House Corporation and Meditrust. Filed as Exhibit 10.43 to the 1995
10-K.
10.44 Letter of Intent, dated November 21, 1995, by and between Sterling
House Corporation and Meditrust. Filed as Exhibit 10.44 to the 1995
10-K.
10.45 Amendment to Letters of Intent, dated January 29, 1996, by and between
Sterling House Corporation and Meditrust Mortgage Investments, Inc.
Filed as Exhibit 10.45 to the 1995 10-K.
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10.46 Franchise Agreement, dated September 21, 1995, by and between Sterling
House Corporation and Brooks Development Co., LLC. Filed as Exhibit
10.1 to the Form 10-Q for the Quarter ended March 31, 1996.
10.47 Amendment to Franchise Agreement, dated April 11, 1996, by and between
Sterling House Corporation and Brooks Development Co., LLC. Filed as
Exhibit 10.2 to the Form 10-Q for the Quarter ended March 31, 1996.
10.48 Letter of Agreement, dated February 3, 1996, by and between Sterling
House Corporation and Robert A. Brooks. Filed as Exhibit 10.3 to the
Form 10-Q for the Quarter ended March 31, 1996.
10.49 Letter of Intent dated April 3, 1996, by and between Sterling House
Corporation and Health Care REIT, Inc. Filed as Exhibit 10.4 to the
Form 10-Q for the Quarter ended March 31, 1996.
10.50 Franchise Agreement, dated July 16, 1996, by and between Sterling
House Corporation and Colorado Springs Assisted Living, LLC. Filed as
Exhibit 10.1 to the Form 10-Q dated June 30, 1996.
10.51 Form Amendment to Lease, by and between Sterling House Corporation and
Colorado Springs Assisted Living, LLC. Filed as Exhibit 10.2 to the
Form 10-Q dated June 30, 1996.
10.52 Form Amendment to Lease, by and between Assisted Living Properties,
Inc. and Meditrust of Kansas, Inc. Filed as Exhibit 10.3 to the Form
10-Q dated June 30, 1996.
10.53 Form Amendment to Lease, by and between Sterling House Corporation and
Kansas-LTC Corporation, formerly known as Coronado Corporation. Filed
as Exhibit 10.4 to the Form 10-Q dated June 30, 1996.
10.54 Schedule of executed amendments to lease, by and between Sterling
House Corporationand Kansas-LTC Corporation, formerly known as
Coronado Corporation. Filed as Exhibit 10.5 to the Form 10-Q dated
June 30, 1996.
10.55 Form of lease agreement, by and between Assisted Living Properties,
Inc. and Meditrust of Florida, Inc. Filed as Exhibit 10.6 to the
Form 10-Q dated June 30, 1996.
10.56 Schedule of executed lease agreements, by and between Assisted Living
Properties, Inc. and Meditrust of Florida, Inc. Filed as Exhibit 10.7
to the Form 10-Q dated June 30, 1996.
10.57 Form of second amendment to lease agreement, by and between Sterling
House Corporation and Health Care REIT, Inc. Filed as Exhibit 10.8 to
the Form 10-Q dated June 30, 1996.
10.58 Schedule of executed second amendment to lease agreement, by and
between Sterling House Corporation and Health Care REIT, Inc. Filed
as Exhibit 10.9 to the Form 10-Q dated June 30, 1996.
10.59 Form of Amendment to lease agreement, by and between Sterling House
Corporation and Health Care REIT, Inc. Filed as Exhibit 10.10 to the
Form 10-Q dated June 30, 1996.
10.60 Schedule of executed amendment of lease agreements, by and between
Sterling House Corporation and Health Care REIT, Inc. Filed as
Exhibit 10.11 to the Form 10-Q dated June 30, 1996.
10.61 Letter of Agreement, dated August 13, 1996, by and between Sterling
House Corporation and LTC Properties, Inc. Filed as Exhibit 10.1 to
the Form 10-Q dated September 30, 1996.
10.62 Letter of Agreement, dated September 25, 1996, by and between Sterling
House Corporation and Nationwide Health Properties, Inc. Filed as
Exhibit 10.2 to the Form 10-Q dated September 30, 1996.
30
<PAGE>
10.63 Amendment to letter of agreement, dated November 12, 1996, by and
between Sterling House Corporation and Nationwide Health Properties,
Inc. Filed as Exhibit 10.3 to Form 10-Q dated September 30, 1996.
10.64 Franchise agreement, dated February 3, 1997, by and between Sterling
House Corporation and Great Plains Assisted Living, LLC-Lincoln,
Nebraska.
10.65 Franchise agreement, dated February 19, 1997, by and between Sterling
House Corporation and Great Plains Assisted Living, LLC-8740 Caenea
Lake Road, Lenexa, Kansas.
10.66 Franchise agreement, dated February 19, 1997, by and between Sterling
House Corporation and Great Plains Assisted Living, LLC-Sioux City,
Iowa.
10.67 Schedule of executed lease agreements by and between Sterling House
Corporation and LTC Properties, Inc.
10.68 Form of lease agreement by and between Sterling House Corporation and
LTC Properties, Inc. dated December 27, 1996.
10.69 Schedule of executed lease agreements by and between Sterling House
Corporation and MLD Texas Trust.
10.70 Form of lease agreement by and between Sterling House Corporation and
MLD Texas Trust dated November 29, 1996.
10.71 Schedule of executed lease agreements by and between Sterling House
Corporation and NH Texas Properties, LP.
10.72 Form of lease agreement by and between Sterling House Corporation and
NH Texas Properties, Inc. dated January 14, 1997.
10.73 Schedule of executed lease agreements by and between Sterling House
Corporation and Nationwide Health Properties, Inc.
10.74 Form of lease agreement by and between Sterling House Corporation and
Nationwide Health Properties, Inc. dated January 14, 1997.
10.75 Joint Venture Agreement by and between Coventry Corporation and SDR
Development, Inc. dated February 21, 1997.
21 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not filed.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) the Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Sterling House Corporation
Registrant
March 31, 1997 By: /s/ Timothy J. Buchanan
Name: Timothy J. Buchanan
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities
and on the date indicted.
Signature Title Date
/s/ TIMOTHY J. BUCHANAN Chairman of the Board and March 31, 1997
Timothy J. Buchanan Chief Executive Officer
(Principal Executive Officer)
/s/ STEVEN L. VICK President and Director March 31, 1997
Steven L. Vick
/s/ R. GAIL KNOTT Chief Financial Officer March 31, 1997
R. Gail Knott Secretary and Treasurer
(Principal Financial Officer)
/s/ MICHAEL F. BUSHEE Director March 31, 1997
Michael F. Bushee
/s/ D. RAY COOK, M.D. Director March 31, 1997
D. Ray Cook, M.D.
/s/ DIANA M. LAING Director March 31, 1997
Diana M. Laing
/s/ RONALD L. MERCER Director March 31, 1997
Ronald L. Mercer
32
<PAGE>
Sterling House Corporation
Index to Financial Statements
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years Ended
December 31,1996, 1995 and 1994 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-9
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Sterling House Corporation
We have audited the accompanying consolidated balance sheets of Sterling
House Corporation as of December31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling
House Corporation at December31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG, LLP
February 10, 1997
Wichita, Kansas
F-2
<PAGE>
<TABLE>
<CAPTION>
Sterling House Corporation
Consolidated Balance Sheets
December 31,
1996 1995
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 11) $13,658,827 $17,396,355
Accounts receivable --- ---
Construction due from REIT 3,847,647 ---
Trade 417,820 157,616
Other 143,138 400,437
Prerental costs (net of amortization) 1,339,309 242,285
Deferred income taxes (Note 9) --- 138,238
Other 560,151 582,945
---------- ----------
Total current assets 19,966,892 18,917,876
Property and equipment (Notes 5, 6, and 8)
Land and improvements 1,384,013 3,714,642
Buildings 10,189,690 14,977,356
Leasehold improvements 40,997 26,636
Vehicles and equipment 626,715 393,599
Furniture, fixtures and office
equipment 1,311,823 1,273,480
Construction in progress 40,382,765 3,102,364
__________ __________
53,936,003 23,488,077
Less accumulated depreciation (829,966) (406,353)
---------- ----------
Net property and equipment 53,106,037 23,081,724
Other assets:
Bond financing cost 1,495,200 142,707
Restricted investments 1,663,784 ---
Other 1,586,505 950,757
__________ __________
Total other assets 4,745,489 1,093,464
__________ __________
Total assets $77,818,418 $43,093,064
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
Sterling House Corporation
Consolidated Balance Sheets
December 31,
1996 1995
____ ____
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings (Notes 5 and 11) $ --- $ 6,726,428
Accounts payable 9,786,224 1,832,100
Accrued expenses:
Salaries and benefits 924,279 255,316
Interest 107,912 284,620
Other 1,171,161 133,584
Deferred income taxes (Note 9) 236,894 ---
Deferred rent and refundable deposits 408,307 189,509
Current maturities of long-term debt 215,623 277,966
__________ ________
Total current liabilities 12,850,400 9,699,523
Long-term debt (Notes 8 and 11) 39,589,497 6,561,808
Deferred income taxes (Note 9) 423,177 1,214,570
Accrued stock option compensation(Note 12) 387,419 412,550
Deferred revenue and other 57,977 ---
Commitments (Note 14) --- ---
Stockholders' equity (Notes 8, 10 and 12)
Preferred stock; no par value; 20,000,000 shares
authorized, none issued and outstanding --- ---
Common stock; no par value; 75,000,000 shares
authorized, 5,038,836 shares issued and outstanding
(5,035,000 in 1995) 28,216,042 28,184,228
Accumulated deficit (3,706,094) (2,979,615)
__________ __________
Total stockholders' equity 24,509,948 25,204,613
Total liabilities and stockholders'
equity $77,818,418 $43,093,064
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
Sterling House Corporation
Consolidated Statements of Operations
Year Ended December 31,
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Revenue:
Residence rental $15,575,866 $2,296,994 $360,943
Development fees:
Affiliates (Note 13) --- 302,871 188,370
Other --- --- 125,000
Initial franchise and royalty fees:
Affiliates (Note 13) 54,606 168,880 152,019
Other 126,523 122,083 83,643
Management and service fees:
Affiliates (Note 13) --- 345,320 232,460
Other 114,527 144,363 73,416
Construction services:
Affiliates (Note 13) --- 803,302 602,052
Other 166,720 413,822 454,180
__________ _________ _________
16,038,242 4,597,635 2,272,083
Operating expenses:
Residence operating expenses 10,267,289 1,509,599 251,484
General and administrative 3,147,191 1,810,186 1,162,149
Stock compensation expense (Note 12) --- 412,550 ---
Cost of construction services 62,976 1,069,270 869,482
Building rental 2,981,529 55,147 ---
Depreciation 597,715 290,761 88,190
Amortization 630,916 169,313 ---
Equity in net loss from investments in
unconsolidated affilates --- 278,636 298,327
__________ _________ _________
Total Operating expenses 17,687,616 5,595,462 2,669,632
__________ _________ _________
Loss from operations (1,649,374) (997,827) (397,549)
Other income (expenses):
Interest income 1,042,628 204,476 7,072
Interest expense (net of interest
capitalized in 1996, 1995 and 1994
of $1,435,376, $344,982 and $33,017) (534,016) (375,165) (102,794)
Minority interest share of (income)
loss of subsidiaries --- 47,757 (1,074)
Other 4,920 38,833 ---
__________ _________ _________
513,532 (84,099) (96,796)
__________ _________ _________
Loss before income taxes and
extraordinary item (1,135,842) 1,081,926) (494,345)
Benefit for income taxes (Note 9) 409,363 74,512 ---
__________ __________ _________
Loss before extraordinary item (726,479) (1,007,414) (494,345)
__________ __________ _________
Extraordinary item:
Loss from early retirement of financing
agreements, net of tax benefit of $747,098
(Note 7) --- (1,175,933) ---
--------- ----------- ----------
Net loss $(726,479) $(2,183,347) $(494,345)
========== ========== =========
Net loss per common share:
Loss before extraordinary item $(.14) $(.36) $(.22)
Extraordinary item --- (.42) ---
--------- --------- ---------
Net loss $(.14) $(.78) $(.22)
========== ========== =========
Weighted average number of common shares
outstanding 5,036,779 2,786,868 2,281,416
</TABLE>
See accompanying notes.
F-5
<PAGE>
Sterling House Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Common Stock Accumulated
Stock Number Amount Deficit Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993
$ --- 2,281,416 $ 2,000 $(301,923) $(299,923)
Net loss --- --- --- (494,345) (494,345)
-------------------------------------------------
Balance at December 31, 1994
--- 2,281,416 2,000 (796,268) (794,268)
Shares issued-initial public
offering (Note 1) --- 2,185,000 21,785,649 --- 21,785,649
Shares issued-acquisition of
assisted living facilities
(Note 3) --- 480,761 5,408,570 --- 5,408,570
Shares issued-termination fee
(Note 7) --- 87,823 988,009 --- 988,009
Net loss --- --- --- (2,183,347) (2,183,347)
-----------------------------------------------------
Balance at December 31, 1995
--- 5,035,000 28,184,228 (2,979,615) 25,204,613
Shares issued-1995 options
exercised (Note 12) --- 3,836 43,155 --- 43,155
Tax effect of options
exercised --- --- (11,341) --- (11,341)
Net loss --- --- --- (726,479) (726,479)
-----------------------------------------------------
Balance at December 31, 1996
$ --- 5,038,836 $28,216,042 $(3,706,094)$24,509,948
========================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Sterling House Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
______________________________________
<S> <C> <C> <C>
Operating activities
Net loss $ (726,479) $ (2,183,347) $ (494,345)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,228,631 460,074 88,190
Amortized rent and interest expense 156,891 --- ---
Deferred income taxes (409,363) (74,512) 7,292
Equity in net loss from investments in
unconsolidated affiliates --- 278,636 298,327
Minority interest in loss of
subsidiaries --- (47,757) 1,074
Loss on early retirement of financing
agreement, excluding cash paid --- 675,933 ---
Stock option compensation --- 412,550 ---
Net change in operating assets and liabilities:
Accounts receivable (2,905) 154,835 264,336
Earnings in excess of billings on
uncompleted contracts --- 143,605 (102,759)
Deferred rent and refundable deposits 190,798 42,381 (6,303)
Prerental costs (1,727,741) (266,456) (3,377)
Accrued expenses 745,843 (138,841) 75,651
Accounts payable 342,863 710,757 (157,810)
Other 934 (100,835) 230,299
_____________________________________
Net cash (used)/provided by
operating activities (200,528) 67,023 200,575
Investing activities
Purchases of property and equipment (59,362,598) (11,998,796) (880,204)
Construction receivable due form REIT (3,847,647) --- ---
Proceeds from sale/leaseback
transactions 39,037,567 8,117,576 ---
Proceeds from sale of property and
equipment --- 130,103 ---
Advances to affiliates --- 127,230 (127,230)
Acquisitions of Assisted living facilities,
net of cash acquired
(Note 3) (2,200,000) (253,053) ---
Net cash acquired in acquisition of
assisted living facilities --- 92,455 ---
Purchases of restricted investments (1,663,784) --- ---
Other assets --- 9,909 (3,893)
______________________________________
Net cash used in investing activities $(28,036,462) $(3,774,576)$(1,011,327)
</TABLE>
F-7
<PAGE>
Sterling House Corporation
Consolidated Statements of Cash Flows
Year Ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Financing activities
Net change in notes payable $ --- $ (88,200) $ 48,200
Proceeds from short-term borrowings 5,749,008 7,700,130 552,906
Payments on short-term borrowings (12,475,436) (1,574,051) ---
Payments on long-term debt (2,007,500) (7,445,294) (177,384)
Proceeds from issuance of
convertible bonds payable 35,000,000 --- ---
Expenditures for financing costs (1,602,000) --- ---
Payments on notes payable to
stockholders --- (85,975) (5,476)
Proceeds from initial public offering --- 21,785,649 ---
Proceeds from issuance of long-term debt --- 283,583 276,483
Contributed capital from minority members --- --- 670,000
Other (164,610) (57,023) (96,771)
-----------------------------------
Net cash provided by financing activities 24,499,462 20,518,819 1,267,958
-----------------------------------
Net (decrease)/increase in cash (3,737,528) 16,811,266 457,206
Cash at beginning of period 17,396,355 585,089 127,883
----------------------------------
Cash at end of period $13,658,827 $17,396,355 $585,089
===================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $2,039,297 $449,493 $135,335
Cash paid (received) during the year
for income taxes --- (13,147) 14,852
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During 1994, the Company purchased the outstanding stock of BCI Construction,
Inc. from a stockholder in exchange for the Company's note payable of
$300,000. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value allocated to assets $1,249,709
Issuance of note payable 300,000
----------
Liabilities assumed $ 949,709
==========
During 1994, the Company purchased $91,006 of furniture, fixtures and office
equipment through capital leases.
During 1995, the Company acquired all the assets of Sterling House of
Wichita, L.P., Sterling House of Bethany, L.L.C., Sterling Group, L.L.C., and
Scotia, L.L.C. and acquired the minority interest remaining in Corridor
Properties, Inc. and Sterling House of Abilene, L.P. in exchange for 480,761
shares of the Company's common stock and the assumption by the Company of all
the liabilities of each entity (see Note 1-Background). In conjunction with
such acquisition, liabilities were assumed as follows:
Fair value allocated to assets $18,543,059
Elimination of intercompany accounts 1,513,840
Issuance of common stock (5,408,570)
-----------
Liabilities assumed $14,648,329
===========
See accompanying notes.
F-8
<PAGE>
1. Background
Sterling House Corporation (the "Company"), was organized as a Kansas
corporation in April 1991 for the purpose of developing, operating,
constructing, managing, franchising and owning Sterling House assisted
living facilities. On October26, 1995, the Company completed an initial
public offering ("IPO") in which it sold 2,185,000 shares of its common stock
and realized net proceeds of $21,785,649. Prior to the effective date of the
IPO, the Company's consolidated financial statements included the accounts
struction, Inc. ("BCI"), formerly Buchanan Homes, Inc., SH Franchise, Inc.
("SHFI"), and Sterling Partners, L.L.C. ("Partners"), and its majority owned
indirect subsidiary, Corridor Properties, L.L.C. ("Corridor"). Corridor was a
60% majority owned subsidiary of the Company. In addition, prior to the IPO,
the Company had investment interests in certain affiliated limited
partnerships and limited liability companies that developed and operated
Sterling House assisted living facilities. Ownership of such investments
ranged from 1% to 40% and the Company accounted for such investments using
the equity method of accounting.
Concurrently with the IPO, the Company merged SHFI, SMC and Partners into the
Company and completed a reorganization transaction which included a series of
transactions involving the Company's common stock (the "Reorganization
Transaction") and enabled the Company to acquire all the remaining interests
in certain affiliates that operated Sterling House assisted living
facilities as follows:
Company's Company's Company's
Ownership Ownership Shares
Interest at Interest After Issued in
Entity October 26, 1995 the Exchange the Exchange
- ------------------------------------------------------------------------------
Sterling House of Wichita, L.P. 25.0% 100.0% 53,333
Sterling House of Bethany, L.L.C. 20.0% 100.0% 53,333
Sterling Group, L.L.C. 40.0% 100.0% 192,000
Scotia, L.L.C. 28.3% 100.0% 32,889
Sterling House of Abilene, L.P. 62.3% 100.0% 30,095
Sterling House of Augusta, Inc. 0.0% 100.0% 42,845
<PAGE>
Corridor Properties, L.L.P. 60.0% 100.0% 119,111
-------
523,606
=======
F-9
<PAGE>
1. Background (continued)
Line of Business
The Company is involved in developing, operating, constructing, managing,
franchising and owning Sterling House assisted living facilities (the
Residences). The Company also enters into general contractor arrangements for
the construction of residential properties. The Company's principal sources
of revenues in 1996 are resident rentals (Note 4). For years prior to 1996,
the Company's principal sources of revenues were development, management,
royalty and franchise fees, and construction revenues from both affiliates
and nonaffiliates which developed and operates Residences.
At December 31, 1996, 1995 and 1994, the Company had seven, nine and fourteen
operating franchised Residences, respectively, one of which opened in 1996
and 6 of which opened in 1995. During 1995 and in connection with the
Exchange, the Company acquired 11 franchised Residences. In addition, the
Company acquired an additional three franchised residences in 1996 (Note 3).
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiary and/or former subsidiaries prior to the IPO after elimination
of all material intercompany accruals and transactions. The minority
interests, which were acquired in the Exchange, represents the minority
members' and partners' proportionate interest in Corridor and Abilene prior
to the Reorganization Transaction.
Cash
For purposes of the consolidated statements of cash flows, the Company
considers cash to include currency on hand, demand deposits and short-term
investments with maturities of three months or less.
F-10
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
The Company's financial instruments that were exposed to concentrations of
credit risk consist primarily of cash. The Company places its funds into high
credit quality financial institutions and, at times, such funds may be in
excess of the Federal Depository insurance limit.
Prerental Costs
Costs incurred in connection with preopening marketing, employee recruitment
and training, and other start-up expenditures necessary to prepare the
Residences for rent are capitalized. These prerental costs are amortized over
12 months beginning when the Residences are available for occupancy.
Accumulated amortization on such prerental costs at December 31, 1996 and
1995 was $763,536 and $132,819, respectively.
Property and Equipment
Property assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Useful lives are as follows:
Land improvements 15 years
Buildings 40 years
Leasehold improvements 5-13 years
Vehicles and equipment 5 years
Furniture, fixtures and office equipment 3-10 years
Property and equipment include interest costs and property taxes incurred
during the construction period, as well as development fees and other costs
directly related to the development and construction of the Residences.
Maintenance and repairs are charged to income as incurred and significant
renewals and betterments are capitalized. Deductions are made for retirements
resulting from the renewals or betterments.
Intangible Assets
Intangible assets include costs incurred in connection with obtaining long-
term financing. Such costs have been capitalized and are being amortized
over the term of the related financing using the effective interest method.
Accumulated amortization at December 31, 1996 and 1995 was $106,800 and
$160,916, respectively.
Initial Franchise and Royalty Fee Revenue
The Company is the franchisor of the Sterling House concept. Under the
franchise agreement (the "Agreement"), the Company provides a Franchisee
with the right to use the formats, trade name and methods developed by the
Company. Each Agreement has an initial term ranging from 10 to 15 years and
can be extended for up to three additional five-year periods provided that
the Franchisee satisfies certain conditions. The Agreement provides for the
Company to receive an initial franchise fee ranging from $25,000 to $35,000
and a continuing monthly royalty fee in the amount of 3% of each Residence's
gross receipts. The Company may also require the Franchisee to contribute a
monthly amount equal to no more than 1% of each Residences' gross receipts
for advertising. Initial franchise fee revenue consists of amounts earned by
the Company under franchise agreements. The Company records initial franchise
fee revenue when all material services or conditions relating to the
franchise agreement have been substantially performed or satisfied by the
Company. Franchise royalty fees from the Residences are recognized as earned
on a monthly basis.
Construction Services
The Company acts in the capacity of general contractor for the construction of
assisted living facilities. In its capacity, the Company's primary function is
the supervision of subcontractors who actually perform the construction
activities. The Company has no investments in construction equipment and has
no employees who perform construction activities other than construction
supervision. The Company typically receives a fee for its time incurred in
the direct supervision of the project plus a specified mark-up based upon
total construction cost. The Company accounts for its construction activities
by recognizing, as revenue only, the construction fee amounts; thus, the
revenues and costs associated with the subcontractor activities are excluded
from the accompanying consolidated statement of operations. The Company
believes that such presentation most accurately depicts the nature of its
opening activities.
F-11
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Earned fees on construction contracts are recognized for financial reporting
purposes on the percentage of completion method. Revenue is recorded and
profit is recognized on each contract principally based upon the total
construction costs incurred. Each contract normally contains a maximum
contract price to be paid by the customer. Provisions for anticipated
losses on all such contracts, if any, are made currently as the amount of
loss is determinable.
Income taxes
Income taxes are provided using the liability method in accordance with State-
ment of Financial Accounting Standars Board No. 109, Accounting for Income
Taxes.
Net Loss Per Common Share
Net loss per common share has been computed by dividing net loss by the
weighted average number of common shares outstanding during each period. The
weighted average number of common shares does not include any common stock
equivalents because, (l) stock options outstanding ae not materially dilutive
and (2) common stock equivalents associated with th convertible debenture
bonds would be anti-dilutive.
Accounting for Stock Based Compensation
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-
Based Compensation, which prescribed accounting and reporting standards for
all stock-based compensation plans, including employee stock options,
restricted stock, and stock appreciation rights. Statement No. 123 did not
require companies to change their existing accounting for employee stock
options under APB Opinion No. 25, Accounting for Stock Issued to Employees,
but instead encouraged companies to recognize expense for stock-base
esent accounting rules under APB 25 are required to provide pro forma
disclosures of what net income and earnings per share would have been had
the new fair value method been used. The Company has elected to continue to
apply the existing accounting rules contained in APB 25 and the required pro
forma disclosures under the new method have been presented (see Note 12).
F-13
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Marketing and Promotional Expense
Marketing and promotion costs incurred prior to the opening of the Residences
are capitalized as prerental costs. All marketing and promotion costs
incurred subsequent to opening the Residences are expensed as incurred. The
total amount of marketing and promotion expense capitalized as prerental
costs during 1996 was $ 376,887 and the total amount of marketing and
promotion expense incurred during the years ended December 31, 1996, 1995,
and 1994, was $156,827, $48,923, and $90,148, respectively.
Restricted Investments
Restricted investments represent United States Treasury obligations and
certificates of deposit which mature at various times during 1998. Such
investments are required by certain real estate investment trusts (the
"REITs") as collateral for leased residences. Management determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. Debt securities
are classified as held-to-maturity as the Company has the positive intent
and ability to hold the securities to maturity. Interest received on debt
securities is included in income at the time it is earned. Held-to-maturity
debt securities are stated at amortized cost, which approximates fair value.
Accounts Receivable
Construction due from REIT's represents receivables from REITs for
construction draws on residences that are being constructed by the Company
pursuant to certain operating lease agreements between the Company and
certain REITs. These costs are reimbursed to the Company by the REITs
throughout the construction phase of the residence, which is generally five
to eight months. Trade receivables include residence billings, franchise
fees, franchisee construction receivables, and other fee receivables.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-14
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Boad issued FAS 121, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. FAS 121 also addresses the accounting for long-
lived assets expected to be disposed of. The Company adopted FAS 121 in the
first quarter of 1996. The effect of the adoption of FAS 121 was not material
to the Company's financial position.
Reclassifications
Certain reclassifications have been made in the 1995 financial statements to
conform with the 1996 financial statement format.
3. Acquisitions of Assisted Living Facilities
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 residences located in Wichita, Kansas and Bethany, Oklahoma.
The total aggregate amount financed with Meditrust for the five residences
was approximately $7,500,000. 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. The lease terms for these agreements are similar to
those described in Note 6. The annual lease expense to be incurred by the
Company under the terms of the agreements will total approximately $952,000.
In August 1996, the Company purchased, from High Plains Senior Living, Inc.
("HPSLI"), the land, building, and other fixed assets of Woodland Terrace, a
45 unit retirement and assisted living residence located in Liberal, Kansas.
The total purchase price was approximately $2,200,000 and was paid in cash.
The acquisition was accounted for under the purchase method of accounting in
accordance with APB No. 16 and, accordingly, the results of operations for
Woodlawn Terrace have been included in the Company's consolidated financial
statements subsequent to the acquisition date. The acquired assets and
liabilities assumed have been recorded at their estimated fair values at the
F-15
<PAGE>
date of acquisition and are summarized as follows:
Property and equipment $2,233,000
Other current liabilities (33,000)
----------
$2,200,000
==========
During 1995, the Company entered into Exchange Agreements (the "Agreements")
with certain affiliates described in Note 1. Pursuant to the Agreements,
each of the affiliates agreed to exchange all of their assets for a total of
523,606 shares of the Company's common stock and the assumption by the
Company of all the liabilities and obligations of each affiliate. The
Company accounted for the purchase of the affiliates (excluding Sterling
House of Augusta, Inc.) using the purchase method of accounting in accordance
with APB No. 16 and the results of the affiliates' operations have been
included in the Company's consolidated financial statements subsequent to
the Exchange date. The acquired assets and liabilities assumed have been
recorded at their estimated fair values at the Exchange date and are
summarized as follows:
Cash $ 92,455
Accounts receivable 17,873
Other current assets 702,317
Property and equipment, net 17,239,368
Other assets 491,046
----------
18,543,059
Less assumed liabilities:
Accounts payable 107,109
Other current liabilities 665,138
Deferred tax liabilities 1,897,942
Long-term debt 11,978,140
----------
14,648,329
----------
Net assets acquired (a) $ 3,894,730
==========
F-16
<PAGE>
3. Acquisitions of Assisted Living Facilities (continued)
(a) Net assets acquired include all the assets acquired and the liabilities
assumed of Sterling House of Wichita, L.P., Sterling House of Bethany,
L.L.C., Sterling Group, L.L.C., and Scotia, L.L.C. and the step-up in
accounting basis attributable to the purchase of minority interest in
Sterling House of Abilene, L.P. (Abilene, L.P.) (see Note 4) and Corridor
Properties, L.L.C. of $419,500 and $925,762, respectively. Both Abilene,
L.P. and Corridor Properties, L.L.C. were majority owned subsidiaries
previously consolidated in the Company's consolidated financial statements.
Accordingly, the results of their operations have been included in the
Company's consolidated statement of operations for the whole year or with
respect to Abilene since May 31, 1995.
Sterling House of Augusta, Inc. ("Augusta") was under the common
control of certain controlling shareholders of the Company and, accordingly,
its assets and liabilities were recorded at historical cost in a manner
similar to that of a pooling of interest and the accompanying financial
statements were restated in the year of acquisition.
The following pro forma information presents the combined results of
operations of the Company and the franchised residences acquired through
the Exchange, the Meditrust transactions and the residence acquired from
HPSLI as though the acquisitions occurred at the beginning of the period
prior to each of the individual the acquisition dates. These pro forma
amounts represent the historical operating results of the acquired
residences combined with those of the Company with appropriate adjustments
which give effect to interest expense, depreciation and amortization, lease
expense, income tax benefits, and elimination of intercompany transactions.
For the year ended December 31,
1996 1995 1994
---- ---- ----
Revenues $16,642,956 $8,320,602 $3,482,000
Net loss before extra
ordinary item (844,243) (1,597,247) (748,000)
Net loss (844,243) (2,773,180) (748,000)
Net loss before extra ordinary
item per common share $ (0.17) $ (0.50) $ (0.27)
Net loss per common share $ (0.17) $ (0.87) $ (0.27)
Weighted average number of shares
of common stock outstanding 5,036,779 3,173,153 2,761,606
F-17
<PAGE>
3. Acquisitions of Assisted Living Facilities (continued)
The pro forma adjustments are based upon available information and
assumptions that management believes are reasonable under the circumstances.
The pro forma consolidated results do not purport to be indicative of the
actual financial position or operating results which would have occurred had
such transactions been consummated on the dates indicated. In addition, the
pro forma information is not intended to be indicative of future results of
operations.
4. Investments in Unconsolidated Affiliates
Prior to the Reorganization Transaction, the Company's investments in
unconsolidated entities reflected the Company's investment in affiliated
entities which own and operate assisted living facilities franchised under
the Sterling House concept. The investee entities generally operated as
limited liability companies or limited partnerships. The Company's
investments in such entities prior to the Exchange are summarized as follows:
Affiliated Entity Ownership Percentage
- ---------------------------------------------------------
Sterling House of Wichita, L.P. 25.00%
Sterling House of Bethany, L.L.C. 20.00%
Sterling Group, L.L.C. 40.00%
Scotia, L.L.C. 28.31%
Sterling House of Abilene, L.P. 62.00% (a)
In connection with the Reorganization Transaction, the Company acquired the
remaining interest in the affiliated entities and, accordingly, the assets,
liabilities and operations of such entities for the period subsequent to the
Exchange date, have been included in the Company's consolidated financial
statements for the year ended December31, 1995. Prior to such date, the
Company accounted for these investments using the equity method of
accounting. Such method was used by the Company because it either owned
greater than a 20% interest in the invested entity or it had the approved
responsibility from the voting members of the entity to exercise significant
influence over the operating and financial policies of such entity. Under
this method, the net income or loss of the investee was recognized as income
or loss in the Company's statement of operations and added to or deducted
from the investment account, and distributions received from the affiliate
were treated as a reduction of the investment account.
F-18
<PAGE>
4. Investments in Unconsolidated Affiliates (continued)
Combined condensed statements of operations for the unconsolidated affiliated
entities accounted for under the equity method of accounting described above
are as follows:
Period from
January 1, 1995 Year Ended
Statement of through October 26, December 31,
Operations 1995 1994
- ----------------------------------------------------------------
Revenues $3,439,413 $1,940,774
Operating expenses 3,309,212 2,287,470
---------- ----------
Operating income (loss) 130,201 (346,696)
Other expense (principally
interest) 740,485 461,366
---------- ---------
Net loss $ (610,284) $ (808,062)
=========== ===========
(a) Effective May 31, 1995, the Company increased its ownership in Sterling
House of Abilene, L.P. from 1% to approximately 62% by purchasing partnership
interests from existing partners. The aggregate purchase price was
approximately $311,600 and the Company financed the purchase through bank
borrowings. The transaction was accounted for as a purchase and the results
of operations of Abilene, L.P. are consolidated in the Company's operating
results from the date of acquisition. Abilene, L.P.'s assets and liabilities
are included in the Company's consolidated balance sheet at December 31, 1995.
The pro forma impact on the results of operations of the Company as if this
transaction occurred on January 1, 1994, are included in the pro forma income
amounts at Note 3.
5. Short-Term Borrowings
At December31, 1995, short-term borrowings consisted of construction loans
pursuant to the sale/leaseback agreements described in Note 6. The loans
permit borrowings up to $1,539,000 per Residence and interest is payable
monthly during the construction period, as defined, at a rate equal to the
National City Bank's prime rate plus 3.5%, and are secured by all tangible
assets of the Residence. As each Residence was completed, the amounts
borrowed during the construction period were retired with proceeds received
from the sale/leaseback transactions.
F-19
<PAGE>
6. Leasing Arrangements
The Company has entered into sale/leaseback agreements with certain REITs as
a primary source of financing the development, construction and, to a lesser
extent, acquisitions of assisted living residences. Under such agreements,
the Company may enter into a series of sale/leaseback transactions whereby
each new Residence is sold at its negotiated value and the Company will enter
into a lease agreement for such Residence. The initial terms of the leases
vary from 10 to 15 years and include aggregate renewal options ranging from
15 to 40 years. The Company is responsible for all operating costs, including
repairs, property taxes, and insurance. All of these lease arrangements pro-
vide the Company with a right of first refusal if the REIT were to seek to
sell the property. The annual minimum lease payments are based upon a
percentage of the negotiated sales value of each Residence. Such percentages
are generally equal to the yield for the ten-year United State Treasury Note
plus rates ranging from 3.25% to 3.75%. The minimum lease payments are
adjusted annually by a percentage multiplier that is contigent upon changes
in the Consumer Price Index. The Residences sold in the sale/leaseback
transactions are sold for an amount equal to or less than their fair market
value. The leases are accounted for as operating leases with any applicable
gain or loss realized in the initial sales transaction being deferred and
amortized into income in proportion to rental expense over the initial term
of the lease.
In addition to leased Residences, the Company leases certain office space
and equipment under noncancelable operating leases from nonaffiliates that
expire at various times through 2009. Rental expense on all such operating
leases, including Residences, for the years ended December 31, 1996, 1995
and 1994, was $3,056,752, $92,727 and $13,215, respectively.
Future minimum lease payments for the next five years and thereafter under
noncancellable operating leases with initial terms of one year or more in
effect at December 31, 1996, are as follows:
Operating Leases
Fiscal Year Residence Leases Other Leases
- ----------- ---------------- ------------
1997 $ 5,523,071 $ 75,504
1998 5,523,071 75,504
1999 5,523,071 73,188
2000 5,523,071 42,630
2001 5,523,071 ---
Thereafter 29,509,559 ---
----------- -------
Total minimum lease payments $57,124,914 $266,826
=========== ========
F-20
<PAGE>
7. Extraordinary Loss
During 1995, upon the completion of the IPO, the Company terminated a certain
loan commitment agreement with a REIT and paid an aggregate termination fee
of $1,488,000, of which $500,000 was paid in cash and $988,000 by delivery of
87,823 shares of the Company's common stock. The Company incurred an
extraordinary pretax loss of $1,923,031 ($1,175,933 net of income taxes),
which represents the termination cost incurred by the Company related to the
early extinguishment of the loan commitment and the write-off of all
unamortized financing costs as of the IPO date which were incurred by the
Company pursuant to the terminated loan commitment.
8. Long-term Debt
Long-term debt as of December 31, 1996 and 1995 is as follows:
1996 1995
---- ----
Serial and term revenue bonds
maturing serially from 1995 through
2013, interest accrues at rates
ranging from 4.0% to 9.5% with
overall effective rates ranging
from 7.2% to 9.2%, secured by
substantially all assets of
the applicable Residences. (a) $ 4,710,000 $6,717,500
Convertible subordinated
debenture bonds due June 30,
2006, callable by the Company
anytime on or after July 15,
1999, convertible into the
Company's common stock at $22.42
per share (equal to approximately
1,561,106 shares). (b) 35,000,000 ---
Other 95,120 122,274
---------- --------
39,805,120 6,839,774
Less current maturities 215,623 277,966
---------- ---------
$39,589,497 $6,561,808
=========== ==========
(a) Certain of these bonds have been issued in compliance with certain
federal regulations to provide tax-exempt interest to the bond holders.
These regulations require that the Company comply with renting a defined
percentage of the rental units of each Residence to certain qualified
tenants. Qualified tenants are determined based upon their income and the
median family income adjusted for the family size for the area in which the
Residences are located.
F-21
<PAGE>
8. Long-term Debt (continued)
Aggregate annual maturities of long-term debt are $215,600, $190,000,
$205,000, $220,000 and $235,000 for the years through 2001, respectively.
(b) The convertible subordinated debenture bonds are callable at a premium
after July 15, 1999, at the following redemption prices (expressed as a
percentage of principal amount):
Year Redemption Prices
---- -----------------
1999 102%
2000 101%
2001 and thereafter 100%
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The tax effects of
temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities are presented below:
December 31,
1996 1995
-------------------------
Deferred tax assets:
Net operating loss carry forwards $ 468,873 $ 447,901
Accrued compensation 150,512 161,713
Other 88,343 ---
--------- ---------
Total deferred tax assets 707,728 609,614
Deferred tax liabilities:
Property and equipment 896,183 1,662,471
Start-up costs 471,616 23,475
---------- ---------
Total gross deferred tax liabilities 1,367,799 1,685,946
---------- ---------
Net deferred tax liabilities $ (660,071) $(1,076,332)
=========== ============
F-22
<PAGE>
9. Income Taxes (continued)
Significant components of the (benefit) provision for income taxes are as
follows:
Year Ended December 31,
1996 1995 1994
------------------------
Current:
Federal $ --- $ --- $(6,571)
State --- --- (721)
---------- ------- ------
Total current --- --- (7,292)
Deferred:
Federal (360,785) (65,881) 6,358
State (48,578) (8,631) 934
---------- -------- -----
Total deferred (409,363) (74,512) 7,292
---------- -------- -----
$(409,363) $(74,512) $ ---
========== ========= =======
The effective tax rate on income before income taxes varies from the
statutory federal income tax rate as follows:
Year Ended December 31,
1996 1995 1994
--------------------------
Statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net (4.9 ) (4.8) (5.0)
Valuation allowance --- 30.3 36.4
Other 2.8 1.6 2.6
---------------------------
(36.1)% (6.9)% 0.0%
===========================
At December 31, 1996, the Company had net operating loss carryforwards for
income tax purposes of aproximately $1,200,000 which expires through 2011.
During 1994, the valuation allowance was increased by approximately $175,746,
because the Company was uncertain that such deferred tax assets in excess of
the applicable reversing deferred tax liabilities would be realized in future
years. During 1995, the valuation allowance was increased by approximately
$328,000 to reserve for the tax benefit of losses accumulated prior to the
Exchange. In connection with the Exchange, the valuation allowance was
subsequently reduced to zero and the related benefit was recorded as a
reduction to the purchase price in accordance with SFASNo.109.
F-23
<PAGE>
10. Preferred Stock
The Company has authorized 20,000,000 shares of preferred stock with no par
value. All preference rights, powers, limitations or restrictions
attributable to such preferred stock will be specified by the Board of
Directors.
11. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
Restricted Investments - Resticted investments represent Treasury bills and
certificates of deposit held by the Company as collateral for letters of
credit. The carrying amount reported in the balance sheet for restricted
investments approximates their fair value.
Short-Term Borrowings, Bonds Payable and Convertible Bond Payable The
carrying amounts of the Company's borrowings under its short-term debt
agreements approximate their fair value. The fair values of the Company's
long-term debt are estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
at December31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Amount Fair Value Carrying Amount Fair Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $13,658,827 $13,658,827 $17,396,355 $17,396,355
Short-term borrowings --- --- 6,726,428 6,726,428
Restricted investments 1,663,784 1,663,784 --- ---
Bonds payable & convertible
bonds Payable 39,805,120 34,667,746 6,839,774 7,167,665
F-24
<PAGE>
12. Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options usually equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company's 1995 Incentive Stock Option Plan (the Plan) has authorized
the grant of options to management and other key employees for up to 237,000
shares of the Company's common stock, and the grant of options for up to
72,000 shares of it common stock to certain Directors outside of the Plan.
Concurrently with the IPO, the Company granted options to certain officers
and key employees to purchase 37,000 shares of the Company's common stock at
exercise prices of $0.10 per share. These options vested immediately and are
exercisable in three 20% increments at the end of each six-month period
subsequent to the grant date and expire ten years from the grant date.
Options granted to the directors vest and become exercisble over three years
and expire ten years from the date of grant. All other options granted under
the Plan vest and become exercisable over three years of continued employment
and expire ten years from the date of grant. In accordance with the pro-
visions of APB 25, the Company has recognized $412,550 of compensation
expense related to options granted in 1995.
Pro forma information regarding net loss and loss per share is required by
Statement 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of the Statement. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, risk-free interest rates of 5.1%; a dividend
yield of 0%; volatility factors of the expectd market price of the Company's
common stock of .541 and a weighted-average expected life of the option of
5 years.
F-25
<PAGE>
12. Stock Options (continued)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferrable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
1996 1995
---- ----
Pro forma net loss before $(938,315) $(1,019,031)
extraordinary item
Pro forma net loss $(938,315) $(2,194,964)
Pro forma loss per share $(0.19) $(0.37)
before extraordinary item
Pro forma loss per share $(0.19) $(0.79)
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1996 and 1995 are as follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding beginning of year 109,000 $ 7.47 --- ---
Granted 149,450 16.31 109,000 $7.47
Exercised (3,836) 0.10 --- ---
Forfeited (6,700) 18.27 --- ---
Outstanding end of year 247,914 $12.62 109,000 $7.47
Exercisable at end of year 34,954 $7.76 --- $0.00
Weighted average fair value of
options granted during the year $9.11 $8.00
F-26
<PAGE>
12. Stock Options (continued)
At December 31, 1996, the Company had 33,164 options outstanding with an
exercise price of $0.10 per share and a remaining contractual life of 8.8
years. In addition, the Company had 214,750 options outstanding with
prices ranging from $8.25 to $19.25 per share and a weighted average
remaining contractual life of 9.3 years.
13. Related Party Transactions
Prior to the Exchange date, the Company had material transactions with
related parties that were unconsolidated affiliates of the Company. Such
transactions included the payment of management, accounting, marketing and
development fees, construction costs, and certain cash management
transactions. Following the Exchange, such transactions no longer occur.
Management and Service Fees
In return for certain management and administrative services, the Company
received a monthly fee for management services rendered on behalf of its
affiliates for each of their Residences. Pursuant to the related management
agreement, the Company received monthly fees for each Residence equal to the
greater of $1,500 or 5% of each Residence's monthly gross revenues. In
addition to these fees, the Company provided its affiliates with bookkeeping
and payroll services for a monthly fee ranging from $250 to $500 per
Residence. Aggregate management and accounting fees received from affiliates
for the years ended December 31, 1996, 1995, and 1994 totaled $-0-,
$232,853 and $128,426, respectively. Such fees are reflected as management
and service fees in the accompanying consolidated statements of operations.
In return for certain preopening marketing services, the Company received
$20,000 per Residence. These services included initial marketing activities,
resident recruitment and qualification, selection of initial Residence staff,
selection and recruitment of third-party service providers and referral
sources, and primary responsibility for state and local licensing. Amounts
recognized by the Company for these preopening services for the years ended
December31, 1996, 1995 and 1994 were $-0-, $112,467 and $104,034,
respectively. Such fees are reflected as management and service fees in the
accompanying consolidated statements of operations.
F-27
<PAGE>
13. Related Party Transactions (continued)
Initial Franchise and Royalty Fees
The Company receives initial franchise fees of $25,000 from certain
affiliated franchisees. Such fees are deferred and recognized when the
Residence commences operations. The Company also received a monthly royalty
fee of 3% of each Residences' gross receipts in consideration for the
continuing rights, licenses and ongoing services provided under each
applicable franchise agreement. Initial franchise and royalty fees earned by
the Company from affiliates during 1996, 1995 and 1994 are $54,606, $168,880,
and $152,019, respectively. Such fees are reflected as initial franchise
and royalty fees in the accompanying consolidated statements of operations.
Development Fees
The Company received compensation from affiliates for planning and executing
the construction and development of their Residence. These services included
primary responsibility for land acquisition, zoning and licensing, obtaining
supplemental financing, site planning and development activities, general
contractor and bid selection, construction oversight, and initial accounting
system and organization setup. Amounts recognized by the Company for
development fees from its affiliates for the years ended December 31, 1996,
1995 and 1994 were $-0-, $302,871 and $188,370, respectively.
During 1994, the Company also received $125,000 in development fees from
Covenant Housing Corporation (CHC), a not-for-profit corporation that is
managed by the Company. This was a one-time payment in consideration for the
Company's services in helping to acquire and reorganize an existing Residence
on behalf of the corporation. Neither the Company nor its affiliates have any
direct ownership in CHC.
Earned Revenues From Construction Services
The Company was retained by certain of its affiliates as the general
contractor for the construction of their Residences for which the Company
received a fee for construction services. Revenues earned by the Company from
such affiliates for the years ended December31, 1996, 1995 and 1994, were
$-0-, $803,302 and $602,002, respectively.
F-28
<PAGE>
13. Related Party Transactions (continued)
Notes Payable to Stockholders
The notes payable to stockholders at December31, 1995, represent working
capital loans made to the Company from certain stockholders. These loans were
payable on demand and accrued interest at the short-term Applicable Federal
Rate as published monthly by the Internal Revenue Service. For the years
ended December31, 1996, 1995 and 1994, interest expense incurred by the
Company on such loans was approximately $-0-, $4,279 and $6,083,
respectively. During 1995, the Company repaid the balance of such loans with
proceeds received from the IPO.
Other
During 1994, the Company sold a portion of its interest in an affiliated
Franchisee to a stockholder of the Company for $12,644, an amount equal to
its book value.
During 1994, the Company paid $30,000 in consulting fees to a stockholder of
the Company.
14. Commitments
The Company entered into three additional sale/leaseback financing
commitments with REITs during 1996 which provide approximately $113,110,000
in sale/leaseback financing. The terms of the financing commitments are
similar to those described in Note 7. The aggregate amount of unused
sale/leaseback financing at December 31, 1996 was approximately $135,630,000.
The Company is required by certain REITs to obtain a letter of credit as
collateral for leased residences. Outstanding letters of credit at December
31, 1996 and 1995, were $1,270,056 and $470,175, respectively.
In connection with the acquisition of BCI, the Company entered into a
consulting agreement with the seller, who is also an officer and stockholder
of the Company, whereby the seller received $10,000 per month through
December 1996 for providing consulting services to BCI.
F-29
<PAGE>
STERLING HOUSE CORPORATION
Notes to Consolidated Financial Statements (continued)
15. Savings Plan
In 1995, the Company initiated an employee savings plan under Section 401(k) of
the Internal Revenue Code. The plan covers full-time employees and allows
employees to contribute up to 15% of their salary to the plan. The Company
matches employee contributions up to a maximum of 3% of the employee's salary.
Amounts charged to expense for matching contributions during 1996 and 1995 were
$40,474 and $43,386, respectively.
</TABLE>
Exhibit 10.64
STERLING HOUSE
FRANCHISE AGREEMENT
(Lincoln, Nebraska)
Great Plains Assisted Living, L. L. C.
___________________________________________
Franchisee
____________________________________________
Date of Agreement
<PAGE>
STERLING HOUSE
FRANCHISE AGREEMENT
TABLE OF CONTENTS
I. GRANT OF FRANCHISE 3
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
4
2.01 Architectural Plans 4
2.02 Site Plan Approval: Construction 4
2.03 Residence Development 6
2.04 Residence Opening 7
2.05 Furnishings, Fixtures, Signs and Equipment 8
III. TRAINING AND GUIDANCE 8
3.01 Management Training 8
3.02 Supplemental Management 9
3.03 Residence Managers - Generally 9
3.04 Interference with Employment Relations 9
3.05 Guidance 10
3.06 Operations Manual 10
IV. MARKS 11
4.01 Ownership of Goodwill and Marks 11
4.02 Limitations on Franchisee's Use of Marks 12
4.03 Infringement 12
4.04 Discontinuance of Use of Marks 13
V. RELATIONSHIP OF THE
PARTIES/INDEMNIFICATION 13
5.01 Independent Status 13
5.02 Additional Limitations on Franchisee's Use of
Marks 13
5.03 Limitations on Liability 14
5.04 Indemnification 14
VI. FEES 15
6.01 Initial Franchisee Fee 15
<PAGE>
6.02 Royalty and Service Fee 15
6.03 Definition of Net Revenues 15
6.04 Interest on Late Payments 16
6.05 Application of Payments 16
6.06 Retention of Fees by the Company 16
VII. CONFIDENTIAL INFORMATION 17
7.01 Limitation on Interest in Confidential Information 17
7.02 Confidential Use of Confidential Information 17
7.03 Exception to Restrictions on Confidential
Information 18
7.04 Improper Disclosure 18
VIII. RESIDENCE IMAGE AND OPERATING STANDARDS 19
8.01 Condition and Appearance of the Residence 19
8.02 Alterations to the Premises by Company 20
8.03 Alterations to the Premises by Franchisee 21
8.04 Service Providers, Distributors and Suppliers 21
8.05 Resident Offerings 22
8.06 Specifications, Standards and Procedures. 22
8.07 Operation of the Residence 22
8.08 Compliance with Laws and Good Business
Practices 23
8.09 Employees 23
8.10 Insurance 24
IX. MARKETING 25
9.01 By Company 25
9.02 By Franchisee 27
X. ACCOUNTING, REPORTS, AND FINANCIAL
STATEMENTS 28
XI. ANNUAL REVIEWS, INSPECTIONS, AND AUDITS 29
11.01 Annual Review 29
11.02 Company's Right to Inspect the Residence 29
11.03 Company's Right to Audit 29
XII. TRANSFER 30
12.01 By Company 30
12.02 Franchisee May Not Transfer Without Approval of
Company 30
12.03 Definition of "Transfer" 31
12.04 Conditions for Approval of Transfer 31
<PAGE>
12.05 Excepted Transfers 33
12.06 Death or Disability of Franchisee 33
12.07 Effect of Consent of Transfer 33
12.08 Company's Right of First Refusal 33
12.09 Public or Private Offerings 34
XIII. RENEWAL OF FRANCHISE 35
13.01 Franchisee's Right to Renew 35
13.02 Renewal Agreement/Releases 35
XIV. TERMINATION OF AGREEMENT BY FRANCHISEE
OR CESSATION
OF RESIDENCE OPERATION 36
14.01 Termination of Good Cause 36
XV. TERMINATION OF THE FRANCHISE 37
15.01 Grounds of Termination 37
15.02 Efforts to Resolve Termination Disputes Other
Than by Termination 39
XVI. RIGHTS AND OBLIGATIONS OF COMPANY AND
FRANCHISE UPONTERMINATION OR EXPIRATION OF THE
FRANCHISE 40
16.01 Payment of Amounts Owned to Company 40
16.02 Marks 40
16.03 Modification of Residence Design and Decor 41
16.04 Cessation of Use of Confidential Information 41
16.05 Continuing Obligations 41
XVII. TEMPORARY DE-IDENTIFICATION OF THE
RESIDENCE 42
XVIII. CASUALTY LOSS OR CONDEMNATION 43
18.01 Casualty Loss 43
18.02 Condemnation Proceedings 43
XIX. ENFORCEMENT 44
19.01 Severability and Substitution of Valid Provisions 44
19.02 Waiver of Obligations 45
19.03 Limitations on Liability. 46
19.04 Specific Performance/Injunctive Relief 47
19.05 Rights of Parties are Cumulative 47
19.06 Governing Law/Consent to Jurisdiction 47
19.07 Binding Effect/Modification 48
<PAGE>
19.08 Construction 48
19.09 Definitions 48
19.10 Counterparts 49
19.11 Consent 49
XX. NOTICES AND PAYMENTS 49
SCHEDULE "1" Schedule of Development Obligations
<PAGE>
<PAGE>
FRANCHISE AGREEMENT
NOW, on this _______ day of ____________________, 19 ____,
Agreement is made,
BY AND BETWEEN STERLING HOUSE
CORPORATION
a Kansas corporation
hereinafter referred to
as
"Company"
AND GREAT PLAINS
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
qualifications and are willing to undertake the requisite investment and
<PAGE>
effort to establish and develop STERLING HOUSE
assisted living facilities (hereinafter referred to as "Resident" 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 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
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 granted 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:
<PAGE>
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 4455 Old
Cheney, Lincoln, Nebraska 68516 (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 ten (10) 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.
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
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
<PAGE>
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").
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 size 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 engineering 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
<PAGE>
property of the Company;
B) At least thirty (30) days prior to the commencement of
construction, Franchisee shall submit to Company the adaptation of
Company's Plans to Franchisee's location 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;
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 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
<PAGE>
(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;
<PAGE>
<PAGE>
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 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 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
<PAGE>
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, or
program offered by Eby Management Company, Inc. that comples with
and includes all training as prescribed by Company. Said programs to be
submitted to Company for approval as they are amended from time to time
and at least thirty (30) days prior to any scheduled training session.
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.
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 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)<PAGE>
<PAGE>
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 and shall not be unreasonably withheld.
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. 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. 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 shall have the right
to communicate directly with Franchisee's Directors concerning all matters
during inspection visits. 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
<PAGE>
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 at per diem fees based upon Company's actual
cost in providing such guidance and assistance..
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 will receive, in a timely manner, all changes, updates, and new
improved Operations Manuals as Company produces them. 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
<PAGE>
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.
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
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
<PAGE>
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.
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 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
<PAGE>
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.
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.
<PAGE>
VI.
FEES
6.01 Initial Franchisee Fee. Contemporaneously herewith,<PAGE>
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").
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, (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), and (iii) all funds collected from tenants for payment to
beauticians, vendors, and other third party contractors to the extent that
Franchisee realizes no revenue therefrom. 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
<PAGE>
the due date at the highest applicable legal rate for open account business
credit, not to exceed one-hald percent (1 1/2%) 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.
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").
<PAGE>
Company will disclose the Confidential Information to Franchisee<PAGE>
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.
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.
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<PAGE>
<PAGE>
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, or 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 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 attorney's fees, that
were incurred by Company in pursuing the cause of action.
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:
<PAGE>
1) continuous and thorough cleaning and sanitation of<PAGE>
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, 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, letting, 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 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
<PAGE>
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 in
compliance with Company standards as same may be amednded from
time to time.
In determining standards for 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 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 the 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
<PAGE>
of the Residence is important to Company's and other franchisee's
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. Franchisee shall comply with all written mandatory
specifications, standards and operating procedures of Company including,
but not limited to, those relating to:
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 governmental 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<PAGE>
<PAGE>
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.
8.09 Employees. Franchisee shall 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 written
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
<PAGE>
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.
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.
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. Provided that not less than fifty one percent (51%) of all
Residences in the area covered by the advertising participate, 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
<PAGE>
right at any 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 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.
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
<PAGE>
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.
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 are reasonably necessary to maintain occupancy levels
and general awareness in the community of the Residence. 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 ten (10) 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.
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.
<PAGE>
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 twentieth (20th) 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 year to date profit and loss statement
and balance sheet;
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 or a designatted representative of its management company, 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
<PAGE>
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.
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
five percent (5%), 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.
<PAGE>
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.
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, more than fifty percent (50%) of
Franchisee's equity (whether voting or non-voting), more than fifty percent
(50%) of Franchisee's voting and/or control rights, such as voting stock or
general partnership interests, as the case may be, 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
<PAGE>
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
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 be 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 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 within a radius of twenty-five (25) miles
from any 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
<PAGE>
comply with then current standards. Company shall approve or disapprove
all transfers within thirty (30) days following receipt of complete
information regarding the proposed transfer and "transferee(s)" as
described in the ARTICLE XII. For purposes of this Section 12.04, the
trem "competitive business" shall mean the 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.
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 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 of 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 if Franchisee has closed the Residence whether with or without
the consent of 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
<PAGE>
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 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
<PAGE>
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 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.
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.
<PAGE>
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 the Residence operated by Franchisee to a
different name, format, style, or use, (iii) willful disregard by Franchisee of
the terms and provisions of this Agreement, or (iv) transferring 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 of 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.
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
<PAGE>
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);
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 after
written notice thereof is delivered to Franchisee within thirty (30) days if
the first such failure or violation, ten (10) days for any subsequent failure
or violation, or in any event no later than the cure time required by any
regulatory oradministrative authority claiming such violation, 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 Franchise 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
<PAGE>
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:
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
<PAGE>
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.
XVI.
RIGHTS AND OBLIGATIONS OF COMPANY AND FRANCHISE
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;
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
<PAGE>
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.
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.
16.05 Continuing Obligations. All obligations of Company and
Franchisee which expressly or by their nature survive the expiration or
termination of this Agreement 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
<PAGE>
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.
During the term of the De-Identification Ageement, 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.
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 excecution 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.
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
<PAGE>
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.
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.
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 confict 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 preceeding 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 of time for appeal
<PAGE>
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 jurisdication in which enforcement is
sought.
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 som 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 provision, 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 applicablity, and this Agreement shall be enforced as originally
made and entered into in all other jurisdictions.
19.02 Waiver of Obligations. Company and Franchisee may be
written instrument unilaterally waive or reduce any obligation of or
restriction imposed upon the other under this Agreeement, 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
<PAGE>
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.
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.
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.
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
<PAGE>
law. Franchisee further agrees that its sole remedy in the event of the entry
of an injunctiion, 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 right or
remedy hereunder or which Company or Franchisee is entitled by law or
equity to enforce.
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
<PAGE>
provided or unless the context otherwise requires:
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 deemed an original.
19.11 Consent. Company shall have the absolute right to refuse
any request by Franchisee or 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.
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
<PAGE>
If to Franchisee: Great Plains Assisted Living,<PAGE>
L.L.C.
P. O. Box 2571
Olathe, KS 66063
Attn: Donald M. Eby
Al 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>
<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:
Title:
"Company"
If an individual:
"Franchisee"
If a partnership, Limited
Liability Company or
Corporation:
WITNESS GREAT PLAINS ASSISTED
LIVING, L.L.C.
By: _______________________________ By:
_______________________________________
Title: _____________________________ Title:
_____________________________________
"Franchisee"
<PAGE>
SCHEDULE "1"
TO FRANCHISE AGREEMENT BY AND BETWEEN
STERLING HOUSE CORPORATION
AND GREAT PLAINS ASSISTED LIVING, L.L.C.
DATED _________________________________
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;
, 19
B) Secure all financing required to fully develop the Residence;
, 19
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;
, 19
D) Construct the Residence in compliance with the Plans;
, 19
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;
, 19
F) The Director and the staff successfully complete
all training; and
, 19
H) Open the Residence for business in accordance with the
provisions of Section 1.04.
, 19
ACKNOWLEDGED:
STERLING HOUSE CORPORATION: GREAT PLAINS
ASSISTED LIVING, L.L.C.
By _________________________________ By
Title _______________________________ Title:
EXHIBIT "A"
Exhibit 10.65
STERLING HOUSE
FRANCHISE AGREEMENT
(Lenexa II, Kansas)
Great Plains Assisted Living, L. L. C.
___________________________________________
Franchisee
____________________________________________
Date of Agreement
<PAGE>
STERLING HOUSE
FRANCHISE AGREEMENT
TABLE OF CONTENTS
I. GRANT OF FRANCHISE 3
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
4
2.01 Architectural Plans 4
2.02 Site Plan Approval: Construction 4
2.03 Residence Development 6
2.04 Residence Opening 7
2.05 Furnishings, Fixtures, Signs and Equipment 8
III. TRAINING AND GUIDANCE 8
3.01 Management Training 8
3.02 Supplemental Management 9
3.03 Residence Managers - Generally 9
3.04 Interference with Employment Relations 9
3.05 Guidance 10
3.06 Operations Manual 10
IV. MARKS 11
4.01 Ownership of Goodwill and Marks 11
4.02 Limitations on Franchisee's Use of Marks 12
4.03 Infringement 12
4.04 Discontinuance of Use of Marks 13
V. RELATIONSHIP OF THE
PARTIES/INDEMNIFICATION 13
5.01 Independent Status 13
5.02 Additional Limitations on Franchisee's Use of
Marks 13
5.03 Limitations on Liability 14
5.04 Indemnification 14
VI. FEES 15
6.01 Initial Franchisee Fee 15
<PAGE>
6.02 Royalty and Service Fee 15
6.03 Definition of Net Revenues 15
6.04 Interest on Late Payments 16
6.05 Application of Payments 16
6.06 Retention of Fees by the Company 16
VII. CONFIDENTIAL INFORMATION 17
7.01 Limitation on Interest in Confidential Information 17
7.02 Confidential Use of Confidential Information 17
7.03 Exception to Restrictions on Confidential
Information 18
7.04 Improper Disclosure 18
VIII. RESIDENCE IMAGE AND OPERATING STANDARDS 19
8.01 Condition and Appearance of the Residence 19
8.02 Alterations to the Premises by Company 20
8.03 Alterations to the Premises by Franchisee 21
8.04 Service Providers, Distributors and Suppliers 21
8.05 Resident Offerings 22
8.06 Specifications, Standards and Procedures. 22
8.07 Operation of the Residence 22
8.08 Compliance with Laws and Good Business
Practices 23
8.09 Employees 23
8.10 Insurance 24
IX. MARKETING 25
9.01 By Company 25
9.02 By Franchisee 27
X. ACCOUNTING, REPORTS, AND FINANCIAL
STATEMENTS 28
XI. ANNUAL REVIEWS, INSPECTIONS, AND AUDITS 29
11.01 Annual Review 29
11.02 Company's Right to Inspect the Residence 29
11.03 Company's Right to Audit 29
XII. TRANSFER 30
12.01 By Company 30
12.02 Franchisee May Not Transfer Without Approval of
Company 30
12.03 Definition of "Transfer" 31
12.04 Conditions for Approval of Transfer 31
<PAGE>
12.05 Excepted Transfers 33
12.06 Death or Disability of Franchisee 33
12.07 Effect of Consent of Transfer 33
12.08 Company's Right of First Refusal 33
12.09 Public or Private Offerings 34
XIII. RENEWAL OF FRANCHISE 35
13.01 Franchisee's Right to Renew 35
13.02 Renewal Agreement/Releases 35
XIV. TERMINATION OF AGREEMENT BY FRANCHISEE
OR CESSATION
OF RESIDENCE OPERATION 36
14.01 Termination of Good Cause 36
XV. TERMINATION OF THE FRANCHISE 37
15.01 Grounds of Termination 37
15.02 Efforts to Resolve Termination Disputes Other
Than by Termination 39
XVI. RIGHTS AND OBLIGATIONS OF COMPANY AND
FRANCHISE UPONTERMINATION OR EXPIRATION OF THE
FRANCHISE 40
16.01 Payment of Amounts Owned to Company 40
16.02 Marks 40
16.03 Modification of Residence Design and Decor 41
16.04 Cessation of Use of Confidential Information 41
16.05 Continuing Obligations 41
XVII. TEMPORARY DE-IDENTIFICATION OF THE
RESIDENCE 42
XVIII. CASUALTY LOSS OR CONDEMNATION 43
18.01 Casualty Loss 43
18.02 Condemnation Proceedings 43
XIX. ENFORCEMENT 44
19.01 Severability and Substitution of Valid Provisions 44
19.02 Waiver of Obligations 45
19.03 Limitations on Liability. 46
19.04 Specific Performance/Injunctive Relief 47
19.05 Rights of Parties are Cumulative 47
19.06 Governing Law/Consent to Jurisdiction 47
19.07 Binding Effect/Modification 48
<PAGE>
19.08 Construction 48
19.09 Definitions 48
19.10 Counterparts 49
19.11 Consent 49
XX. NOTICES AND PAYMENTS 49
SCHEDULE "1" Schedule of Development Obligations
<PAGE>
FRANCHISE AGREEMENT
NOW, on this _______ day of ____________________, 19 ____,
Agreement is made,
BY AND BETWEEN STERLING HOUSE
CORPORATION
a Kansas corporation
hereinafter referred to
as
"Company"
AND GREAT PLAINS
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
qualifications and are willing to undertake the requisite investment and
<PAGE>
effort to establish and develop STERLING HOUSE
assisted living facilities (hereinafter referred to as "Resident" 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 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
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 granted 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:
<PAGE>
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 8740 Caenen Lake
Road, Lenexa II, Kansas 66215 (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 ten (10) 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.
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
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
<PAGE>
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").
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 size 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 engineering 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
<PAGE>
property of the Company;
B) At least thirty (30) days prior to the commencement of
construction, Franchisee shall submit to Company the adaptation of
Company's Plans to Franchisee's location 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;
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 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
<PAGE>
(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;
<PAGE>
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 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 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
<PAGE>
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, or
program offered by Eby Management Company, Inc. that comples with
and includes all training as prescribed by Company. Said programs to be
submitted to Company for approval as they are amended from time to time
and at least thirty (30) days prior to any scheduled training session.
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.
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 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)
<PAGE>
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 and shall not be unreasonably withheld.
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. 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. 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 shall have the right
to communicate directly with Franchisee's Directors concerning all matters
during inspection visits. 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
<PAGE>
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 at per diem fees based upon Company's actual
cost in providing such guidance and assistance..
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 will receive, in a timely manner, all changes, updates, and new
improved Operations Manuals as Company produces them. 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
<PAGE>
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.
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
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
<PAGE>
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.
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 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
<PAGE>
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.
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.
<PAGE>
VI.
FEES
6.01 Initial Franchisee Fee. Contemporaneously herewith,<PAGE>
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").
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, (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), and (iii) all funds collected from tenants for payment to
beauticians, vendors, and other third party contractors to the extent that
Franchisee realizes no revenue therefrom. 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
<PAGE>
the due date at the highest applicable legal rate for open account business
credit, not to exceed one-hald percent (1 1/2%) 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.
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").
<PAGE>
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.
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.
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
<PAGE>
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, or 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 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 attorney's fees, that
were incurred by Company in pursuing the cause of action.
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:
<PAGE>
1) continuous and thorough cleaning and sanitation of<PAGE>
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, 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, letting, 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 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
<PAGE>
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 in
compliance with Company standards as same may be amednded from
time to time.
In determining standards for 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 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 the 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
<PAGE>
of the Residence is important to Company's and other franchisee's
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. Franchisee shall comply with all written mandatory
specifications, standards and operating procedures of Company including,
but not limited to, those relating to:
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 governmental 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<PAGE>
<PAGE>
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.
8.09 Employees. Franchisee shall 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 written
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
<PAGE>
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.
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.
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. Provided that not less than fifty one percent (51%) of all
Residences in the area covered by the advertising participate, 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
<PAGE>
right at any 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 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.
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
<PAGE>
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.
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 are reasonably necessary to maintain occupancy levels
and general awareness in the community of the Residence. 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 ten (10) 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.
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.
<PAGE>
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 twentieth (20th) 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 year to date profit and loss statement
and balance sheet;
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 or a designatted representative of its management company, 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
<PAGE>
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.
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
five percent (5%), 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.
<PAGE>
XII.
TRANSFER
12.01 By Company. This Agreement and the Franchise are fully<PAGE>
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.
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, more than fifty percent (50%) of
Franchisee's equity (whether voting or non-voting), more than fifty percent
(50%) of Franchisee's voting and/or control rights, such as voting stock or
general partnership interests, as the case may be, 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
<PAGE>
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
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 be 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 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 within a radius of twenty-five (25) miles
from any 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
<PAGE>
comply with then current standards. Company shall approve or disapprove
all transfers within thirty (30) days following receipt of complete
information regarding the proposed transfer and "transferee(s)" as
described in the ARTICLE XII. For purposes of this Section 12.04, the
trem "competitive business" shall mean the 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.
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 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 of 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 if Franchisee has closed the Residence whether with or without
the consent of 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
<PAGE>
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 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
<PAGE>
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 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.
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.
<PAGE>
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 the Residence operated by Franchisee to a
different name, format, style, or use, (iii) willful disregard by Franchisee of
the terms and provisions of this Agreement, or (iv) transferring 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 of 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.
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
<PAGE>
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);
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 after
written notice thereof is delivered to Franchisee within thirty (30) days if
the first such failure or violation, ten (10) days for any subsequent failure
or violation, or in any event no later than the cure time required by any
regulatory oradministrative authority claiming such violation, 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 Franchise 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
<PAGE>
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:
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
<PAGE>
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.
XVI.
RIGHTS AND OBLIGATIONS OF COMPANY AND FRANCHISE
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;
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
<PAGE>
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.
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.
16.05 Continuing Obligations. All obligations of Company and
Franchisee which expressly or by their nature survive the expiration or
termination of this Agreement 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
<PAGE>
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.
During the term of the De-Identification Ageement, 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.
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 excecution 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.
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
<PAGE>
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.
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.
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 confict 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 preceeding 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 of time for appeal
<PAGE>
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 jurisdication in which enforcement is
sought.
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 som 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 provision, 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 applicablity, and this Agreement shall be enforced as originally
made and entered into in all other jurisdictions.
19.02 Waiver of Obligations. Company and Franchisee may be
written instrument unilaterally waive or reduce any obligation of or
restriction imposed upon the other under this Agreeement, 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
<PAGE>
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.
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.
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.
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
<PAGE>
law. Franchisee further agrees that its sole remedy in the event of the entry
of an injunctiion, 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 right or
remedy hereunder or which Company or Franchisee is entitled by law or
equity to enforce.
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
<PAGE>
provided or unless the context otherwise requires:
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 deemed an original.
19.11 Consent. Company shall have the absolute right to refuse
any request by Franchisee or 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.
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
<PAGE>
If to Franchisee: Great Plains Assisted Living,L.L.C.
P. O. Box 2571
Olathe, KS 66063
Attn: Donald M. Eby
Al 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:
Title:
"Company"
If an individual:
"Franchisee"
If a partnership, Limited Liability Company or
Corporation:
WITNESS GREAT PLAINS ASSISTED
LIVING, L.L.C.
By: _______________________________ By:
_______________________________________
Title: _____________________________ Title:
_____________________________________
"Franchisee"
<PAGE>
SCHEDULE "1"
TO FRANCHISE AGREEMENT BY AND BETWEEN
STERLING HOUSE CORPORATION
AND GREAT PLAINS ASSISTED LIVING, L.L.C.
DATED _________________________________
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;
, 19
B) Secure all financing required to fully develop the Residence;
, 19
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;
, 19
D) Construct the Residence in compliance with the Plans;
, 19
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;
, 19
F) The Director and the staff successfully complete
all training; and
, 19
H) Open the Residence for business in accordance with the
provisions of Section 1.04.
, 19
ACKNOWLEDGED:
STERLING HOUSE CORPORATION: GREAT PLAINS
ASSISTED LIVING, L.L.C.
By _________________________________ By
Title _______________________________ Title:
EXHIBIT "A"
Exhibit 10.66
STERLING HOUSE
FRANCHISE AGREEMENT
(Sioux City, Iowa)
Great Plains Assisted Living, L. L. C.
___________________________________________
Franchisee
____________________________________________
Date of Agreement
<PAGE>
STERLING HOUSE
FRANCHISE AGREEMENT
TABLE OF CONTENTS
I. GRANT OF FRANCHISE 3
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
4
2.01 Architectural Plans 4
2.02 Site Plan Approval: Construction 4
2.03 Residence Development 6
2.04 Residence Opening 7
2.05 Furnishings, Fixtures, Signs and Equipment 8
III. TRAINING AND GUIDANCE 8
3.01 Management Training 8
3.02 Supplemental Management 9
3.03 Residence Managers - Generally 9
3.04 Interference with Employment Relations 9
3.05 Guidance 10
3.06 Operations Manual 10
IV. MARKS 11
4.01 Ownership of Goodwill and Marks 11
4.02 Limitations on Franchisee's Use of Marks 12
4.03 Infringement 12
4.04 Discontinuance of Use of Marks 13
V. RELATIONSHIP OF THE
PARTIES/INDEMNIFICATION 13
5.01 Independent Status 13
5.02 Additional Limitations on Franchisee's Use of
Marks 13
5.03 Limitations on Liability 14
5.04 Indemnification 14
VI. FEES 15
6.01 Initial Franchisee Fee 15
<PAGE>
6.02 Royalty and Service Fee 15
6.03 Definition of Net Revenues 15
6.04 Interest on Late Payments 16
6.05 Application of Payments 16
6.06 Retention of Fees by the Company 16
VII. CONFIDENTIAL INFORMATION 17
7.01 Limitation on Interest in Confidential Information 17
7.02 Confidential Use of Confidential Information 17
7.03 Exception to Restrictions on Confidential
Information 18
7.04 Improper Disclosure 18
VIII. RESIDENCE IMAGE AND OPERATING STANDARDS 19
8.01 Condition and Appearance of the Residence 19
8.02 Alterations to the Premises by Company 20
8.03 Alterations to the Premises by Franchisee 21
8.04 Service Providers, Distributors and Suppliers 21
8.05 Resident Offerings 22
8.06 Specifications, Standards and Procedures. 22
8.07 Operation of the Residence 22
8.08 Compliance with Laws and Good Business
Practices 23
8.09 Employees 23
8.10 Insurance 24
IX. MARKETING 25
9.01 By Company 25
9.02 By Franchisee 27
X. ACCOUNTING, REPORTS, AND FINANCIAL
STATEMENTS 28
XI. ANNUAL REVIEWS, INSPECTIONS, AND AUDITS 29
11.01 Annual Review 29
11.02 Company's Right to Inspect the Residence 29
11.03 Company's Right to Audit 29
XII. TRANSFER 30
12.01 By Company 30
12.02 Franchisee May Not Transfer Without Approval of
Company 30
12.03 Definition of "Transfer" 31
12.04 Conditions for Approval of Transfer 31
<PAGE>
12.05 Excepted Transfers 33
12.06 Death or Disability of Franchisee 33
12.07 Effect of Consent of Transfer 33
12.08 Company's Right of First Refusal 33
12.09 Public or Private Offerings 34
XIII. RENEWAL OF FRANCHISE 35
13.01 Franchisee's Right to Renew 35
13.02 Renewal Agreement/Releases 35
XIV. TERMINATION OF AGREEMENT BY FRANCHISEE
OR CESSATION
OF RESIDENCE OPERATION 36
14.01 Termination of Good Cause 36
XV. TERMINATION OF THE FRANCHISE 37
15.01 Grounds of Termination 37
15.02 Efforts to Resolve Termination Disputes Other
Than by Termination 39
XVI. RIGHTS AND OBLIGATIONS OF COMPANY AND
FRANCHISE UPONTERMINATION OR EXPIRATION OF THE
FRANCHISE 40
16.01 Payment of Amounts Owned to Company 40
16.02 Marks 40
16.03 Modification of Residence Design and Decor 41
16.04 Cessation of Use of Confidential Information 41
16.05 Continuing Obligations 41
XVII. TEMPORARY DE-IDENTIFICATION OF THE
RESIDENCE 42
XVIII. CASUALTY LOSS OR CONDEMNATION 43
18.01 Casualty Loss 43
18.02 Condemnation Proceedings 43
XIX. ENFORCEMENT 44
19.01 Severability and Substitution of Valid Provisions 44
19.02 Waiver of Obligations 45
19.03 Limitations on Liability. 46
19.04 Specific Performance/Injunctive Relief 47
19.05 Rights of Parties are Cumulative 47
19.06 Governing Law/Consent to Jurisdiction 47
19.07 Binding Effect/Modification 48
<PAGE>
19.08 Construction 48
19.09 Definitions 48
19.10 Counterparts 49
19.11 Consent 49
XX. NOTICES AND PAYMENTS 49
SCHEDULE "1" Schedule of Development Obligations
<PAGE>
FRANCHISE AGREEMENT
NOW, on this _______ day of ____________________, 19 ____,
Agreement is made,
BY AND BETWEEN STERLING HOUSE
CORPORATION
a Kansas corporation
hereinafter referred to
as
"Company"
AND GREAT PLAINS
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
qualifications and are willing to undertake the requisite investment and
<PAGE>
effort to establish and develop STERLING HOUSE
assisted living facilities (hereinafter referred to as "Resident" 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 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
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 granted 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:
<PAGE>
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 4120 Indian
Hills Drive, Sioux City, Iowa 51103 (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 ten (10) 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.
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
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
<PAGE>
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").
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 size 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 engineering 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
<PAGE>
property of the Company;
B) At least thirty (30) days prior to the commencement of
construction, Franchisee shall submit to Company the adaptation of
Company's Plans to Franchisee's location 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;
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 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
<PAGE>
(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;
<PAGE>
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 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 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
<PAGE>
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, or
program offered by Eby Management Company, Inc. that comples with
and includes all training as prescribed by Company. Said programs to be
submitted to Company for approval as they are amended from time to time
and at least thirty (30) days prior to any scheduled training session.
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.
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 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)
<PAGE>
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 and shall not be unreasonably withheld.
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. 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. 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 shall have the right
to communicate directly with Franchisee's Directors concerning all matters
during inspection visits. 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
<PAGE>
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 at per diem fees based upon Company's actual
cost in providing such guidance and assistance..
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 will receive, in a timely manner, all changes, updates, and new
improved Operations Manuals as Company produces them. 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
<PAGE>
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.
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
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
<PAGE>
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.
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 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
<PAGE>
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.
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.
<PAGE>
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").
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, (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), and (iii) all funds collected from tenants for payment to
beauticians, vendors, and other third party contractors to the extent that
Franchisee realizes no revenue therefrom. 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
<PAGE>
the due date at the highest applicable legal rate for open account business
credit, not to exceed one-hald percent (1 1/2%) 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.
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").
<PAGE>
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.
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.
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
<PAGE>
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, or 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 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 attorney's fees, that
were incurred by Company in pursuing the cause of action.
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:
<PAGE>
1) continuous and thorough cleaning and sanitation of<PAGE>
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, 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, letting, 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 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
<PAGE>
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 in
compliance with Company standards as same may be amednded from
time to time.
In determining standards for 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 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 the 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
<PAGE>
of the Residence is important to Company's and other franchisee's 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. Franchisee shall comply with all written mandatory
specifications, standards and operating procedures of Company including,
but not limited to, those relating to:
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 governmental 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
<PAGE>
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.
8.09 Employees. Franchisee shall 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 written
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
<PAGE>
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.
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.
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. Provided that not less than fifty one percent (51%) of all
Residences in the area covered by the advertising participate, 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
<PAGE>
right at any 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 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.
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
<PAGE>
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.
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 are reasonably necessary to maintain occupancy levels
and general awareness in the community of the Residence. 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 ten (10) 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.
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.
<PAGE>
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 twentieth (20th) 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 year to date profit and loss statement
and balance sheet;
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 or a designatted representative of its management company, 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
<PAGE>
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.
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
five percent (5%), 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.
<PAGE>
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.
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, more than fifty percent (50%) of
Franchisee's equity (whether voting or non-voting), more than fifty percent
(50%) of Franchisee's voting and/or control rights, such as voting stock or
general partnership interests, as the case may be, 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
<PAGE>
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
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 be 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 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 within a radius of twenty-five (25) miles
from any 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
<PAGE>
comply with then current standards. Company shall approve or disapprove
all transfers within thirty (30) days following receipt of complete
information regarding the proposed transfer and "transferee(s)" as
described in the ARTICLE XII. For purposes of this Section 12.04, the
trem "competitive business" shall mean the 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.
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 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 of 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 if Franchisee has closed the Residence whether with or without
the consent of 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
<PAGE>
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 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
<PAGE>
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 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.
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.
<PAGE>
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 the Residence operated by Franchisee to a
different name, format, style, or use, (iii) willful disregard by Franchisee of
the terms and provisions of this Agreement, or (iv) transferring 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 of 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.
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
<PAGE>
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);
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 after
written notice thereof is delivered to Franchisee within thirty (30) days if
the first such failure or violation, ten (10) days for any subsequent failure
or violation, or in any event no later than the cure time required by any
regulatory oradministrative authority claiming such violation, 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 Franchise 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
<PAGE>
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:
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
<PAGE>
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.
XVI.
RIGHTS AND OBLIGATIONS OF COMPANY AND FRANCHISE
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;
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
<PAGE>
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.
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.
16.05 Continuing Obligations. All obligations of Company and
Franchisee which expressly or by their nature survive the expiration or
termination of this Agreement 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
<PAGE>
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.
During the term of the De-Identification Ageement, 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.
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 excecution 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.
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
<PAGE>
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.
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.
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 confict 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 preceeding 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 of time for appeal
<PAGE>
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 jurisdication in which enforcement is
sought.
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 som 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 provision, 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 applicablity, and this Agreement shall be enforced as originally
made and entered into in all other jurisdictions.
19.02 Waiver of Obligations. Company and Franchisee may be
written instrument unilaterally waive or reduce any obligation of or
restriction imposed upon the other under this Agreeement, 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
<PAGE>
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.
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.
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.
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
<PAGE>
law. Franchisee further agrees that its sole remedy in the event of the entry
of an injunctiion, 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 right or
remedy hereunder or which Company or Franchisee is entitled by law or
equity to enforce.
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
<PAGE>
provided or unless the context otherwise requires:
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 deemed an original.
19.11 Consent. Company shall have the absolute right to refuse
any request by Franchisee or 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.
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
<PAGE>
If to Franchisee: Great Plains Assisted Living, L.L.C.
P. O. Box 2571
Olathe, KS 66063
Attn: Donald M. Eby
Al 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:
Title:
"Company"
If an individual:
"Franchisee"
If a partnership, Limited
Liability Company or
Corporation:
WITNESS GREAT PLAINS ASSISTED
LIVING, L.L.C.
By: _______________________________ By:
_______________________________________
Title: _____________________________ Title:
_____________________________________
"Franchisee"
<PAGE>
SCHEDULE "1"
TO FRANCHISE AGREEMENT BY AND BETWEEN
STERLING HOUSE CORPORATION
AND GREAT PLAINS ASSISTED LIVING, L.L.C.
DATED _________________________________
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;
, 19
B) Secure all financing required to fully develop the Residence;
, 19
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;
, 19
D) Construct the Residence in compliance with the Plans;
, 19
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;
, 19
F) The Director and the staff successfully complete
all training; and
, 19
H) Open the Residence for business in accordance with the
provisions of Section 1.04.
, 19
ACKNOWLEDGED:
STERLING HOUSE CORPORATION: GREAT PLAINS
ASSISTED LIVING, L.L.C.
By _________________________________ By
Title _______________________________ Title:
EXHIBIT "A"
Exhibit 10.67
Schedule of Executed Lease Agreements
By and Between Sterling House Corporation
Schedule of executed lease Agreements, by and between Sterling House Corporation
and LTC Properties, Inc.
Location Date of Lease Lease Amount
801 S. Stadium Dr. December 27, 1996 $1,750,000
Ada, OK 74820
3505 University December 27, 1996 $1,900,000
Tyler, TX 75701
918 Midwestern Prkwy December 27, 1996 $1,950,000
Wichita Falls, TX 76302
Exhibit 10.68
LEASE
Dated December 27, 1996
BETWEEN
LTC PROPERTIES, INC., as Lessor
and
STERLING HOUSE CORPORATION, as Lessee
<PAGE>
TABLE OF CONTENTS
ARTICLE I 1
1.1 Leased Property 1
1.2 Term 2
1.3 Contingencies. 2
ARTICLE II 3
2. Definitions 3
ARTICLE III 7
3.1 Minimum Rent 7
(a) Initial Term 7
(b) Extended Terms 7
(c) Annual Escalation of Minimum Rent 8
3.2 Additional Charges 9
3.3 Net Lease 9
3.4 Late Charge 9
ARTICLE IV 10
4.1 Payment of Impositions 10
4.2 Notice of Impositions 11
4.3 Utility Charges 11
4.4 Insurance Premiums 11
4.5 Payables 11
ARTICLE V 12
5.1 No Termination, Abatement, etc 12
5.2 Abatement Procedures 12
ARTICLE VI 13
6.1 Ownership of the Leased Property 13
6.2 Lessee's Personal Property 13
6.3 Consumable Inventory 13
ARTICLE VII 13
7.1 Condition of Leased Property 14
7.2 Use of the Leased Property 14
ARTICLE VIII 16
8.1 Compliance with Legal and Insurance
Requirements,Instruments, etc. 16
<PAGE>
8.2 Legal Requirement Covenants 16
ARTICLE IX 17
9.1 Maintenance and Repair 17
9.2 Expenditures to Comply with Law; Construction of
Additional
Improvements Pursuant to Certificate of Need 18
9.3 Encroachments, Restrictions, etc. 18
ARTICLE X 19
10.1 Lessee's Obligations for Hazardous Materials 19
10.2 Definition of Hazardous Materials 19
ARTICLE XI 20
11.1 No Liens 20
ARTICLE XII 20
12. Permitted Contests 20
ARTICLE XIII 21
13.1 General Insurance Requirements 21
13.2 Replacement Cost 22
13.3 Additional Insurance 22
13.4 Waiver of Subrogation 22
13.5 Form Satisfactory, etc. 23
13.6 Increase in Limits 23
13.7 Blanket Policy 23
13.8 No Separate Insurance 23
13.9 Continuous Coverage 24
ARTICLE XIV 24
14.1 Insurance Proceeds 24
14.2 Reconstruction in the Event of Damage or
Destruction Covered by Insurance Proceeds 24
14.3 Reconstruction in the Event of Damage or
Destruction Not Covered by Insurance 25
14.4 Lessee's Property 25
14.5 Restoration of Lessee's Property 25
14.6 No Abatement of Rent 25
14.7 Termination of Option to Extend 25
14.8 Waiver 25
ARTICLE XV 26
15. Condemnation 26
<PAGE>
15.1 Definitions 26
15.2 Parties' Rights and Obligations 26
15.3 Total Condemnation 26
15.4 Allocation of Portion of Award 26
15.5 Partial Taking 27
15.6 Temporary Taking 27
ARTICLE XVI 28
16.1 Events of Default 28
16.2 Certain Remedies 30
16.3 Damages 30
16.4 Waiver 31
16.5 Application of Funds 31
ARTICLE XVII 32
17. Lessor's Right to Cure Lessee's Default 32
ARTICLE XVIII 32
18.1 Options to Extend 32
18.2 Minimum Rent During Extended Terms 33
ARTICLE XIX 34
19. Holding Over 34
ARTICLE XX 34
20. Risk of Loss 34
ARTICLE XXI 35
21. Indemnification 35
ARTICLE XXII 36
22. Subletting and Assignment 36
22.1 Attornment 36
22.2 Sublease Limitation 37
ARTICLE XXIII 37
23. Officer's Certificates and Financial Statements 37
ARTICLE XXIV 37
24. Lessor's Right to Inspect 37
ARTICLE XXV 38
25. No Waiver 38
<PAGE>
ARTICLE XXVI 38
26. Remedies Cumulative 38
ARTICLE XXVII 38
27. Acceptance of Surrender 38
ARTICLE XXVIII 38
28. No Merger of Title 38
ARTICLE XXIX 38
29. Conveyance by Lessor 38
ARTICLE XXX 39
30. Quiet Enjoyment 39
ARTICLE XXXI 39
31. Notices 39
ARTICLE XXXII 40
32.1 Lessor May Grant Liens 40
32.2 Lessee's Right to Cure 41
32.3 Breach by Lessor 41
ARTICLE XXXIII 41
33. Miscellaneous 41
33.1 Survival of Obligations 41
33.2 Late Charges; Interest 41
33.3 Limits of Lessor's Liability 41
33.4 Transfer of Operations 42
33.5 Addendum, Amendments and Exhibits 42
33.6 Headings 42
33.7 Time 42
33.8 Days 42
y 33.9 Rent 42
33.10 Applicable Law 42
33.11 Successors and Assigns 42
33.12 Recordation 42
33.13 Prior and Future Agreements 43
33.14 Partial Invalidity 43
33.15 Attorneys' Fees 43
33.16 Authority of Lessor and Lessee 43
33.17 Relationship of the Parties 43
33.18 Counterparts 43
33.19 Brokers 44
33.20 Computer Disc 44
<PAGE>
LEASE
THIS LEASE (this "Lease") is made as of the 27th day of December,
1996, by and between LTC PROPERTIES, INC., a Maryland corporation,
herein called "Lessor", and STERLING HOUSE CORPORATION, a
Kansas corporation, herein called "Lessee", subject to the terms, conditions
and contingencies set forth below.
ARTICLE I
1.1 Leased Property. Upon and subject to the terms and
conditions hereinafter set forth, Lessor leases to Lessee, and Lessee rents and
hires from Lessor all of the following (the "Leased Property"):
(i) The real property situated in the City of Ada,
Pontotoc County, Oklahoma and more particularly described in Exhibit "A"
attached hereto (the "Land");
(ii) All buildings, structures, Fixtures (as
hereinafter defined) and other improvements of every kind including, but not
limited to, alleyways and connecting tunnels, sidewalks, utility pipes,
conduits and lines (on-site and off-site), parking areas and roadways
appurtenant to such buildings and structures presently situated upon the Land
(collectively, the "Leased Improvements");
(iii) All easements, rights and appurtenances
relating to the Land and the Leased Improvements;
(iv) All permanently affixed equipment, machinery,
fixtures, and other items of real and/or personal property, including all
components thereof, permanently affixed to or incorporated into the Leased
Improvements, including, without limitation, all furnaces, boilers, heaters,
electrical equipment, heating, plumbing, lighting, ventilating, refrigerating,
incineration, air and water pollution control, waste disposal, air-cooling and
air conditioning systems and apparatus, sprinkler systems and fire and theft
protection equipment, all of which to the greatest extent permitted by the law,
are hereby deemed by the parties hereto to constitute real estate, together with
all replacements, modifications, alterations and additions thereto, to the
extent acquired by Lessor pursuant to the "Purchase Agreement" as defined in
Article II hereof (collectively the "Fixtures"); and
(v) All personal tangible and intangible property
<PAGE>
comprising the "Property" acquired by Lessor pursuant to the Purchase
Agreement.
The Leased Property includes that certain 37-unit assisted
living facility commonly known as the "Sterling House" and located in the
City of Ada, Pontotoc County, Oklahoma. Notwithstanding the foregoing,
the Leased Property shall not include any property not acquired by Lessor
from the Seller pursuant to the Purchase Agreement. The Leased Property is
demised subject to all covenants, conditions, restrictions, easements, and
other matters of record, and all other matters that affect title, zoning and any
other matters set forth in that certain Title Policy issued by Chicago Title
Company concurrently with Lessor's purchase of the Leased Property and all
matters disclosed in the ALTA survey obtained in connection with such title
insurance (collectively the "Permitted Title Matters").
1.2 Term. The initial term of the Lease (the "Initial
Term") shall be the period commencing on the closing (the "Closing") under
the Purchase Agreement (the "Commencement Date") and expiring on
December 31, 2006. Lessee has the right to extend the term of this Lease, at
Lessee's option, as provided in Article XVIII, below. (The Initial Term plus
all validly exercised options to extend, if any, shall be referred to herein as
the "Term").
1.3 Contingencies.
1.3.1 Lessee acknowledges and agrees that, at the time
of executing this Lease, Lessor might not own the Leased Property, but
Lessor has a right to purchase the Leased Property pursuant to the Purchase
Agreement. This Lease, and all obligations hereunder of either party, are
contingent upon Lessor's acquisition of the fee simple interest in the Leased
Property. Therefore, if Lessor has not acquired fee simple title to the Leased
Property on or before thirty (30) days after the date hereof, this Lease shall
be null and void and of no force or effect whatsoever, and both Lessor and
Lessee shall be relieved of all responsibility under this Lease.
1.3.2 Lessor and Lessee acknowledge and agree that
Lessor entered into this Lease, and agreed upon the amount of the Minimum
Rent payable under Paragraph 3.1 hereof, subject to the following conditions:
(a) that, on or after the date hereof, Lessor and Lessee will enter into four
(4) other leases ("Other Leases") between Lessor, as "Lessor", and Lessee, as
"Lessee", pertaining to the assisted living facility in each of the following
locations: (i) the "Sterling House" located in Tyler, Texas, (ii) the "Sterling
House" located in Wichita Falls, Texas, (iii) the "Sterling House" located in
Durant, Oklahoma, and (iv) the "Sterling House" located in Salina, Kansas;
<PAGE>
and (b) that each of the Other Leases will be cross-defaulted with this Lease
as additional security for Lessee's performance hereunder. Accordingly,
Lessor and Lessee acknowledge and agree that this Lease and each of the
Other Leases shall hereafter be amended as may be necessary or appropriate
to reflect the cross-default provisions contemplated hereunder.
ARTICLE II
2. Definitions. For all purposes of this Lease, except as
otherwise expressly provided, (i) the terms defined in this Article II have the
meanings assigned to them in this Article II and include the plural as well as
the singular; (ii) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles at the time applicable; and (iii) the words "herein", "hereof" and
"hereunder" and other words of similar import refer to this Lease as a whole
and not to any particular Article, Paragraph or other subdivision:
Additional Charges. As defined in Paragraph 3.2.
Additional Rent. As defined in Paragraph 3.1.
Affiliate. When used with respect to any corporation, the term
"Affiliate" shall mean any person or entity (including any trust) which,
directly or indirectly, controls or is controlled by or is under common control
with such corporation. For the purposes of this definition, "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), as used with respect to any person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction
of the management and policies of such person, through the ownership of
voting securities, partnership interests or other equity interests. For the
purposes of this definition, "person" shall mean any natural person, trust,
partnership, corporation, joint venture or other legal entity.
Business Day. Each Monday, Tuesday, Wednesday,
Thursday, and Friday, which is not a day on which national banks in the State
of Oklahoma are authorized or obligated, by law or executive order, to close.
Calendar Year. The period from January 1 through and
including December 31 in the same calendar year.
Code. The Internal Revenue Code of 1986, as amended.
Encumbrance. As defined in Article XXXII.
<PAGE>
Event of Default. As defined in Article XVI.
Extended Term. As defined in Article XVIII.
Facility. That certain 37-unit assisted living facility which is
part of the Leased Property, as defined in Article I, above.
Facility Mortgage. As defined in Article XIII.
Facility Mortgagee. As defined in Article XIII.
Fiscal Year. The twelve (12) month period from January 1
through the following December 31.
Fixtures. As defined in Article I.
Impositions. Collectively, all taxes (including, without
limitation, all ad valorem, sales and use, single business, gross receipts,
transaction, privilege, rent taxes, bed taxes or fees or any other taxes as the
same relate to or are imposed upon Lessee or Lessor or the business
conducted upon the Leased Property), assessments (including, without
limitation, all assessments for public improvements or benefits, whether or
not commenced or completed prior to the date hereof and whether or not to
be completed within the Term), water, sewer or other rents and charges,
excises, tax levies, fees (including, without limitation, license, permit,
inspection, authorization and similar fees), and all other governmental
charges, in each case whether general or special, ordinary or extraordinary,
or foreseen or unforeseen, of every character in respect of the Leased
Property, Lessor, or the business conducted thereon by Lessee (including all
interest and penalties thereon due to any failure in payment by Lessee), and
all increases in all the above from any cause whatsoever, including
reassessment, which at any time prior to, during or in respect of the Term
may be assessed or imposed on or in respect of or be a lien upon (a) Lessor's
interest in the Leased Property or any part thereof; (b) the Leased Property or
any part thereof, including without limitation any Personal Property located
thereon or used in connection therewith, or any rent therefrom or any estate,
right, title or interest therein; or (c) any occupancy, operation, use or
possession of, or sales from, or activity conducted on, or in connection with
the Leased Property or the leasing or use of the Leased Property or any part
thereof by Lessee. Without limiting the foregoing, the term "Imposition"
shall include any sales tax on rents paid under this Lease or by residents of
the Facility (including, but not limited to, rental receipts taxes), bed taxes,
depreciation recapture, any other taxes (except for the specific exclusions
stated below), fees or charges imposed by the State of Oklahoma and any
<PAGE>
potential subdivision thereof relating to the Facility or the Leased Property,
this Lease, or rents received under this Lease, whether relating to any period
prior to or after the Commencement Date. Nothing contained in this Lease
shall be construed to require Lessee to pay (1) the following taxes and fees
to the extent they relate to Lessor's business generally (as opposed to relating
specifically to Lessor's ownership of the Facility, lease thereof to Lessee or
income therefrom): any federal, state or local income tax of Lessor, taxes
based on outstanding corporate shares of Lessor or Lessor's equity or
capitalization, regardless of whether denominated as an income tax, franchise
tax, capital tax or otherwise; (2) any income or capital gain tax imposed with
respect to the sale, exchange or other disposition, or operation, by Lessor of
any Leased Property or the proceeds thereof; or (3) estate, inheritance, gift
taxes or documentary transfer taxes. In addition, Lessee shall not be required
to pay any franchise, registration, or qualification tax or fee to the extent
such
tax or fee exceeds the minimum amount which would be imposed on Lessor
if Lessor reported liabilities equal to at least eighty percent (80%) of
Lessor's assets.
Insurance Requirements. All terms of any insurance policy
required by this Lease and all requirements of the issuer of any such policy.
Land. As defined in Article I.
Lease. As defined in the Preamble.
Lease Year. The twelve (12) month period from January 1 to December 31 in
each calendar year. In the case of the beginning of the
Initial Term, the provision "Lease Year" shall mean the period from the
Commencement Date (defined in Paragraph 1.2, above) to December 31,
1996; in the case of the end of the Term, the provision "Lease Year" shall
mean the period from the last January 1 to occur in the Term to the date of
expiration of the Lease. The Lease Year 1996 shall mean the
Commencement Date through December 31, 1996; the Lease Year 1997 shall
mean January 1, 1997 through December 31, 1997, and so on.
Leased Improvements; Leased Property. Each as defined in Article I.
Legal Requirements. All federal, state, county, municipal,
and other governmental statutes, laws, rules, orders, regulations, ordinances,
judgments, decrees, and injunctions affecting either the Leased Property or
the construction, use or alteration thereof whether now or hereafter enacted
and in force, including any which may (i) require repairs, modifications or
alterations in or to the Leased Property; or (ii) in any way adversely affect
the
use and enjoyment thereof, and all permits, licenses and authorizations and
<PAGE>
regulations thereto, and all covenants, agreements, restrictions, and
encumbrances contained in any instruments, either of record or known to
Lessee, at any time in force affecting the Leased Property.
Lessee. Sterling House Corporation, a Kansas corporation
(and any assignee permitted subject to the terms and conditions in this Lease).
Lessee's Personal Property. All machinery, equipment,
furniture, furnishings, movable walls or partitions, computers, or trade
fixtures or other personal property, and consumable inventory and supplies,
owned by Lessee and used or useful in Lessee's business on the Leased
Property, including without limitation, all items of furniture, furnishings,
equipment, supplies and inventory, except items acquired by Lessor pursuant
to the Purchase Agreement.
Lessor. LTC Properties, Inc., a Maryland corporation, and its
successors and assigns. Unless Lessee is notified by Lessor otherwise,
Lessor's address is: 300 Esplanade Drive, Suite 1860, Oxnard, California
93030, Attention: William McBride III.
Minimum Rent. As defined in Paragraph 3.1.
Notice. A notice given pursuant to Article XXXI hereof.
Officer's Certificate. A certificate of Lessee signed by (i) the
Chairman of the Board of Directors or the President or any authorized Vice
President; and (ii) the secretary, or another officer authorized by appropriate
resolution to so sign by the Board of Directors. Any signature required above
may be substituted with a signature of another person whose power and
authority to act has been authorized by an appropriate corporate resolution.
Other Leases. As defined in Paragraph 1.3.
Overdue Rate. On any date, a rate equal to the Prime Rate
(defined below), plus two percent (2%); provided, however, that it is the
intent of Lessor and Lessee that the Overdue Rate (and all other interest rates
provided for hereunder) be in strict compliance with applicable usury laws of
the State of Oklahoma, and that in the event the Overdue Rate (or other
interest rate provided for hereunder) shall be deemed to exceed that permitted
to be charged by the laws of the State of Oklahoma, any and all excess sums
collected by Lessor shall be credited against the Rent payable under this
Lease or if there is no Rent due, promptly refunded to Lessee.
Payment Date. Any due date for the payment of the
<PAGE>
installments of Minimum Rent or any other payments required under this
Lease.
Primary Intended Use. As defined in Paragraph 7.2.2.
Prime Rate. On any date, a rate equal to the annual rate on
such date announced by Citibank, N.A. to be its prime rate for 90-day
unsecured loans to its corporate borrowers of the highest credit standing or,
if not available, such other rate as may be published by The Wall Street
Journal as the prime rate in its listing of "Money Rates."
Purchase Agreement. That certain Agreement of Purchase
and Sale and Joint Escrow Instructions, dated as of even date herewith,
between Lessee as "Seller" and Lessor as "Buyer" providing for Lessor's
acquisition of all of Lessee's interest in and to the Leased Property.
Rent. Any and all monetary obligations of Lessee owing
under this Lease.
Subsidiaries. Corporations, of which either Lessee or Lessor
owns, directly or indirectly, more than 50% of the voting stock (individually,
a "Subsidiary").
Term. Collectively, the Initial Term plus any Extended
Terms, as the context may require, unless earlier terminated pursuant to the
provisions hereof.
Unsuitable for its Primary Intended Use. A state of
condition of the Facility such that by reason of damage or destruction, or a
partial taking by Condemnation, in the good faith judgment of Lessor,
reasonably exercised, the Facility cannot be operated on a commercially
practicable basis for its Primary Intended Use taking into account, among
other relevant factors, the number of usable units affected by such damage or
destruction or partial Condemnation.
Unavoidable Delays. Delays due to strikes, lock-outs,
inability to procure materials, power failure, acts of God, governmental
restrictions, enemy action, civil commotion, fire, unavoidable casualty or
other causes beyond the control of the party responsible for performing an
obligation hereunder; provided that lack of funds shall not be deemed a cause
beyond the control of either party hereto unless such lack of funds available
to Lessor results from Lessee's failure to perform any of its obligations under
this Lease.
<PAGE>
The above does not include all the definitions to be used in
this Lease. Various definitions of other terms are included in the other
Articles of this Lease.
ARTICLE III
3.1 Minimum Rent. Lessee will pay to Lessor in lawful
money of the United States of America which shall be legal tender for the
payment of public and private debts, at Lessor's address set forth above or at
such other place or to such other person, firms or corporations as Lessor from
time-to-time may designate in a Notice, Minimum Rent (as defined below),
during the Term, as follows:
(a) Initial Term. The "Minimum Rent" is the
annual sum of $168,525.00. The Minimum Rent shall be subject to increase
as and when provided in Paragraph 3.2. The Minimum Rent shall be paid in
advance in equal, consecutive monthly installments on the first day of each
calendar month of the Term. Minimum Rent shall be prorated for any partial
month at the beginning or end of the Term; and
(b) Extended Terms. The Minimum Rent during
the Extended Terms shall be as stated in Article XVIII, below.
(c) Annual Escalation of Minimum Rent. Commencing on the one-year
anniversary of the Commencement Date, and
continuing on each subsequent one-year anniversary thereof during the Term
(including any Extended Term) (each, an "Adjustment Date"), the Minimum
Rent (irrespective of any prorations made pursuant to Paragraph 3.1(a) above)
shall increase to an amount equal to the Minimum Rent for the one-year
period immediately preceding the Adjustment Date multiplied by a fraction,
the numerator of which shall be the C.P.I. (defined below) for the month in
which the Adjustment Date occurs, and the denominator of which shall be the
C.P.I. for the month that was one year prior to the Adjustment Date;
provided, however, that the product of said multiplication shall not result in
an increase of the Minimum Rent by more than two percent (2%) per year on
a cumulative basis ("Annual Multiplier"). If, however, the Annual Multiplier
is less than two percent (2%) on any Adjustment Date (a "Less Than 2%
Adjustment Date"), then at such time as the Annual Multiplier is determined
for subsequent Adjustment Dates, the Minimum Rent for each Less Than 2%
Adjustment Date shall be retroactively recalculated such that subsequent
Annual Multipliers (whether less than or greater than 2%) shall be first
applied to increase the Annual Multiplier for each Less Than 2% Adjustment
Date to an amount up to, but not greater than, 2%, with such recalculations
to be made in chronological order beginning with the earliest Less Than 2%
<PAGE>
Adjustment Date and continuing, so long as there is Annual Multiplier
remaining, until recalculations have been made with respect to all Less Than
2% Adjustment Dates. After each such recalculation has been made, the
shortfall in the Minimum Rent for the newly recalculated Less Than 2%
Adjustment Dates shall be billed to Lessee and Lessee shall pay such shortfall
amount to Lessor together with the next payment of Minimum Rent
otherwise coming due hereunder. Such recalculations and shortfall billings
shall be made on each Adjustment Date where there remain prior Less Than
2% Adjustment Dates which have not yet been recalculated to 2%. For
purposes of example only, if the Commencement Date is November 1, 1996
and the initial Minimum Rent equals $939,120, and if (a) the C.P.I. increased
1.5% as of November 1, 1997, the Minimum Rent as of November 1, 1997
would increase to $953,207; (b) the C.P.I. increased 1.5% as of November 1,
1998, the Minimum Rent as of November 1, 1998 would increase to
$967,505; (c) the C.P.I. increased 6% as of November 1, 1999, the Minimum
Rent as of November 1, 1999 would increase to $996,602, which is the
Minimum Rent increased by 2% per year for three years (i.e. the average
annual increases have been 3% (1.5% + 1.5% + 6% for the three years,
respectively) subject to the 2% annual limitation), and the total shortfall
amount to be billed to Lessee would be $4,695 for the 1997 Adjustment Date
and $9,555 for the 1998 Adjustment Date. "C.P.I." shall mean and refer to the
Consumer Price Index of the Bureau of Labor Statistics of the Department of
Labor, U.S. Cities Average, All Items (1982-84=100); provided that if
compilation of the C.P.I. is discontinued or transferred to any other
governmental department or bureau, then the index most nearly the same as
the C.P.I. shall be used. If Lessor is unable to determine the C.P.I. by any
Adjustment Date, Lessee shall continue to pay the Minimum Rent at the rate
paid for the period immediately prior to that Adjustment Date, and once the
C.P.I. for that Adjustment Date is published, the new Minimum Rent (as
increased by the Annual Multiplier) shall be effective retroactively as of such
Adjustment Date and the aggregate amount of any additional Minimum Rent
shall be paid by Lessee promptly after written notice thereof from Lessor (but
not later than the date of the next monthly installment of Minimum Rent,
unless the next installment falls due within five (5) days after Lessor's
notice,
in which case not later than the date of the second next monthly installment
of Minimum Rent). No delay by Lessor in providing notice of any such
increase in Minimum Rent shall be deemed a waiver of Lessor's right to
increase the Minimum Rent as provided hereunder.
3.2 Additional Charges. In addition to the Minimum
Rent, (1) Lessee will also pay and discharge as and when due and payable all
other amounts, liabilities, obligations and Impositions which Lessee assumes
or agrees to pay under this Lease, and (2) in the event of any failure on the
part of Lessee to pay any of those items referred to in the immediately
preceding clause (1) above, Lessee will also promptly pay and discharge
<PAGE>
every fine, penalty, interest and cost which may be added for non-payment or
late payment of such items (the items referred to in clauses (1) and (2) above
being referred to herein collectively as the "Additional Charges"), and Lessor
shall have all legal, equitable and contractual rights, powers and remedies
provided either in this Lease or by statute or otherwise in the case of non-
payment of the Additional Charges. If any elements of Additional Charges
shall not be paid within seven (7) Business Days after its due date and Lessor
pays any such amount (which Lessor shall have the right, but not the
obligation, to do), then, in addition to Lessor's other rights and remedies,
Lessee will pay Lessor on demand, as Additional Charges, interest on such
unpaid Additional Charges computed at the Overdue Rate from the due date
of such installment to the date of Lessee's payment thereof.
3.3 Net Lease. Subject to the provisions of Article V,
below, without limiting any provision of this Lease, the Rent shall be paid
absolutely net to Lessor, so that this Lease shall yield to Lessor the full
amount of the installments of Minimum Rent throughout the Term, all as
more fully set forth in Articles IV, VIII, IX and XIII, and other provisions of
this Lease, so that, accordingly, Lessee shall pay all Additional Charges and
any other expenses of any kind associated with this Lease and the Leased
Property to insure that Lessor receives the Minimum Rent, net of all
expenses. Further, because Lessee, prior to the date of this Lease, is the
owner of fee simple title to the Leased Property, Lessee shall be responsible
for all Additional Charges and all other amounts due under this Lease for any
period prior to and during the Term.
3.4 Late Charge. LESSEE HEREBY
ACKNOWLEDGES THAT LATE PAYMENT BY LESSEE TO
LESSOR OF RENT (INCLUDING WITHOUT LIMITATION
MINIMUM RENT AND ADDITIONAL CHARGES) WILL CAUSE
LESSOR TO INCUR COSTS NOT CONTEMPLATED BY THIS
LEASE, THE EXACT AMOUNT OF WHICH WILL BE
EXTREMELY DIFFICULT TO ASCERTAIN. SUCH COSTS
INCLUDE, BUT ARE NOT LIMITED TO, PROCESSING AND
ACCOUNTING CHARGES. ACCORDINGLY, IF ANY
INSTALLMENT OF MINIMUM RENT OR ANY OTHER SUM DUE
FROM LESSEE SHALL NOT BE RECEIVED BY LESSOR WITHIN
SEVEN (7) BUSINESS DAYS AFTER SUCH AMOUNT SHALL BE
DUE, THEN WITHOUT ANY REQUIREMENT FOR NOTICE TO
LESSEE, LESSEE SHALL PAY TO LESSOR A LATE CHARGE
EQUAL TO FIVE PERCENT (5%) OF SUCH OVERDUE AMOUNT.
THE PARTIES HEREBY AGREE THAT SUCH LATE CHARGE
REPRESENTS A FAIR AND REASONABLE ESTIMATE OF THE
COSTS LESSOR WILL INCUR BY REASON OF LATE PAYMENT
<PAGE>
BY LESSEE. ACCEPTANCE OF SUCH LATE CHARGE BY
LESSOR SHALL IN NO EVENT CONSTITUTE A WAIVER OF
LESSEE'S DEFAULT OR BREACH WITH RESPECT TO ANY
UNPAID OVERDUE AMOUNTS, NOR PREVENT LESSOR FROM
EXERCISING ANY OF THE OTHER RIGHTS AND REMEDIES
GRANTED UNDER THIS LEASE WITH RESPECT TO ANY SUCH
UNPAID OVERDUE AMOUNTS.
ARTICLE IV
4.1 Payment of Impositions. Subject to Article XII
relating to permitted contests, Lessee will pay, or cause to be paid, all
Impositions coming due prior to or during the Term, or which relate to any
period within the Term or prior to the Term, before any fine, penalty, interest
or cost may be added for non-payment (or earlier if required by any taxing
authority), such payments to be made directly to the taxing authorities where
feasible, and will promptly furnish to Lessor copies of official receipts or
other satisfactory proof evidencing such payments. Lessee's obligation to
pay Impositions shall be deemed absolutely fixed upon the date such
Impositions become a lien upon the Leased Property or any part thereof. If
any Imposition may, at the option of the taxpayer, lawfully (without penalty)
be paid in installments (whether or not interest shall accrue on the unpaid
balance of such Imposition), Lessee may exercise the option to pay the same
(and any accrued interest on the unpaid balance of such Imposition) in
installments and in such event, shall pay such installments during the Term
hereof (subject to Lessee's right of contest pursuant to the provisions of
Article XII) as the same respectively become due and before any fine,
penalty, premium, further interest or cost may be added thereto. Lessee, at
its expense, shall, to the extent required or permitted by Legal Requirements,
prepare and file all tax returns and reports in respect of any Imposition as may
be required by governmental authorities. If any refund shall be due from any
taxing authority in respect of any Imposition, the same shall be paid over to
or retained by Lessee if no Event of Default shall have occurred hereunder
and be continuing, but if such Event of Default has occurred and is
continuing (i.e., it has not been cured), such refund shall be paid to Lessor
and utilized to cure any such continuing Event of Default. After fully curing
such Event of Default, any excess funds from such refund shall be paid by
Lessor to Lessee. Any such funds retained by Lessor, as provided above,
shall be applied as provided in Article XVI. Lessor and Lessee shall, upon
request of the other, provide such data as is maintained by the party to whom
the request is made with respect to the Leased Property as may be necessary
to prepare any required returns and reports. In the event governmental
authorities classify any property covered by this Lease as personal property,
Lessee shall file all personal property tax returns in such jurisdictions where
<PAGE>
it must legally so file. Lessor, to the extent it possesses the same, and
Lessee,
to the extent it possesses the same, will provide the other party, upon request,
with cost and depreciation records necessary for filing returns for any
property so classified as personal property. Where Lessor is legally required
to file personal property tax returns, Lessee will provide to Lessor copies of
assessment notices indicating a value in excess of the reported value in
sufficient time for Lessor to file a protest. Lessee may, upon notice to
Lessor,
at Lessee's option and at Lessee's sole cost and expense, protest, appeal or
institute such proceedings as Lessee may deem appropriate to effect a
reduction of real estate or personal property assessments and Lessor, at
Lessee's sole cost and expense as aforesaid, shall fully cooperate with Lessee
in such protest, appeal, or other action, provided that Lessee may not
withhold payments pending such challenges except under the conditions set
forth in Article XII. Billings for reimbursement by Lessee to Lessor of
personal property taxes shall be accompanied by copies of a bill therefor and
payments thereof which identify the personal property with respect to which
such payments are made. Lessor shall have the right to require that Lessee
pay to Lessor 1/12th of the annual Impositions each month concurrently with
the payment of Minimum Rent, effective (a) upon the occurrence of any
Event of Default relating to the payment or nonpayment of Impositions (and
irrespective of whether such Event of Default is continuing or has been
cured); (b) as to any Event of Default not covered in the preceding
subparagraph (a), upon the occurrence of the second Event of Default under
this Lease (and irrespective of whether any such Events of Default are
continuing or have been cured); and (c) once any Event of Default has
occurred hereunder that has not been cured within sixty (60) days. Unless
Lessee is notified by Lessor otherwise, Lessee shall pay all Impositions
directly to the appropriate taxing or other authorities to which payments are
due, and Lessee shall provide Lessor written evidence and notice that all such
payments have been made. Without limiting any of the other indemnities set
forth in this Lease, Lessee hereby agrees to defend, indemnify, protect and
hold harmless Lessor in connection with any Impositions that relate to any
time prior to or during the Term, and Lessee acknowledges and agrees that it
will not make claims against, or otherwise look to, Lessor to reimburse
Lessee for payments made relating to any period prior to the Commencement
Date.
4.2 Notice of Impositions. Lessor shall give prompt
Notice to Lessee for all Impositions payable by Lessee hereunder of which
Lessor has knowledge, but Lessor's failure to give any such Notice shall in
no way diminish Lessee's obligations hereunder to pay such Impositions, but
such failure shall obviate any default hereunder for a reasonable time after
Lessee receives notice (from any source) of any Imposition which it is
obligated to pay. However, notwithstanding the foregoing, it shall be
<PAGE>
Lessee's sole duty to inquire and determine all of the Impositions for which
it is liable as provided herein and shall promptly pay such Impositions when
due, and Lessor shall have no duty of inquiry concerning Impositions.
4.3 Utility Charges. Lessee will pay or cause to be paid
all charges for electricity, power, gas, oil, water, sewer connection and all
other utilities used in or for the Leased Property during the Term.
4.4 Insurance Premiums. Lessee will pay or cause to be
paid all premiums for the insurance coverage required to be maintained
pursuant to Article XIII during the Term.
4.5 Payables. Lessee acknowledges and agrees that prior
to the Commencement Date, certain liabilities and other obligations were
incurred arising from the development, construction and operation of the
Facility for which Lessee is and shall remain responsible and liable and
Lessor shall have no responsibility, liability or obligation whatsoever with
respect to the same. Therefore, Lessee agrees as part of this Lease to pay all
liabilities and obligations concerning the Facility, whether arising before or
after the Commencement Date.
ARTICLE V
5.1 No Termination, Abatement, etc. Subject to the
provisions of Paragraph 5.2, Lessee shall not be entitled to any abatement,
deduction, deferment or reduction of Rent, or set-off against the Rent, nor
shall the respective obligations of Lessor and Lessee be otherwise affected by
reasons of (a) any damage to, or destruction of, any Leased Property or any
portion thereof; (b) the lawful or unlawful prohibition of, or restriction upon,
Lessee's use of the Leased Property, or any portion thereof, the interference
with such use by any person, corporation, partnership or other entity, or by
reason of eviction by paramount title; (c) any claim which Lessee has or
might have against Lessor or by reason of any default or breach of any
warranty by Lessor under this Lease or any other agreement between Lessor
and Lessee, or to which Lessor and Lessee are parties; (d) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation,
dissolution, winding-up or other proceedings affecting Lessor or any assignee
or transferee of Lessor; or (e) for any other cause whether similar or
dissimilar to any of the foregoing other than a discharge of Lessee from any
such obligations as a matter of law. Lessee hereby specifically waives all
rights, arising from any occurrence whatsoever, which may now or hereafter
be conferred upon it by law to (i) modify, surrender or terminate this Lease
or quit or surrender the Leased Property or any portion thereof; or (ii) entitle
Lessee to any abatement, reduction, suspension or deferment of the Rent
<PAGE>
payable under this Lease. The obligations of Lessor and Lessee hereunder
shall be separate and independent covenants and agreements and the Rent due
under this Lease shall continue to be payable in all events, irrespective of
Lessor's performance or non-performance under this Lease, unless the
obligations to pay the same shall be terminated pursuant to the express
provisions of this Lease or by termination of this Lease other than by reason
of an Event of Default.
5.2 Abatement Procedures. In the event Lessee is entitled to an abatement
of Minimum Rent under Article XV (by reason of
any Condemnation as provided thereunder), the Lease shall not terminate
(except as provided in Article XV) but the Minimum Rent shall be abated in
proportion to the reduced capacity of the Leased Property for the use made of
the same by Lessee at the time of the Condemnation (i.e., the reduction in
the number of residents the Leased Property can accommodate under
standards existing immediately prior to the Condemnation). If Lessor and
Lessee are unable to agree upon the amount of such abatement within thirty
(30) days after any partial taking as provided under Article XV, the matter
shall be submitted by either party to a court of competent jurisdiction for
resolution, but Lessee during such resolution shall continue to perform its
obligations hereunder, including, but not limited to, payment of that portion
of the Minimum Rent which is not then in dispute.
ARTICLE VI
6.1 Ownership of the Leased Property. Lessee
acknowledges and agrees that the Leased Property is the property of Lessor
and that Lessee has only the right to the exclusive possession and use of the
Leased Property upon the terms and conditions of this Lease.
6.2 Lessee's Personal Property. Lessee may (and shall as provided
hereinbelow), at its expense, install, assemble or place on any
parcels of the Land or in any of the Leased Improvements, any items of
Lessee's Personal Property, and Lessee may, subject to the conditions set
forth below, remove the same upon the expiration or any prior termination of
the Term. Lessee shall provide and maintain during the entire Term all such
Lessee's Personal Property as shall be necessary in order to operate the
Facility in compliance with all licensure and certification requirements, in
compliance with all applicable Legal Requirements and Insurance
Requirements and otherwise in accordance with customary practice in the
industry for the Primary Intended Use. All of Lessee's Personal Property not
removed by Lessee within twenty (20) days following the expiration or earlier
termination of this Lease shall be considered abandoned by Lessee and may
be used, appropriated, sold, destroyed, or otherwise disposed of by Lessor
<PAGE>
without first giving notice thereof to Lessee and without any payment to
Lessee and without any obligation to account therefor. Lessee shall, within
twenty (20) days following the expiration or earlier termination of this Lease,
at its sole cost and expense, repair any damage to the Land or the Leased
Improvements occasioned by the installation, maintenance or removal of
Lessee's Personal Property, and restore the Land or Leased Improvements to
its condition immediately prior to any such installation. To the extent
allowed by law, Lessor and Lessee agree that the provisions of this Paragraph
6.2 and Paragraph 6.3 below shall be in substitution of any statutory
obligations Lessor may have to give Lessee notice of demand for removal of
Lessee's Personal Property and notice of sale of Lessee's Personal Property.
Lessor and Lessee agree that Lessor shall not be required to sell Lessee's
Personal Property or account to Lessee therefor. To that end, Lessee
specifically waives any and all rights Lessee may have pursuant to 41 O.S.
Sec. 52 for damages against Lessor for failure to comply with the provisions
thereof.
6.3 Consumable Inventory. Lessor and Lessee
acknowledge that certain inventory, including consumables, at the Facility,
as of the Commencement Date ("Consumable Inventory") will be completely
consumed or otherwise disposed of during the course of Lessee's operation of
the Facility. Lessee agrees that, at the end of the Term or earlier
termination of the Lease, it shall replace and restore the Consumable
Inventory to the type and amount (with the same value) as that existing as of
the Commencement Date, and as may otherwise be sufficient to fully equip
the Facility for its operation and maintenance as may be customary for
assisted living facilities comparable to the Leased Property in the State of
Oklahoma.
ARTICLE VII
7.1 Condition of Leased Property. Lessee acknowledges
receipt and delivery of possession of the Leased Property and further
acknowledges that Lessee has examined and otherwise has knowledge of the
condition of the Leased Property prior to the execution and delivery of this
Lease and has found the same to be in good order and repair and satisfactory
for it purposes hereunder. Lessee represents and warrants that the Personal
Property (as defined in Paragraph 1.1(v) hereof) includes all equipment and
property required under applicable federal and state law to operate the
Facility at full capacity. Lessee is leasing the Leased Property "AS-IS" in its
present condition. Lessee waives any claim or action against Lessor in
respect of the condition of the Leased Property. LESSOR MAKES NO
WARRANTY OR REPRESENTATIONS, EXPRESS OR IMPLIED, IN
RESPECT OF THE LEASED PROPERTY OR ANY PART THEREOF,
<PAGE>
EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION
FOR THE MATERIAL OR WORKMANSHIP THEREIN, LATENT
OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO
BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE
LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS
SATISFACTORY TO IT. WITHOUT LIMITING THE FOREGOING,
IT SHALL BE LESSEE'S RESPONSIBILITY TO DETERMINE THE
AMOUNT OF REIMBURSEMENT AND OTHER PAYMENTS THAT
IT IS ENTITLED TO RECEIVE FROM THE FEDERAL, STATE OR
LOCAL GOVERNMENTS AND LESSEE'S OBLIGATIONS UNDER
THIS LEASE SHALL NOT BE MODIFIED, CHANGED OR
OTHERWISE BE REDUCED IN THE EVENT THAT LESSEE HAS
INCORRECTLY ANALYZED THE AMOUNTS TO BE PAID TO
LESSEE BY ANY GOVERNMENT OR AGENCY THEREOF.
7.2 Use of the Leased Property.
7.2.1 Lessee covenants that it will obtain and, at all times
during the Term, maintain all approvals needed to use and operate the Leased
Property and the Facility under applicable federal, state and local law,
including, but not limited to, licensure and Medicaid certification, as
applicable. Lessee shall provide to Lessor, at Lessor's request a copy of any
report or survey conducted by any federal, state or local government entity
regarding the quality of care at the Facility, and any other such information
or documents concerning the operation of the Facility.
7.2.2 After the Commencement Date and during the entire
Term, Lessee shall use or cause to be used the Leased Property as an assisted
living facility licensed by the State of Oklahoma and uses incidental to the
foregoing (the particular such use to which the Leased Property is put at any
particular time is herein referred to as the "Primary Intended Use"). Lessee
shall not use the Leased Property or any portion thereof for any other use
without the prior written consent of Lessor, which consent may be withheld
in Lessor's sole and absolute discretion; provided, however, that Lessor shall
not unreasonably withhold its consent to any alternate use that is within the
long term care industry. No use shall be made of the Leased Property, and no
acts shall be done, which will cause the cancellation of any insurance policy
to residents therein, or permit to be kept, used or sold in or about the Leased
Property any article which may be prohibited by law or by the standard form
of fire insurance policies, or any other insurance policies required to be
carried hereunder, or fire underwriter's regulations. Lessee shall, at its sole
cost, comply with all of the requirements pertaining to the Leased Property
or other improvements of any insurance board, association, organization, or
company necessary for the maintenance of insurance, as herein provided,
covering the Leased Property and Lessee's Personal Property.
<PAGE>
7.2.3 Lessee covenants and agrees that during the Term it
will operate continuously the Leased Property in accordance with its Primary
Intended Use and will maintain its certifications for reimbursement and its
licensure.
7.2.4 Lessee shall not commit or suffer to be committed any
waste on the Leased Property, or in the Facility nor shall Lessee cause or
permit any nuisance thereon.
7.2.5 Lessee shall neither suffer nor permit the Leased
Property or any portion thereof, including Lessee's Personal Property, to be
used in such a manner as (i) might reasonably tend to impair Lessor's (or
Lessee's, as the case may be), title thereto or to any portion thereof; or (ii)
may reasonably make possible a claim or claims of adverse usage or adverse
possession by the public, as such, or of implied dedication of the Leased
Property or any portion thereof.
ARTICLE VIII
8.1 Compliance with Legal and Insurance Requirements,
Instruments, etc. Subject to Article XII relating to permitted contests,
Lessee, at its sole cost and expense, will promptly (a) comply with all
applicable Legal Requirements and Insurance Requirements in respect of the
use, operation, maintenance, repair, and restoration of the Leased Property,
whether or not compliance therewith shall require structural changes in any
of the Leased Improvements or interfere with the use and enjoyment of the
Leased Property; and (b) procure, maintain and comply with all licenses,
certificates of need, provider agreements and other authorizations, if any,
required for any use of the Leased Property and Lessee's Personal Property
then being made, and for the proper erection, installation, operation, and
maintenance of the Leased Property or any part thereof.
8.2 Legal Requirement Covenants. Lessee covenants and agrees
that the Leased Property and Lessee's Personal Property shall not be used for
any unlawful purpose. Lessee further warrants and represents that Lessee has
obtained all necessary governmental approvals and has given all necessary
notices to allow Lessee to operate the Leased Property for its Primary
Intended Use. Lessee shall acquire and maintain all licenses, certificates,
permits, provider agreements and other authorizations and approvals needed
to operate the Leased Property in its customary manner for the Primary
Intended Use, and any other use conducted on the Leased Property as may be
permitted by Lessor from time-to-time hereunder. Lessee further covenants
and agrees that Lessee's use of the Leased Property and maintenance,
<PAGE>
alteration and operation of the same, and all parts thereof, shall at all times
conform to all applicable federal, state and local laws, ordinances, rules, and
regulations unless the same are held by a court of competent jurisdiction to
be unlawful. Lessee, may, however, upon prior written notice to Lessor,
contest the legality or applicability of any such law, ordinance, rule, or
regulation, or any licensure or certification decision if Lessee maintains such
action in good faith, with due diligence, without prejudice to Lessor's rights
hereunder, and at Lessee's own expense. If by the terms of any such law,
ordinance, rule or regulation, compliance therewith pending the prosecution
of any such proceeding may legally be delayed without the incurrence of any
fine, charge or liability of any kind against the Leased Property, including the
Facility, or Lessee's leasehold interest therein and without subjecting Lessor
to any liability, civil or criminal, for failure so to comply therewith, Lessee
may delay compliance therewith until the final determination of such
proceeding. If any lien, charge or civil or criminal liability would be
incurred
by reason of any such delay, Lessee, on the prior written consent of Lessor,
may nonetheless contest as aforesaid and delay as aforesaid provided that
such delay would not subject Lessor to criminal liability and Lessee both (a)
furnishes to Lessor security reasonably satisfactory to Lessor against any loss
or injury by reason of such contest or delay; and (b) prosecutes the contest
continuously, with due diligence and in good faith.
ARTICLE IX
9.1 Maintenance and Repair.
9.1.1 Lessee, at its sole cost and expense, will keep the
Leased Property and Lessee's Personal Property and all private roadways,
sidewalks and curbs appurtenant thereto and which are under Lessee's control
in good order and repair (whether or not the need for such repairs occurs as
a result of Lessee's use, any prior use, the elements or the age of the Leased
Property, or any portion thereof), and, except as otherwise provided in Article
XIV, with reasonable promptness, make all necessary and appropriate repairs
thereto of every kind and nature, whether interior or exterior, structural or
non-structural, ordinary or extraordinary, foreseen or unforeseen or arising by
reason of a condition existing prior to the Commencement Date (concealed or
otherwise). All repairs shall, to the extent reasonably achievable, be at
least equivalent in quality to the original work. Lessee will not take or omit
to take any action the taking or omission of which may materially or
adversely impair the value or the usefulness of the Leased Property or any
part thereof for its Primary Intended Use. Any repair work performed by
Lessee shall be paid for so that no lien (i.e., mechanics', materialmen's or
other liens) shall attach to the Leased Property, subject to the provisions of
Article XII.
<PAGE>
9.1.2 Lessor shall not under any circumstances be required
in connection with this Lease to build or rebuild any improvements on the
Leased Property, or to make any repairs, replacements, alterations,
restorations, or renewals of any nature or description to the Leased Property,
whether ordinary or extraordinary, structural or non-structural, foreseen or
unforeseen, or to make any expenditure whatsoever with respect thereto, or to
maintain the Leased Property in any way. Lessee hereby waives, to the
extent permitted by law, the right to make repairs at the expense of Lessor
pursuant to any law in effect at the time of the execution of this Lease or
hereafter enacted. Lessor shall have the right to give, record and post, as
appropriate, notices of non-responsibility (or similar notices) under any
mechanics' or materialmen's lien laws now or hereafter existing.
9.1.3 Lessee shall not make any modifications, alterations or improvements
to the Leased Improvements or any portion thereof, whether
by addition or deletion, without Lessor's prior written consent, which consent
may be given or withheld in Lessor's sole and absolute discretion; provided
that Lessor shall not unreasonably withhold its consent to any non-structural
modifications, alterations or improvements that do not constitute capital
improvements and that are otherwise made in compliance with this Lease, so
long as the total cost thereof does not exceed $50,000 and the total cost in any
twelve (12) month period does not exceed $100,000. Nothing contained in
this Lease and no action or inaction by Lessor shall be construed as (i)
constituting the consent or request of Lessor, express or implied, to any
contractor, sub-contractor, laborer, materialman, or vendor to or for the
performance of any labor or services or the furnishing of any materials or
other property for the construction, alteration, addition, repair, or demolition
of, or to the Leased Property or any part thereof; or (ii) giving Lessee any
right, power or permission to contract for or permit the performance of any
labor or services or the furnishing of any materials or other property in such
fashion as would permit the making of any claim against Lessor in respect
thereof or to make any agreement that may create, or in any way be the basis
for any right, title, interest, lien, claim, or other encumbrance upon the
estate
of Lessor in the Leased Property, or any portion thereof. Lessor shall have
the right to give, record and post, as appropriate, notices of non-
responsibility
(or similar notices) under any mechanics' or materialmen's lien laws now or
hereafter existing.
9.1.4 Lessee will, upon the expiration or prior termination of the Term,
vacate and surrender the Leased Property in the condition in
which the Leased Property was originally received from Lessor, except as
repaired, rebuilt, restored, altered or added to as permitted or required under
this Lease and except for ordinary wear and tear (subject to the obligation of
Lessee to maintain the Leased Property in good order and repair during the
entire Term).
<PAGE>
9.2 Expenditures to Comply with Law; Construction of
Additional Improvements Pursuant to Certificate of Need. Without
limiting Lessee's other obligations, during the Term of this Lease, Lessee
will, at its expense, make whatever expenditures (including, but not limited
to capital and non-capital expenditures) that are required to conform the
Leased Property to such standards as may from time-to-time be required by
Federal Medicaid (Title 19) assisted living programs, if applicable, or any
other applicable programs or legislation, or capital improvements required by
any other governmental agency having jurisdiction over the Leased Property
as a condition of the continued operation of the Leased Property during the
Term (as extended) as an assisted living residence or other health-care related
facility, approved for Medicaid and similar programs, pursuant to present or
future laws of governmental regulation. Lessor shall not unreasonably
withhold its consent to any expenditures or capital improvements made by
Lessee pursuant to this Paragraph 9.2 and otherwise made in compliance with
this Lease.
9.3 Encroachments, Restrictions, etc. If any of the Leased
Improvements shall, at any time, encroach upon any property, street or right-
of-way adjacent to the Leased Property, or shall violate the agreements or
conditions contained in any lawful restrictive covenant or other agreement
affecting the Leased Property, or any part thereof, or shall impair the rights
of others under any easement or right-of-way to which the Leased Property is
subject, then promptly upon the request of Lessor at the behest of any
person affected by any such encroachment, violation or impairment, Lessee
shall, at its sole cost and expense, (and after Lessor's prior approval) subject
to Lessee's right to sue Lessor's predecessors in title with respect thereto or
to contest the existence of any such encroachment, violation or impairment
and, in such case, in the event of an adverse final determination, either (i)
obtain valid and effective waivers or settlements of all claims, liabilities and
damages resulting from each such encroachment, violation or impairment,
whether the same shall affect Lessor or the Leased Property; or (ii) make such
changes in the Leased Improvements, and take such other actions, as Lessee
in the good faith exercise of its judgment deems reasonably practicable, to
remove such encroachment, and to end such violation or impairment,
including, if necessary, the alteration of any of the Leased Improvements, and
in any event take all such actions as may be necessary in order to be able to
continue the operation of the Leased Improvements for the Primary Intended
Use substantially in the manner and to the extent the Leased Improvements
were operated prior to the assertion of such violation, impairment or
encroachment. Any such alteration shall be made in conformity with the
applicable requirements of Paragraph 6.2 and this Article IX. Lessee's
obligations under this Paragraph 9.3 shall be in addition to and shall in no
way discharge or diminish any obligation of any insurer under any policy of
title or other insurance.
<PAGE>
ARTICLE X
10.1 Lessee's Obligations for Hazardous Materials. Lessee
shall, at its sole cost and expense, take all actions as required to cause the
Leased Property including, but not limited to, the Land and all Leased
Improvements, to be free and clear of the presence of all Hazardous Materials
during the Term; provided, however, that Lessee shall be entitled to use and
maintain Hazardous Materials on the Leased Property in connection with
Lessee's business and in compliance with all applicable laws. In this
connection, Lessee shall, upon its discovery, belief or suspicion of the
presence of Hazardous Materials on, in or under any part of the Leased
Property, including, but not limited to, the Land and all Leased
Improvements, immediately notify Lessor and, at no expense to Lessor, cause
any such Hazardous Materials to be removed immediately, in compliance
with all applicable laws and in a manner causing the least disruption of or
interference with the operation of Lessee's business. Lessee hereby agrees
to fully indemnify, protect, defend and hold harmless Lessor from any costs,
damages, claims, liability or loss of any kind or nature arising out of or in
any
way in connection with the presence, suspected presence, removal or
remediation of Hazardous Materials in, on, or about the Leased Property, or
any part thereof. Lessee acknowledges that it has received and reviewed that
certain Phase I Site Investigation Update, dated as of December 18, 1996, and
prepared by C-K Associates, Inc. as Project No. 06-388, Task 3.0 (the
"Environmental Report"). A copy of the Environmental Report is attached
hereto as Exhibit "B". Without limiting Lessee's other obligations under
this Lease, Lessee agrees, at Lessee's sole cost, to fully comply with all
recommendations set forth in the Environmental Report, as updated,
promptly after the Commencement Date hereunder. Lessee's obligations
hereunder shall apply to all Hazardous Materials, irrespective of whether the
existence of such Hazardous Materials is known by Lessor and no matter
when they arose or were discovered and therefore will include any Hazardous
Materials that existed prior to, at, or after the Commencement Date and
during the Term.
10.2 Definition of Hazardous Materials. For purposes of this
Lease, "Hazardous Materials" shall include, but not be limited to, any
substance, material, waste, pollutant or contaminant, now or hereafter
defined, listed or regulated by the "Environmental Laws" (defined below) or
any other federal state or local law, regulation or order or by common law
decision. "Environmental Laws" means and includes any law, ordinance,
regulation or requirement now or hereinafter in effect relating to land use,
air,
soil, surface water, groundwater (including the protection, cleanup, removal,
<PAGE>
remediation or damage thereof), human health and safety or any other
environmental matter, including, without limitation, the following laws as the
same may be amended from time to time: Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C.
Sec. 9601, et seq.; Federal Resource Conservation and Recovery Act, 42 U.S.C.
Sec. 6901, et seq.; Clean Water Act, 33 U.S.C. Sec. 1251, et seq.; Toxic
Substances Control Act, 15 U.S.C. Sec. 2601, et seq.; Refuse Act, 33 U.S.C.
Sec. 407; Occupational Safety and Health Act, 29 U.S.C. Sec. 651, et seq.;
Clean Air Act, 42 U.S.C. Sec. 7401, et seq.; and any and all similar state and
local laws and ordinances and the regulations now or hereafter adopted,
published and/or promulgated pursuant thereto.
ARTICLE XI
11.1 No Liens. Subject to the provisions of Article XII
relating to permitted contests, Lessee will not directly or indirectly,
voluntarily or by operation of law, create or allow to remain and will
promptly discharge at its expense any lien, mortgage, encumbrance,
attachment, title retention agreement, or claim upon the Leased Property or
any attachment, levy, claim, or encumbrance in respect of the Rent.
ARTICLE XII
12. Permitted Contests. Lessee shall have the right to contest the
amount or validity of any Imposition or any Legal Requirement or Insurance
Requirement or any lien, attachment, levy, encumbrance, charge or claim
("Claims") not otherwise permitted by Article XI, by appropriate legal
proceedings in good faith and with due diligence, and to delay payment if
legally permitted; provided this shall not be deemed or construed in any way
as relieving, modifying or extending Lessee's covenants to pay or its
covenants to cause to be paid any such charges at the time and in the manner
as in this Lease provided and further provided that, such legal proceedings
(and delay in payment) shall not cause the sale of the Leased Property, or any
part thereof, to satisfy the same or cause Lessor or Lessee to be in default
under any mortgage or deed of trust encumbering the Leased Property or any
interest therein or otherwise threaten to cause loss or damage to Lessor or the
Leased Property. Upon the reasonable request of Lessor, Lessee shall provide
to Lessor reasonable security satisfactory to Lessor to assure the payment of
all Claims which may be assessed against the Leased Property, together with
interest and penalties, if any, thereon. Lessor agrees to join in any such
proceedings if the same be required to legally prosecute such contest of the
validity of such Claims; provided, however, that Lessor shall not thereby be
subjected to any liability for the payment of any costs or expenses in
connection with any proceedings brought by Lessee; and Lessee covenants to
indemnify and save
<PAGE>
harmless Lessor from any such costs or expenses. In
the event that Lessee fails to pay any Claims when due or, upon Lessor's
request, to provide the security therefor as provided in this Article XII and to
diligently prosecute any contest of the same or in the event the same threatens
to cause loss or damage to Lessor or the Leased Property, Lessor may, upon
thirty (30) days advance written Notice to Lessee, pay such charges together
with any interest and penalties and the same shall be repayable by Lessee to
Lessor at the next Payment Date provided for in this Lease. Provided,
however, that should Lessor reasonably determine that the giving of such
Notice would risk loss to the Leased Property or otherwise threaten to cause
loss or damage to Lessor, then Lessor shall give such written Notice as is
practical under the circumstances. Lessee shall be entitled to any refund of
any Claims and such charges and penalties or interest thereon which have
been paid by Lessee or paid by Lessor and for which Lessor has been fully
reimbursed.
ARTICLE XIII
13.1 General Insurance Requirements. Subject to the
provisions of Paragraph 13.8, during the Term, Lessee shall at all times keep
the Leased Property, and all property located in or on the Leased Property,
including Lessee's Personal Property, insured with the kinds and amounts of
insurance described below. This insurance shall be written by companies
authorized to do insurance business in the state in which the Leased Property
is located. The policies must name Lessor as loss payee and additional
named insured, shall contain a provision that such insurance may not be
cancelled or amended without at least thirty (30) days' notice to Lessor and
shall be payable to Lessor as provided in Article XIV. In addition, upon
Lessor's written request, the policies shall name as mortgagee, loss payee and
additional insured the holder ("Facility Mortgagee") of any mortgage, deed of
trust or other security agreement and any other Encumbrance placed on the
Leased Property in accordance with the provisions of Article XXXII, as well
as any other entity interested in the Leased Property ("Facility Mortgage") by
way of a standard form of mortgagee's loss payable endorsement. Evidence
of insurance shall be deposited with Lessor and, if requested, with any
Facility Mortgagee(s). If any provision of any Facility Mortgage requires
deposits of premiums for insurance to be made with such Facility Mortgagee,
or, pursuant to written direction by Lessor upon the occurrence of any Event
of Default hereunder (and irrespective of whether such Event of Default is
continuing or has been cured), Lessee shall make such deposits directly with
such Facility Mortgagee or with Lessor, as required. The policies on the
Leased Property, including the Leased Improvements, Fixtures and Lessee's
Personal Property, shall insure against the following risks:
<PAGE>
13.1.1 Loss or damage by fire, vandalism and
malicious mischief, extended coverage perils commonly known as "All
Risk," and all physical loss perils normally included in such All Risk
insurance, including, but not limited to, sprinkler leakage, in an amount not
less than one hundred percent (100%) of the then full replacement cost
thereof (as defined below in Paragraph 13.2);
13.1.2 Loss or damage by explosion of steam boilers, pressure vessels or
similar apparatus, now or hereafter installed in the
Facility, if any, in such amounts with respect to any one accident as may be
reasonably requested by Lessor from time-to-time;
13.1.3 Loss of rental under a rental value insurance
policy covering risk of loss during the first twelve (12) months of
reconstruction necessitated by the occurrence of any of the hazards described
in Paragraph 13.1.1 or 13.1.2 in an amount sufficient to prevent Lessor from
becoming a co-insurer.
13.1.4 Claims for personal injury or property damage
under a policy of comprehensive general public liability insurance with
amounts not less than One Million Dollars ($1,000,000) per occurrence, and
with an annual aggregate of Three Million Dollars ($3,000,000.00);
13.1.5 Claims arising out of malpractice or other
professional actions or omissions under a policy of professional liability
insurance with amounts not less than One Million Dollars ($1,000,000) per
occurrence, and with an annual aggregate of Three Million Dollars
($3,000,000);
13.1.6 Flood (if the Leased Property is located in
whole or in part within a flood plain area, as designated by any governmental
or other responsible agency and if such insurance is available pursuant to
applicable law) and such other hazards and in such amounts as may be
customary for comparable properties in the area; and
13.1.7 Any other kinds of insurance, and in such
amounts, as Lessor may reasonably require from time to time to the extent
available in the state where the Leased Property is located.
13.2 Replacement Cost. The term "full replacement cost"
as used herein, shall mean the full actual replacement cost of the Leased
Property as determined from time-to-time upon the request of Lessor or
Lessee (but not more frequently than once in every 24 months), including an
increased cost of construction endorsement, less exclusions provided in the
<PAGE>
standard form of fire insurance policy in the state where the Leased Property
is located. Lessor and Lessee agree that as of the Commencement Date the
full replacement cost shall be deemed to be $1,565,000.00.
13.3 Additional Insurance. In addition to the insurance
described above, Lessee shall maintain such additional insurance as may be
reasonably required from time-to-time by Lessor or any Facility Mortgagee
(to the extent available in the state where the Leased Property is located) and
shall further at all times maintain adequate worker's compensation insurance
coverage for all persons employed by Lessee on the Leased Property. Such
worker's compensation insurance shall be in accordance with the
requirements of applicable federal, state and local law.
13.4 Waiver of Subrogation. All insurance policies
carried by either party covering the Leased Property, the Fixtures, the
Facility,
or Lessee's Personal Property including without limitations, contents, fire and
casualty insurance, shall expressly waive any right of subrogation on the part
of the insurer against the other party. The parties hereto agree that their
policies will include such waiver clause or endorsement so long as the same
are obtainable without extra cost, and in the event of such an extra charge the
other party, at its election, may pay the same, but shall not be obligated to do
so. Upon written request, each party shall provide the other party with a copy
of each insurance policy with the waiver clause or endorsement attached.
13.5 Form Satisfactory, etc. All of the policies of
insurance referred to in this Article XIII shall be written in a form reasonably
satisfactory to Lessor and by insurance companies reasonably satisfactory to
Lessor. Subject to the foregoing, Lessor agrees that it will not unreasonably
withhold its approval as to the form of the policies of insurance or as to the
insurance companies selected by Lessee. Lessee shall pay all of the
premiums therefor, and deliver such policies or certificates thereof to Lessor
prior to their effective date (and, with respect to any renewal policy, prior to
the expiration of the existing policy), and in the event of the failure of
Lessee
either to effect such insurance as herein called for or to pay the premiums
therefor, or to deliver such policies or certificates thereof to Lessor at the
times required, Lessor shall be entitled, but shall have no obligation, to
effect
such insurance and pay the premiums therefor, which premiums shall be
repayable by Lessee to Lessor upon written demand therefor, and failure to
repay the same shall constitute an Event of Default within the meaning of
Paragraph 16.1(c). Each insurer mentioned in this Article XIII shall agree,
by endorsement on the policy or policies issued by it, or by independent
instrument furnished to Lessor, that will give to Lessor (and to any Facility
Mortgagee, if required by the same) thirty (30) days written notice before the
policy or policies in questions shall be altered, allowed to expire or cancel.
<PAGE>
13.6 Increase in Limits. In the event that Lessor or a
Facility Mortgagee shall at any reasonable time deem the limits of the
personal injury or property damage public liability insurance then carried to
be insufficient, Lessee shall thereafter carry the insurance with increased
limits until further change pursuant to the provisions of this Paragraph;
provided that if Lessor desires to increase the limits of insurance, and such
is not pursuant to the request of a Facility Mortgagee, then Lessor may not
demand an increase in limits above the limits generally consistent with the
requirements of owners of long term care properties in the State of
Oklahoma.
13.7 Blanket Policy. Notwithstanding anything to the
contrary contained in this Article XIII, Lessee's obligations to carry the
insurance provided for herein may be brought within the coverage of a so-
called blanket policy or policies of insurance carried and maintained by
Lessee; provided, however, that the coverage afforded Lessor will not be
reduced or diminished or otherwise be different from that which would exist
under a separate policy meeting all other requirements of this Lease by reason
of the use of such blanket policy of insurance, and provided further that the
requirements of this Article XIII are otherwise satisfied.
13.8 No Separate Insurance. Lessee shall not on Lessee's
own initiative or pursuant to the request or requirement of any third party take
out separate insurance concurrent in form or contributing in the event of loss
with that required in this Article, to be furnished or which may reasonably be
required to be furnished, by Lessee or increase the amount of any then
existing insurance by securing any additional policy or additional policies,
unless all parties having an insurable interest in the subject matter of the
insurance, including in all cases Lessor and all Facility Mortgagees, are
included therein as additional insureds, and the loss is payable under said
insurance in the same manner as losses are payable under the Lease. Lessee
shall immediately notify Lessor of the taking out of any such separate
insurance or of the increasing of any of the amount of the then existing
insurance.
13.9 Continuous Coverage. Lessee was the owner of the
Leased Property prior to the date of this Lease. Therefore, Lessee already has
in place insurance with respect to the Leased Property. Lessee shall assure
that there is no gap in the insurance coverage provided in connection with the
Facility at or after the Commencement Date, and therefore, the insurance
provided by Lessee shall be continuous, with the types and amounts of
coverage, described herein to be applicable on the Commencement Date. To
the extent there is not full, complete and continuous coverage for all issues,
no matter when arising, claimed or occurring, Lessee shall, at its sole cost,
obtain such insurance.
<PAGE>
ARTICLE XIV
14.1 Insurance Proceeds. All proceeds payable by reason
of any loss of or damage to the Leased Property, or any portion thereof, which
is insured under any policy of insurance required by Article XIII of the Lease,
where the total proceeds paid by the insurer are less than $150,000.00, shall
be paid to Lessee and applied to the reconstruction or repair, as the case may
be, of any damage to or destruction of the Leased Property, or any portion
thereof. All proceeds payable by reason of any loss of or damage to the
Leased Property, or any portion thereof, which is insured under any policy of
insurance required by Article XIII of this Lease where the total proceeds paid
by the insurer are equal to or in excess of $150,000.00 shall be paid to Lessor
and held by Lessor in trust (subject to the provisions of Paragraph 14.7) and
shall be made available for reconstruction or repair, as the case may be, of
any damage to or destruction of the Leased Property, or any portion thereof,
and shall be paid out by Lessor from time-to-time for the reasonable costs of
such reconstruction or repair. Any excess proceeds of insurance remaining
after the completion of the restoration or reconstruction of the Leased
Property shall go to Lessee, provided the Lease is in force and there exists no
uncured Event of Default; otherwise such excess shall be paid to Lessor for
application as set forth in Article XVI hereof. In the event neither Lessor nor
Lessee is required or elects to repair and restore, and the Lease is terminated
as described in Paragraph 14.7, all such insurance proceeds shall be retained
by Lessor. All salvage resulting from any risk covered by insurance shall
belong to Lessor except that any salvage relating to Lessee's Personal
Property shall belong to Lessee.
14.2 Reconstruction in the Event of Damage or
Destruction Covered by Insurance Proceeds.
14.2.1 If during the Term, the Leased Property is
totally or partially destroyed by a risk covered by the insurance described in
Article XIII and whether or not the Facility thereby is rendered Unsuitable for
Its Primary Intended Use, Lessee shall restore the Leased Property to
substantially the same condition as existed immediately before the damage or
destruction.
14.2.2 If the cost of the repair or restoration exceeds
the amount of proceeds received by Lessee or Lessor from the insurance
required under Article XIII, Lessee shall be obligated to restore the Leased
Property and pay the extra cost therefor, provided that, prior to commencing
the repair and restoration, Lessee shall either (i) contribute any excess amount
needed to restore the Leased Property, or (ii) provide Lessor with satisfactory
evidence that such funds are, and throughout the entire period of
<PAGE>
reconstruction will be, available. If Lessee contributes such excess in cash,
such excess shall be paid by Lessee to Lessor to be held in trust, together with
any insurance proceeds, for application to the cost of repair and restoration.
14.3 Reconstruction in the Event of Damage or
Destruction Not Covered by Insurance. If during the Term, the Leased
Property is damaged or destroyed irrespective of the extent of the damage
from a risk not covered by the insurance described in Article XIII, whether
or not such damage or renders the Facility Unsuitable for Its Primary Intended
Use, Lessee shall restore the Leased Property to substantially the same
condition it was in immediately before such damage or destruction and such
damage or destruction shall not terminate this Lease.
14.4 Lessee's Property. All insurance proceeds payable by reason of any
loss of or damage to any of Lessee's Personal Property shall be paid to
Lessee, and Lessee shall hold such insurance proceeds in trust to
pay the cost of repairing or replacing damaged Lessee's Personal Property.
Any proceeds in excess of the cost of repairing or replacing any such Lessee's
Personal Property shall belong to Lessee.
14.5 Restoration of Lessee's Property. Without limiting
Lessee's obligation to restore the Leased Property as provided in Paragraphs
14.2 and 14.3, Lessee shall also pay the cost to restore all Alterations and
other improvements made by Lessee which Lessee elects to restore, including
Lessee's Personal Property to the extent that Lessee's Personal Property is
necessary to the operation of the Leased Property for its Primary Intended
Use in accordance with applicable Legal Requirements.
14.6 No Abatement of Rent. This Lease shall remain in
full force and effect and Lessee's obligation to make rental payments and to
pay all other charges required by this Lease shall remain unabated during any
period required for repair and restoration.
14.7 Termination of Option to Extend. Any termination
of this Lease by reason of damage to or destruction of the Leased Property
shall cause any options to extend the Lease under Article XVIII to be
terminated and without further force or effect.
14.8 Waiver. Lessee hereby waives any statutory rights of
termination which may arise by reason of any damage to or destruction of the
Leased Property which Lessor is obligated to restore or may restore under any
of the provisions of this Lease.
ARTICLE XV
<PAGE>
15. Condemnation.
15.1 Definitions.
15.1.1 "Condemnation" means (a) the exercise of any
governmental power, whether by legal proceedings or otherwise, by a Condemnor;
(b) a voluntary sale or transfer by Lessor to any Condemnor, either under
threat of Condemnation or while legal proceedings for
Condemnation are pending.
15.1.2 "Date of Taking" means the date the
Condemnor has the right to possession of the property being condemned.
15.1.3 "Award" means all compensation, sums or
anything of value awarded, paid or received on a total or partial
Condemnation.
15.1.4 "Condemnor" means any public or quasi-public
authority, or private corporation or individual, having the power of
Condemnation.
15.2 Parties' Rights and Obligations. If during the Term
there is any taking of all or any part of the Leased Property or any interest in
this Lease by Condemnation, the rights and obligations of the parties shall be
determined by this Article XV.
15.3 Total Condemnation. If title to the fee of the whole
of the Leased Property shall be taken or condemned by any Condemnor, this
Lease shall cease and terminate as of the Date of Condemnation by said
Condemnor. If title to the fee of less than the whole of the Leased Property
shall be so taken or condemned, which nevertheless renders the Leased
Property Unsuitable for Its Primary Intended Use, as reasonably determined
by Lessor and Lessee, Lessee and Lessor shall each have the option by
written Notice to the other, at any time at or prior to the taking of possession
by, or the date of vesting of title in, such Condemnor, whichever first occurs,
to terminate this Lease as of the date of the occurrence of such first event.
If
such Notice has timely been given, this Lease shall thereupon cease and
terminate. Upon the termination of the Lease, all Minimum Rent, and
Additional Charges paid or payable by Lessee hereunder shall be apportioned
as of the date the Lease terminates.
15.4 Allocation of Portion of Award. The total Award
made with respect to all or any portion of the Leased Property or for loss of
rent, or for loss of business, whether or not beyond the Term of this Lease,
or for the loss of
<PAGE>
value of the leasehold (including the bonus value of the
Lease) shall be solely the property of and payable to Lessor and Lessee
hereby assigns to Lessor any and all rights in such Award; provided,
however, that Lessee shall be entitled to make a separate claim for the taking
of Lessee's Personal Property and relocation expense as long as any such
claim will not in any way diminish Lessor's Award, or for any other loss that
can be awarded to Lessee separately from Lessor's claim and which will not
in any respect whatsoever diminish or threaten to diminish the total amounts
to be awarded to Lessor, as set forth above or otherwise. To the extent
Lessee's claim may thereafter reduce Lessor's claim, Lessee shall, and hereby
does, assign its claim to Lessor. In any Condemnation proceedings, each of
the Lessor and Lessee shall seek its own claim in conformity herewith, at its
own expense.
15.5 Partial Taking. If title to the fee of less than the
whole of the Leased Property shall be so taken or condemned, and the Leased
Property is still suitable for its Primary Intended Use, as reasonably
determined by Lessor and Lessee, or if Lessee or Lessor shall be so entitled,
but shall not elect to terminate this Lease as provided in Paragraph 15.3
hereof, Lessee, at its own cost and expense (subject to Lessor's contribution
described below), shall with all reasonable dispatch restore the untaken
portion of any Leased Improvements on the Leased Property so that such
Leased Improvements shall constitute a complete architectural unit of the
same general character and condition (as nearly as may be possible under the
circumstances) as the Leased Improvements existed immediately prior to
such Condemnation. Lessor shall contribute to the cost of restoration that
part of its Award specifically allocated to such restoration, provided,
however, the amount of such contribution shall not exceed the cost of
restoration. The Minimum Rent shall be reduced as set forth in Paragraph
5.2.
15.6 Temporary Taking. Lessee agrees that if, at any time
after the date hereof, the whole or any part of the Leased Property or of
Lessee's interest under this Lease, shall be Condemned by any Condemnor
for its temporary use or occupancy, this Lease shall not terminate by reason
thereof, and Lessee shall continue to pay, in the manner and at the times
herein specified, the full amounts of Minimum Rent and Additional Charges.
Except only to the extent that Lessee may be prevented from doing so
pursuant to the terms of the order of the Condemnor, Lessee shall also
continue to perform and observe all of the other terms, covenants, conditions
and obligations hereof, on the part of the Lessee to be performed and
observed, as though such Condemnation had not occurred. In the event of
any such Condemnation as in this Paragraph 15.6 described, the entire
amount of any such Award made for such temporary use, whether paid by
<PAGE>
way of damages, rent or otherwise, shall be paid to Lessee to the extent
attributable to any period within the Initial Term (as extended by any already
exercised options to extend) and except as otherwise provided hereunder.
Notwithstanding the foregoing, in the event that any temporary use or
occupancy covered under this Paragraph 15.6 renders any portion of the
Leased Property Unsuitable for its Primary Intended Use (or otherwise
reduces the number of residents the Leased Property can accommodate) for a
period in excess of twelve (12) calendar months, Lessee shall have the right
to elect a reduction in Minimum Rent as set forth in Paragraph 5.2
commencing on the twelve (12) month anniversary of any such use or
occupancy and continuing so long as such temporary use or occupancy
continues, in which event any Award made for such temporary use or
occupancy shall be paid to Lessor to the extent attributable to the period that
Minimum Rent is so abated. Lessee covenants that upon the termination of
any such period of temporary use or occupancy as set forth in this Paragraph
15.6, it will, at its sole cost and expense, restore the Leased Property as
nearly
as may be reasonably possible, to the condition in which the same was
immediately prior to the Condemnation, unless such period of temporary use
or occupancy shall extend beyond the expiration of the Term, in which case
Lessee shall not be required to make such restoration, and in such case,
Lessee shall contribute to the cost of such restoration that portion of its
entire
Award which is specifically allocated to such restoration in the judgment or
order of the court, if any.
ARTICLE XVI
16.1 Events of Default. Any one or more of the following
events shall be an "Event of Default":
(a) if Lessee fails to make payment of the Rent
payable by Lessee under this Lease when the same becomes due and payable
and such failure is not cured by Lessee within a period of three (3) Business
Days after Notice thereof from Lessor; or
(b) if Lessee fails to observe or perform any other
term, covenant or condition of this Lease and such failure is not cured by
Lessee within a period of thirty (30) days after Notice thereof from Lessor,
unless such failure cannot with due diligence be cured within a period of
thirty (30) days, in which case such failure shall not be deemed an Event of
Default if Lessee proceeds promptly and with due diligence to cure the failure
and diligently completes the curing thereof within ninety (90) days; or
(c) if Lessee commits an "Event of Default" under any
of the Other Leases. Without limiting the foregoing, if Lessee commits an
<PAGE>
"Event of Default" under this Lease, Lessee shall thereby be in default (and
shall therefore have committed an "Event of Default") under all of the Other
Leases; or
(d) if Lessee does any of the following:
(i) admit in writing its inability to pay its
debts generally as they become due;
(ii) file a petition in bankruptcy or a petition
to take advantage of any insolvency law;
(iii) make an assignment for the benefit of
creditors;
(iv) consent to the appointment of a receiver
of itself or of the whole or any substantial part of its property; or
(v) file a petition or answer seeking
reorganization or arrangement under the Federal bankruptcy laws or any other
applicable law or statute of the United States of America or any state thereof;
or
(e) if Lessee, on a petition in bankruptcy filed against
it, is adjudicated a bankrupt or an order for relief thereunder is entered
against
it or a court of competent jurisdiction shall enter an order or decree
appointing, without the consent of Lessee, a receiver for Lessee or of the
whole or substantially all of its property or the Facility, or approving a
petition filed against Lessee seeking reorganization or arrangement of Lessee
under the Federal bankruptcy laws or other applicable law or statute of the
United States of America or any state thereof, and such judgment, order or
decree shall not be vacated or set aside within sixty (60) days from the date
of the entry thereof; or
(f) if Lessee shall be liquidated or dissolved, or shall
begin proceedings toward such liquidation or dissolution, or shall, in any
manner, permit the sale or divestiture of substantially all of its assets; or
(g) subject to the provisions of Article XII hereof, if
the estate or interest of Lessee in the Leased Property or any part thereof be
levied upon or attached in a proceeding and the same shall not be vacated or
discharged within the later of ninety (90) days after commencement thereof or
thirty (30) days after Notice thereof from Lessor, or a mechanic's or
similar lien is filed with respect to the Leased Property and is not released or
<PAGE>
bonded around for a period exceeding sixty (60) days after Lessee first has
knowledge of the same; or
(h) if Lessee voluntarily ceases operations on the
Leased Property for a period in excess of two (2) days; or
(i) if any of Lessee's representations or warranties
expressly set forth in this Lease (or financial statements provided to Lessor)
proves to be untrue when made in any material respect which materially and
adversely affects Lessor; or
(j) if Lessee (or any of its Affiliates) commits an
"Event of Default" or any other form of default under any other lease or
sublease now or hereafter entered into between Lessor (or any of its
Affiliates) and Lessee (or any of its Affiliates). Without limiting the
foregoing, if Lessee commits an "Event of Default" under this Lease, Lessee
(or any of its Affiliates) shall thereby be in default (and shall therefore have
committed an "Event of Default") under all other leases between Lessor (or
any of its Affiliates) and Lessee (or any of its Affiliates); or
(k) if Lessee attempts to assign or sublease, in
violation of the provisions of this Lease; or
(l) subject to the provisions of Article XII hereof, if
Lessee ceases to maintain in effect any license, permit, certificate or approval
necessary or otherwise required to operate the Facility in accordance with its
Primary Intended Use.
Upon the occurrence of an Event of Default, in addition to all
of Lessor's other remedies, Lessor may terminate this Lease by giving Lessee
not less than ten (10) Business Days Notice of such termination and upon the
expiration of the time fixed in such Notice, the Term shall terminate and all
rights of Lessee under this Lease shall cease.
In the event litigation is commenced with respect to any
alleged default under this Lease, the prevailing party in such litigation shall
receive, in addition to its damages incurred, such sum as the court shall
determine as its reasonable attorneys' fees, and all costs and expenses
incurred in connection therewith, including reasonable attorneys' fees and
costs incurred on appeal.
16.2 Certain Remedies. Lessor shall have all remedies and
rights provided under this Lease and/or otherwise available in law and equity
as a result of an Event of Default or Lessee's other breach under this Lease,
<PAGE>
including, to the extent permitted by Oklahoma law, the right to appoint a
receiver as a matter of strict right without regard to the solvency of Lessee,
for the purpose of procuring the Leased Property, preventing waste,
protecting and otherwise enforcing the provisions of this Lease and for any
and all other purposes for which a receiver is allowed under the laws of the
State of Oklahoma. Without limiting the foregoing, if an Event of Default
occurs (and the event giving rise to such Event of Default has not been cured
within the curative period, if any, relating thereto as set forth in this Lease)
whether or not this Lease has been terminated pursuant to Paragraph 16.1,
Lessee shall, to the extent permitted by law, and if required by Lessor to so
do, immediately surrender to Lessor the Leased Property pursuant to the
provisions of Paragraph 16.1 and quit the same and Lessor may enter upon
and repossess the Leased Property, in person, by agent or by a court-
appointed receiver, by reasonable force, summary proceedings, ejectment or
otherwise, and may remove Lessee and all other persons and any and all
personal property from the Leased Property subject to rights of any residents
(and their property) and to any requirements of law. Without limiting all
other rights and remedies of Lessor under this Lease and under law, Lessor
shall have the right to accelerate all Rent (including Minimum Rent) and
therefore, upon Lessee's default, at Lessor's option, all such Rent shall
become immediately due and payable in accordance with Paragraph 16.3,
below. Further, without limiting all other rights and remedies of Lessor
under this Lease and under law, Lessor shall be entitled to recover from
Lessee, and Lessee shall therefore be liable for, all costs of recovering
possession (including without limitation all costs associated with any
receiver) and renovating the Leased Property for a new lessee and all other
costs of re-leasing, including, but not limited to, broker's commissions and
attorneys' fees, except as limited by Paragraph 16.3 below.
16.3 Damages. Neither (i) the termination of this Lease
pursuant to Section 16.1, (ii) the repossession of the Leased Property; (iii)
the
failure of Lessor, notwithstanding reasonable good faith efforts, to relet the
Leased Property; nor (iv) the reletting of all or any portion thereof, shall
relieve Lessee of its liability and obligations hereunder, all of which shall
survive any such termination, repossession or reletting (except for proceeds
received on subletting). In the event of any such termination, Lessee shall
forthwith pay to Lessor all Rent due and payable with respect to the Leased
Property to and including the date of such termination.
(a) Lessor shall not be deemed to have terminated
this Lease unless Lessor delivers written Notice to Lessee of such election.
If Lessee voluntarily elects to terminate this Lease upon an Event of Default,
then in addition to all remedies available to Lessor, Lessor may recover the
sum of:
<PAGE>
(i) the worth at the time of award of the
unpaid Rent which had been earned at the time of termination;
(ii) the worth at the time of award of the
amount by which the unpaid Rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss
that Lessee proves could have been reasonably avoided;
(iii) the worth at the time of award of the
amount by which the unpaid Rent for the balance of the Term after the time
of award exceeds the amount of such rental loss that Lessee proves could be
reasonably avoided; and
(iv) any other amount necessary to
compensate Lessor for all the detriment proximately caused by Lessee's
failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom.
The "worth at the time of award" of the
amounts referred to in subparagraphs (i) and (ii) above is computed by
allowing interest at the Overdue Rate. The worth at the time of award of the
amount referred to in subparagraph (iii) is computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at
the time of award plus one percent (1%).
(b) Without limiting Lessor's other remedies
provided herein and provided by law, Lessor may continue the Lease in effect
after Lessee's breach and abandonment and recover Rent as it becomes due,
provided that, in such event, Lessee has the right to sublet or assign subject
only to reasonable conditions imposed by Lessor. Accordingly, without
termination of Lessee's right to possession of the Leased Property, Lessor
may demand and recover each installment of Minimum Rent and other sums
payable by Lessee to Lessor under the Lease as the same becomes due and
payable, which Minimum Rent and other sums shall bear interest at the
maximum interest rate permitted in accordance with the laws of the State of
Oklahoma (or the Overdue Rate, whichever is lower), from the date when due
until paid, and Lessor may enforce, by action or otherwise, any other term or
covenant of this Lease. If Lessor elects to recover each installment of Rent
as it becomes due, then Lessor may file any number of lawsuits for the
recovery of the amounts due hereunder.
16.4 Waiver. If this Lease is terminated pursuant to
Paragraph 16.1, Lessee waives, to the extent permitted by applicable law, the
benefit of any laws now or hereafter in force exempting property from
liability for rent or for debt.
<PAGE>
16.5 Application of Funds. Any payments received by
Lessor under any of the provisions of this Lease during the existence or
continuance of any Event of Default shall be applied to Lessee's obligations
in the order which Lessor may determine or as may be prescribed by the laws
of the State of Oklahoma.
ARTICLE XVII
17. Lessor's Right to Cure Lessee's Default. If Lessee
fails to make any payment or to perform any act required to be made or
performed under this Lease, and to cure the same within the relevant time
periods, if any, provided under this Lease, Lessor, after fifteen (15) days'
Notice to and demand upon Lessee, and without waiving or releasing any
obligation of Lessee or default, may (but shall be under no obligation to) at
any time thereafter make such payment or perform such act for the account
and at the expense of Lessee, and may, to the extent permitted by law, enter
upon the Leased Property, in person, by agent or by court-appointed receiver,
for such purpose and take all such action thereon as, in Lessor's opinion, may
be necessary or appropriate therefor. Provided, however, that should Lessor
reasonably determine that the giving of such Notice would risk loss to the
Leased Property, or cause damage to Lessor, then Lessor shall give such
written Notice as is practical under the circumstances. No such entry shall
be deemed an eviction of Lessee. In exercising any remedy under this Article
XVII, Lessor shall use its good faith efforts not to violate any rights of
residents of the Facility. All sums so paid by Lessor and all costs and
expenses (including, without limitation, reasonable attorneys' fees and
expenses, in each case) so incurred, together with a late charge thereon (to the
extent permitted by law) at the Overdue Rate from the date on which sums or
expenses are paid or incurred by Lessor, shall be paid by Lessee to Lessor
on demand. The obligations of Lessee and rights of Lessor contained in this
Article shall survive the expiration or earlier termination of this Lease.
ARTICLE XVIII
18.1 Options to Extend. Provided there exists no uncured
Event of Default under this Lease, or any of the Other Leases at the time
Lessee exercises any option to extend (in accordance with this Article XVIII),
Lessee will have the right to extend this Lease for two (2) periods of five (5)
years each (each such additional term shall be referred to herein as an
"Extended Term"), commencing immediately following the end of the Initial
Term or the immediately preceding Extended Term, as the case may be.
Notwithstanding anything stated in this Paragraph 18.1 or elsewhere in this
Lease, Lessee shall not be entitled to exercise its option to extend this Lease
<PAGE>
for any Extended Term (and any such option to extend shall automatically
expire and terminate) unless Lessee concurrently exercises its option to
extend each of the Other Leases for the same period, as provided in Article
XVIII of each of the Other Leases; and any attempt to exercise Lessee's
option to extend this Lease without Lessee exercising its options under all of
the Other Leases shall be null and void. The Lease during any Extended
Term shall be on the same terms and conditions as during the Initial Term,
except that the Minimum Rent shall be determined as set forth in Paragraph
18.2 below. In the event Lessee desires to exercise any option to extend
granted in this Article XVIII, Lessee shall give Landlord written notice
("Notice to Extend") not less than one hundred eighty (180) days prior to the
expiration of the Initial Term or the immediately preceding Extended Term, as
the case may be. If Lessee fails to give Landlord any such notice, then such
option to extend and all future options to extend granted in this Article
XVIII shall be null and void and of no further force or effect.
18.2 Minimum Rent During Extended Terms. The
Minimum Rent at the commencement of each Extended Term shall be the
higher of: (i) the Minimum Rent at the rate paid immediately preceding such
Extended Term, increased by two percent (2%); and (ii) the Fair Market Rent,
as determined below. The Minimum Rent shall be redetermined at the
commencement of both the first Extended Term and the second Extended
Term and upon such determination shall apply for the entire Extended Term
(subject to annual adjustments as set forth in Paragraph 3.1(c) hereof).
(a) If Lessor and Lessee cannot agree on the Fair
Market Rent within thirty (30) days after the date of any Notice to Extend,
each party shall, by notice to the other, appoint a disinterested and licensed
M.A.I. Real Estate Appraiser with at least five years of experience in long
term care facilities in the State of Oklahoma (with the same type of operating
license and as that in effect for the Facility) to determine the Fair Market
Rent. If any party should fail to appoint an appraiser within ten (10) days
after notice, the appraiser selected by the other party shall determine the Fair
Market Rent. In determining the Fair Market Rent, each appraiser shall give
appropriate consideration to, among other things, generally applicable
minimum rent for tenancies of property comparable to the Leased Property in the
area in which the Leased Property is located.
(b) If the two appraisers selected pursuant to
Paragraph 18.2(a) above, cannot agree upon the Fair Market Rent within forty-
five (45) days, they shall immediately give written notice of such
inability ("Notice of Disagreement") to both Lessor and Lessee setting forth
the Fair Market Rent determinations of each of the appraisers. If the
determinations of each of the two appraisers of the Fair Market Rent at the
<PAGE>
commencement of such Extended Term differ by less than ten percent (10%)
of the lower determination, the Fair Market Rent shall be fixed at an amount
equal to the average of the two determinations.
(c) If the determinations of each of the two
appraisers selected pursuant to Paragraph 18.2(a), above, differ by ten percent
(10%) or more of the lower determination with respect to the Fair Market
Rent to be paid at the commencement of such Extended Term, then within
thirty (30) days after the giving of the Notice of Disagreement, the two
appraisers shall appoint a third disinterested and licensed M.A.I. Real Estate
Appraiser with at least 5 years of experience appraising long term care
facilities. If the parties cannot then agree on the Fair Market Rent, the third
appraiser shall determine the Fair Market Rent, and in so doing, shall give
appropriate consideration to those items described in Paragraph 18.2(a). The
third appraiser shall not select a Fair Market Rent either (i) higher than the
highest of the two appraisals made pursuant to Paragraph 18.2(a); or (ii)
lower than the lowest of the two appraisals made pursuant to Paragraph
18.2(a), above. If the first two appraisers cannot agree on the selection of a
third appraiser within such thirty (30) days, or if the first two appraisers
fail
to provide a Notice of Disagreement (as stated above in Paragraph 18.2(b),
above, then the Fair Market Rent shall be determined by a third appraiser
selected by the American Arbitration Association (or such other organization
at Lessor's election) upon application by Lessor.
(d) During the time before the determination of the
Fair Market Rent, Lessee shall pay Minimum Rent at the rate paid
immediately preceding such Extended Term, increased by two percent (2%);
provided, however, that, if the Fair Market Rent is determined to be higher
than such amount, the Minimum Rent owed by Lessee at the Fair Market
Rent shall be effective retroactively as of the first day of such Extended
Term. If, after the Minimum Rent for an Extended Term is adjusted and
applied retroactively as of the first day of such Extended Term, it is
determined that additional Minimum Rent is due Lessor, the aggregate
amount of any such additional Minimum Rent shall be paid to Lessor within
thirty (30) days of the determination of the Fair Market Rent for such
Extended Term.
(e) Each of the parties shall pay the fees of the
appraiser that it selects pursuant to Paragraph 18.2(a), above, and shall
equally share the cost of the third appraiser, if necessary, and shall equally
share the cost of arbitration (excluding attorneys' fees), if necessary.
ARTICLE XIX
<PAGE>
19. Holding Over. If Lessee shall for any reason remain
in possession of the Leased Property after the expiration of the Term or
earlier termination of the Term hereof, such possession shall be as a month-
to-month tenant during which time Lessee shall pay as rental each month, one
and one-half times the aggregate of (i) one-twelfth of the aggregate Minimum
Rent payable with respect to the last Lease Year of the Term; (ii) all
Additional Rent accruing or otherwise payable during the month; (iii) all
Additional Charges accruing during the month; and (iv) all other sums
payable by Lessee pursuant to the provisions of this Lease. During such
period of month-to-month tenancy, Lessee shall be obligated to perform and
observe all of the terms, covenants and conditions of this Lease, but shall
have no rights hereunder other than the right, to the extent given by law to
month-to-month tenancies, to continue its occupancy and use of the Leased
Property. Nothing contained herein shall constitute the consent, express or
implied, of Lessor to the holding over of Lessee after the expiration or
earlier termination of this Lease.
ARTICLE XX
20. Risk of Loss. During the Term of this Lease, the risk
of loss or of decrease in the enjoyment and beneficial use of the Leased
Property in consequence of the damage or destruction thereof by fire, the
elements, casualties, thefts, riots, wars or otherwise, or in consequence of
foreclosures (to the extent caused by or through Lessee), attachments, levies
or executions (other than those caused by or through Lessor) is assumed by
Lessee, and Lessor shall in no event be answerable or accountable therefor,
nor shall any of the events mentioned in this Paragraph entitle Lessee to any
abatement of Rent except as specifically provided in this Lease, or any right
to terminate this Lease, except as provided in Articles XIV or XV, above.
Without limiting the foregoing, Lessor shall not be liable for injury or
damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Leased Property, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning, or lighting fixtures, or from
any other cause, whether the said injury or damage results from conditions
arising upon the Leased Property, or upon other portions of the Land, or any
part thereof, or from other sources or places, and regardless of whether the
cause of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising from any
act or neglect of Lessee, or any other party named above. Lessor shall,
however, remain liable for any damages arising from Lessor's own gross
negligence or willful misconduct.
<PAGE>
ARTICLE XXI
21. Indemnification. Notwithstanding the existence of
any insurance provided for in Article XIII, and without regard to the policy
limits of any such insurance, Lessee will protect, indemnify, hold harmless
and defend Lessor from and against all liabilities, obligations, claims,
demands, damages, penalties, causes of action, costs, and expenses
(including, without limitation, actual reasonable attorneys' fees and
expenses), to the extent permitted by law, imposed upon or incurred by or
asserted against Lessor by reason of any of the following: (a) any accident,
injury to or death of persons or loss of or damage to property occurring on or
about the Leased Property or adjoining sidewalks, including without
limitation any claims of malpractice, whether occurring prior to or after the
Commencement Date provided however, that if any such liability, obligation,
demand, claim or cause of action is covered by liability insurance pursuant to
Article XIII, and if the insurance carrier is providing a defense acceptable
to Lessor in the reasonable exercise of Lessor's discretion, or has otherwise
acknowledged coverage for same, then Lessee shall not be obligated to
duplicate the defense, investigation, adjustment, or other steps being taken by
the insurer; (b) any occupancy, use, misuse, non-use, condition, maintenance,
or repair by Lessee of the Leased Property; (c) any Impositions (which are the
obligations of Lessee to pay pursuant to the applicable provisions of this
Lease, which include any Impositions arising prior to the Commencement
Date); (d) any failure on the part of Lessee to perform or comply with any of
the terms of this Lease; (e) the non-performance of any of the terms and
provisions of any and all existing and future subleases of the Leased Property
to be performed by the landlord (Lessee) thereunder; (f) any Hazardous
Materials, as defined in Paragraph 10.2, above that now or hereafter during
the Term may be located in, on or around, or may potentially affect, any part
of the Land or Leased Improvements; (g) any and all other matters pertaining
to the Leased Property or the operation of the Facility after the date of this
Lease or otherwise during the Term, including without limitation compliance
with or failure to comply with the provisions of Section 8 of the United States
Housing Act of 1937 as and to the extent applicable, and the provisions of the
Fair Housing Amendments Act of 1988, each as amended from time to time;
and (h) any liability relating to the construction or development of the
Facility, whether arising in connection with events occurring prior to or after
the Commencement Date, including without limitation compliance with or
failure to comply with the provisions of the federal Americans with
Disabilities Act, as amended from time to time. Any amounts which became
payable by Lessee under this Paragraph shall be paid within ten (10) days of
the date the same becomes due and if not timely paid, shall bear a late charge
(to the extent permitted by law) at the Overdue Rate from the date of such
determination to the date of payment. Lessee, at its expense, shall contest,
<PAGE>
resist and defend any such claim, action or proceeding asserted or instituted
against Lessor or may compromise or otherwise dispose of the same as
Lessee sees fit, at Lessee's sole cost, but after consultation with and approval
by Lessor. Nothing herein shall be construed as indemnifying Lessor against
its own gross negligence or willful misconduct. Lessee's liability for a
breach of the provisions of this article arising during the Term hereof shall
survive any termination of this Lease.
ARTICLE XXII
22. Subletting and Assignment. Lessee may not assign,
sublease or sublet, encumber, appropriate, pledge or otherwise transfer, the
Lease or the leasehold or other interest in the Leased Property without the
prior written consent of Lessor, which consent shall not be unreasonably
withheld; provided, however, that Lessee may from time to time during the
Term of this Lease enter into rental agreements with residents of the Facility,
and execute any documents necessary in connection therewith, without
obtaining Lessor's prior consent. Upon Lessor's consent, (a) in the case of
any subletting, the sublessee shall comply with the provisions of Paragraph
22.2, and (b) in the case of any assignment, any such assignee shall assume in
writing and agree to keep and perform all of the terms of this Lease on the
part of Lessee to be kept and performed and shall be, and become, jointly and
severally liable with Lessee for the performance thereof. In the case of either
an assignment or a subletting, (i) an original counterpart of each sublease and
assignment and assumption, duly executed by Lessee and such sublessee or
assignee, as the case may be, in form and substance satisfactory to Lessor,
shall be delivered promptly to Lessor, and (ii) Lessee shall remain primarily
liable, as principal rather than as surety, for the prompt payment of the Rent
and for the performance and observance of all of the covenants and
conditions to be performed by Lessee hereunder.
22.1 Attornment. Lessee shall insert in each sublease
permitted under Paragraph 22 (not including rental agreements with
residents) provisions to that effect that (i) such sublease is subject and
subordinate to all of the terms and provisions of this Lease and the rights of
Lessor hereunder; (ii) in the event this Lease shall terminate before the
expiration of such sublease, the sublessee thereunder will, at Lessor's option,
attorn to Lessor and waive any right the sublessee may have to terminate the
sublease or to surrender possession thereunder, as a result of the termination
of this Lease; and (iii) in the event the sublessee receives a written Notice
from Lessor or Lessor's assignees, if any, stating that Lessee is in default
under this Lease, the sublessee shall thereafter be obligated to pay all rentals
accruing under said sublease directly to the party giving such Notice, or as
such party may direct. All rents received from the sublessee by Lessor or
Lessor's assignees, if any, as the case may be, shall be credited against
amounts owing by Lessee under this Lease.
<PAGE>
22.2 Sublease Limitation. Anything contained in this
Lease to the contrary notwithstanding, Lessee shall not sublet the Leased
Property on any basis such that the rental to be paid by the sublessee
thereunder would be based, in whole or in part, on either (i) the income or
profits derived by the business activities of the sublessee; or (ii) any other
formula such that any portion of the sublease rental received by Lessor would
fail to qualify as "rents from real property" within the meaning of Paragraph
856(d) of the Code, or any similar or successor provision thereto.
ARTICLE XXIII
23. Officer's Certificates and Financial Statements.
(a) At any time from time-to-time upon not less
than twenty (20) days Notice by Lessor, Lessee will furnish to Lessor an
Officer's Certificate certifying that this Lease
unmodified and in full force and effect (or that this Lease is in full force and
effect as modified and setting forth the modifications), the date to which the
Rent has been paid and such other information concerning this Lease as may
be reasonably requested by Lessor. Any such certificate furnished pursuant to
this Paragraph may be relied upon by Lessor and any prospective purchaser
or lender of the Leased Property.
(b) In addition to all other obligations to provide
financial information contained in the Lease, Lessee will furnish the
following statements to Lessor:
(i) within one hundred twenty (120) days after
the end of each Lease Year, an Officer's Certificate stating that to the best of
the signer's knowledge and belief after making reasonable inquiry, Lessee is
not in default in the performance or observance of any of the terms of this
Lease, or if Lessee shall be in default to its knowledge, specifying all such
defaults, the nature thereof, and the steps being taken to remedy the same, and
(ii) with reasonable promptness, such other
information respecting the financial condition and affairs of Lessee as Lessor
may reasonably request from time-to-time.
(c) Within one hundred twenty (120) days after the
end of each Fiscal Year, Lessee agrees to provide to Lessor Consolidated
Financials of Lessee for such Fiscal Year.
<PAGE>
ARTICLE XXIV
24. Lessor's Right to Inspect. Lessee shall permit Lessor
and its authorized representatives to inspect the Leased Property on at least
one Business Day's prior notice during usual business hours subject to any
security, health, safety, or confidentiality requirements of Lessee or any
governmental agency or insurance requirement relating to the Leased
Property, or imposed by law or applicable regulations. Lessor shall take
reasonable steps to avoid interference with the residents.
ARTICLE XXV
25. No Waiver. The waiver by Lessor or Lessee of any
term, covenant or condition in this Lease shall not be deemed to be a waiver
of any other term, covenant or condition or any subsequent waiver of the
same or any other term, covenant or condition contained in this Lease. The
subsequent acceptance of rent hereunder by Lessor or any payment by Lessee
shall not be deemed to be a waiver of any preceding default of any term,
covenant or condition of this Lease, other than the failure to pay the
particular
amount so received and accepted, regardless of the knowledge of any
preceding default at the time of the receipt or acceptance.
ARTICLE XXVI
26. Remedies Cumulative. To the extent permitted by
law, each legal, equitable or contractual right, power and remedy of each
party now or hereafter provided either in this Lease or by statute or otherwise
shall be cumulative and concurrent and shall be in addition to every other
right, power and remedy and the exercise or beginning of the exercise by each
party of any one or more of such rights, powers and remedies shall not
preclude the simultaneous or subsequent exercise by such party of any or all
of such other rights, powers and remedies.
ARTICLE XXVII
27. Acceptance of Surrender. No surrender to Lessor of
this Lease or of the Leased Property or any part thereof, or of any interest
therein, shall be valid or effective unless agreed to and accepted in writing by
Lessor and no act by Lessor or any representative or agent of Lessor, other
than such a written acceptance by Lessor, shall constitute an acceptance of
any such surrender.
ARTICLE XXVIII
<PAGE>
28. No Merger of Title. There shall be no merger of this
Lease or of the leasehold estate created hereby by reason of the fact that the
same person, firm, corporation, or other entity may acquire, own or hold,
directly or indirectly, (a) this Lease or the leasehold estate created hereby or
any interest in this Lease or such leasehold estate; and (b) the fee estate in
the Leased Property.
ARTICLE XXIX
29. Conveyance by Lessor. If Lessor or any successor
owner of the Leased Property shall transfer or assign Lessor's title or interest
in the Leased Property or this Lease other than as security for a debt, then,
subject to the provisions of this Article XXIX and provided the new owner
has agreed in writing for the benefit of Lessee to recognize this Lease and be
bound by all of the terms and conditions hereof, Lessor shall thereupon be
released from all future liabilities and obligations of Lessor under this Lease
arising or accruing from and after the date of such transfer or assignment and
all such future liabilities and obligations shall thereupon be binding upon the
new owner.
ARTICLE XXX
30. Quiet Enjoyment. So long as Lessee shall pay all
Rent as the same becomes due and shall comply with all of the terms of this
Lease and perform its obligations hereunder, and except for any claims,
actions, liens or encumbrances arising from the acts or omissions of Lessee or
otherwise from events occurring prior to the Commencement Date here
under, Lessee shall peaceably and quietly have, hold and enjoy the Leased
Property for the Term hereof, free of any claim or other action by Lessor or
anyone claiming by, through or under Lessor, but subject to all liens and
encumbrances of record as of the date hereof or hereafter consented to by
Lessee. Except as otherwise provided in this Lease, no failure by Lessor to
comply with the foregoing covenant or any covenant of this Lease shall give
Lessee any right to cancel or terminate this Lease or abate, reduce or made a
deduction from or offset against the Rent or any other sum payable under this
Lease, or to fail to perform any other obligation of Lessee hereunder.
ARTICLE XXXI
31. Notices. All notices, demands, requests, consents,
approvals, and other communications ("Notice" or "Notices") hereunder shall
be in writing and personally served upon an Executive Officer of the party
being served or mailed (by registered or certified mail, return receipt
requested and postage prepaid), overnight delivery service addressed to the
respective parties, as follows:
<PAGE>
(a) If to Lessee: Sterling House Corporation
453 S. Webb Road
East Pike Building, 5th Floor
Wichita, Kansas 67207
Attention: Mr. Steven Vick
with a copy to: Crockett & Gilhousen
1005 North Market
Wichita, Kansas 67214
Attention: David G. Crockett, Esq.
(b) If to Lessor: LTC Properties, Inc.
300 Esplanade Drive,
Suite 1860
Oxnard, California 93030
Attention: William McBride III, President
with a copy to: Law Offices of Pamela J. Privett
300 Esplanade Drive, Suite 1865
Oxnard, California 93030
Attention: Pamela J. Privett, Esq.
and: Stern, Neubauer, Greenwald & Pauly
1299 Ocean Avenue, Tenth Floor
Santa Monica, CA 90401-1007
Attention: Dennis L. Greenwald, Esq.
or to such other address as either party may hereafter designate by a Notice
pursuant to this Paragraph. Personally delivered Notice (including Notices
sent by overnight delivery service) shall be effective upon receipt, and Notice
<PAGE>
given by mail shall be completed five (5) days after the time of deposit in the
U.S. Mail system. For the purposes hereof, the term "Executive Officer"
shall mean the Chairman of the Board of Directors, the President, any Vice
President, or the Secretary of the corporation upon which service is to be
made.
ARTICLE XXXII
32.1 Lessor May Grant Liens. Lessor may, subject to the
terms and conditions set forth below in this Paragraph 32.1, from time-to-
time, directly or indirectly, create or otherwise cause to exist any lien or
encumbrance or any other change of title ("Encumbrance") upon the Leased
Property, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing. Any such
Encumbrance shall contain the right to prepay (whether or not subject to a
prepayment penalty) and shall provide that it is subject to the rights of Lessee
under this Lease, provided that any holder of an Encumbrance shall (a) give
Lessee the same notice, if any, given to Lessor of any default or acceleration
of any obligation underlying any such mortgage or any sale in foreclosure
under such mortgage; (b) permit Lessee to cure any such default on Lessor's
behalf within any applicable cure period, and Lessee shall be reimbursed by
Lessor or shall be entitled to offset against Minimum Rent payments next
accruing or coming due for any and all costs incurred in effecting such cure,
including, without limitation, out-of-pocket costs incurred to effect any such
cure (including reasonable attorneys' fees); (c) permit Lessee to appear and to
bid at any sale in foreclosure made with respect to, and/or any sale by
virtue of the exercise of the power of sale contained in, any such mortgage,
and (d) provide that in the event of foreclosure or other possession of the
Leased Property by the Mortgagee, that the Mortgagee (or other purchaser)
shall be bound by the terms and provisions of this Lease. Upon the
reasonable request of Lessor, Lessee shall execute an agreement to the effect
that this Lease shall be subject and subordinate to the lien of a new mortgage
on the Leased Property, and that in the event of any default or foreclosure
under such mortgage, Lessee shall attorn to the new mortgagee, and as
otherwise requested by Lessor on the condition that the mortgagee execute a
non-disturbance agreement recognizing this Lease and agreeing, for itself
and its successor and assigns, to comply with the provisions of this Article
XXXII.
32.2 Lessee's Right to Cure. Subject to the provisions of
Paragraph 32.3, if Lessor breaches any covenant to be performed by it under
this Lease, Lessee, after Notice to and demand upon Lessor, without waiving
or releasing any obligation hereunder, and in addition to any other remedies
available to Lessee, may (but shall be under no obligation at any time
<PAGE>
thereafter to) make such payment or perform such act for the account and at
the expense of Lessor. All sums so paid by Lessee and all costs and expenses
(including, without limitation, reasonable attorneys' fees) so incurred,
together with interest thereon from the date on which such sums or expenses
are paid or incurred by Lessee, shall be paid by Lessor to Lessee on demand,
but may not be offset by Lessee against payments of Rent hereunder.
32.3 Breach by Lessor. It shall be a breach of this Lease if Lessor fails to
observe or perform any term, covenant or condition of this
Lease on its part to be performed, and such failure shall continue for a period
of thirty (30) days after Notice thereof from Lessee unless such failure cannot
with due diligence be cured within a period of thirty (30) days, in which case
such failure shall not be deemed to continue if Lessor, within said thirty (30)
day period, proceeds promptly, continuously and with due diligence to cure
the failure and diligently completes the curing thereof. The time within
which Lessor shall be obligated to cure any such failure shall also be subject
to extension of time due to the occurrence of any Unavoidable Delay.
ARTICLE XXXIII
33. Miscellaneous.
33.1 Survival of Obligations. Anything contained in this
Lease to the contrary notwithstanding, all claims against, and liabilities of,
Lessee or Lessor arising prior to, or in connection with any event occurring
prior to, the date of any expiration or termination of this Lease or the date of
Lessee's surrender of possession, whichever is later, shall survive such
termination or surrender of possession.
33.2 Late Charges; Interest. If any interest rate provided
for in any provision of this Lease is based upon a rate in excess of the
maximum rate permitted by applicable law, the parties agree that such
charges shall be fixed at the maximum permissible rate.
33.3 Limits of Lessor's Liability. Lessee specifically
agrees to look solely to the assets of Lessor for recovery of any judgment
against Lessor, it being specifically agreed that no constituent shareholder,
officer or director of Lessor shall ever be personally liable for any such
judgment or the payment of any monetary obligation to Lessee. The
provision contained in the foregoing sentence is not intended to, and shall
not, limit any right that Lessee might otherwise have to obtain injunctive
relief against Lessor or Lessor's successors in interest, or any action not
involving the personal liability of Lessor (original or successor).
Additionally, Lessor shall be exonerated from any further liability under this
<PAGE>
Lease upon Lessor's transfer or other divestiture of its ownership of the
Leased Property, provided that the assignee or grantee shall expressly assume
in writing the obligations of Lessor hereunder. Furthermore, in no event shall
Lessor (original or successor) ever be liable to Lessee for any indirect or
consequential damages suffered by Lessee from whatever cause.
33.4 Transfer of Operations. At Lessor's request, upon
the expiration or earlier termination of the Term, Lessee shall use its best
efforts to transfer to Lessor or Lessor's nominee (or to cooperate with Lessor
or Lessor's nominee in connection with the processing by Lessor or Lessor's
nominee of any applications for) all licenses, operating permits and other
governmental authorizations and all contracts, including contracts with
governmental or quasi-governmental entities which may be necessary for the
operation of the Facility; provided that the costs and expenses of any such
transfer or the processing of any such application shall be paid by Lessor or
Lessor's nominee.
33.5 Addendum, Amendments and Exhibits. Any
addendum, amendments and exhibits attached to this Lease are hereby
incorporated in this Lease and made a part of this Lease.
33.6 Headings. The headings and paragraph titles in this
Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part of this Lease.
33.7 Time. Time is of the essence of this Lease and each
and all of its provisions.
33.8 Days. Unless otherwise expressly indicated herein,
any reference to "days" in this Lease shall be deemed to refer to calendar
days.
33.9 Rent. Each and every monetary obligation under this
Lease shall be deemed to be "Rent" under this Lease and for all other
purposes under law.
33.10 Applicable Law. This Lease shall be governed by and
construed in accordance with the laws of the State of Oklahoma, but not
including its conflicts of laws rules; thus the law that will apply is the law
applicable to a transaction solely within the State of Oklahoma, including
parties solely domiciled in the State of Oklahoma.
33.11 Successors and Assigns. The covenants and
conditions contained in this Lease shall, subject to the provisions regarding
assignment (Article XXII), apply to and bind the heirs, successors, executors,
administrators, and assigns of Lessor and Lessee.
<PAGE>
33.12 Recordation. Lessor and Lessee shall execute with
appropriate acknowledgments and record in the Official Records of Pontotoc
County, that certain Short Form Lease in the form and content of Exhibit
"C" attached hereto. Lessor and Lessee shall equally share the cost of
recording the Memorandum of Lease.
33.13 Prior and Future Agreements. This Lease contains
all of the agreements of Lessor and Lessee with respect to any matter covered
or mentioned in this Lease, and no prior agreements or understanding
pertaining to any such matters shall be effective for any purpose. No
provision of this Lease may be amended or supplemented except by an
agreement in writing signed by both Lessor and Lessee or their respective
successors in interest. This Lease shall not be effective or binding on any
party until fully executed by both Lessor and Lessee.
33.14 Partial Invalidity. Any provision of this Lease which
shall be held by a court of competent jurisdiction to be invalid, void or
illegal
shall in no way affect, impair or invalidate any other provision or term of this
Lease, and such other provision or terms shall remain in full force and effect.
33.15 Attorneys' Fees. In the event of any action or
proceeding brought by one party against the other under this Lease, the
prevailing party shall be entitled to recover its attorneys' fees in such action
or proceeding from the other party, including all attorneys' fees incurred in
connection with any appeals, and any post-judgment attorneys' fees incurred
in efforts to collect on any judgment.
33.16 Authority of Lessor and Lessee. Lessor and Lessee
each hereby represent and warrant that the individuals signing on its behalf
are duly authorized to execute and deliver this Lease on behalf of the
corporation, in accordance with the bylaws of the corporation, and that this
Lease is binding upon the corporation.
33.17 Relationship of the Parties. Nothing contained in
this Lease shall be deemed or construed by Lessor or Lessee, nor by any third
party, as creating the relationship of principal and agent or a partnership, or
a joint venture by Lessor or Lessee, it being understood and agreed that no
provision contained in this Lease nor any acts of Lessor and Lessee shall be
deemed to create any relationship other than the relationship of landlord and
tenant.
33.18 Counterparts. This Lease may be executed in one or
<PAGE>
more separate counterparts, each of which, once they are executed, shall be
deemed to be an original. Such counterparts shall be and constitute one and
the same instrument.
33.19 Brokers. Lessor and Lessee each warrants that it has
had no dealings with any real estate broker or agent in connection with the
negotiation of this Lease and it knows of no real estate broker or agent who
is entitled to a commission in connection with this Lease. Lessor and Lessee
hereby agree to indemnify the other and to hold the other harmless from and
against any and all costs, expenses, claims, damages, suits, including
attorneys' fees, in any way resulting from claims or demands for
commissions or other compensation from any real estate brokers claiming
through such party with respect to this Lease.
<PAGE>
33.20 Computer Disc. In order to facilitate the electronic
filing of this document with the United States Securities Exchange
Commission and other governmental agencies, Lessor shall provide or cause
to be provided to Lessee a computer disc containing this document, together
with all exhibits, schedules and ancillary documents related thereto,
formatted in WordPerfect 5.1 Times New Roman Font 12, upon Lessee's one-
time request for same.
WHEREFORE, each of the parties has accepted and agreed by
affixing their respective authorized signatures below as of the date first above
written.
"LESSEE" STERLING HOUSE
CORPORATION,
a Kansas corporation
By:_______________________________________
Name:____________________________________
Its:_______________________________________
"LESSOR" LTC PROPERTIES, INC.,
a Maryland corporation
By:_______________________________________
Name:____________________________________
Its:_______________________________________
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
ADA, OKLAHOMA
A part of Lot 3, Section 3, Township 3 North, Range 6 East, Pontotoc
County, Oklahoma, more particularly described as follows, to-wit:
BEGINNING at the Northeast corner of said Lot 3; Thence due West
282.56 feet; Thence due South 330 feet; Thence East 282.56 feet; Thence
due North 330 feet to the point of beginning.
<PAGE>
EXHIBIT "B"
ENVIRONMENTAL REPORT
[attached hereto]
<PAGE>
EXHIBIT "C"
SHORT FORM LEASE
[attached hereto]
<PAGE>
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
STERN, NEUBAUER, GREENWALD & PAULY,
A Professional Corporation
1299 Ocean Avenue, Tenth Floor
Santa Monica, California 90401-1007
Attention: Dennis L. Greenwald, Esq.
SHORT FORM LEASE
THIS SHORT FORM LEASE is made as of December _____,
1996, by and between LTC Properties, Inc., a Maryland corporation
("Lessor") and Sterling House Corporation, a Kansas corporation ("Lessee").
W I T N E S S E T H:
1. In consideration of the covenants of Lessee, Lessor
leases to Lessee, and Lessee leases from Lessor, all of Lessor's right, title
and
interest in and to that certain real property and improvements thereon located
in the City of Ada, Pontotoc County, Oklahoma ("Facility"), as more
particularly described in Exhibit "A", attached hereto.
2. This is a short form lease relating to that certain Lease
dated as of December _____, 1996 ("Lease"). The Lease has been executed
by the parties and each party has a full copy thereof.
3. The term of the Lease shall be for a period of time
commencing on December _____, 1996, and shall continue to and include the
31st day of December, 2006, unless the Lease is sooner terminated according
to the terms of the Lease or extended according to specific extension rights
set forth in the Lease.
4. The Lease provides, and Lessor and Lessee hereby
confirm, that neither Lessee nor anyone claiming by, through or under Lessee,
including contractors, subcontractors, materialmen, mechanics and laborers,
shall have any mechanics', materialmen's or construction liens of any sort
whatsoever upon the interest of Lessor in the Facility, and, to the contrary,
any such lien is specifically prohibited. All parties with whom Lessee may
deal are hereby put on notice that Lessee has no power to subject the interest
of Lessor in the Facility to any claim or lien of any kind or character, and all
such persons dealing with Lessee must look solely to Lessee for payment and
not to Lessor's interest in the Facility or any other asset of Lessor.
<PAGE>
5. The terms, conditions, provisions, covenants and
agreements set forth in the Lease shall be binding upon the Lessor and
Lessee, their respective heirs, legal representatives, successors and assigns,
shall be deemed to be covenants running with the Facility, and the entire
Lease is hereby incorporated herein by this reference. In addition to those
terms referred to herein, the Lease contains numerous other terms, conditions
and provisions. In the event of any conflict between the provisions of this
Short Form Lease and the Lease, the provisions of the Lease shall govern,
control and prevail.
6. This Short Form Lease may be executed in one or
more separate counterparts, each of which, once they are executed, shall be
deemed to be an original. Such counterparts shall be and constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Short Form Lease to be signed as of the date first above written.
"LESSEE" STERLING HOUSE
CORPORATION, a Kansas
corporation
By:______________________________________
Name:____________________________________
Title:____________________________________
"LESSOR" LTC PROPERTIES, INC., a
Maryland corporation
By:_______________________________________
Name:____________________________________
Title:____________________________________
<PAGE>
ACKNOWLEDGEMENT
STATE OF ___________ )
) SS
COUNTY OF _________ )
This instrument was acknowledged before me on
December ___, 1996 by ____________________ as ____________________
of Sterling House Corporation.
(Seal)
By:________________________________
Name:______________________________
Title:_______________________________
[My Appointment
expires____________________]
ACKNOWLEDGEMENT
STATE OF CALIFORNIA )
) SS
COUNTY OF VENTURA )
This instrument was acknowledged before me on
December ___, 1996 by ________________ as _____________________ of
LTC Properties, Inc.
(Seal)
By:________________________________
<PAGE>
Name:______________________________
Title:_______________________________
[My Appointment
expires____________________]
Exhibit 10.69
Schedule of Executed Lease Agreements
By and Between Sterling House Corporation
Schedule of executed lease Agreements, by and between Sterling House
Corporation and MLD Texas Trust
Location Date of Lease
3329 W. 7th Ave. November 29, 1996
Coriscana, TX 75110
2525 N. Hinkle Dr. November 29, 1996
Denton, TX 76201
2500 Yorkstown Dr. November 29, 1996
Ennis, TX 75119
2410 Stilhouse Rd. November 29, 1996
Paris, TX 75462
Exhibit 10.70
LEASE AND SECURITY AGREEMENT
This Lease and Security Agreement (this "Lease") is made and
entered into as of the 29th day of November, 1996, by and between MLD
TEXAS TRUST, a Delaware business trust ("Landlord"), and STERLING
HOUSE CORPORATION, a Kansas corporation ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord is the owner of that certain real property, all
improvements thereon and all appurtenances thereto, presently used and
licensed as a personal care facility (Type B Large) ("PCF") by the State of
Texas for sixty (60) beds, located at 2525 N. Hinkle Drive, Denton, Texas
and more specifically described in Exhibit "A" attached hereto, together with
certain of the furniture, machinery, equipment, appliances, fixtures, supplies
and other personal property used in connection therewith as more specifically
described on Exhibit "B" attached hereto ("Landlord Personal Property").
The foregoing property owned by Landlord shall be collectively referred to
in this Lease as the "Premises"; and
WHEREAS, Landlord desires to lease the Premises to Tenant, and
Tenant desires to lease the Premises from Landlord.
NOW THEREFORE, in consideration of the mutual covenants,
conditions and agreements set forth herein, Landlord hereby leases and lets
unto Tenant the Premises for the term and upon the conditions and provisions
hereinafter set forth.
1. Term.
1.1 Term. The term of this Lease shall commence on
November 29, 1996 ("Lease Commencement Date") and shall end on
December 31, 2008 (the "Initial Term") unless extended pursuant to Section
1.2 or earlier terminated in accordance with the provisions hereof. The Initial
Term and all Renewal Terms (as hereinafter defined) are referred to
collectively as the "Term".
1.2 Renewal Terms. The Term may be extended for four
(4) separate renewal terms (each a "Renewal Term") of ten (10) years each,
upon the satisfaction of all of the following terms and conditions:
<PAGE>
1.2.1 Not more than thirty (30) days before or after
the date which is fifteen (15) months prior to the end of the then current
Term, Tenant shall give Landlord written notice that Tenant desires to
exercise its right to extend the then current Term for one (1) Renewal Term.
1.2.2 There shall be no Event of Default under this
Lease, either on the date of Tenant's notice to Landlord pursuant to Section
1.2.1 above, or on the last day of the then current Term.
1.2.3 All other provisions of this Lease shall remain
in full force and effect and shall continuously apply throughout the Renewal
Term(s).
1.2.4 It shall be a further condition of Tenant's
exercise of any of its renewal rights hereunder, that Tenant and all Affiliates
of Tenant then leasing property from Landlord or any Affiliate of Landlord
shall have previously, or simultaneous with Tenant's exercise hereunder,
exercised similar extension rights under their respective lease agreements
with Landlord or any Affiliates of Landlord (collectively, all such lease
agreements and future lease agreements with Landlord or any Affiliates of
Landlord are sometimes referred to as the "Affiliate Leases").
2. Rent. During the Initial Term and all Renewal Terms, Tenant
shall pay to Landlord an annual minimum rent ("Minimum Rent"), which
Minimum Rent shall be expressed as an annual amount but shall be paid in
advance in equal monthly installments on the first (1st) day of each calendar
month. The Minimum Rent shall be determined as follows:
2.1 Initial Term Minimum Rent. During the first Lease
Year of the Initial Term, Tenant shall pay to Landlord Minimum Rent equal
to the amount of One Hundred Fifty-One Thousand Three Hundred
Seventeen and 65/100 Dollars ($151,317.65) payable in equal monthly
installments of Twelve Thousand Six Hundred Nine and 80/100 Dollars
($12,609.80).
2.2 Annual Escalation of Minimum Rent during Term.
2.2.1 Computation of Annual Escalations.
Commencing on December 1, 1997 and continuing on each subsequent
December 1 during the Initial Term and Renewal Term, the Minimum Rent
(irrespective of any prorations made pursuant to Section 2.6 of this Lease)
shall increase to an annual amount (which, although expressed as an annual
<PAGE>
amount, shall be payable in equal monthly installments) equal to the
Minimum Rent for the immediately preceding Lease Year multiplied by a
fraction, the numerator of which shall be the C.P.I. (as hereinafter defined)
for January 1 of the Lease Year then in effect, and the denominator of which
shall be the C.P.I. for January 1 of the immediately preceding Lease Year;
provided, however, that the product of said multiplication shall not result in
an increase of the Minimum Rent by more than two percent (2%) per year on
a cumulative basis ("Annual Multiplier"); provided, further, if the Annual
Multiplier is less than two percent (2%) in any Lease Year (a "Less Than
2% Lease Year"), then at such time as the Annual Multiplier is being
determined for each subsequent Lease Year, the Minimum Rent for each
preceding Less Than 2% Lease Year shall be retroactively recalculated such
that subsequent Annual Multipliers (whether less than or greater than 2%)
shall be first applied to increase the Annual Multiplier for each Less Than 2%
Lease Year to an amount up to, but not greater than, 2%, with such
recalculations to be made in chronological order beginning with the earliest
Less Than 2% Lease Year and continuing, so long as there is Annual
Multiplier remaining, until recalculations have been made with respect to all
Less Than 2% Lease Years. After each such recalculation has been made, the
shortfall in the Minimum Rent for the newly recalculated Less Than 2%
Lease Years shall be billed to Tenant; and Tenant shall pay such shortfall
amount to Landlord within three (3) days after written notice of such shortfall
from Landlord. Such recalculations and shortfall billings shall be made in
each Lease Year where there remain prior Less Than 2% Lease Years which
have not yet been recalculated to 2%. For purposes of example only, if the
initial Minimum Rent equals $939,120.00, and if (a) the C.P.I. increased
1.5% as of January 1, 1998, the Minimum Rent as of January 1, 1998 would
increase to $953,207.00; (b) the C.P.I. increased 1.5% as of January 1, 1999,
the Minimum Rent as of January 1, 1999 would increase to $967,505.00; (c)
the C.P.I. increased 6% as of December 1, 1999, the Minimum Rent as of
January 1, 2000 would increase to $996,602.00, which is the Minimum Rent
increased by 2% per year for three years (i.e., the average annual increases
have been 3% [1.5% + 1.5% + 6% for the three years, respectively], subject
to the 2% annual limitation), and the total shortfall amount to be billed to
Tenant would be $4,695.00 for Lease Year 1998 and $9,555.00 for Lease
Year 1999. For purposes hereof, "C.P.I." shall mean and refer to the United
States Department of Labor, Bureau of Labor Statistics Consumer Price
Index, United States Average, "All Items" (1982-84=100); provided that if
compilation of the C.P.I. is discontinued or transferred to any other
governmental department or bureau, then the index most nearly the same as
the C.P.I. shall be used as reasonably chosen by Landlord. If Landlord is
unable to determine the C.P.I. by January 1 of any Lease Year, Tenant shall
<PAGE>
continue to pay the Minimum Rent at the rate paid for the immediately prior
Lease Year, and once the C.P.I. for January 1 of such Lease Year is
published, the new Minimum Rent (as increased by the Annual Multiplier)
shall be effective retroactively as of the first day of such Lease Year and the
aggregate amount of any additional Minimum Rent shall be paid by Tenant to
Landlord within three (3) days after written notice thereof from Landlord.
No delay by Landlord in providing notice of any such increase in Minimum
Rent shall be deemed a waiver of Landlord's right to increase the Minimum
Rent as provided hereunder.
2.2.2 "Lease Year" shall be defined as the twelve
(12) month periods commencing on January 1 of each year of the Term.
2.3 Renewal Term Minimum Rent. The Minimum Rent
for the first Lease Year in any Renewal Term shall be equal to the greater of:
2.3.1 the product of the fair market value of the
Premises on the date of Tenant's notice of exercise pursuant to Section 1.2.1
multiplied by a percentage equal to three hundred (300) basis points over the
10-year United States Treasury rate in effect on the date of Tenant's notice of
exercise pursuant to Section 1.2.1 or
2.3.2 the Minimum Rent for the immediately
preceding Lease Year (regardless of whether such immediately preceding
Lease Year is in the Initial Term or a Renewal Term) after such Minimum
Rent has been adjusted for escalation in the manner set forth in Section 2.2.1
of this Lease.
If within ten (10) days of the date of Tenant's notice of exercise pursuant to
Section 1.2.1, Landlord and Tenant are unable to agree on the fair market
value of the Premises for purposes of this calculation, such fair market value
shall be established by the appraisal process described on Exhibit "C"
attached hereto; provided, however, Landlord and Tenant agree to use good
faith and diligent efforts to agree on the fair market value of the Premises
within such ten (10) day period. Landlord and Tenant acknowledge and agree
that this Section is designed to establish a fair market Minimum Rent for the
Premises during the first Lease Year of any applicable Renewal Term.
2.4 Minimum Rent Escalations after Inception of
Renewal Term. Commencing with the second Lease Year of each Renewal Term and
every Lease Year of such Renewal Term thereafter, the Minimum
Rent shall increase by an escalation adjustment determined in the manner set
forth in Section 2.2.1 of this Lease.
<PAGE>
2.5 Total Rent. For all purposes of calculating and paying
Minimum Rent under this Lease, the Minimum Rent payable by Tenant in
any Lease Year will not be less than the Minimum Rent paid by Tenant for
the previous Lease Year.
2.6 Proration for Partial Periods. The rent for any month
during the Term which begins or ends on other than the first or last calendar
day of a calendar month shall be prorated based on actual days elapsed.
2.7 Form for Calculating Minimum Rent. Tenant shall
accompany each installment of Minimum Rent owing in respect to a Lease
Year with Tenant's calculation of the Minimum Rent payable for such Lease
Year, which calculation shall be set forth on a form mutually approved by
Landlord and Tenant.
2.8 Absolute Net Lease. All rent payments shall be
absolutely net to the Landlord free of taxes, assessments, utility charges,
operating expenses, refurnishings, insurance premiums or any other charge
or expense in connection with the Premises. All expenses and charges,
whether for upkeep, maintenance, repair, refurnishing, refurbishing,
restoration, replacement, insurance premiums, taxes, utilities, and other
operating or other charges of a like nature or otherwise, shall be paid by
Tenant. This provision is not in derogation of the specific provisions of this
Lease, but in expansion thereof and as an indication of the general intentions
of the parties hereto. Tenant shall continue to perform its obligations under
this Lease even if Tenant claims that Tenant has been damaged by any act or
omission of Landlord. Therefore, Tenant shall at all times remain obligated
under this Lease without any right of set-off, counterclaim, abatement,
deduction, reduction or defense of any kind. Tenant's sole right to recover
damages against Landlord by reason of a breach or alleged breach of
Landlord's obligations under this Lease shall be to prove such damages in a
separate action against Landlord.
3. Taxes, Assessments and Other Charges:
3.1 Tenant's Obligations. Tenant agrees to pay and
discharge (including the filing of all required returns) any and all taxes
(including but not limited to real estate and personal property taxes, business
and occupational license taxes, ad valorem, sales, use, single business, gross
receipts, transaction privilege, rent or other excise taxes) and other
<PAGE>
assessments levied or assessed against the Premises or any interest therein
during the Term, prior to delinquency or imposition of any fine, penalty,
interest or other cost. Tenant agrees to pay all franchise taxes of Landlord
(but excluding franchise taxes relating to the restructuring of Landlord's
liabilities) assessed or proposed for assessment, including, without limitation,
franchise taxes derived as a result of an appreciation of the fair market value
of the Premises or a change in the method of calculating franchise taxes. In
computing the amount of any franchise tax payable by Tenant, the amount
payable by Tenant shall be equitably apportioned in a manner followed by
taxing authorities. Notwithstanding the foregoing, nothing contained in this
Lease shall be construed to require Tenant to pay (1) any federal, state, or
local income tax assessed against Landlord, or (2) any tax assessed as a result
of the sale, exchange or other disposition by Landlord of the Premises or the
proceeds thereof.
3.2 Proration. At the commencement and at the end of the
Term, all such taxes and assessments shall be prorated.
3.3 Right to Protest. Landlord and/or Tenant shall have
the right, but not the obligation, to protest the amount or payment of any real
or personal property taxes or assessments levied against the Premises;
provided that in the event of any protest by Tenant, Landlord shall not incur
any expense because of any such protest, Tenant shall diligently and
continuously prosecute any such protest and notwithstanding such protest
Tenant shall pay any tax, assessment or other charge before the imposition of
any penalty or interest.
3.4 Tax Bills. Landlord shall promptly forward to Tenant
copies of all tax bills and payment receipts relating to the Premises received
by Landlord.
3.5 Other Charges. Tenant agrees to pay and discharge,
punctually as and when the same shall become due and payable without
penalty, all electricity, gas, garbage collection, cable television, telephone,
water, sewer, and other utilities costs and all other charges, obligations or
deposits assessed against the Premises during the Term.
4. Insurance.
4.1 General Insurance Requirements. All insurance
provided for in this Lease shall be maintained under valid and enforceable
policies issued by insurers of recognized responsibility, licensed and
<PAGE>
approved to do business in the State of Texas, having a rating of not less than
"A-X" in the then most current Best's Insurance Report. Any and all policies
of insurance required under this Lease shall name the Landlord as an
additional insured and shall be on an "occurrence" basis. In addition,
Landlord shall be shown as the loss payable beneficiary under the casualty
insurance policy maintained by Tenant pursuant to Section 4.2. All policies of
insurance required herein may be in the form of "blanket" or "umbrella"
type policies which shall name the Landlord and Tenant as their interests may
appear and allocate to the Premises the full amount of insurance required
hereunder. Original policies or satisfactory certificates from the insurers
evidencing the existence of all policies of insurance required by this Lease
and showing the interest of the Landlord shall be filed with the Landlord prior
to the commencement of the Term and shall provide that the subject policy
may not be cancelled except upon not less than ten (10) days prior written
notice to Landlord. If Landlord is provided with a certificate, upon Landlord's
request Tenant shall use its best efforts to provide Landlord with a complete
copy of the insurance policy evidenced by such certificate as soon as possible
after the commencement of the Term but not later than sixty (60) days after
the commencement of the Term. Certificates of the renewal policies from the
insurers evidencing the existence thereof shall be deposited with Landlord not
less than five (5) days prior to the expiration dates of the policies. Upon
Landlord's request Tenant shall use its best efforts to deliver a copy of the
complete renewal policy to Landlord as soon as possible after the expiration
of the replaced policy but not later than sixty (60) days after the expiration
of
the replaced policy. Any claims under any policies of insurance described in
this Lease shall be adjudicated by and at the expense of the Tenant or of its
insurance carrier, but shall be subject to joint control of Tenant and Landlord.
4.2 Fire and Other Casualty. Tenant shall keep the
Premises insured against loss or damage from all causes under standard "all
risk" property insurance coverage, without exclusion for fire, lightning,
windstorm, explosion, smoke damage, vehicle damage, sprinkler leakage,
vandalism, malicious mischief or any other risks as are normally covered
under an extended coverage endorsement, in an amount that is not less than
the full insurable value of the Premises including all equipment and personal
property (whether or not Landlord Personal Property) used in the operation
of the Premises, but in no event less than One Million Five Hundred Ninety-
Five Thousand Dollars ($1,595,000.00). The term "full insurable value" as
used in this Lease shall mean the actual replacement value of the Premises
(including all improvements) and every portion thereof, including the cost of
compliance with changes in zoning and building codes and other laws and
regulations, demolition and debris removal and increased cost of
<PAGE>
construction. In addition, the casualty insurance required under this Section
4.2 will include an agreed amount endorsement such that the insurance carrier
has accepted the amount of coverage and has agreed that there will be no co-
insurance penalty. In the event the Premises is ever reasonably deemed by
Landlord to be in an earthquake prone or flood prone area, then Tenant
agrees, within twenty (20) days after receipt of notice from Landlord, to
purchase flood and/or earthquake insurance, to keep the Premises insured
against loss or damage from flood and earthquake in an amount that is not
less than the full insurable value of the Premises including all equipment and
personal property (whether or not Landlord Personal Property) used in the
operation of the Premises, but in no event less than the amount shown above
in this Section 4.2.
4.3 Public Liability. Tenant shall maintain comprehensive
general public liability insurance coverage against claims for bodily injury,
death or property damage occurring on, in or about the Premises and the
adjoining sidewalks and passageways, such insurance to include a broad form
endorsement and to afford protection to Landlord and Tenant of not less than
One Million Dollars ($1,000,000.00) with respect to bodily injury or death to
any one person, not less than Five Million Dollars ($5,000,000.00) with
respect to any one accident, and not less than One Million Dollars
($1,000,000.00) with respect to property damage; provided, that Landlord
shall have the right at any time hereafter to require such higher limits as may
be reasonable and customary for transactions and properties similar to the
Premises.
4.4 Professional Liability Insurance. Tenant shall
maintain insurance against liability imposed by law upon Tenant for damages
on account of professional services rendered or which should have been
rendered by Tenant or any person for which acts Tenant is legally liable on
account of injury, sickness or disease, including death at any time resulting
therefrom, and including damages allowed for loss of service, in a minimum
amount of One Million Dollars ($1,000,000.00) for each claim and Five
Million Dollars ($5,000,000.00) in the aggregate.
4.5 Workers Compensation. Tenant shall comply with all legal requirements
regarding worker's compensation, including any
requirement to maintain worker's compensation insurance against claims for
injuries sustained by Tenant's employees in the course of their employment.
4.6 Boiler Insurance In the event any boilers or pressure
vessels are ever located at the Premises, Tenant shall maintain boiler and
<PAGE>
pressure vessel insurance, including an endorsement for boiler interruption
insurance, on any fixtures or equipment which are capable of bursting or
exploding, in an amount not less than Five Million and No/100 Dollars
($5,000,000.00) for damage to property, bodily injury or death resulting from
such perils.
4.7 Business Interruption Insurance. Tenant shall
maintain, at its expense, business interruption and extra expense insurance
insuring against loss of rental value for a period of not less than one (1)
year.
4.8 Deductible Amounts. The policies of insurance which
Tenant is required to provide under this Lease will not have deductibles or
self-insured retentions in excess of Fifty Thousand Dollars ($50,000).
5. Use, Maintenance and Alteration of the Premises.
5.1 Tenant's Maintenance Obligations.
5.1.1 Tenant will keep and maintain the Premises in
good appearance, repair and condition and maintain proper housekeeping.
Tenant shall promptly make or cause to be made all repairs, interior and
exterior, structural and nonstructural, ordinary and extraordinary, foreseen
and unforeseen, necessary to keep the Premises in good and lawful order and
condition and in substantial compliance with all requirements for the
licensing of a PCF in the State of Texas or as otherwise required under all
applicable local, state and federal laws. In the event the Premises is ever
certified to participate in Medicare or Medicaid (or any successor programs,
Tenant agrees to keep the Premises in good and lawful order and condition
in compliance with all of the requirements to maintain such Medicare and/or
Medicaid certification.
5.1.2 As part of Tenant's obligations under this
Section 5.1, Tenant shall be responsible to maintain, repair and replace all
Landlord Personal Property and all Tenant Personal Property (as defined in
Section 7.1 below) in good condition, ordinary wear and tear excepted,
consistent with prudent PCF industry practice.
5.1.3 Without limiting Tenant's obligations to
maintain the Premises under this Lease, within thirty (30) days of the end of
each Lease Year starting with the end of the sixth (6th) Lease Year, Tenant
shall provide Landlord with evidence satisfactory to Landlord in the
reasonable exercise of Landlord's discretion that Tenant has in such Lease
<PAGE>
Year spent on Upgrade Expenditures (as hereinafter defined) an annual
average amount of at least Two Hundred and No/100 Dollars ($200.00) (as
such amount shall be adjusted annually at the end of each Lease Year for
increases in the CPI) per occupant unit of the Premises. The term "Upgrade
Expenditures" is defined to mean upgrades or improvements to the Premises
which have the effect of maintaining or improving the competitive position of
the Premises in its marketplace. Non-exclusive examples of Upgrade
Expenditures are new or replacement wallpaper, tiles, window coverings,
lighting fixtures, painting, upgraded landscaping, carpeting, architectural
adornments, common area amenities and the like. It is expressly understood
that capital improvements or repairs (such as, but not limited to, repairs or
replacements to the structural elements of the walls, parking area, or the roof
or to the electrical, plumbing, HVAC or other mechanical or structural
systems in the Premises) shall not be considered to be Upgrade Expenditures.
If Tenant fails to make at least the above amount of Upgrade Expenditures,
Tenant shall promptly on demand from Landlord (but in no event more than
five [5] days) pay cash to Landlord in the amount of the applicable shortfall
in Upgrade Expenditures. Such cash shall be deposited by Landlord in its
name in such United States savings accounts or interest bearing investments
as are deemed appropriate therefor by Landlord in its reasonable discretion
from time to time and as are fully insured by an agency of the United States
of America or are issued or guaranteed by the United States of America (the
"Upgrades Reserve Account"). All interest earned on any such deposits
shall be added to such deposits and held in the Upgrades Reserve Account
until the assets thereof are required to be distributed in accordance with the
following provisions of this Section 5.1.3. No other funds shall be deposited
into or commingled with the Upgrade Reserve Account. Funds deposited in
the Upgrade Reserve Account may only be withdrawn in accordance with this
Section 5.1.3. Upon the expiration of the Term or at such other time as
Tenant shall provide the Substantiation (hereinafter defined), the assets in the
Upgrades Reserve Account (if any) shall be refunded to Tenant if Tenant has
provided adequate substantiation in writing to Landlord in reasonable detail
prior to such expiration that Tenant has satisfied all of its obligations
imposed
under the first sentence of this Section 5.1.3 for all Lease Years in the Term
(other than the first five Lease Years of the Initial Term) (the
"Substantiation"), but if Tenant has not provided the Substantiation to
Landlord prior to such expiration, all the assets of the Upgrades Reserve
Account shall be immediately paid to Landlord as additional rent upon such
expiration.
5.2 Regulatory Compliance.
<PAGE>
5.2.1 Tenant and the Premises shall comply with all
federal, state and local licensing and other laws and regulations applicable to
the operation of a PCF. Further, Tenant shall ensure that the Premises
continue to be licensed as a PCF with a licensed capacity of sixty (60) beds
throughout the Term and at the time the Premises are returned to Landlord at
the termination thereof, all without any suspension, revocation,
decertification or limitation. Further, Tenant shall not commit any act or
omission that would in any way violate any certificate of occupancy affecting
the Premises. In the event the Premises is ever certified to participate in
Medicare or Medicaid (or any successor programs), Tenant shall ensure that
the condition of the Premises is such that the Premises could thereafter
continue to be fully certified to participate in Medicare and Medicaid (or any
successor program) throughout the remainder of the Term and at the time the
Premises are returned to Landlord at the termination thereof, all without any
suspension, revocation, decertification or limitation. Notwithstanding
anything to the contrary herein, Tenant shall be entitled to voluntarily cause
the Premises to be decertified from Medicare and/or Medicaid without
Landlord's prior written consent, unless a decertification proceeding is then
taking place in which event Tenant shall be required to obtain Landlord's
consent for such decertification.
5.2.2 During the Term, all inspection fees, costs and
charges associated with a change of any licensure or certification shall be
borne solely by Tenant. Tenant shall at its sole cost make any additions or
alterations to the Premises necessitated by, or imposed in connection with, a
change of ownership inspection survey for the transfer of operation of the
Premises from Tenant or Tenant's assignee or subtenant to Landlord or
Landlord's designee at the expiration or earlier termination of the Term in
accordance herewith.
5.3 Permitted Use. Tenant shall continuously use and
occupy the Premises during the Term, solely as a sixty (60) bed licensed PCF.
5.4 Tenant Repurchase Obligation. [INTENTIONALLY
DELETED]
5.5 No Liens; Permitted Contests. Tenant shall not cause
or permit any liens, levies or attachments to be placed or assessed against the
Premises or the operation thereof for any reason. However, Tenant shall be
permitted in good faith and at its expense to contest the existence, amount or
validity of any lien upon the Premises by appropriate proceedings sufficient
to prevent the collection or other realization of the lien or claim so contested
<PAGE>
as well as the sale, forfeiture or loss of any of the Premises or any rent to
satisfy the same. Tenant shall provide Landlord with security satisfactory to
Landlord in Landlord's reasonable judgment to assure the foregoing. Each
contest permitted by this Section 5.5 shall be promptly and diligently
prosecuted to a final conclusion by Tenant.
5.6 Alterations by Tenant. Subject to Section 12.1
hereof, Tenant shall have the right of altering, improving, replacing,
modifying or expanding the facilities, equipment or appliances in the
Premises from time to time as it may determine is desirable for the continuing
and proper use and maintenance of the Premises under this Lease; provided,
however, that any alterations, improvements, replacements, expansions or
modifications in excess of Two Hundred Fifty Thousand Dollars
($250,000.00) in any rolling twelve (12) month period shall require the prior
written consent of the Landlord. The cost of all such alterations,
improvements, replacements, modifications, expansions or other purchases,
whether undertaken as an on-going licensing, Medicare or Medicaid (or any
successor program) or other regulatory requirement or otherwise shall be
borne solely and exclusively by Tenant (unless funded by Landlord under
Section 5.7) and shall immediately become a part of the Premises and the
property of the Landlord subject to the terms and conditions of this Lease. All
work done in connection therewith shall be done in a good and workmanlike
manner and in compliance with all existing codes and regulations pertaining
to the Premises and shall comply with the requirements of insurance policies
required under this Lease. In the event any items of the Premises have
become inadequate, obsolete or worn out or require replacement (by direction
of any regulatory body or otherwise), Tenant shall remove such items and
exchange or replace the same at Tenant's sole cost and the same shall become
part of the Premises and property of the Landlord.
5.7 Capital Improvements Funded by Landlord. In the
event Tenant desires to make a capital improvement or a related series of
capital improvements to the Premises and if Tenant desires that Landlord
fund the same, Landlord shall, in its discretion and without obligation, within
thirty (30) days of Tenants' written request therefor, consider Tenant's
request to fund such capital improvements. Each and every capital
improvement funded by Landlord under this Section shall immediately
become a part of the Premises and shall belong to Landlord subject to the
terms and conditions of this Lease. Notwithstanding anything to the contrary
herein, Landlord shall not be required to fund any capital improvements
unless expressly set forth herein.
<PAGE>
5.8 Compliance with IRS Guidelines. Any improvement
or modification to the Premises shall satisfy the requirements set forth in
Sections 4(4).02 and .03 of Revenue Procedure 75-21, 1975-1 C.B. 715, as
modified by Revenue Procedure 79-48, 1979-2 C.B. 529. Landlord reserves
the right to refuse to consent to any improvement or modification to the
Premises if, in its judgment, such improvement or modification does not meet
the foregoing requirements.
6. Condition and Title of Premises. Tenant acknowledges that
it is presently engaged in the operation of PCFs in the State of Texas and has
expertise in the PCF industry. Tenant has thoroughly investigated the
Premises, has selected the Premises to its own specifications, and has
concluded that no improvements or modifications to the Premises are
required in order to operate the Premises for its intended use. Tenant accepts
the Premises for use as a PCF under this Lease on an "AS IS, WHERE IS,
WITH ALL FAULTS" basis and will assume all responsibility and cost for
the correction of any observed or unobserved deficiencies or violations. In
making its decision to enter into this Lease, Tenant has not relied on any
representations or warranties, express or implied, of any kind from Landlord.
Notwithstanding any other provisions of this Lease to the contrary, Tenant
accepts the Premises in their present condition, AS IS, WHERE IS, WITH
ALL FAULTS, and without any representations or warranties whatsoever,
express or implied, including, without limitation, any express or implied
representations or warranties as to the fitness, use, suitability, or
condition of
the Premises. Tenant hereby represents and warrants to Landlord that Tenant
is thoroughly familiar with the Premises and the condition thereof, that
Tenant is relying on Tenant's own personal knowledge of the condition of the
Premises, that neither Landlord nor any person or entity acting or allegedly
acting for or on behalf of Landlord or any other person or entity having or
claiming any interest in the Premises has made any representations,
warranties, agreements, statements, or expressions of opinions in any way or
manner whatsoever related to, connected with, or concerning the Premises,
the condition of the Premises, or any other fact or circumstance whatsoever
on which Tenant is relying, and, to the maximum extent not prohibited by
applicable law, Tenant hereby releases and discharges Landlord and all other
persons and entities having or claiming any interest in the Premises from all
liability, damages, costs, and expenses of every kind and nature whatsoever
in any way or manner arising out of, connected with, related to, or emanating
from the condition of the Premises at any time during the Term of this Lease.
Tenant has examined the condition of title to the Premises prior to the
execution and delivery of this Lease and has found the same to be
satisfactory.
<PAGE>
7. Tenant Personal Property.
7.1 Tenant Personal Property. Tenant shall install, affix,
assemble or place on the Premises all items of furniture, fixtures, equipment
and supplies not included as Landlord Personal Property as Tenant reasonably
considers to be appropriate for Tenant's use of the Premises as contemplated
by this Lease (the "Tenant Personal Property"). Tenant shall provide and
maintain during the entire Term all Tenant Personal Property as shall be
necessary in order to operate the Premises in compliance with all
requirements set forth in this Lease. All Tenant Personal Property shall be
and shall remain the property of Tenant and may be removed by Tenant upon
the expiration of the Term. However, if there is any Event of Default, Tenant
will not remove the Tenant Personal Property from the Premises and will on
demand from Landlord, convey the Tenant Personal Property to Landlord by
executing a bill of sale in a form reasonably required by Landlord. In any
event, Tenant will repair all damage to the Premises caused by any removal
of the Tenant Personal Property.
7.2 Landlord's Security Interest.
7.2.1 The parties intend that if Tenant defaults under
this Lease, Landlord will control the Tenant Personal Property and the
Intangible Property (as defined in Section 7.4 below) so that Landlord or its
designee can operate or re-let the Premises intact for use as a PCF.
7.2.2 Therefore, to implement the intention of the
parties, and for the purpose of securing the payment and performance of
Tenant's obligations under this Lease, Tenant, as debtor, hereby grants to
Landlord, as secured party, a security interest in and an express contractual
lien upon, all of Tenant's right, title and interest in and to the Tenant
Personal
Property and in and to the Intangible Property and any and all products and
proceeds thereof, in which Tenant now owns or hereafter acquires an interest
or right, including any leased Tenant Personal Property. This Lease
constitutes a security agreement covering all such Tenant Personal Property
and the Intangible Property. The security interest granted to Landlord in this
Section 7.2.2 is intended by Landlord and Tenant to be subordinate to any
security interest granted in connection with the financing or leasing of all or
any portion of the Tenant Personal Property so long as the lessor or financier
of such Tenant Personal Property agrees to (a) give Landlord written notice
of any default by Tenant under the terms of such lease or financing
arrangement, (b) give Landlord a reasonable time following such notice to
cure any such default and (c) consent to Landlord's written assumption of
<PAGE>
such lease or financing arrangement upon Landlord's curing of any defaults
thereunder. This security agreement and the security interest created herein
shall survive the termination of this Lease if such termination results from the
occurrence of an Event of Default.
7.3 Financing Statements. If required by Landlord at any
time during the Term, Tenant will execute and deliver to Landlord, in a form
reasonably satisfactory to Landlord, additional security agreements, financing
statements, fixture filings and such other documents as Landlord may
reasonably require to perfect or continue the perfection of Landlord's security
interest in the Tenant Personal Property and the Intangible Property and any
and all products and proceeds thereof now owned or hereafter acquired by
Tenant. Tenant shall pay all fees and costs that Landlord may incur in filing
such documents in public offices and in obtaining such record searches as
Landlord may reasonably require. In the event Tenant fails to execute any
financing statements or other documents for the perfection or continuation of
Landlord's security interest, Tenant hereby appoints Landlord as its true and
lawful attorney-in-fact to execute any such documents on its behalf, which
power of attorney shall be irrevocable and is deemed to be coupled with an
interest.
7.4 Intangible Property. The term "Intangible
Property" means all accounts, proceeds of accounts, rents, profits, income
or revenue derived from the use of rooms or other space within the Premises
or the providing of services in or from the Premises; documents, chattel
paper, instruments, contract rights, deposit accounts, general intangibles,
choses in action, now owned or hereafter acquired by Tenant (including any
right to any refund of any taxes or other charges heretofore or hereafter paid
to any governmental authority) arising from or in connection with Tenant's
operation or use of the Premises; all licenses and permits now owned or
hereinafter acquired by Tenant, necessary or desirable for Tenant's use of the
Premises under this Lease, including without limitation, if applicable, any
certificate of need or other similar certificate; and the right to use any trade
or other name hereafter associated with the operation of the Premises by
Tenant, excluding any name which includes "Sterling House". The word
"accounts" above shall include, without limitation and to the extent
assignable, accounts to be paid by Medicaid or Medicare (or successor
programs), if any.
8. Representations and Warranties. Landlord and Tenant do
hereby each for itself represent and warrant to each other as follows:
<PAGE>
8.1 Due Authorization and Execution. This Lease and
all agreements, instruments and documents executed or to be executed in
connection herewith by either Landlord or Tenant were duly authorized and
shall be binding upon the party that executed and delivered the same.
8.2 Due Organization. Landlord and Tenant are duly
organized, validly existing and in good standing under the laws of the State
of their respective formations and are duly authorized and qualified to do all
things required of the applicable party under this Lease within the State of
Texas.
8.3 No Breach of Other Agreements. Neither this Lease
nor any agreement, document or instrument executed or to be executed in
connection herewith, violates the terms of any other agreement to which
either Landlord or Tenant is a party.
9. Financial, Management and Regulatory Reports.
9.1 Monthly Facility Reports. Within forty-five (45) days
after the end of each calendar month during the Term, Tenant shall prepare
and deliver monthly financial reports concerning the business conducted at
the Premises to Landlord consisting of a balance sheet and income statement
prepared in accordance with GAAP, together with census reports that indicate
(a) the average rent received by Tenant from occupants at the Premises, (b)
the number of occupants, and (c) a breakdown of payment source. These
reports will be accompanied by a statement signed by the President, Chief
Financial Officer, Principal Accounting Officer, Controller, Executive Vice
President, Development, or other officer of Tenant as approved by Landlord
in writing, certifying that said reports are true, correct, and complete in all
material respects after due inquiry.
9.2 Annual Financial Statement. On or before the earlier
of (a) one hundred twenty (120) days after each fiscal year end of Tenant
during the Term or (b) the date Tenant files its Form 10-K with the Securities
and Exchange Commission (the "SEC"), Tenant shall deliver to Landlord (y)
the annual consolidated financial statement of Tenant audited by a reputable
certified public accounting firm and (z) a copy of Tenant's Form 10-K filed
with the SEC pursuant to applicable securities laws during the Term.
Simultaneously with the filing of Tenant's Form 10-Q's with the SEC,
Tenant agrees to deliver to Landlord a copy of same.
9.3 Accounting Principles. All of the reports and
statements required hereby shall be prepared in accordance with GAAP and
Tenant's accounting principles consistently applied.
<PAGE>
9.4 Regulatory Reports. In addition, Tenant shall within
five (5) business days of receipt thereof deliver to Landlord all federal, state
and local licensing and reimbursement certification surveys, inspection and
other reports received by Tenant as to the Premises and the operation of
business thereon, including, without limitation, state department of health
licensing surveys, Medicare and Medicaid (and successor programs)
certification surveys if applicable to the Premises or any portion thereof, and
life safety code reports. Within five (5) business days of receipt thereof,
Tenant shall give Landlord written notice of any violation of any federal, state
or local licensing or reimbursement certification statute or regulation,
including, without limitation, Medicare or Medicaid (or successor programs)
if applicable to the Premises or any portion thereof, any suspension,
termination or restriction placed upon Tenant or the Premises, the operation
of business thereon or the ability to admit patients, or any violation of any
other permit, approval or certification in connection with the Premises or its
business, by any federal, state or local authority, including, without
limitation, Medicare or Medicaid (or successor programs) if applicable to the
Premises or any portion thereof.
10. Events of Default and Landlord's Remedies.
10.1 Events of Default. The occurrence of any of the
following shall constitute an event of default on the part of Tenant hereunder
("Event of Default"):
10.1.1 Tenants's failure to pay Landlord within three (3)
calendar days after Landlord has delivered written notice to Tenant by
facsimile as provided in the last sentence of Section 15 hereof specifying
such failure, any portion of any Minimum Rent, taxes or assessments,
utilities, premiums for insurance or other charges or payments required of
Tenant under this Lease;
10.1.2 A breach by Tenant of any of the representations,
warranties or covenants in favor of Landlord as set forth in the Purchase and
Sale Agreement ("Purchase Agreement") of even date herewith between
Tenant, as seller, and Landlord, as buyer;
10.1.3 A material default by Tenant (or any Affiliate of
Tenant) ("Affiliate" being defined to mean, with respect to any person or
entity, any other person or entity which controls, is controlled by or is under
<PAGE>
common control with the first person or entity) under any obligation other
than this Lease owed by Tenant (or any Affiliate of Tenant) to Landlord or
any Affiliate of Landlord (including without limitation any financing
agreement or any other lease or the Letter of Credit Agreement of even date
herewith pursuant to which the letter of credit referenced in Section 11
hereinbelow is maintained), which default is not cured within any applicable
cure period provided in the documentation for such obligation;
10.1.4 A judgment is, or judgments are, obtained against
Tenant in the amount of Five Hundred Thousand and No/100 Dollars
($500,000.00) or more; provided that such judgment is, or judgments are,
uninsured and remain unpaid or not released for more than thirty (30) days.
10.1.5 Any material misstatement or omission of fact in any
written report, notice or communication from Tenant to Landlord with
respect to Tenant or the Premises;
10.1.6 An assignment by Tenant of all or substantially all of
its property for the benefit of creditors;
10.1.7 The appointment of a receiver, trustee, or liquidator
for Tenant or any of the property of Tenant, if within three (3) business days
of such appointment Tenant does not inform Landlord in writing that Tenant
intends to cause such appointment to be discharged or Tenant does not
thereafter diligently prosecute such discharge to completion within sixty (60)
days after the date of such appointment;
10.1.8 The failure to deliver evidence of insurance to
Landlord as required by Section 4 after five (5) days notice of such failure
from Landlord by facsimile as provided in the last sentence of Section 15
hereof;
10.1.9 The failure to maintain insurance as required herein
without any notice, grace, or opportunity to cure rights whatsoever.
10.1.10 The filing by Tenant of a voluntary petition
under any federal bankruptcy law or under the law of any state to be
adjudicated as bankrupt or for any arrangement or other debtor's relief, or in
the alternative, if any such petition is involuntarily filed against Tenant by
any other party and Tenant does not within three (3) business days of any
such filing inform Landlord in writing of the intent by Tenant to cause such
petition to be dismissed, if Tenant does not thereafter diligently prosecute
such dismissal, or if such filing is not dismissed within ninety (90) days after
filing thereof;
<PAGE>
10.1.11 The failure to perform or comply with any other term
or provision of this Lease (other than those provisions set forth in Sections
10.1.9 and 10.1.12) not requiring the payment of money, including, without
limitation, the failure to comply with the provisions hereof pertaining to the
use, operation and maintenance of the Premises or the breach of any
representation or warranty of Tenant in this Lease; provided, however, the
default described in this Section 10.1.11 is curable and shall be deemed
cured, if: (i) within three (3) business days of Tenant's receipt of a notice of
default from Landlord, Tenant gives Landlord notice of its intent to cure such
default; and (ii) Tenant cures such default within thirty (30) days after such
notice from Landlord, unless such default cannot with due diligence be cured
within a period of thirty (30) days because of the nature of the default or
delays beyond the control of Tenant, and cure after such thirty (30) day period
will not have a material and adverse effect upon the Premises, in which case
such default shall not constitute an Event of Default if Tenant uses its best
efforts to cure such default by promptly commencing and diligently pursuing
such cure to the completion thereof, provided, however, no such default shall
continue for more than one hundred twenty (120) days from Tenant's receipt
of a notice of default from Landlord;
10.1.12 There shall be no cure period in the event of the
breach by Tenant of (i) the provisions of Section 10.1.9 hereof, (ii) the
provisions of Section 20 hereof, or (iii) the provisions of Section 22 hereof
with respect to assignments and other related matters; and
10.1.13 All notice and cure periods provided herein shall run
concurrently with any notice or cure periods provided by applicable law.
10.2 Remedies. Upon the occurrence of an Event of
Default, Landlord may exercise all rights and remedies under this Lease and
the laws of the State of Texas available to a lessor of real and personal
property in the event of a default by its lessee, and as to the Tenant Personal
Property and the Intangible Property all remedies granted under the laws of
such State to a secured party under its Uniform Commercial Code. Without
limiting the foregoing, Landlord shall have the right to do any of the
following:
10.2.1 Sue for the specific performance of any covenant of
Tenant under this Lease as to which Tenant is in breach;
<PAGE>
10.2.2 Upon compliance with the requirements of applicable law,
Landlord may do any of the following: enter upon the Premises,
terminate this Lease, dispossess Tenant from the Premises and/or collect
money damages by reason of Tenant's breach, including without limitation
all rent which would have accrued after such termination and all obligations
and liabilities of Tenant under this Lease which survive the termination of the
Term;
10.2.3 Elect to leave this Lease in place and sue for rent
and/or other money damages as the same come due;
10.2.4 Before or after repossession of the Premises pursuant
to Section 10.2.2, and whether or not this Lease has been terminated,
Landlord shall have the right (but shall be under no obligation) to relet any
portion of the Premises to such tenant or tenants, for such term or terms
(which may be greater or less than the remaining balance of the Term), for
such rent, or such conditions (which may include concessions or free rent)
and for such uses, as Landlord, in its absolute discretion, may determine, and
Landlord may collect and receive any rents payable by reason of such
reletting. Landlord shall have no duty to mitigate damages unless required by
applicable law and shall not be responsible or liable for any failure to relet
any of the Premises or for any failure to collect any rent due upon any such
reletting. Tenant agrees to pay Landlord, immediately upon demand, all
expenses incurred by Landlord in obtaining possession and in reletting any
of the Premises, including fees, commissions and costs of attorneys,
architects, agents and brokers;
10.2.5 Sell the Tenant Personal Property and/or the Intangible
Property in a non-judicial foreclosure sale.
10.3 Receivership. Tenant acknowledges that one of the
rights and remedies available to Landlord under applicable law is to apply to
a court of competent jurisdiction for the appointment of a receiver to take
possession of the Premises, to collect the rents, issues, profits and income of
the Premises and to manage the operation of the Premises. Tenant further
acknowledges that the revocation, suspension or material limitation of the
certification of the Premises for provider status (in the event the Premises is
ever certified for such provider status) under Medicare or Medicaid (or
successor programs) and/or the revocation, suspension or material limitation
of the license of the Premises as a sixty (60) bed PCF under the laws of the
State of Texas will materially and irreparably impair the value of Landlord's
investment in the Premises. Therefore, in any of such events, and in addition
<PAGE>
to any other right or remedy of Landlord under this Lease, Tenant hereby
consents to the appointment of such a receiver to enter upon and take
possession of the Premises, to manage the operation of the Premises, to
collect and disburse all rents, issues, profits and income generated thereby
and to preserve or replace to the extent possible the PCF license and provider
certification of the Premises or to otherwise substitute the licensee or
provider thereof. The receiver shall be entitled to a reasonable fee for its
services as a receiver. All such fees and other expenses of the receivership
estate shall be added to the monthly rent due to Landlord under this Lease.
Tenant hereby irrevocably stipulates to the appointment of a receiver under
such circumstances and for such purposes and agrees not to contest such
appointment.
10.4 Late Charges. Tenant acknowledges that the late
payment of any Minimum Rent will cause Landlord to lose the use of such
money and incur costs and expenses not contemplated under this Lease,
including, without limitation, administrative and collection costs and
processing and accounting expenses, the exact amount of which is extremely
difficult to ascertain. Therefore, if any installment of Minimum Rent is not
paid within five (5) calendar days after the due date for such rent payment,
then Tenant shall thereafter pay to Landlord on demand a late charge equal
to ten percent (10%) of the amount of any installment of Minimum Rent not
paid on the due date. Landlord and Tenant agree that this late charge
represents a reasonable estimate of such costs and expenses and is fair
compensation to Landlord for the loss suffered from such nonpayment by
Tenant.
10.5 Remedies Cumulative; No Waiver. No right or
remedy herein conferred upon or reserved to Landlord is intended to be
exclusive of any other right or remedy, and each and every right and remedy
shall be cumulative and in addition to any other right or remedy given
hereunder or now or hereafter existing at law or in equity. No failure of
Landlord to insist at any time upon the strict performance of any provision of
this Lease or to exercise any option, right, power or remedy contained in this
Lease shall be construed as a waiver, modification or relinquishment thereof
as to any similar or different breach (future or otherwise) by Tenant. A receipt
by Landlord of any rent or other sum due hereunder (including any late
charge) with knowledge of the breach of any provision contained in this
Lease shall not be deemed a waiver of such breach, and no waiver by
Landlord of any provision of this Lease shall be deemed to have been made
unless expressed in a writing signed by Landlord.
<PAGE>
10.6 Performance of Tenant's Obligations by Landlord.
If Tenant at any time shall fail to make any payment or perform any act on its
part required to be made or performed under this Lease, then Landlord may,
without waiving or releasing Tenant from any obligations or default of
Tenant hereunder, make any such payment or perform any such act for the
account and at the expense of Tenant, and may enter upon the Premises for
the purpose of taking all such action thereon as may be reasonably necessary
therefor. No such entry shall be deemed an eviction of Tenant. All sums so
paid by Landlord and all necessary and incidental costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses)
incurred in connection with the performance of any such act by Landlord,
together with interest at the rate of the Prime Rate as reported daily by the
Wall Street Journal plus 5% (or if said interest rate is violative of any
applicable statute or law, then the maximum lawful non-usurious interest rate
allowable) from the date of the making of such payment or the incurring of
such costs and expenses by Landlord, shall be payable by Tenant to Landlord
on demand.
11. Security Deposit. Tenant shall deposit with Landlord a sum
equal to one-third (1/3) of the Minimum Rent for the Initial Term in cash
representing a security deposit against the faithful performance of the terms
and conditions contained in this Lease. Tenant shall have the right to
substitute a letter of credit for such cash deposit on terms and issued by a
financial institution acceptable to Landlord. Landlord shall not be deemed
a trustee as to such deposit and shall have the right to commingle said
security deposit with its own or other funds. Interest on any cash deposit
shall be paid by Landlord to Tenant on a quarterly basis in arrears (i) if
Landlord segregates such deposit from its general funds, at the average rate
earned in such period on Landlord's cash and cash equivalent investments,
and (ii) if Landlord does not segregate such deposit from its general funds,
at the average cost of funds for Landlord for short term borrowings for such
period.
12. Damage by Fire or Other Casualty.
12.1 Reconstruction Using Insurance. In the event of the
damage or destruction of the Premises, Tenant shall forthwith notify Landlord
and diligently repair or reconstruct the same to a like or better condition than
existed prior to such damage or destruction. Any net insurance proceeds
payable with respect to the casualty shall be used for the repair or
reconstruction of the Premises pursuant to reasonable disbursement controls
in favor of Landlord. If such proceeds are insufficient for such purposes,
Tenant shall provide the required additional funds.
<PAGE>
12.2 Surplus Proceeds. If there remains any surplus of
insurance proceeds after the completion of the repair or reconstruction of the
Premises, such surplus shall belong to and be paid to Tenant.
12.3 No Rent Abatement. The rent payable under this
Lease shall not abate by reason of any damage or destruction of the Premises
by reason of an insured or uninsured casualty. Tenant hereby waives all rights
under applicable law to abate, reduce or offset rent by reason of such damage
or destruction.
13. Condemnation.
13.1 Complete Taking. If during the Term all or
substantially all of the Premises is taken or condemned by any competent
public or quasi-public authority, then Tenant may, at Tenant's election, made
within thirty (30) days of such taking by condemnation, terminate this Lease,
and the current Minimum Rent shall be prorated as of the date of such
termination. The award payable upon such taking shall be allocated between
Landlord and Tenant as so allocated by the taking authority. In the absence
of such allocation by the taking authority, the award shall be allocated as
agreed by Landlord and Tenant. Failing such agreement within thirty (30)
days after the effective date of such taking, the award shall be allocated
between Landlord and Tenant pursuant to the appraisal procedure described
on Exhibit "C" attached hereto.
13.2 Partial Taking. In the event such condemnation
proceeding or right of eminent domain results in a taking of less than all or
substantially all of the Premises, the Minimum Rent thereto shall be abated
to the same extent as the diminution in the fair market value of the Premises
by reason of the condemnation. Such diminution in the fair market value shall
be as agreed between Landlord and Tenant, but failing such agreement within
thirty (30) days of the effective date of the condemnation such fair market
value will be determined by appraisal pursuant to Exhibit "C" attached
hereto. Landlord shall be entitled to receive and retain any and all awards for
the partial taking and damage and Tenant shall not be entitled to receive or
retain any such award for any reason.
13.3 Lease Remains in Effect. Except as provided above,
this Lease shall not terminate and shall remain in full force and effect in the
event of a taking or condemnation of the Premises, or any portion thereof,
and Tenant hereby waives all rights under applicable law to abate, reduce or
offset rent by reason of such taking.
<PAGE>
14. Provisions on Termination of Term.
14.1 Surrender of Possession. Tenant shall, on or before
the last day of the Term, or upon earlier termination of this Lease, surrender
to Landlord the Premises (including all patient charts and resident records
along with appropriate patient and resident consents) in good condition and
repair, ordinary wear and tear excepted.
14.2 Removal of Personal Property. If Tenant is not then
in default hereunder Tenant shall have the right in connection with the
surrender of the Premises to remove from the Premises all Tenant Personal
Property but not the Landlord Personal Property (including the Landlord
Personal Property replaced by Tenant or required by the State of Texas or any
other governmental entity to operate the Premises for the purpose set forth in
Section 5.3 above). Any such removal shall be done in a workmanlike
manner leaving the Premises in good and presentable condition and
appearance, including repair of any damage caused by such removal. At the
end of the Term or upon the earlier termination of this Lease, Tenant shall
return the Premises to Landlord with the Landlord Personal Property (or
replacements thereof) in the same condition and utility as was delivered to
Tenant at the commencement of the Term, normal wear and tear excepted.
14.3 Title to Personal Property Not Removed. Title to
any of Tenant Personal Property which is not removed by Tenant upon the
expiration of the Term shall, at Landlord's election, vest in Landlord;
provided, however, that Landlord may remove and dispose of any or all of
such Tenant Personal Property which is not so removed by Tenant, at
Tenant's expense, without obligation or accounting to Tenant.
14.4 Management of Premises. Upon the expiration or
earlier termination of the Term, Landlord or its designee, upon written notice
to Tenant, may elect to assume the responsibilities and obligations for the
management and operation of the Premises and Tenant agrees to cooperate
fully with Landlord or its designee to accomplish the transfer of such
management and operation without interrupting the operation of the
Premises. Tenant shall not commit any act or be remiss in the undertaking of
any act that would jeopardize any licensure or certification of the facility,
and
Tenant shall comply with all requests for an orderly transfer of the PCF
license, Medicare and Medicaid (or any successor program) certifications (if
any) and possession at the time of any such surrender. Upon the expiration
or earlier termination of the Term, Tenant shall promptly deliver copies of all
of Tenant's books and records relating to the Premises and its operations to
Landlord.
<PAGE>
14.5 Correction of Deficiencies. Upon termination or
cancellation of this Lease, Tenant shall indemnify Landlord for any loss,
damage, cost or expense incurred by Landlord to correct all deficiencies of
a physical nature identified by the Texas Department of Health and/or the
Texas Department of Human Services or any other government agency or
Medicare or Medicaid (or any successor program) providers in the course of
the change of ownership inspection and audit.
15. Notices and Demands. All notices and demands, certificates,
requests, consents, approvals, and other similar instruments under this Lease
shall be in writing and shall be deemed to have been properly given upon
actual receipt thereof or within three (3) business days of being placed in the
United States certified or registered mail, return receipt requested, postage
prepaid (a) if to Tenant, addressed to Sterling House Corporation, 453 S.
Webb Road, Suite 500, Wichita, KS 67207, Attention: Steven L. Vick, Fax
No. (316) 681-1517 with a copy to Crockett & Gilhousen, 1005 N. Market,
Wichita, Kansas 67214-2971, Attention: David G. Crockett, Fax No. (316)
263-7220, or at such other address as Tenant from time to time may have
designated by written notice to Landlord, (b) if to Landlord, addressed to
MLD Texas Trust, 1280 Bison, Suite B9-203, Newport Beach, CA 92660,
Attention: Trustee, Fax No. (714) 644-7757 with a copy to Cordray &
Goodrich, 5847 San Felipe, 22nd Floor, Houston, Texas 77057, Attention:
Howard F. Cordray, Jr., Fax No. (713) 787-6175, or at such address as
Landlord may from time to time have designated by written notice to Tenant.
Refusal to accept delivery shall be deemed delivery. If Tenant is not an
individual, notice may be made to any officer, general partner or principal
thereof. Notwithstanding anything to the contrary herein, any notice given
pursuant to the terms of Sections 10.1.1 or 10.1.8 hereof shall be deemed to
have been properly given upon either (a) the manner of delivery contained in
the first two (2) sentences of this Section 15 or (b) by facsimile transmission
to Sterling House Corporation, Attention: Steven L. Vick, Fax No. (316)
681-1517 with a copy sent by facsimile transmission to Crockett &
Gilhousen, Attention: David G. Crockett, Fax No. (316) 263-7220.
16. Right of Entry; Examination of Records. Landlord and its
representative may enter the Premises at any reasonable time after reasonable
notice to Tenant for the purpose of inspecting the Premises for any reason
including, without limitation, Tenant's default under this Lease, or to exhibit
the Premises for sale, lease or mortgage financing, or posting notices of
default, or non-responsibility under any mechanic's or materialman's lien law
<PAGE>
or to otherwise inspect the Premises for compliance with the terms of this
Lease. Any such entry shall not unreasonably interfere with residents,
patients, patient care, or any other of Tenant's operations. Upon the
occurrence of any Event of Default or in the event Tenant does not exercise
its then current option to renew the Term for a Renewal Term, Landlord and
Landlord's representatives, inspectors and consultants shall have the right to
examine all contracts, books and records relating to Tenant's operations at the
Premises, including, without limitation, Tenant's financial records, during
normal business hours, if such records are maintained at the Premises; and
any records maintained in the normal course of business at some other
location shall be available for inspection by Landlord during any normal
business hours. Notwithstanding anything to the contrary herein, Landlord
shall only be entitled to inspect financial books and records and contracts
relating to the Premises.
17. Landlord May Grant Liens. Without the consent of Tenant,
Landlord may, subject to the terms and conditions set forth below in this
Section 17, from time to time, directly or indirectly, create or otherwise cause
to exist any lien, encumbrance or title retention agreement ("Encumbrance")
upon the Premises, or any portion thereof or interest therein (including this
Lease), whether to secure any borrowing or other means of financing or
refinancing or otherwise. Any such Encumbrance shall provide that it is
subject to the rights of Tenant under this Lease, and shall further provide that
so long as no Event of Default shall have occurred under this Lease, Tenant's
occupancy hereunder, including but without limitation Tenant's right of quiet
enjoyment provided in Section 18, shall not be disturbed in the event any
such lienholder or any other person takes possession of the Premises through
foreclosure proceeding or otherwise. Upon the request of Landlord, Tenant
shall subordinate this Lease to the lien of a new Encumbrance on the
Premises, on the condition that the proposed lender agrees not to disturb
Tenant's rights under this Lease so long as Tenant is not in default hereunder.
18. Quiet Enjoyment. So long as there is no Event of Default by
Tenant, Landlord covenants and agrees that Tenant shall peaceably and
quietly have, hold and enjoy the Premises for the Term, free of any claim or
other action not caused or created by Tenant (excepting, however, intrusion
of Tenant's quiet enjoyment occasioned by condemnation or destruction of
the property as referred to in Sections 12 and 13 hereof).
19. Applicable Law. This Lease shall be governed by and
construed in accordance with the internal laws of the State of Texas without
regard to the conflict of laws rules of such State.
<PAGE>
20. Preservation of Gross Revenues.
20.1 Tenant acknowledges that a fair return to Landlord on
its investment in the Premises is dependent, in part, on Tenant's
concentration on the Premises during the Term of the PCF business of Tenant
and its Affiliates in the geographical area of the Premises. Tenant further
acknowledges that the diversion of residents and/or patient care activities
from the Premises to other facilities owned or operated by Tenant or its
Affiliates at or near the end of the Term will have a material adverse impact
on the value and utility of the Premises.
20.1.1 Therefore, Tenant agrees that during the Term,
and for a period of one (1) year thereafter, neither Tenant nor any of its
Affiliates shall, without the prior written consent of Landlord, operate, own,
participate in or otherwise receive revenues from any other facility or
institution providing services or similar goods to those provided on or in
connection with the Premises and the permitted use thereof as contemplated
under this Lease, within a three (3) mile radius of the Premises.
20.1.2 In addition, in the event Tenant does not
exercise any option to renew the Term for a Renewal Term, Tenant hereby
covenants and agrees that for a period of one (1) year prior to the expiration
or earlier termination of this Lease and for a period of one (1) year following
the expiration or earlier termination of this Lease, neither Tenant nor any of
its Affiliates shall, without prior written consent of Landlord, solicit for
hire,
hire, engage or otherwise employ any management or supervisory personnel
working on or in connection with the Premises.
20.2 Except in the ordinary course of business or as
required for medically appropriate reasons, prior to Lease termination, neither
Tenant nor any of its Affiliates will recommend or solicit the removal or
transfer of any resident or patient from the Premises to any other personal
care facility, any other nursing or health care facility, or to any senior
housing
or retirement housing facility. After Lease termination, neither Tenant nor
any of its Affiliates will recommend or solicit the removal or transfer of any
resident or patient from the Premises to any other personal care facility, any
other nursing or health care facility, or to any senior housing or retirement
housing facility.
20.3 Tenant hereby specifically acknowledges and agrees
that the temporal, geographical and other restrictions contained in this
<PAGE>
Section 20 are reasonable and necessary to protect the business and prospects
of Landlord, and that the enforcement of the provisions of this Section 20 will
not work an undue hardship on Tenant. Tenant further agrees that in the event
either the length of time, geographical or any other restrictions, or portion
thereof, set forth in this Section 20 is overly restrictive and unenforceable in
any court proceeding, the court may reduce or modify such restrictions, but
only to the extent necessary, to those which it deems reasonable and
enforceable under the circumstances, and the parties agree that the restrictions
of this Section 20 will remain in full force and effect as reduced or modified.
Tenant further agrees and acknowledges that Landlord does not have an
adequate remedy at law for the breach or threatened breach by Tenant of the
covenants contained in this Section 20, and Tenant therefore specifically
agrees that Landlord may, in addition to other remedies which may be
available to Landlord hereunder, file a suit in equity to enjoin Tenant from
such breach or threatened breach, without the necessity of posting any bond.
Tenant further agrees, in the event that any provision of this Section 20 is
held to be invalid or against public policy, the remaining provisions of this
Section 20 and the remainder of this Lease shall not be affected thereby.
21. Hazardous Materials.
21.1 Hazardous Material Covenants. Tenant's use of the
Premises shall comply with all Hazardous Materials Laws. In the event any
Environmental Activities occur or are suspected to have occurred in violation
of any Hazardous Materials Laws or if Tenant has received any Hazardous
Materials Claim against the Premises, Tenant shall promptly obtain all
permits and approvals necessary to remedy any such actual or suspected
problem through the removal of Hazardous Materials or otherwise, and upon
Landlord's approval of the remediation plan, remedy any such problem to the
satisfaction of Landlord and all applicable governmental authorities, in
accordance with all Hazardous Materials Laws and good business practices.
21.2 Tenant Notices to Landlord. Tenant shall
immediately advise Landlord in writing of:
21.2.1 any Environmental Activities known or
believed by Tenant to be in violation of any Hazardous Materials Laws;
21.2.2 any Hazardous Materials Claims against
Tenant or the Premises;
21.2.3 any remedial action taken by Tenant in
response to any Hazardous Materials Claims or any Hazardous Materials on,
under or about the Premises in violation of any Hazardous Materials Laws;
<PAGE>
21.2.4 Tenant's discovery of any occurrence or
condition on or in the vicinity of the Premises that materially increase the
risk
that the Premises will be exposed to Hazardous Materials; and
21.2.5 all communications to or from Tenant, any
governmental authority or any other person relating to Hazardous Materials
Laws or Hazardous Materials Claims with respect to the Premises, including
copies thereof.
21.3 Extension of Term. Notwithstanding any other
provision of this Lease, in the event any Hazardous Materials are discovered
on, under or about the Premises in violation of any Hazardous Materials Law,
the Term shall be automatically extended and this Lease shall remain in full
force and effect until the earlier to occur of the completion of all remedial
action or monitoring, as approved by Landlord, in accordance with all
Hazardous Materials Laws, or the date specified in a written notice from
Landlord to Tenant terminating this Lease (which date may be subsequent to
the date upon which the Term was to have expired).
21.4 Participation in Hazardous Materials Claims.
Landlord shall have the right to join and participate in, as a party if it so
elects, any legal proceedings or actions initiated in connection with any
Hazardous Materials Claims.
21.5 Environmental Activities shall mean the use,
generation, transportation, handling, discharge, production, treatment,
storage, release or disposal of any Hazardous Materials at any time to or from
the Premises or located on or present on or under the Premises. Nothing
contained in the foregoing or elsewhere in this Section 21 is intended to, nor
shall it, limit the liability of Tenant, if any, to Landlord with respect to any
representation or warranty given by Tenant to Landlord with respect to
Hazardous Materials or environmental matters generally as set forth in the
Purchase Agreement.
21.6 Hazardous Materials shall mean (i) any petroleum
products and/or by-products (including any fraction thereof), flammable
substances, explosives, radioactive materials, hazardous or toxic wastes,
substances or materials, known carcinogens or any other materials,
contaminants or pollutants which pose a hazard to the Premises or to persons
on or about the Premises or cause the Premises to be in violation of any
<PAGE>
Hazardous Materials Laws; (ii) asbestos in any form which is friable; (iii)
urea formaldehyde in foam insulation or any other form; (iv) transformers or
other equipment which contain dielectric fluid containing levels of
polychlorinated biphenyls in excess of fifty (50) parts per million or any other
more restrictive standard then prevailing; (v) medical wastes and biohazards
which pose a hazard to the Premises or to persons on or about the Premises
or cause the Premises to be in violation of any Hazardous Materials Laws;
(vi) radon gas which poses a hazard to the Premises or to persons on or about
the Premises or cause the Premises to be in violation of any Hazardous
Materials Laws; and (vii) any other chemical, material or substance, exposure
to which is prohibited, limited or regulated by any governmental authority or
may or could pose a hazard to the health and safety of the occupants of the
Premises or the owners and/or occupants of property adjacent to or
surrounding the Premises, including, without limitation, any materials or
substances that are listed in the United States Department of Transportation
Hazardous Materials Table (49 CFR 172.101) as amended from time to time.
21.7 Hazardous Materials Claims shall mean any and all
enforcement, clean-up, removal or other governmental or regulatory actions
or orders threatened, instituted or completed pursuant to any Hazardous
Material Laws, together with all claims made or threatened by any third party
against the Premises, Landlord or Tenant relating to damage, contribution,
cost recovery compensation, loss or injury resulting from any Hazardous
Materials.
21.8 Hazardous Materials Laws shall mean any laws,
ordinances, regulations, rules, orders, guidelines or policies relating to the
environment, health and safety, Environmental Activities, Hazardous
Materials, air and water quality, waste disposal and other environmental
matters.
22. Assignment and Subletting. Tenant shall not, without the
prior written consent of Landlord, which may be withheld at Landlord's sole
discretion, voluntarily or involuntarily assign, mortgage, encumber or
hypothecate this Lease or any interest herein or sublet the Premises or any
part thereof. For the purposes of this Lease, a management or similar
agreement shall be considered to be an assignment of this Lease by Tenant.
Any of the foregoing acts without such consent shall be void but shall, at the
option of Landlord in its sole discretion, constitute an Event of Default giving
rise to Landlord's right, among other things, to terminate this Lease. Without
limiting the foregoing, this Lease shall not, nor shall any interest of Tenant
herein, be assigned or encumbered by operation of law without the prior
<PAGE>
written consent of Landlord which may be withheld at Landlord's sole
discretion. Notwithstanding the foregoing, Tenant may without Landlord's
consent assign this Lease or sublet the Premises or any portion thereof to a
wholly-owned subsidiary of Tenant, provided that such subsidiary fully
assumes the obligations of Tenant under this Lease, Tenant remains fully
liable under this Lease, the use of the Premises remains unchanged, and no
such assignment or sublease shall be valid and no such subsidiary shall take
possession of the Premises until an executed counterpart of such assignment
or sublease has been delivered to Landlord. Anything contained in this Lease
to the contrary notwithstanding, Tenant shall not sublet the Premises on any
basis such that the rental to be paid by the sublessee thereunder would be
based, in whole or in part, on either the income or profits derived by the
business activities of the sublessee, or any other formula, such that any
portion of the sublease rental received by Landlord would fail to qualify as
"rents from real property" within the meaning of Section 856(d) of the U.S.
Internal Revenue Code, or any similar or successor provision thereto.
Nothing herein shall require Landlord's consent to lease agreements or rental
agreements with residents in the ordinary course of Tenant's business.
23. Indemnification. To the fullest extent permitted by law,
Tenant agrees to protect, indemnify, defend and save harmless Landlord, its
directors, officers, shareholders, agents and employees from and against any
and all foreseeable or unforeseeable liability, expense loss, costs, deficiency,
fine, penalty, or damage (including, without limitation, punitive or
consequential damages) of any kind or nature, including reasonable attorneys'
fees, from any suits, claims or demands, on account of any matter or thing,
action or failure to act arising out of or in connection with this Lease
(including, without limitation, the breach by Tenant of any of its obligations
hereunder), the Premises, or the operations of Tenant on the Premises,
including without limitation all Environmental Activities on the Premises, all
Hazardous Materials Claims or any violation by Tenant of a Hazardous
Materials Law with respect to the Premises. Upon receiving knowledge of
any suit, claim or demand asserted by a third party that Landlord believes is
covered by this indemnity, Landlord shall give Tenant notice of the matter.
Tenant shall defend Landlord against such matter at Tenant's sole cost and
expense with legal counsel reasonably satisfactory to Landlord. In the event
Tenant chooses legal counsel that is not reasonably satisfactory to Landlord,
Landlord may elect to defend the matter with its own counsel at Tenant's
expense.
24. Holding Over. If Tenant shall for any reason remain in
possession of the Premises after the expiration or earlier termination of this
<PAGE>
Lease, such possession shall be a month-to-month tenancy during which time
Tenant shall pay as rental each month, one hundred fifty percent (150%) of
the aggregate of the monthly Minimum Rent payable with respect to the last
Lease Year plus all additional charges accruing during the month and all
other sums, if any, payable by Tenant pursuant to the provisions of this Lease
with respect to the Premises. Nothing contained herein shall constitute the
consent, express or implied, of Landlord to the holding over of Tenant after
the expiration or earlier termination of this Lease, nor shall anything
contained herein be deemed to limit Landlord's remedies pursuant to this
Lease or otherwise available to Landlord at law or in equity.
25. Estoppel Certificates. Tenant shall, at any time upon not less
than five (5) days prior written request by Landlord, execute, acknowledge
and deliver to Landlord or its designee a statement in writing, executed by an
officer or general partner of Tenant, certifying that this Lease is unmodified
and in full force and effect (or, if there have been any modifications, that
this
Lease is in full force and effect as modified, and setting forth such
modifications), the dates to which Minimum Rent and additional charges
hereunder have been paid, certifying that no default by either Landlord or
Tenant exists hereunder or specifying each such default and as to other
matters as Landlord may reasonably request.
26. Conveyance by Landlord. If Landlord or any successor
owner of the Premises shall convey the Premises in accordance with the
terms hereof, Landlord or such successor owner shall thereupon be released
from all future liabilities and obligations of Landlord under this Lease arising
or accruing from and after the date of such conveyance or other transfer as to
the Premises and all such future liabilities and obligations shall thereupon be
binding upon the new owner.
27. Waiver of Jury Trial. Landlord and Tenant hereby waive any
rights to trial by jury in any action, proceedings or counterclaim brought by
either of the parties against the other in connection with any matter
whatsoever arising out of or in any way connected with this Lease, including,
without limitation, the relationship of Landlord and Tenant, Tenant's use and
occupancy of the Premises, or any claim of injury or damage relating to the
foregoing or the enforcement of any remedy hereunder.
28. Attorneys' Fees. If Landlord or Tenant brings any action to
interpret or enforce this Lease, or for damages for any alleged breach hereof,
the prevailing party in any such action shall be entitled to reasonable
attorneys' fees and costs as awarded by the court in addition to all other
recovery, damages and costs.
<PAGE>
29. Severability. In the event any part or provision of the Lease
shall be determined to be invalid or enforceable, the remaining portion of this
Lease shall nevertheless continue in full force and effect.
30. Counterparts. This Lease may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same agreement.
31. Binding Effect. Subject to the provisions of Section 22 above,
this Lease shall be binding upon and inure to the benefit of Landlord and
Tenant and their respective heirs, personal representatives, successors in
interest and assigns.
32. Waiver and Subrogation. Landlord and Tenant hereby waive
to each other all rights of subrogation which any insurance carrier, or either
of them, may have as to the Landlord or Tenant by reason of any provision
in any policy of insurance issued to Landlord or Tenant, provided such waiver
does not thereby invalidate the policy of insurance.
33. No Recordation of Lease. The parties hereto agree that
neither this Lease nor any memorandum, affidavit, or any other instrument
regarding this Lease shall be recorded affecting title to the Premises;
provided, however, Landlord shall be permitted to file financing statements
to perfect its security interests created by this Lease.
34. Incorporation of Recitals and Attachments. The recitals and
exhibits, schedules, addenda and other attachments to this Lease are hereby
incorporated into this Lease and made a part hereof.
35. Titles and Headings. The titles and headings of sections of
this Lease are intended for convenience only and shall not in any way affect
the meaning or construction of any provision of this Lease.
36. Nature of Relationship; Usury Savings Clause. The parties
intend that their relationship shall be that of lessor and lessee only. Nothing
contained in this Lease shall be deemed or construed to constitute an
extension of credit by Landlord to Tenant, nor shall this Lease be deemed to
be a partnership or venture agreement between Landlord and Tenant.
Notwithstanding the foregoing, in the event any payment made to Landlord
hereunder is deemed to violate any applicable laws regarding usury, the
portion of any payment deemed to be usurious shall be held by Landlord to
<PAGE>
pay the future obligations of Tenant as such obligations arise and, in the event
Tenant discharges and performs all obligations hereunder, such funds will be
reimbursed to Tenant upon the expiration of the Term. No interest shall be
paid on any such funds held by Landlord.
37. Joint and Several. If more than one person or entity is the
Tenant hereunder, the liability and obligations of such persons or entities
under this Lease shall be joint and several.
38. Survival of Representations, Warranties and Covenants.
All of the obligations, representations, warranties and covenants of Tenant
under this Lease shall survive the expiration or earlier termination of the
Term.
39. Interpretation. Both Landlord and Tenant have been
represented by counsel and this Lease has been freely and fairly negotiated.
Consequently, all provisions of this Lease shall be interpreted according to
their fair meaning and shall not be strictly construed against any party.
40. Sale of Premises by Landlord. In the event Landlord ever
determines that it desires to sell the Premises, Landlord agrees not to market
or sell the Premises without first complying with the provisions of this
Section 40.
40.1 Prior to making any agreement to sell the Premises,
Landlord shall select one (1) qualified appraiser to determine the fair market
value of the Premises as of a date selected by Landlord (hereinafter
designated "Determination Date"); such appraiser must meet the following
qualifications: (i) such appraiser shall be a MAI Appraiser; and (ii) such
appraiser shall not otherwise be disqualified from exercising independent
judgment as to the fair market value determination to be made. Such
appraiser shall be required to prepare a written report (hereinafter designated
"First Appraisal") as to the Premises' fair market value (hereinafter
designated "Appraised Value") as of the Determination Date and the First
Appraisal shall satisfy the professional standards applicable to an MAI
Appraiser for appraisal reports. The First Appraisal must be completed and
issued within thirty (30) days of the Determination Date. For purposes
hereof, "MAI Appraiser" shall mean an appraiser licensed or otherwise
qualified to do business in the State of Texas and who has substantial
experience in performing appraisals of facilities similar to the Premises and
is certified as a member of the American Institute of Real Estate Appraisers
or certified as a SRPA by the Society of Real Estate Appraisers, or, if such
organizations no longer exist or certify appraisers, such successor
organization or such other organization as is approved by Landlord.
<PAGE>
40.2 Upon completion of the First Appraisal, Landlord shall
determine whether it is still interested in selling the Premises for cash at a
purchase price equal to or higher than the Appraised Value, and if Landlord
is still interested, Landlord shall deliver a written notice to Tenant
(hereinafter designated "Landlord's Original Notice") advising Tenant that
Landlord desires to sell the Premises for cash at the Appraised Value or a
higher price. A complete copy of the First Appraisal must be provided to
Tenant simultaneous with the delivery of Landlord's Original Notice.
40.3 Tenant shall have thirty (30) days from the date the
Landlord's Original Notice is delivered to Tenant (hereinafter designated
"Original Notice Delivery Date") in which to deliver to Landlord a written
offer (hereinafter designated "Tenant's Original Offer") to purchase the
Premises for cash at a purchase price equal to the Appraised Value and upon
the Agreed Terms (as hereinafter defined). Any offer by Tenant to purchase
the Premises must include the following terms (herein designated "Agreed
Terms"): (i) Tenant shall pay all costs related to obtaining any environmental
assessment reports (hereinafter collectively designated "Environmental
Reports") related to the Premises; (ii) Tenant shall pay all costs of obtaining
any survey of the Premises; (iii) Landlord shall pay the base premium for
Form T-1 Owner Policy of Title Insurance for the Premises providing
coverage to Tenant comparable to the title insurance policy (hereinafter
designated "Title Insurance") obtained for Landlord in respect to Landlord's
purchase of the Premises (with the exception in such Owner Policy of Title
Insurance relating to discrepancies, conflicts, or shortages in area or boundary
lines, or any encroachments, or protrusions, or any overlapping of
improvements shall be deleted at Tenant's expense to the extent permitted by
the then existing regulations of the State Board of Insurance), and in this
regard, Landlord shall be entitled to select the title insurance agency to close
the sale of the Premises and through which the Title Insurance is to be issued
(hereinafter designated "Title Company"); (iv) each party shall pay for the
attorneys' fees and costs which that party incurs; (v) Tenant and Landlord
shall equally share all other closing costs; (vi) there shall not be any
contingencies or conditions whatsoever to Tenant's obligation to purchase the
Premises; (vii) Tenant shall pay Landlord the full purchase price equal to the
Appraised Value (or Secondary Price or Successive Price, as applicable) for
the Premises in cash at closing; (viii) Tenant shall deposit cash with the Title
Company equal to ten percent (10%) of the Appraised Value (or the
Secondary Price or Successive Price, as applicable) as an earnest money
deposit (hereinafter designated "Earnest Money"), which Earnest Money
<PAGE>
shall be nonrefundable and shall be paid to Landlord in the event Tenant fails
to perform its obligations under Tenant's Original Offer (provided that such
Earnest Money shall be applied towards the purchase price of the Premises
if the purchase closes); (ix) the sale of the Premises shall be on an "AS IS,
WHERE IS, WITH ALL FAULTS" basis with no representations or
warranties of Landlord whatsoever; (x) the conveyance shall be by special
warranty deed; and (xi) the closing of the sale and purchase of the Premises
must occur within one hundred twenty (120) days after the Original Notice
Delivery Date.
40.4 In the event Tenant does not timely deliver a Tenant's
Original Offer to Landlord within such thirty (30) day period, Tenant shall be
conclusively deemed to have forfeited any right to purchase the Premises
pursuant to the Landlord's Original Notice; and Landlord shall become
entitled to market and sell the Premises in accordance with the provisions of
Section 40.5 hereof. In the event Tenant timely delivers a Tenant's Original
Offer to Landlord within such thirty (30) day period, Tenant and Landlord
shall each deliver to the Title Company duplicate signed counterparts of the
Tenant's Original Offer (executed by duly authorized representatives of the
Tenant and Landlord, respectively) and Tenant shall pay the Earnest Money
to the Title Company within forty-eight (48) hours of such acceptance.
40.5 In the event Landlord becomes entitled to market
and/or sell the Premises pursuant to this Section 40.5, Landlord shall be free
for a period of two hundred forty (240) days from the Original Notice
Delivery Date to advertise, list for sale, solicit offers, negotiate contracts
for
the sale of, and sell (hereinafter collectively designated "Sale Activity") the
Premises at the applicable Appraised Value or higher price, and in the event
the Premises is not sold within such two hundred forty (240) day period but
is subject to a Pending Contract, Landlord shall continue to be free to sell the
Premises upon the terms set forth in the Pending Contract. For purposes of
this Section 40.5, the term "Pending Contract" means a bona fide written
contract providing for (i) the sale of the Premises by Landlord to a Person
other than a Person affiliated with Landlord at a sale price at least equal
to the
Appraised Value and (ii) a date for the closing of such sale that is scheduled
to occur within ninety (90) days of the date of such contract. In the event
Landlord does not sell the Premises in accordance with the preceding
provisions of this Section 40.5, Landlord may either:
(a) cease its efforts to sell the Premises (subject to Landlord's
right to again seek to market and/or sell the Premises on such other occasions
as Landlord may determine in its sole and absolute discretion, provided
Landlord again complies with the provisions of this Section 40 upon each
such other occasion); or
<PAGE>
(b) deliver a written notice (hereinafter designated "Landlord's
Secondary Notice") to Tenant advising Tenant that Landlord desires to sell
the Premises for cash (i) at a price less than the Appraised Value determined
under the First Appraisal as determined by Landlord in its sole and absolute
discretion or (ii) at the fair market value of the Premises as determined by an
appraisal conducted in the same manner as the First Appraisal (hereinafter
designated "Secondary Appraisal"), with either of such prices being herein
designated "Secondary Price"; and in the event a Secondary Appraisal is
conducted, a complete copy of the written report prepared in connection with
the Secondary Appraisal shall be provided to Tenant simultaneously with the
delivery of the Landlord's Secondary Notice. Upon delivery of a Landlord's
Secondary Notice, Tenant and Landlord shall have the same rights as set forth
in Sections 40.3, 40.4 and 40.5 hereof as though such Landlord's Secondary
Notice was a Landlord's First Notice, including, but not limited to, (i) Tenant
making an offer to purchase the Premises for cash at the Secondary Price and
upon the Agreed Terms, and (ii) Landlord having the right to engage in Sale
Activity at the Secondary Price or a higher price.
In the event the Landlord delivers a Landlord's Secondary Notice but the
same does not result in the sale of the Premises in the manner contemplated
above, Landlord may either:
(c) cease its efforts to sell the Premises (subject to Landlord's
right to again seek to market and/or sell the Premises on such other
occasions as Landlord may determine in its sole and absolute discretion,
provided Landlord again complies with the provisions of this Section 40 upon
each such other occasion); or
(d) deliver a written notice (hereinafter designated "Landlord's
Successive Notice") to Tenant advising Tenant that Landlord desires to sell
the Premises for cash (i) at a price less than the Secondary Price as
determined by Landlord in its sole and absolute discretion or (ii) at the fair
market value of the Premises as determined by an appraisal conducted in the
same manner as the First Appraisal and Secondary Appraisal (hereinafter
designated "Successive Appraisal"), with either of such prices being herein
designated "Successive Price"; and in the event a Successive Appraisal is
conducted, a complete copy of the written report prepared in connection with
the Successive Appraisal shall be provided to Tenant simultaneously with the
delivery of the Landlord's Successive Notice. Upon delivery of a Landlord's
Successive Notice, Tenant and Landlord shall have the same rights as set
<PAGE>
forth in Sections 40.3, 40.4 and 40.5 hereof as though such Landlord's
Successive Notice was a Landlord's Secondary Notice, including, but not
limited to, (i) Tenant making an offer to purchase the Premises for cash at the
Successive Price and upon the Agreed Terms, and (ii) Landlord having the
right to engage in Sale Activity at the Successive Price or a higher price.
In the event the Landlord delivers a Landlord's Successive Notice but the
same does not result in the sale of the Premises in the manner contemplated
above, Landlord may repeat the procedures set forth in this Section 40.5 and
on each occasion of repeating such procedures adopt a new price at which the
Premises may be sold for cash, whether to Tenant pursuant to an written offer
made by Tenant at such new price (and upon the Agreed Terms) or to a
Person not affiliated with Landlord at such new price.
[FOLLOWING PAGE IS SIGNATURE PAGE]
<PAGE>
Landlord and Tenant have executed this Lease as of the date first
indicated above.
LANDLORD:
MLD TEXAS TRUST, a
Delaware business trust
By:_______________________________________
Name:____________________________________
Title: Trustee
TENANT:
STERLING HOUSE
CORPORATION, a Kansas
corporation
By:_______________________________________
Name:____________________________________
Title:
____________________________________
<PAGE>
EXHIBIT "A"
[ATTACH LEGAL DESCRIPTION]
<PAGE>
EXHIBIT "B"
[ATTACH DESCRIPTION OF LANDLORD PERSONAL PROPERTY]
<PAGE>
EXHIBIT "C"
APPRAISAL PROCESS
If Landlord and Tenant are unable to agree upon the Fair Market
Value of the Premises within any relevant period provided in this Lease, each
shall within ten (10) days after written demand by the other select one MAI
Appraiser to participate in the determination of fair market value. For all
purposes under this Lease, the fair market value of the Premises shall be the
fair market value of the Premises unencumbered by this Lease. Within ten
(10) days of such selection, the MAI Appraisers so selected by Landlord and
Tenant shall select a third MAI Appraiser ("Third MAI Appraiser"). The
three (3) selected MAI Appraisers shall each determine the fair market value
of the Premises within thirty (30) days of the selection of the third appraiser.
To the extent consistent with sound appraisal practices as then existing at the
time of any such appraisal, and if requested by Landlord, such appraisal, shall
be made on a basis consistent with the basis on which the Premises was
appraised at the time of its acquisition by Landlord. The fees and expenses
of any MAI Appraiser retained pursuant to this Exhibit shall be borne by the
party retaining such MAI Appraiser, with the exception of the Third MAI
Appraiser whose fees and expenses shall be borne by the Landlord and
Tenant equally.
In the event either Landlord or Tenant fails to select a MAI Appraiser
within the time period set forth in the foregoing paragraph, the MAI
Appraiser selected by the other party shall alone determine the fair market
value of the Premises in accordance with the provisions of this Exhibit and
the fair market value so determined shall be binding upon Landlord and
Tenant.
In the event the MAI Appraisers selected by Landlord and Tenant are
unable to agree upon a third MAI Appraiser within the time period set forth
in the first paragraph of this Exhibit, either Landlord or Tenant shall have the
right to apply at Tenant's expense to the presiding judge of the court of
original trial jurisdiction in the county in which the Premises is located to
name the third MAI Appraiser.
Within five (5) days after completion of the third MAI Appraiser's
appraisal, all three MAI Appraisers shall meet and a majority of the MAI
Appraisers shall attempt to determine the fair market value of the Premises.
If a majority are unable to determine the fair market value at such meeting,
<PAGE>
the three appraisals shall be added together and their total divided by three.
The resulting quotient shall be the fair market value of the Premises. If,
however, either or both of the low appraisal or the high appraisal are more
than ten percent (10%) lower or higher than the middle appraisal, any such
lower or higher appraisal shall be disregarded. If only one appraisal is
disregarded, the remaining two appraisals shall be added together and their
total divided by two, and the resulting quotient shall be such fair market
value. If both the lower appraisal and higher appraisal are disregarded as
provided herein, the middle appraisal shall be such fair market value. In any
event, the result of the foregoing appraisal process shall be final and binding.
"MAI Appraiser" shall mean an appraiser licensed or otherwise
qualified to do business in the State of Texas and who has substantial
experience in performing appraisals of facilities similar to the Premises and
is certified as a member of the American Institute of Real Estate Appraisers
or certified as a SRPA by the Society of Real Estate Appraisers, or, if such
organizations no longer exist or certify appraisers, such successor
organization or such other organization as is approved by Landlord.
<PAGE> TABLE OF CONTENTS
Page
1. Term 1
1.1 Term 1
1.2 Renewal Terms 1
2. Rent 2
2.1 Initial Term Minimum Rent 2
2.2 Annual Escalation of Minimum Rent during Term 2
2.3 Renewal Term Minimum Rent 4
2.4 Minimum Rent Escalations after Inception of Renewal Term
4
2.5 Total Rent 4
2.6 Proration for Partial Periods 4
2.7 Form for Calculating Minimum Rent 4
2.8 Absolute Net Lease 4
3. Taxes, Assessments and Other Charges 5
3.1 Tenant's Obligations 5
3.2 Proration 5
3.3 Right to Protest 5
3.4 Tax Bills 5
3.5 Other Charges 6
4. Insurance 6
4.1 General Insurance Requirements 6
4.2 Fire and Other Casualty 6
4.3 Public Liability 7
4.4 Professional Liability Insurance 7
4.5 Workers Compensation 7
4.6 Boiler Insurance 7
4.7 Business Interruption Insurance 7
4.8 Deductible Amounts 8
5. Use, Maintenance and Alteration of the Premises 8
5.1 Tenant's Maintenance Obligations 8
5.2 Regulatory Compliance 9
5.3 Permitted Use 10
5.4 Tenant Repurchase Obligation 10
<PAGE>
5.5 No Liens; Permitted Contests 10
5.6 Alterations by Tenant 10
5.7 Capital Improvements Funded by Landlord 11
5.8 Compliance with IRS Guidelines 11
6. Condition and Title of Premises 11
7. Tenant Personal Property 12
7.1 Tenant Personal Property 12
7.2 Landlord's Security Interest 12
7.3 Financing Statements 13
7.4 Intangible Property 13
8. Representations and Warranties 13
8.1 Due Authorization and Execution 13
8.2 Due Organization 14
8.3 No Breach of Other Agreements 14
9. Financial, Management and Regulatory Reports 14
9.1 Monthly Facility Reports 14
9.2 Annual Financial Statement 14
9.3 Accounting Principles 14
9.4 Regulatory Reports 15
10. Events of Default and Landlord's Remedies 15
10.1 Events of Default 15
10.2 Remedies 17
10.3 Receivership 18
10.4 Late Charges 18
10.5 Remedies Cumulative; No Waiver 18
10.6 Performance of Tenant's Obligations by Landlord 19
11. Security Deposit 19
12. Damage by Fire or Other Casualty 19
12.1 Reconstruction Using Insurance 19
12.2 Surplus Proceeds 19
12.3 No Rent Abatement 20
13. Condemnation 20
13.1 Complete Taking 20
13.2 Partial Taking 20
<PAGE>
13.3 Lease Remains in Effect 20
14. Provisions on Termination of Term 20
14.1 Surrender of Possession 20
14.2 Removal of Personal Property 20
14.3 Title to Personal Property Not Removed 21
14.4 Management of Premises 21
14.5 Correction of Deficiencies 21
15. Notices and Demands 21
16. Right of Entry; Examination of Records 22
17. Landlord May Grant Liens 22
18. Quiet Enjoyment 23
19. Applicable Law 23
20. Preservation of Gross Revenues 23
21. Hazardous Materials 24
21.1 Hazardous Material Covenants 24
21.2 Tenant Notices to Landlord 24
21.3 Extension of Term 25
21.4 Participation in Hazardous Materials Claims 25
21.5 Environmental Activities 25
21.6 Hazardous Materials 25
21.7 Hazardous Materials Claims 26
21.8 Hazardous Materials Laws 26
22. Assignment and Subletting 26
23. Indemnification 27
24. Holding Over 27
25. Estoppel Certificates 27
26. Conveyance by Landlord 27
27. Waiver of Jury Trial 28
<PAGE>
28. Attorneys' Fees 28
29. Severability 28
30. Counterparts 28
31. Binding Effect 28
32. Waiver and Subrogation 28
33. No Recordation of Lease 28
34. Incorporation of Recitals and Attachments 28
35. Titles and Headings 28
36. Nature of Relationship; Usury Savings Clause 28
37. Joint and Several 29
38. Survival of Representations, Warranties and Covenants 29
39. Interpretation 29
40. Sale of Premises by Landlord 29
EXHIBITS
EXHIBIT A - LEGAL DESCRIPTION
EXHIBIT B - LANDLORD PERSONAL PROPERTY
EXHIBIT C - APPRAISAL PROCESS
<PAGE>
LEASE AND SECURITY AGREEMENT
by and between
MLD TEXAS TRUST,
a Delaware business trust,
as "Landlord"
and
STERLING HOUSE CORPORATION,
a Kansas corporation,
as "Tenant"
November 29, 1996
STERLING HOUSE OF DENTON
2525 N. HINKLE DRIVE
DENTON, TEXAS
<PAGE>
Exhibit 10.71
Schedule of Executed Lease Agreements
By and Between Sterling House Corporation
Schedule of executed lease Agreements, by and between Sterling House
Corporation and NH Texas Properties, LP
Location Date of Lease
1771 Country Club Dr. January 14, 1997
Mansfield, TX 76063
7520 Glenview Dr. January 14, 1997
Richland Hills, TX 76180
EXhibit 10.72
LEASE AND SECURITY AGREEMENT
This Lease and Security Agreement (this "Lease") is made and
entered into as of the 14th day of January, 1997, by and between NH TEXAS
PROPERTIES LIMITED PARTNERSHIP, a Texas limited partnership ("Landlord"), and
STERLING HOUSE CORPORATION, a Kansas
corporation ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord is the owner of that certain real property, all
improvements thereon and all appurtenances thereto, presently used and
licensed as a personal care facility (Type B Large) ("PCF") by the State of
Texas for sixty (60) beds, located at 7520 Glenview Drive, Richland Hills,
Texas and more specifically described in Exhibit "A" attached hereto,
together with certain of the furniture, machinery, equipment, appliances,
fixtures, supplies and other personal property used in connection therewith as
more specifically described on Exhibit "B" attached hereto ("Landlord
Personal Property"). The foregoing property owned by Landlord shall be
collectively referred to in this Lease as the "Premises"; and
WHEREAS, Landlord desires to lease the Premises to Tenant, and
Tenant desires to lease the Premises from Landlord.
NOW THEREFORE, in consideration of the mutual covenants,
conditions and agreements set forth herein, Landlord hereby leases and lets
unto Tenant the Premises for the term and upon the conditions and provisions
hereinafter set forth.
1. Term.
1.1 Term. The term of this Lease shall commence on the
date of the Lease as referenced in the introductory paragraph above ("Lease
Commencement Date") and shall end on January 31, 2009 (the "Initial
Term") unless extended pursuant to Section 1.2 or earlier terminated in
accordance with the provisions hereof. The Initial Term and all Renewal
Terms (as hereinafter defined) are referred to collectively as the "Term".
1.2 Renewal Terms. The Term may be extended for four
(4) separate renewal terms (each a "Renewal Term") of ten (10) years each,
upon the satisfaction of all of the following terms and conditions:
<PAGE>
1.2.1 Not more than thirty (30) days before or after the date which is
fifteen (15) months prior to the end of the then current Term, Tenant shall
give Landlord written notice that Tenant desires to exercise its right to
extend the then current Term for one (1) Renewal Term.
1.2.2 There shall be no Event of Default under this Lease, either on the
date of Tenant's notice to Landlord
pursuant to Section 1.2.1 above, or on the last day of the then current Term.
1.2.3 All other provisions of this Lease shall remain
in full force and effect and shall continuously apply throughout the Renewal
Term(s).
1.2.4 It shall be a further condition of Tenant's
exercise of any of its renewal rights hereunder, that Tenant and all
Affiliates of Tenant then leasing property from Landlord or any Affiliate of
Landlord shall have previously, or simultaneous with Tenant's exercise
hereunder, exercised similar extension rights under their respective lease
agreements with Landlord or any Affiliates of Landlord
(collectively, all such lease agreements and future lease agreements with
Landlord or any Affiliates of Landlord are sometimes referred to as the
"Affiliate Leases").
2. Rent. During the Initial Term and all Renewal Terms, Tenant
shall pay to Landlord an annual minimum rent ("Minimum Rent"), which
Minimum Rent shall be expressed as an annual amount but shall be paid in
advance in equal monthly installments on the first (1st) day of each calendar
month. The Minimum Rent shall be determined as follows:
2.1 Initial Term Minimum Rent. During the first Lease
Year of the Initial Term, Tenant shall pay to Landlord Minimum Rent equal
to the amount of One Hundred Seventy Three Thousand Two Hundred
Seventy-One and 36/100 Dollars ($173,271.36) payable in equal monthly
installments of Fourteen Thousand Four Hundred Thirty-Nine and 28/100
Dollars ($14,439.28).
2.2 Annual Escalation of Minimum Rent during Term.
<PAGE>
2.2.1 Computation of Annual Escalations. Commencing on February 1, 1998 and
continuing on each subsequent February 1 during the
Initial Term and Renewal Term, the Minimum Rent (irrespective of any
prorations made pursuant to Section 2.6 of this Lease) shall increase to an
annual amount (which, although expressed as an annual amount, shall be
payable in equal monthly installments) equal to the Minimum Rent for the
immediately preceding Lease Year multiplied by a fraction, the numerator of
which shall be the C.P.I. (as hereinafter defined) for February 1 of the Lease
Year then in effect, and the denominator of which shall be the C.P.I. for
February 1 of the immediately preceding Lease Year; provided, however, that
the product of said multiplication shall not result in an increase of the
Minimum Rent by more than two percent (2%) per year on a cumulative basis
("Annual Multiplier"); provided, further, if the Annual Multiplier is less
than two percent (2%) in any Lease Year (a "Less Than 2% Lease Year"),
then at such time as the Annual Multiplier is being determined for each
subsequent Lease Year, the Minimum Rent for each preceding Less Than 2%
Lease Year shall be retroactively recalculated such that subsequent Annual
Multipliers (whether less than or greater than 2%) shall be first applied to
increase the Annual Multiplier for each Less Than 2% Lease Year to an
amount up to, but not greater than, 2%, with such recalculations to be made
in chronological order beginning with the earliest Less Than 2% Lease Year
and continuing, so long as there is Annual Multiplier remaining, until
recalculations have been made with respect to all Less Than 2% Lease Years.
After each such recalculation has been made, the shortfall in the
Minimum Rent for the newly recalculated Less Than 2% Lease Years shall
be billed to Tenant; and Tenant shall pay such shortfall amount to Landlord
within three (3) days after written notice of such shortfall from Landlord.
Such recalculations and shortfall billings shall be made in each Lease Year
where there remain prior Less Than 2% Lease Years which have not yet been
recalculated to 2%. For purposes of example only, if the initial Minimum
Rent equals $939,120.00, and if (a) the C.P.I. increased 1.5% as of February
1, 1998, the Minimum Rent as of February 1, 1998 would increase to
$953,207.00; (b) the C.P.I. increased 1.5% as of February 1, 1999, the
Minimum Rent as of February 1, 1999 would increase to $967,505.00; (c) the
C.P.I. increased 6% as of February 1, 1999, the Minimum Rent as of
February 1, 2000 would increase to $996,602.00, which is the Minimum Rent
increased by 2% per year for three years (i.e., the average annual increases
have been 3% [1.5% + 1.5% + 6% for the three years, respectively], subject
to the 2% annual limitation), and the total shortfall amount to be billed to
Tenant would be $4,695.00 for Lease Year 1998 and $9,555.00 for Lease
Year 1999. For purposes hereof, "C.P.I." shall mean and refer to the United
States Department of Labor, Bureau of Labor Statistics Consumer Price
<PAGE>
Index, United States Average, "All Items" (1982-84=100); provided that if
compilation of the C.P.I. is discontinued or transferred to any other
governmental department or bureau, then the index most nearly the same as
the C.P.I. shall be used as reasonably chosen by Landlord. If Landlord is
unable to determine the C.P.I. by February 1 of any Lease Year, Tenant shall
continue to pay the Minimum Rent at the rate paid for the immediately prior
Lease Year, and once the C.P.I. for February 1 of such Lease Year is
published, the new Minimum Rent (as increased by the Annual Multiplier)
shall be effective retroactively as of the first day of such Lease Year and the
aggregate amount of any additional Minimum Rent shall be paid by Tenant to
Landlord within three (3) days after written notice thereof from Landlord.
No delay by Landlord in providing notice of any such increase in Minimum
Rent shall be deemed a waiver of Landlord's right to increase the Minimum
Rent as provided hereunder.
2.2.2 "Lease Year" shall be defined as the twelve
(12) month periods commencing on February 1 of each year of the Term.
2.3 Renewal Term Minimum Rent. The Minimum Rent
for the first Lease Year in any Renewal Term shall be equal to the greater of:
2.3.1 the product of the fair market value of the
Premises on the date of Tenant's notice of exercise pursuant to Section 1.2.1
multiplied by a percentage equal to three hundred (300) basis points over the
10-year United States Treasury rate in effect on the date of Tenant's notice
of exercise pursuant to Section 1.2.1 or
2.3.2 the Minimum Rent for the immediately
preceding Lease Year (regardless of whether such immediately preceding
Lease Year is in the Initial Term or a Renewal Term) after such Minimum
Rent has been adjusted for escalation in the manner set forth in Section 2.2.1
of this Lease.
If within ten (10) days of the date of Tenant's notice of exercise pursuant to
Section 1.2.1, Landlord and Tenant are unable to agree on the fair market
value of the Premises for purposes of this calculation, such fair market value
shall be established by the appraisal process described on Exhibit "C"
attached hereto; provided, however, Landlord and Tenant agree to use good
faith and diligent efforts to agree on the fair market value of the Premises
<PAGE>
within such ten (10) day period. Landlord and Tenant acknowledge and agree
that this Section is designed to establish a fair market Minimum Rent for the
Premises during the first Lease Year of any applicable Renewal Term.
2.4 Minimum Rent Escalations after Inception of
Renewal Term. Commencing with the second Lease Year of each Renewal
Term and every Lease Year of such Renewal Term thereafter, the Minimum
Rent shall increase by an escalation adjustment determined in the manner set
forth in Section 2.2.1 of this Lease.
2.5 Total Rent. For all purposes of calculating and paying
Minimum Rent under this Lease, the Minimum Rent payable by Tenant in
any Lease Year will not be less than the Minimum Rent paid by Tenant for
the previous Lease Year.
2.6 Proration for Partial Periods. The rent for any month
during the Term which begins or ends on other than the first or last calendar
day of a calendar month shall be prorated based on actual days elapsed.
2.7 Form for Calculating Minimum Rent. Tenant shall
accompany each installment of Minimum Rent owing in respect to a Lease
Year with Tenant's calculation of the Minimum Rent payable for such Lease
Year, which calculation shall be set forth on a form mutually approved by
Landlord and Tenant.
2.8 Absolute Net Lease. All rent payments shall be
absolutely net to the Landlord free of taxes, assessments, utility charges,
operating expenses, refurnishings, insurance premiums or any other charge
or expense in connection with the Premises. All expenses and charges,
whether for upkeep, maintenance, repair, refurnishing, refurbishing,
restoration, replacement, insurance premiums, taxes, utilities, and other
operating or other charges of a like nature or otherwise, shall be paid by
Tenant. This provision is not in derogation of the specific provisions of this
Lease, but in expansion thereof and as an indication of the general intentions
of the parties hereto. Tenant shall continue to perform its obligations under
this Lease even if Tenant claims that Tenant has been damaged by any act or
omission of Landlord. Therefore, Tenant shall at all times remain obligated
under this Lease without any right of set-off, counterclaim, abatement,
deduction, reduction or defense of any kind. Tenant's sole right to recover
damages against Landlord by reason of a breach or alleged breach of
Landlord's obligations under this Lease shall be to prove such damages in a
separate action against Landlord.
<PAGE>
3. Taxes, Assessments and Other Charges:
3.1 Tenant's Obligations. Tenant agrees to pay and
discharge (including the filing of all required returns) any and all taxes
(including but not limited to real estate and personal property taxes, business
and occupational license taxes, ad valorem, sales, use, single business, gross
receipts, transaction privilege, rent or other excise taxes) and other
assessments levied or assessed against the Premises or any interest therein
during the Term, prior to delinquency or imposition of any fine, penalty,
interest or other cost. Tenant agrees to pay all franchise taxes of Landlord
(but excluding franchise taxes relating to the restructuring of Landlord's
liabilities) assessed or proposed for assessment, including, without limitation,
franchise taxes derived as a result of an appreciation of the fair market value
of the Premises or a change in the method of calculating franchise taxes. In
computing the amount of any franchise tax payable by Tenant, the amount
payable by Tenant shall be equitably apportioned in a manner followed by
taxing authorities. Notwithstanding the foregoing, nothing contained in this
Lease shall be construed to require Tenant to pay (1) any federal, state, or
local income tax assessed against Landlord, or (2) any tax assessed as a result
of the sale, exchange or other disposition by Landlord of the Premises or the
proceeds thereof.
3.2 Proration. At the commencement and at the end of the
Term, all such taxes and assessments shall be prorated.
3.3 Right to Protest. Landlord and/or Tenant shall have
the right, but not the obligation, to protest the amount or payment of any real
or personal property taxes or assessments levied against the Premises;
provided that in the event of any protest by Tenant, Landlord shall not incur
any expense because of any such protest, Tenant shall diligently and
continuously prosecute any such protest and notwithstanding such protest
Tenant shall pay any tax, assessment or other charge before the imposition of
any penalty or interest.
3.4 Tax Bills. Landlord shall promptly forward to Tenant
copies of all tax bills and payment receipts relating to the Premises received
by Landlord.
3.5 Other Charges. Tenant agrees to pay and discharge,
punctually as and when the same shall become due and payable without
penalty, all electricity, gas, garbage collection, cable television, telephone,
water, sewer, and other utilities costs and all other charges, obligations or
deposits assessed against the Premises during the Term.
<PAGE>
4. Insurance.
4.1 General Insurance Requirements. All insurance
provided for in this Lease shall be maintained under valid and enforceable
policies issued by insurers of recognized responsibility, licensed and
approved to do business in the State of Texas, having a rating of not less than
"A-X" in the then most current Best's Insurance Report. Any and all policies
of insurance required under this Lease shall name the Landlord as an
additional insured and shall be on an "occurrence" basis. In addition,
Landlord shall be shown as the loss payable beneficiary under the casualty
insurance policy maintained by Tenant pursuant to Section 4.2. All policies
of insurance required herein may be in the form of "blanket" or "umbrella"
type policies which shall name the Landlord and Tenant as their interests may
appear and allocate to the Premises the full amount of insurance required
hereunder. Original policies or satisfactory certificates from the insurers
evidencing the existence of all policies of insurance required by this Lease
and showing the interest of the Landlord shall be filed with the Landlord prior
to the commencement of the Term and shall provide that the subject policy
may not be cancelled except upon not less than ten (10) days prior written
notice to Landlord. If Landlord is provided with a certificate, upon Landlord's
request Tenant shall use its best efforts to provide Landlord with a complete
copy of the insurance policy evidenced by such certificate as soon as possible
after the commencement of the Term but not later than sixty (60) days after
the commencement of the Term. Certificates of the renewal policies from the
insurers evidencing the existence thereof shall be deposited with Landlord not
less than five (5) days prior to the expiration dates of the policies. Upon
Landlord's request Tenant shall use its best efforts to deliver a copy of the
complete renewal policy to Landlord as soon as possible after the expiration
of the replaced policy but not later than sixty (60) days after the expiration
of
the replaced policy. Any claims under any policies of insurance described in
this Lease shall be adjudicated by and at the expense of the Tenant or of its
insurance carrier, but shall be subject to joint control of Tenant and Landlord.
4.2 Fire and Other Casualty. Tenant shall keep the
Premises insured against loss or damage from all causes under standard "all
risk" property insurance coverage, without exclusion for fire, lightning,
windstorm, explosion, smoke damage, vehicle damage, sprinkler leakage,
vandalism, malicious mischief or any other risks as are normally covered
under an extended coverage endorsement, in an amount that is not less than
the full insurable value of the Premises including all equipment and personal
<PAGE>
property (whether or not Landlord Personal Property) used in the operation
of the Premises, but in no event less than One Million Seven Hundred
Ninety-Five Thousand Dollars ($1,795,000.00). The term "full insurable value"
as used in this Lease shall mean the actual replacement value of the
Premises (including all improvements) and every portion thereof, including
the cost of compliance with changes in zoning and building codes and other
laws and regulations, demolition and debris removal and increased cost of
construction. In addition, the casualty insurance required under this Section
4.2 will include an agreed amount endorsement such that the insurance carrier
has accepted the amount of coverage and has agreed that there will be no co-
insurance penalty. In the event the Premises is ever reasonably deemed by
Landlord to be in an earthquake prone or flood prone area, then Tenant
agrees, within twenty (20) days after receipt of notice from Landlord, to
purchase flood and/or earthquake insurance, to keep the Premises insured
against loss or damage from flood and earthquake in an amount that is not
less than the full insurable value of the Premises including all equipment and
personal property (whether or not Landlord Personal Property) used in the
operation of the Premises, but in no event less than the amount shown above
in this Section 4.2.
4.3 Public Liability. Tenant shall maintain comprehensive
general public liability insurance coverage against claims for bodily injury,
death or property damage occurring on, in or about the Premises and the
adjoining sidewalks and passageways, such insurance to include a broad form
endorsement and to afford protection to Landlord and Tenant of not less than
One Million Dollars ($1,000,000.00) with respect to bodily injury or death
to any one person, not less than Five Million Dollars ($5,000,000.00) with
respect to any one accident, and not less than One Million Dollars
($1,000,000.00) with respect to property damage; provided, that Landlord
shall have the right at any time hereafter to require such higher limits as may
be reasonable and customary for transactions and properties similar to the
Premises.
4.4 Professional Liability Insurance. Tenant shall
maintain insurance against liability imposed by law upon Tenant for damages
on account of professional services rendered or which should have been
rendered by Tenant or any person for which acts Tenant is legally liable on
account of injury, sickness or disease, including death at any time resulting
therefrom, and including damages allowed for loss of service, in a minimum
amount of One Million Dollars ($1,000,000.00) for each claim and Five
Million Dollars ($5,000,000.00) in the aggregate.
<PAGE>
4.5 Workers Compensation. Tenant shall comply with
all legal requirements regarding worker's compensation, including any
requirement to maintain worker's compensation insurance against claims for
injuries sustained by Tenant's employees in the course of their employment.
4.6 Boiler Insurance In the event any boilers or pressure
vessels are ever located at the Premises, Tenant shall maintain boiler and
pressure vessel insurance, including an endorsement for boiler interruption
insurance, on any fixtures or equipment which are capable of bursting or
exploding, in an amount not less than Five Million and No/100 Dollars
($5,000,000.00) for damage to property, bodily injury or death resulting from
such perils.
4.7 Business Interruption Insurance. Tenant shall
maintain, at its expense, business interruption and extra expense insurance
insuring against loss of rental value for a period of not less than one (1)
year.
4.8 Deductible Amounts. The policies of insurance which
Tenant is required to provide under this Lease will not have deductibles or
self-insured retentions in excess of Fifty Thousand Dollars ($50,000).
5. Use, Maintenance and Alteration of the Premises.
5.1 Tenant's Maintenance Obligations.
5.1.1 Tenant will keep and maintain the Premises in
good appearance, repair and condition and maintain proper housekeeping.
Tenant shall promptly make or cause to be made all repairs, interior and
exterior, structural and
nonstructural, ordinary and extraordinary, foreseen and unforeseen, necessary
to keep the Premises in good and lawful order and condition and in
substantial compliance with all requirements for the licensing of a PCF in the
State of Texas or as otherwise required under all applicable local, state and
federal laws. In the event the Premises is ever certified to participate in
Medicare or Medicaid (or any successor programs, Tenant agrees to keep the
Premises in good and lawful order and condition in compliance with all of the
requirements to maintain such Medicare and/or Medicaid certification.
5.1.2 As part of Tenant's obligations under this
Section 5.1, Tenant shall be responsible to maintain, repair and replace all
Landlord Personal Property and all Tenant
Personal Property (as defined in Section 7.1 below) in good condition,
ordinary wear and tear excepted, consistent with prudent PCF industry
practice.
<PAGE>
5.1.3 Without limiting Tenant's obligations to
maintain the Premises under this Lease, within thirty (30) days of the end of
each Lease Year starting with the end of the sixth (6th) Lease Year, Tenant
shall provide Landlord with evidence satisfactory to Landlord in the
reasonable exercise of Landlord's discretion that Tenant has in such Lease
Year spent on Upgrade Expenditures (as hereinafter defined) an annual
average amount of at least Two Hundred and No/100 Dollars ($200.00) (as
such amount shall be adjusted annually at the end of each Lease Year for
increases in the CPI) per occupant unit of the Premises. The term "Upgrade
Expenditures" is defined to mean upgrades or improvements to the Premises
which have the effect of maintaining or improving the competitive position
of the Premises in its marketplace. Non-exclusive examples of Upgrade
Expenditures are new or replacement wallpaper, tiles, window coverings,
lighting fixtures, painting, upgraded landscaping, carpeting, architectural
adornments, common area amenities and the like. It is expressly understood
that capital improvements or repairs (such as, but not limited to, repairs or
replacements to the structural elements of the walls, parking area, or the roof
or to the electrical, plumbing, HVAC or other mechanical or structural
systems in the Premises) shall not be considered to be Upgrade Expenditures.
If Tenant fails to make at least the above amount of Upgrade Expenditures,
Tenant shall promptly on demand from Landlord (but in no event more than
five [5] days) pay cash to Landlord in the amount of the applicable shortfall
in Upgrade Expenditures. Such cash shall be deposited by Landlord in its
name in such United States savings accounts or interest bearing investments
as are deemed appropriate therefor by Landlord in its reasonable discretion
from time to time and as are fully insured by an agency of the United States
of America or are issued or guaranteed by the United States of America (the
"Upgrades Reserve Account"). All interest earned on any such deposits
shall be added to such deposits and held in the Upgrades Reserve Account
until the assets thereof are required to be distributed in accordance with the
following provisions of this Section 5.1.3. No other funds shall be deposited
into or commingled with the Upgrade Reserve Account. Funds deposited in
the Upgrade Reserve Account may only be withdrawn in accordance with this
Section 5.1.3. Upon the expiration of the Term or at such other time as
Tenant shall provide the Substantiation (hereinafter defined), the assets in the
Upgrades Reserve Account (if any) shall be refunded to Tenant if Tenant has
provided adequate substantiation in writing to Landlord in reasonable detail
prior to such expiration that Tenant has satisfied all of its obligations
imposed
<PAGE>
under the first sentence of this Section 5.1.3 for all Lease Years in the Term
(other than the first five Lease Years of the Initial Term) (the
"Substantiation"), but if Tenant has not provided the Substantiation to
Landlord prior to such expiration, all the assets of the Upgrades Reserve
Account shall be immediately paid to Landlord as additional rent upon such
expiration.
5.2 Regulatory Compliance.
5.2.1 Tenant and the Premises shall comply with all
federal, state and local licensing and other laws and regulations applicable to
the operation of a PCF. Further, Tenant shall ensure that the Premises
continue to be licensed as a PCF with a licensed capacity of sixty (60) beds
throughout the Term and at the time the Premises are returned to Landlord at
the termination thereof, all without any
suspension, revocation, decertification or limitation. Further, Tenant shall not
commit any act or omission that would in any way violate any certificate of
occupancy affecting the Premises. In the event the Premises is ever certified
to participate in Medicare or Medicaid (or any successor programs), Tenant
shall ensure that the condition of the Premises is such that the Premises could
thereafter continue to be fully certified to participate in Medicare and
Medicaid (or any successor program) throughout the remainder of the Term
and at the time the Premises are returned to Landlord at the termination
thereof, all without any suspension, revocation, decertification or limitation.
Notwithstanding anything to the contrary herein, Tenant shall be entitled to
voluntarily cause the Premises to be decertified from Medicare and/or
Medicaid without Landlord's prior written consent, unless a decertification
proceeding is then taking place in which event Tenant shall be required to
obtain Landlord's consent for such decertification.
5.2.2 During the Term, all inspection fees, costs and
charges associated with a change of any licensure or certification shall be
borne solely by Tenant. Tenant shall at its sole cost make any additions or
alterations to the Premises
necessitated by, or imposed in connection with, a change of ownership
inspection survey for the transfer of operation of the Premises from Tenant
or Tenant's assignee or subtenant to Landlord or Landlord's designee at the
expiration or earlier termination of the Term in accordance herewith.
5.3 Permitted Use. Tenant shall continuously use and
occupy the Premises during the Term, solely as a sixty (60) bed licensed PCF.
5.4 Tenant Repurchase Obligation. [INTENTIONALLY
DELETED]
<PAGE>
5.5 No Liens; Permitted Contests. Tenant shall not cause or permit any liens,
levies or attachments to be placed or assessed against the
Premises or the operation thereof for any reason. However, Tenant shall be
permitted in good faith and at its expense to contest the existence, amount or
validity of any lien upon the Premises by appropriate proceedings sufficient
to prevent the collection or other realization of the lien or claim so
contested,
as well as the sale, forfeiture or loss of any of the Premises or any rent to
satisfy the same. Tenant shall provide Landlord with security satisfactory to
Landlord in Landlord's reasonable judgment to assure the foregoing. Each
contest permitted by this Section 5.5 shall be promptly and diligently
prosecuted to a final conclusion by Tenant.
5.6 Alterations by Tenant. Subject to Section 12.1
hereof, Tenant shall have the right of altering, improving, replacing,
modifying or expanding the facilities, equipment or appliances in the
Premises from time to time as it may determine is desirable for the continuing
and proper use and maintenance of the Premises under this Lease; provided,
however, that any alterations, improvements, replacements, expansions or
modifications in excess of Two Hundred Fifty Thousand Dollars
($250,000.00) in any rolling twelve (12) month period shall require the prior
written consent of the Landlord. The cost of all such alterations,
improvements, replacements, modifications, expansions or other purchases,
whether undertaken as an on-going licensing, Medicare or Medicaid (or any
successor program) or other regulatory requirement or otherwise shall be
borne solely and exclusively by Tenant (unless funded by Landlord under
Section 5.7) and shall immediately become a part of the Premises and the
property of the Landlord subject to the terms and conditions of this Lease. All
work done in connection therewith shall be done in a good and workmanlike
manner and in compliance with all existing codes and regulations pertaining
to the Premises and shall comply with the requirements of insurance policies
required under this Lease. In the event any items of the Premises have
become inadequate, obsolete or worn out or require replacement (by direction
of any regulatory body or otherwise), Tenant shall remove such items and
exchange or replace the same at Tenant's sole cost and the same shall become
part of the Premises and property of the Landlord.
5.7 Capital Improvements Funded by Landlord. In the
event Tenant desires to make a capital improvement or a related series of
capital improvements to the Premises and if Tenant desires that Landlord
fund the same, Landlord shall, in its discretion and without obligation, within
<PAGE>
thirty (30) days of Tenants' written request therefor, consider Tenant's
request to fund such capital improvements. Each and every capital improvement
funded by Landlord under this Section shall immediately
become a part of the Premises and shall belong to Landlord subject to the
terms and conditions of this Lease. Notwithstanding anything to the contrary
herein, Landlord shall not be required to fund any capital improvements
unless expressly set forth herein.
5.8 Compliance with IRS Guidelines. Any improvement
or modification to the Premises shall satisfy the requirements set forth in
Sections 4(4).02 and .03 of Revenue Procedure 75-21, 1975-1 C.B. 715, as
modified by Revenue Procedure 79-48, 1979-2 C.B. 529. Landlord reserves
the right to refuse to consent to any improvement or modification to the
Premises if, in its judgment, such improvement or modification does not meet
the foregoing requirements.
6. Condition and Title of Premises. Tenant acknowledges that
it is presently engaged in the operation of PCFs in the State of Texas and has
expertise in the PCF industry. Tenant has thoroughly investigated the
Premises, has selected the Premises to its own specifications, and has
concluded that no improvements or modifications to the Premises are
required in order to operate the Premises for its intended use. Tenant accepts
the Premises for use as a PCF under this Lease on an "AS IS, WHERE IS,
WITH ALL FAULTS" basis and will assume all responsibility and cost for
the correction of any observed or unobserved deficiencies or violations. In
making its decision to enter into this Lease, Tenant has not relied on any
representations or warranties, express or implied, of any kind from Landlord.
Notwithstanding any other provisions of this Lease to the contrary, Tenant
accepts the Premises in their present condition, AS IS, WHERE IS, WITH
ALL FAULTS, and without any representations or warranties whatsoever,
express or implied, including, without limitation, any express or implied
representations or warranties as to the fitness, use, suitability, or
condition of
the Premises. Tenant hereby represents and warrants to Landlord that Tenant
is thoroughly familiar with the Premises and the condition thereof, that
Tenant is relying on Tenant's own personal knowledge of the condition of the
Premises, that neither Landlord nor any person or entity acting or allegedly
acting for or on behalf of Landlord or any other person or entity having or
claiming any interest in the Premises has made any representations,
warranties, agreements, statements, or expressions of opinions in any way or
manner whatsoever related to, connected with, or concerning the Premises,
the condition of the Premises, or any other fact or circumstance whatsoever
on which Tenant is relying, and, to the maximum extent not prohibited by
<PAGE>
applicable law, Tenant hereby releases and discharges Landlord and all other
persons and entities having or claiming any interest in the Premises from all
liability, damages, costs, and expenses of every kind and nature whatsoever
in any way or manner arising out of, connected with, related to, or emanating
from the condition of the Premises at any time during the Term of this Lease.
Tenant has examined the condition of title to the Premises prior to the
execution and delivery of this Lease and has found the same to be
satisfactory.
7. Tenant Personal Property.
7.1 Tenant Personal Property. Tenant shall install, affix,
assemble or place on the Premises all items of furniture, fixtures, equipment
and supplies not included as Landlord Personal Property as Tenant reasonably
considers to be appropriate for Tenant's use of the Premises as contemplated
by this Lease (the "Tenant Personal Property"). Tenant shall provide and
maintain during the entire Term all Tenant Personal Property as shall be
necessary in order to operate the Premises in compliance with all
requirements set forth in this Lease. All Tenant Personal Property shall be
and shall remain the property of Tenant and may be removed by Tenant upon
the expiration of the Term. However, if there is any Event of Default, Tenant
will not remove the Tenant Personal Property from the Premises and will on
demand from Landlord, convey the Tenant Personal Property to Landlord by
executing a bill of sale in a form reasonably required by Landlord. In any
event, Tenant will repair all damage to the Premises caused by any removal
of the Tenant Personal Property.
7.2 Landlord's Security Interest.
7.2.1 The parties intend that if Tenant defaults under
this Lease, Landlord will control the Tenant Personal Property and the
Intangible Property (as defined in Section 7.4 below) so that Landlord or its
designee can operate or re-let the
Premises intact for use as a PCF.
7.2.2 Therefore, to implement the intention of the
parties, and for the purpose of securing the payment and performance of
Tenant's obligations under this Lease, Tenant, as debtor, hereby grants to
Landlord, as secured party, a
security interest in and an express contractual lien upon, all of Tenant's
right,
title and interest in and to the Tenant Personal Property and in and to the
Intangible Property and any and all products and proceeds thereof, in which
<PAGE>
Tenant now owns or hereafter acquires an interest or right, including any
leased Tenant Personal Property. This Lease constitutes a security agreement
covering all such Tenant Personal Property and the Intangible Property. The
security interest granted to Landlord in this Section 7.2.2 is intended by
Landlord and Tenant to be subordinate to any security interest granted in
connection with the financing or leasing of all or any portion of the Tenant
Personal Property so long as the lessor or financier of such Tenant Personal
Property agrees to (a) give Landlord written notice of any default by Tenant
under the terms of such lease or financing arrangement, (b) give Landlord a
reasonable time following such notice to cure any such default and (c)
consent to Landlord's written assumption of such lease or financing
arrangement upon Landlord's curing of any defaults thereunder. This security
agreement and the security interest created herein shall survive the
termination of this Lease if such termination results from the occurrence of
an Event of Default.
7.3 Financing Statements. If required by Landlord at any
time during the Term, Tenant will execute and deliver to Landlord, in a form
reasonably satisfactory to Landlord, additional security agreements, financing
statements, fixture filings and such other documents as Landlord may
reasonably require to perfect or continue the perfection of Landlord's security
interest in the Tenant Personal Property and the Intangible Property and any
and all products and proceeds thereof now owned or hereafter acquired by
Tenant. Tenant shall pay all fees and costs that Landlord may incur in filing
such documents in public offices and in obtaining such record searches as
Landlord may reasonably require. In the event Tenant fails to execute any
financing statements or other documents for the perfection or continuation of
Landlord's security interest, Tenant hereby appoints Landlord as its true and
lawful attorney-in-fact to execute any such documents on its behalf, which
power of attorney shall be irrevocable and is deemed to be coupled with an
interest.
7.4 Intangible Property. The term "Intangible
Property" means all accounts, proceeds of accounts, rents, profits, income
or revenue derived from the use of rooms or other space within the Premises
or the providing of services in or from the Premises; documents, chattel
paper, instruments, contract rights, deposit accounts, general intangibles,
choses in action, now owned or hereafter acquired by Tenant (including any
right to any refund of any taxes or other charges heretofore or hereafter paid
to any governmental authority) arising from or in connection with Tenant's
operation or use of the Premises; all licenses and permits now owned or
hereinafter acquired by Tenant, necessary or desirable for Tenant's use of the
<PAGE>
Premises under this Lease, including without limitation, if applicable, any
certificate of need or other similar certificate; and the right to use any trade
or other name hereafter associated with the operation of the Premises by
Tenant, excluding any name which includes "Sterling House". The word
"accounts" above shall include, without limitation and to the extent
assignable, accounts to be paid by Medicaid or Medicare (or successor
programs), if any.
8. Representations and Warranties. Landlord and Tenant do
hereby each for itself represent and warrant to each other as follows:
8.1 Due Authorization and Execution. This Lease and
all agreements, instruments and documents executed or to be executed in
connection herewith by either Landlord or Tenant were duly authorized and
shall be binding upon the party that executed and delivered the same.
8.2 Due Organization. Landlord and Tenant are duly
organized, validly existing and in good standing under the laws of the State
of their respective formations and are duly authorized and qualified to do all
things required of the applicable party under this Lease within the State of
Texas.
8.3 No Breach of Other Agreements. Neither this Lease
nor any agreement, document or instrument executed or to be executed in
connection herewith, violates the terms of any other agreement to which
either Landlord or Tenant is a party.
9. Financial, Management and Regulatory Reports.
9.1 Monthly Facility Reports. Within forty-five (45) days
after the end of each calendar month during the Term, Tenant shall prepare
and deliver monthly financial reports concerning the business conducted at
the Premises to Landlord consisting of a balance sheet and income statement
prepared in accordance with United States Generally Accepted Accounting
Principles ("GAAP"), together with census reports that indicate (a) the
average rent received by Tenant from occupants at the Premises, (b) the
number of occupants, and (c) a breakdown of payment source. These reports
will be accompanied by a statement signed by the President, Chief Financial
Officer, Principal Accounting Officer, Controller, Executive Vice President,
Development, or other officer of Tenant as approved by Landlord in writing,
certifying that said reports are true, correct, and complete in all material
respects after due inquiry.
<PAGE>
9.2 Annual Financial Statement. On or before the earlier
of (a) one hundred twenty (120) days after each fiscal year end of Tenant
during the Term or (b) the date Tenant files its Form 10-K with the Securities
and Exchange Commission (the "SEC"), Tenant shall deliver to Landlord (y)
the annual consolidated financial statement of Tenant audited by a reputable
certified public accounting firm and (z) a copy of Tenant's Form 10-K filed
with the SEC pursuant to applicable securities laws during the Term.
Simultaneously with the filing of Tenant's Form 10-Q's with the SEC,
Tenant agrees to deliver to Landlord a copy of same.
9.3 Accounting Principles. All of the reports and
statements required hereby shall be prepared in accordance with GAAP and
Tenant's accounting principles consistently applied.
9.4 Regulatory Reports. In addition, Tenant shall within
five (5) business days of receipt thereof deliver to Landlord all federal, state
and local licensing and reimbursement certification surveys, inspection and
other reports received by Tenant as to the Premises and the operation of
business thereon, including, without limitation, state department of health
licensing surveys, Medicare and Medicaid (and successor programs)
certification surveys if applicable to the Premises or any portion thereof, and
life safety code reports. Within five (5) business days of receipt thereof,
Tenant shall give Landlord written notice of any violation of any federal, state
or local licensing or reimbursement certification statute or regulation,
including, without limitation, Medicare or Medicaid (or successor programs)
if applicable to the Premises or any portion thereof, any suspension,
termination or restriction placed upon Tenant or the Premises, the operation
of business thereon or the ability to admit patients, or any violation of any
other permit, approval or certification in connection with the Premises or its
business, by any federal, state or local authority, including, without
limitation, Medicare or Medicaid (or successor programs) if applicable to the
Premises or any portion thereof.
10. Events of Default and Landlord's Remedies.
10.1 Events of Default. The occurrence of any of the
following shall constitute an event of default on the part of Tenant hereunder
("Event of Default"):
10.1.1 Tenants's failure to pay Landlord within three (3)
calendar days after Landlord has delivered written notice to Tenant by
facsimile as provided in the last sentence of Section 15 hereof
<PAGE>
specifying such failure, any portion of any Minimum Rent, taxes or
assessments, utilities, premiums for insurance or other charges or payments
required of Tenant under this Lease;
10.1.2 A breach by Tenant of any of the representations,
warranties or covenants in favor of Landlord as set forth in the Purchase and
Sale Agreement ("Purchase Agreement") of even date herewith between
Tenant, as seller, and Landlord, as buyer;
10.1.3 A material default by Tenant (or any Affiliate of
Tenant) ("Affiliate" being defined to mean, with respect to any person or
entity, any other person or entity which controls, is controlled by or is under
common control with the first person or entity) under any obligation other
than this Lease owed by Tenant (or any Affiliate of Tenant) to Landlord or
any Affiliate of Landlord (including without limitation any financing
agreement or any other lease or the Letter of Credit Agreement of even date
herewith
pursuant to which the letter of credit referenced in Section 11 hereinbelow is
maintained), which default is not cured within any applicable cure period
provided in the documentation for such obligation;
10.1.4 A judgment is, or judgments are, obtained against
Tenant in the amount of Five Hundred Thousand and No/100 Dollars
($500,000.00) or more; provided that such judgment is, or judgments are,
uninsured and remain unpaid or not released for more than thirty (30) days.
10.1.5 Any material misstatement or omission of fact in any
written report, notice or communication from Tenant to Landlord with
respect to Tenant or the Premises;
10.1.6 An assignment by Tenant of all or substantially all of
its property for the benefit of creditors;
10.1.7 The appointment of a receiver, trustee, or liquidator
for Tenant or any of the property of Tenant, if within three (3) business days
of such appointment Tenant does not inform Landlord in writing that Tenant
intends to cause such appointment to be
discharged or Tenant does not thereafter diligently prosecute such discharge
to completion within sixty (60) days after the date of such appointment;
10.1.8 The failure to deliver evidence of insurance to
<PAGE>
Landlord as required by Section 4 after five (5) days notice of such failure
from Landlord by facsimile as provided in the last sentence of Section 15
hereof;
10.1.9 The failure to maintain insurance as required herein
without any notice, grace, or opportunity to cure rights whatsoever.
10.1.10 The filing by Tenant of a voluntary petition under any
federal bankruptcy law or under the law of any state to be adjudicated as
bankrupt or for any arrangement or other debtor's relief, or in the alternative,
if any such petition is involuntarily filed against Tenant by any other party
and Tenant does not within three (3) business days of any such filing inform
Landlord in writing of the intent by Tenant to cause such petition to be
dismissed, if Tenant does not thereafter diligently prosecute such dismissal,
or if such filing is not dismissed within ninety (90) days after filing thereof;
10.1.11 The failure to perform or comply with any other term
or provision of this Lease (other than those provisions set forth in Sections
10.1.9 and 10.1.12) not requiring the payment of money, including, without
limitation, the failure to comply with the
provisions hereof pertaining to the use, operation and maintenance of the
Premises or the breach of any representation or warranty of Tenant in this
Lease; provided, however, the default described in this Section 10.1.11 is
curable and shall be deemed cured, if: (i) within three (3) business days of
Tenant's receipt of a notice of default from Landlord, Tenant gives Landlord
notice of its intent to cure such default; and (ii) Tenant cures such default
within thirty (30) days after such notice from Landlord, unless such default
cannot with due diligence be cured within a period of thirty (30) days because
of the nature of the default or delays beyond the control of Tenant, and cure
after such thirty (30) day period will not have a material and adverse effect
upon the Premises, in which case such default shall not constitute an Event
of Default if Tenant uses its best efforts to cure such default by promptly
commencing and diligently pursuing such cure to the completion thereof,
provided, however, no such default shall continue for more than one hundred
twenty (120) days from Tenant's receipt of a notice of default from Landlord;
10.1.12 There shall be no cure period in the event of the
breach by Tenant of (i) the provisions of Section 10.1.9 hereof, (ii) the
provisions of Section 20 hereof, or (iii) the provisions of Section 22 hereof
with respect to assignments and other related
matters; and
<PAGE>
10.1.13 All notice and cure periods provided herein shall run
concurrently with any notice or cure periods provided by applicable law.
10.2 Remedies. Upon the occurrence of an Event of
Default, Landlord may exercise all rights and remedies under this Lease and
the laws of the State of Texas available to a lessor of real and personal
property in the event of a default by its lessee, and as to the Tenant Personal
Property and the Intangible Property all remedies granted under the laws of
such State to a secured party under its Uniform Commercial Code. Without
limiting the foregoing, Landlord shall have the right to do any of the
following:
10.2.1 Sue for the specific performance of any covenant of
Tenant under this Lease as to which Tenant is in breach;
10.2.2 Upon compliance with the requirements of applicable
law, Landlord may do any of the following: enter upon the Premises,
terminate this Lease, dispossess Tenant from the Premises and/or collect
money damages by reason of Tenant's breach, including
without limitation all rent which would have accrued after such termination
and all obligations and liabilities of Tenant under this Lease which survive
the termination of the Term;
10.2.3 Elect to leave this Lease in place and sue for rent
and/or other money damages as the same come due;
10.2.4 Before or after repossession of the Premises pursuant
to Section 10.2.2, and whether or not this Lease has been terminated,
Landlord shall have the right (but shall be under no obligation) to relet any
portion of the Premises to such tenant or tenants, for such
term or terms (which may be greater or less than the remaining balance of the
Term), for such rent, or such conditions (which may include concessions or
free rent) and for such uses, as Landlord, in its absolute discretion, may
determine, and Landlord may collect and receive any rents payable by reason
of such reletting. Landlord shall have no duty to mitigate damages unless
required by applicable law and shall not be responsible or liable for any
failure to relet any of the Premises or for any failure to collect any rent due
upon any such reletting. Tenant agrees to pay Landlord, immediately upon
demand, all expenses incurred by Landlord in obtaining possession and in
reletting any of the Premises, including fees, commissions and costs of
attorneys, architects, agents and brokers;
<PAGE>
10.2.5 Sell the Tenant Personal Property and/or the Intangible
Property in a non-judicial foreclosure sale.
10.3 Receivership. Tenant acknowledges that one of the
rights and remedies available to Landlord under applicable law is to apply to
a court of competent jurisdiction for the appointment of a receiver to take
possession of the Premises, to collect the rents, issues, profits and income of
the Premises and to manage the operation of the Premises. Tenant further
acknowledges that the revocation, suspension or material limitation of the
certification of the Premises for provider status (in the event the Premises is
ever certified for such provider status) under Medicare or Medicaid (or
successor programs) and/or the revocation, suspension or material limitation
of the license of the Premises as a sixty (60) bed PCF under the laws of the
State of Texas will materially and irreparably impair the value of Landlord's
investment in the Premises. Therefore, in any of such events, and in addition
to any other right or remedy of Landlord under this Lease, Tenant hereby
consents to the appointment of such a receiver to enter upon and take
possession of the Premises, to manage the operation of the Premises, to
collect and disburse all rents, issues, profits and income generated thereby
and to preserve or replace to the extent possible the PCF license and provider
certification of the Premises or to otherwise substitute the licensee or
provider thereof. The receiver shall be entitled to a reasonable fee for its
services as a receiver. All such fees and other expenses of the receivership
estate shall be added to the monthly rent due to Landlord under this Lease.
Tenant hereby irrevocably stipulates to the appointment of a receiver under
such circumstances and for such purposes and agrees not to contest such
appointment.
10.4 Late Charges. Tenant acknowledges that the late
payment of any Minimum Rent will cause Landlord to lose the use of such
money and incur costs and expenses not contemplated under this Lease,
including, without limitation, administrative and collection costs and
processing and accounting expenses, the exact amount of which is extremely
difficult to ascertain. Therefore, if any installment of Minimum Rent is not
paid within five (5) calendar days after the due date for such rent payment,
then Tenant shall thereafter pay to Landlord on demand a late charge equal
to ten percent (10%) of the amount of any installment of Minimum Rent not
paid on the due date. Landlord and Tenant agree that this late charge
represents a reasonable estimate of such costs and expenses and is fair
compensation to Landlord for the loss suffered from such nonpayment by
Tenant.
<PAGE>
10.5 Remedies Cumulative; No Waiver. No right or
remedy herein conferred upon or reserved to Landlord is intended to be
exclusive of any other right or remedy, and each and every right and remedy
shall be cumulative and in addition to any other right or remedy given
hereunder or now or hereafter existing at law or in equity. No failure of
Landlord to insist at any time upon the strict performance of any provision of
this Lease or to exercise any option, right, power or remedy contained in this
Lease shall be construed as a waiver, modification or relinquishment thereof
as to any similar or different breach (future or otherwise) by Tenant. A receipt
by Landlord of any rent or other sum due hereunder (including any late
charge) with knowledge of the breach of any provision contained in this
Lease shall not be deemed a waiver of such breach, and no waiver by
Landlord of any provision of this Lease shall be deemed to have been made
unless expressed in a writing signed by Landlord.
10.6 Performance of Tenant's Obligations by Landlord.
If Tenant at any time shall fail to make any payment or perform any act on its
part required to be made or performed under this Lease, then Landlord may,
without waiving or releasing Tenant from any obligations or default of
Tenant hereunder, make any such payment or perform any such act for the
account and at the expense of Tenant, and may enter upon the Premises for
the purpose of taking all such action thereon as may be reasonably necessary
therefor. No such entry shall be deemed an eviction of Tenant. All sums so
paid by Landlord and all necessary and incidental costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses)
incurred in connection with the performance of any such act by Landlord,
together with interest at the rate of the Prime Rate as reported daily by the
Wall Street Journal plus 5% (or if said interest rate is violative of any
applicable statute or law, then the maximum lawful non-usurious interest rate
allowable) from the date of the making of such payment or the incurring of
such costs and expenses by Landlord, shall be payable by Tenant to Landlord
on demand.
11. Security Deposit. Tenant shall deposit with Landlord a sum
equal to one-third (1/3) of the Minimum Rent for the Initial Term in cash
representing a security deposit against the faithful performance of the terms
and conditions contained in this Lease. Tenant shall have the right to
substitute a letter of credit for such cash deposit on terms and issued by a
financial institution acceptable to Landlord. Landlord shall not be deemed
a trustee as to such deposit and shall have the right to commingle said
security deposit with its own or other funds. Interest on any cash deposit
shall be paid by Landlord to Tenant on a quarterly basis in arrears (i) if
<PAGE>
Landlord segregates such deposit from its general funds, at the average rate
earned in such period on Landlord's cash and cash equivalent investments,
and (ii) if Landlord does not segregate such deposit from its general funds,
at the average cost of funds for Landlord for short term borrowings for such
period.
12. Damage by Fire or Other Casualty.
12.1 Reconstruction Using Insurance. In the event of the
damage or destruction of the Premises, Tenant shall forthwith notify Landlord
and diligently repair or reconstruct the same to a like or better condition than
existed prior to such damage or destruction. Any net insurance proceeds
payable with respect to the casualty shall be used for the repair or
reconstruction of the Premises pursuant to reasonable disbursement controls
in favor of Landlord. If such proceeds are insufficient for such purposes,
Tenant shall provide the required additional funds.
12.2 Surplus Proceeds. If there remains any surplus of
insurance proceeds after the completion of the repair or reconstruction of the
Premises, such surplus shall belong to and be paid to Tenant.
12.3 No Rent Abatement. The rent payable under this
Lease shall not abate by reason of any damage or destruction of the Premises
by reason of an insured or uninsured casualty. Tenant hereby waives all rights
under applicable law to abate, reduce or offset rent by reason of such damage
or destruction.
13. Condemnation.
13.1 Complete Taking. If during the Term all or
substantially all of the Premises is taken or condemned by any competent
public or quasi-public authority, then Tenant may, at Tenant's election, made
within thirty (30) days of such taking by condemnation, terminate this Lease,
and the current Minimum Rent shall be prorated as of the date of such
termination. The award payable upon such taking shall be allocated between
Landlord and Tenant as so allocated by the taking authority. In the absence
of such allocation by the taking authority, the award shall be allocated as
agreed by Landlord and Tenant. Failing such agreement within thirty (30)
days after the effective date of such taking, the award shall be allocated
between Landlord and Tenant pursuant to the appraisal procedure described
on Exhibit "C" attached hereto.
<PAGE>
13.2 Partial Taking. In the event such condemnation
proceeding or right of eminent domain results in a taking of less than all or
substantially all of the Premises, the Minimum Rent thereto shall be abated
to the same extent as the diminution in the fair market value of the Premises
by reason of the condemnation. Such diminution in the fair market value shall
be as agreed between Landlord and Tenant, but failing such agreement within
thirty (30) days of the effective date of the condemnation such fair market
value will be determined by appraisal pursuant to Exhibit "C" attached
hereto. Landlord shall be entitled to receive and retain any and all awards for
the partial taking and damage and Tenant shall not be entitled to receive or
retain any such award for any reason.
13.3 Lease Remains in Effect. Except as provided above,
this Lease shall not terminate and shall remain in full force and effect in the
event of a taking or condemnation of the Premises, or any portion thereof,
and Tenant hereby waives all rights under applicable law to abate, reduce or
offset rent by reason of such taking.
14. Provisions on Termination of Term.
14.1 Surrender of Possession. Tenant shall, on or before
the last day of the Term, or upon earlier termination of this Lease, surrender
to Landlord the Premises (including all patient charts and resident records
along with appropriate patient and resident consents) in good condition and
repair, ordinary wear and tear excepted.
14.2 Removal of Personal Property. If Tenant is not then
in default hereunder Tenant shall have the right in connection with the
surrender of the Premises to remove from the Premises all Tenant Personal
Property but not the Landlord Personal Property (including the Landlord
Personal Property replaced by Tenant or required by the State of Texas or any
other governmental entity to operate the Premises for the purpose set forth in
Section 5.3 above). Any such removal shall be done in a workmanlike
manner leaving the Premises in good and presentable condition and
appearance, including repair of any damage caused by such removal. At the
end of the Term or upon the earlier termination of this Lease, Tenant shall
return the Premises to Landlord with the Landlord Personal Property (or
replacements thereof) in the same condition and utility as was delivered to
Tenant at the commencement of the Term, normal wear and tear excepted.
14.3 Title to Personal Property Not Removed. Title to
any of Tenant Personal Property which is not removed by Tenant upon the
<PAGE>
expiration of the Term shall, at Landlord's election, vest in Landlord;
provided, however, that Landlord may remove and dispose of any or all of
such Tenant Personal Property which is not so removed by Tenant, at
Tenant's expense, without obligation or accounting to Tenant.
14.4 Management of Premises. Upon the expiration or
earlier termination of the Term, Landlord or its designee, upon written notice
to Tenant, may elect to assume the responsibilities and obligations for the
management and operation of the Premises and Tenant agrees to cooperate
fully with Landlord or its designee to accomplish the transfer of such
management and operation without interrupting the operation of the
Premises. Tenant shall not commit any act or be remiss in the undertaking of
any act that would jeopardize any licensure or certification of the facility,
and
Tenant shall comply with all requests for an orderly transfer of the PCF
license, Medicare and Medicaid (or any successor program) certifications (if
any) and possession at the time of any such surrender. Upon the expiration
or earlier termination of the Term, Tenant shall promptly deliver copies of all
of Tenant's books and records relating to the Premises and its operations to
Landlord.
14.5 Correction of Deficiencies. Upon termination or
cancellation of this Lease, Tenant shall indemnify Landlord for any loss,
damage, cost or expense incurred by Landlord to correct all deficiencies of
a physical nature identified by the Texas Department of Health and/or the
Texas Department of Human Services or any other government agency or
Medicare or Medicaid (or any successor program) providers in the course of
the change of ownership inspection and audit.
15. Notices and Demands. All notices and demands, certificates,
requests, consents, approvals, and other similar instruments under this Lease
shall be in writing and shall be deemed to have been properly given upon
actual receipt thereof or within three (3) business days of being placed in the
United States certified or registered mail, return receipt requested, postage
prepaid (a) if to Tenant, addressed to Sterling House Corporation, 453 S.
Webb Road, Suite 500, Wichita, KS 67207, Attention: Steven L. Vick, Fax
No. (316) 681-1517 with a copy to Crockett & Gilhousen, 1005 N. Market,
Wichita, Kansas 67214-2971, Attention: David G. Crockett, Fax No. (316)
263-7220, or at such other address as Tenant from time to time may have
designated by written notice to Landlord, (b) if to Landlord, addressed to NH
Texas Properties Limited Partnership, 1280 Bison, Suite B9-203, Newport
Beach, CA 92660, Attention: General Partner, Fax No. (714) 644-7757 with
a copy to Cordray & Goodrich, 5847 San Felipe, 22nd Floor, Houston, Texas
<PAGE>
77057, Attention: Howard F. Cordray, Jr., Fax No. (713) 787-6175, or at such
address as Landlord may from time to time have designated by written notice
to Tenant. Refusal to accept delivery shall be deemed delivery. If Tenant is
not an individual, notice may be made to any officer, general partner or
principal thereof. Notwithstanding anything to the contrary herein, any
notice given pursuant to the terms of Sections 10.1.1 or 10.1.8 hereof shall
be deemed to have been properly given upon either (a) the manner of delivery
contained in the first two (2) sentences of this Section 15 or (b) by facsimile
transmission to Sterling House Corporation, Attention: Steven L. Vick, Fax
No. (316) 681-1517 with a copy sent by facsimile transmission to Crockett
& Gilhousen, Attention: David G. Crockett, Fax No. (316) 263-7220.
16. Right of Entry; Examination of Records. Landlord and its
representative may enter the Premises at any reasonable time after reasonable
notice to Tenant for the purpose of inspecting the Premises for any reason
including, without limitation, Tenant's default under this Lease, or to exhibit
the Premises for sale, lease or mortgage financing, or posting notices of
default, or non-responsibility under any mechanic's or materialman's lien law
or to otherwise inspect the Premises for compliance with the terms of this
Lease. Any such entry shall not unreasonably interfere with residents,
patients, patient care, or any other of Tenant's operations. Upon the
occurrence of any Event of Default or in the event Tenant does not exercise
its then current option to renew the Term for a Renewal Term, Landlord and
Landlord's representatives, inspectors and consultants shall have the right to
examine all contracts, books and records relating to Tenant's operations at the
Premises, including, without limitation, Tenant's financial records, during
normal business hours, if such records are maintained at the Premises; and
any records maintained in the normal course of business at some other
location shall be available for inspection by Landlord during any normal
business hours. Notwithstanding anything to the contrary herein, Landlord
shall only be entitled to inspect financial books and records and contracts
relating to the Premises.
17. Landlord May Grant Liens. Without the consent of Tenant,
Landlord may, subject to the terms and conditions set forth below in this
Section 17, from time to time, directly or indirectly, create or otherwise cause
to exist any lien, encumbrance or title retention agreement ("Encumbrance")
upon the Premises, or any portion thereof or interest therein (including this
Lease), whether to secure any borrowing or other means of financing or
refinancing or otherwise. Any such Encumbrance shall provide that it is
subject to the rights of Tenant under this Lease, and shall further provide that
so long as no Event of Default shall have occurred under this Lease, Tenant's
<PAGE>
occupancy hereunder, including but without limitation Tenant's right of quiet
enjoyment provided in Section 18, shall not be disturbed in the event any
such lienholder or any other person takes possession of the Premises through
foreclosure proceeding or otherwise. Upon the request of Landlord, Tenant
shall subordinate this Lease to the lien of a new Encumbrance on the
Premises, on the condition that the proposed lender agrees not to disturb
Tenant's rights under this Lease so long as Tenant is not in default hereunder.
18. Quiet Enjoyment. So long as there is no Event of Default by
Tenant, Landlord covenants and agrees that Tenant shall peaceably and
quietly have, hold and enjoy the Premises for the Term, free of any claim or
other action not caused or created by Tenant (excepting, however, intrusion
of Tenant's quiet enjoyment occasioned by condemnation or destruction of
the property as referred to in Sections 12 and 13 hereof).
19. Applicable Law. This Lease shall be governed by and
construed in accordance with the internal laws of the State of Texas without
regard to the conflict of laws rules of such State.
20. Preservation of Gross Revenues.
20.1 Tenant acknowledges that a fair return to Landlord on
its investment in the Premises is dependent, in part, on Tenant's
concentration on the Premises during the Term of the PCF business of Tenant
and its Affiliates in the geographical area of the Premises. Tenant further
acknowledges that the diversion of residents and/or patient care activities
from the Premises to other facilities owned or operated by Tenant or its
Affiliates at or near the end of the Term will have a material adverse impact
on the value and utility of the Premises.
20.1.1 Therefore, Tenant agrees that during the Term,
and for a period of one (1) year thereafter, neither Tenant nor any of its
Affiliates shall, without the prior written consent of Landlord, operate, own,
participate in or otherwise receive
revenues from any other facility or institution providing services or similar
goods to those provided on or in connection with the Premises and the
permitted use thereof as contemplated under this Lease, within a three (3)
mile radius of the Premises.
20.1.2 In addition, in the event Tenant does not
exercise any option to renew the Term for a Renewal Term, Tenant hereby
covenants and agrees that for a period of one
<PAGE>
(1) year prior to the expiration or earlier termination of this Lease and for a
period of one (1) year following the expiration or earlier termination of this
Lease, neither Tenant nor any of its Affiliates shall, without prior written
consent of Landlord, solicit for hire, hire, engage or otherwise employ any
management or supervisory personnel working on or in connection with the
Premises.
20.2 Except in the ordinary course of business or as
required for medically appropriate reasons, prior to Lease termination, neither
Tenant nor any of its Affiliates will recommend or solicit the removal or
transfer of any resident or patient from the Premises to any other personal
care facility, any other nursing or health care facility, or to any senior
housing
or retirement housing facility. After Lease termination, neither Tenant nor
any of its Affiliates will recommend or solicit the removal or transfer of any
resident or patient from the Premises to any other personal care facility, any
other nursing or health care facility, or to any senior housing or retirement
housing facility.
20.3 Tenant hereby specifically acknowledges and agrees
that the temporal, geographical and other restrictions contained in this
Section 20 are reasonable and necessary to protect the business and prospects
of Landlord, and that the enforcement of the provisions of this Section 20 will
not work an undue hardship on Tenant. Tenant further agrees that in the event
either the length of time, geographical or any other restrictions, or portion
thereof, set forth in this Section 20 is overly restrictive and unenforceable in
any court proceeding, the court may reduce or modify such restrictions, but
only to the extent necessary, to those which it deems reasonable and
enforceable under the circumstances, and the parties agree that the restrictions
of this Section 20 will remain in full force and effect as reduced or modified.
Tenant further agrees and acknowledges that Landlord does not have an
adequate remedy at law for the breach or threatened breach by Tenant of the
covenants contained in this Section 20, and Tenant therefore specifically
agrees that Landlord may, in addition to other remedies which may be
available to Landlord hereunder, file a suit in equity to enjoin Tenant from
such breach or threatened breach, without the necessity of posting any bond.
Tenant further agrees, in the event that any provision of this Section 20 is
held to be invalid or against public policy, the remaining provisions of this
Section 20 and the remainder of this Lease shall not be affected thereby.
21. Hazardous Materials.
21.1 Hazardous Material Covenants. Tenant's use of the
<PAGE>
Premises shall comply with all Hazardous Materials Laws. In the event any
Environmental Activities occur or are suspected to have occurred in violation
of any Hazardous Materials Laws or if Tenant has received any Hazardous
Materials Claim against the Premises, Tenant shall promptly obtain all
permits and approvals necessary to remedy any such actual or suspected
problem through the removal of Hazardous Materials or otherwise, and upon
Landlord's approval of the remediation plan, remedy any such problem to the
satisfaction of Landlord and all applicable governmental authorities, in
accordance with all Hazardous Materials Laws and good business practices.
21.2 Tenant Notices to Landlord. Tenant shall
immediately advise Landlord in writing of:
21.2.1 any Environmental Activities known or
believed by Tenant to be in violation of any Hazardous Materials Laws;
21.2.2 any Hazardous Materials Claims against
Tenant or the Premises;
21.2.3 any remedial action taken by Tenant in
response to any Hazardous Materials Claims or any Hazardous Materials on,
under or about the Premises in
violation of any Hazardous Materials Laws;
21.2.4 Tenant's discovery of any occurrence or
condition on or in the vicinity of the Premises that materially increase the
risk that the Premises will be exposed to Hazardous Materials; and
21.2.5 all communications to or from Tenant, any
governmental authority or any other person relating to Hazardous Materials
Laws or Hazardous Materials Claims with respect to the Premises, including
copies thereof.
21.3 Extension of Term. Notwithstanding any other
provision of this Lease, in the event any Hazardous Materials are discovered
on, under or about the Premises in violation of any Hazardous Materials Law,
the Term shall be automatically extended and this Lease shall remain in full
force and effect until the earlier to occur of the completion of all remedial
action or monitoring, as approved by Landlord, in accordance with all
Hazardous Materials Laws, or the date specified in a written notice from
Landlord to Tenant terminating this Lease (which date may be subsequent to
the date upon which the Term was to have expired).
<PAGE>
21.4 Participation in Hazardous Materials Claims.
Landlord shall have the right to join and participate in, as a party if it so
elects, any legal proceedings or actions initiated in connection with any
Hazardous Materials Claims.
21.5 Environmental Activities shall mean the use,
generation, transportation, handling, discharge, production, treatment,
storage, release or disposal of any Hazardous Materials at any time to or from
the Premises or located on or present on or under the Premises. Nothing
contained in the foregoing or elsewhere in this Section 21 is intended to, nor
shall it, limit the liability of Tenant, if any, to Landlord with respect to any
representation or warranty given by Tenant to Landlord with respect to
Hazardous Materials or environmental matters generally as set forth in the
Purchase Agreement.
21.6 Hazardous Materials shall mean (i) any petroleum
products and/or by-products (including any fraction thereof), flammable
substances, explosives, radioactive materials, hazardous or toxic wastes,
substances or materials, known carcinogens or any other materials,
contaminants or pollutants which pose a hazard to the Premises or to persons
on or about the Premises or cause the Premises to be in violation of any
Hazardous Materials Laws; (ii) asbestos in any form which is friable; (iii)
urea formaldehyde in foam insulation or any other form; (iv) transformers or
other equipment which contain dielectric fluid containing levels of
polychlorinated biphenyls in excess of fifty (50) parts per million or any other
more restrictive standard then prevailing; (v) medical wastes and biohazards
which pose a hazard to the Premises or to persons on or about the Premises
or cause the Premises to be in violation of any Hazardous Materials Laws;
(vi) radon gas which poses a hazard to the Premises or to persons on or about
the Premises or cause the Premises to be in violation of any Hazardous
Materials Laws; and (vii) any other chemical, material or substance, exposure
to which is prohibited, limited or regulated by any governmental authority or
may or could pose a hazard to the health and safety of the occupants of the
Premises or the owners and/or occupants of property adjacent to or
surrounding the Premises, including, without limitation, any materials or
substances that are listed in the United States Department of Transportation
Hazardous Materials Table (49 CFR 172.101) as amended from time to time.
21.7 Hazardous Materials Claims shall mean any and all
enforcement, clean-up, removal or other governmental or regulatory actions
or orders threatened, instituted or completed pursuant to any Hazardous
<PAGE>
Material Laws, together with all claims made or threatened by any third party
against the Premises, Landlord or Tenant relating to damage, contribution,
cost recovery compensation, loss or injury resulting from any Hazardous
Materials.
21.8 Hazardous Materials Laws shall mean any laws,
ordinances, regulations, rules, orders, guidelines or policies relating to the
environment, health and safety, Environmental Activities, Hazardous
Materials, air and water quality, waste disposal and other environmental
matters.
22. Assignment and Subletting. Tenant shall not, without the
prior written consent of Landlord, which may be withheld at Landlord's sole
discretion, voluntarily or involuntarily assign, mortgage, encumber or
hypothecate this Lease or any interest herein or sublet the Premises or any
part thereof. For the purposes of this Lease, a management or similar
agreement shall be considered to be an assignment of this Lease by Tenant.
Any of the foregoing acts without such consent shall be void but shall, at the
option of Landlord in its sole discretion, constitute an Event of Default giving
rise to Landlord's right, among other things, to terminate this Lease. Without
limiting the foregoing, this Lease shall not, nor shall any interest of Tenant
herein, be assigned or encumbered by operation of law without the prior
written consent of Landlord which may be withheld at Landlord's sole
discretion. Notwithstanding the foregoing, Tenant may without Landlord's
consent assign this Lease or sublet the Premises or any portion thereof to a
wholly-owned subsidiary of Tenant, provided that such subsidiary fully
assumes the obligations of Tenant under this Lease, Tenant remains fully
liable under this Lease, the use of the Premises remains unchanged, and no
such assignment or sublease shall be valid and no such subsidiary shall take
possession of the Premises until an executed counterpart of such assignment
or sublease has been delivered to Landlord. Anything contained in this Lease
to the contrary notwithstanding, Tenant shall not sublet the Premises on any
basis such that the rental to be paid by the sublessee thereunder would be
based, in whole or in part, on either the income or profits derived by the
business activities of the sublessee, or any other formula, such that any
portion of the sublease rental received by Landlord would fail to qualify as
"rents from real property" within the meaning of Section 856(d) of the U.S.
Internal Revenue Code, or any similar or successor provision thereto.
Nothing herein shall require Landlord's consent to lease agreements or rental
agreements with residents in the ordinary course of Tenant's business.
23. Indemnification. To the fullest extent permitted by law,
<PAGE>
Tenant agrees to protect, indemnify, defend and save harmless Landlord, its
directors, officers, shareholders, agents and employees from and against any
and all foreseeable or unforeseeable liability, expense loss, costs, deficiency,
fine, penalty, or damage (including, without limitation, punitive or
consequential damages) of any kind or nature, including reasonable attorneys'
fees, from any suits, claims or demands, on account of any matter or thing,
action or failure to act arising out of or in connection with this Lease
(including, without limitation, the breach by Tenant of any of its obligations
hereunder), the Premises, or the operations of Tenant on the Premises,
including without limitation all Environmental Activities on the Premises, all
Hazardous Materials Claims or any violation by Tenant of a Hazardous
Materials Law with respect to the Premises. Upon receiving knowledge of
any suit, claim or demand asserted by a third party that Landlord believes is
covered by this indemnity, Landlord shall give Tenant notice of the matter.
Tenant shall defend Landlord against such matter at Tenant's sole cost and
expense with legal counsel reasonably satisfactory to Landlord. In the event
Tenant chooses legal counsel that is not reasonably satisfactory to Landlord,
Landlord may elect to defend the matter with its own counsel at Tenant's
expense.
24. Holding Over. If Tenant shall for any reason remain in
possession of the Premises after the expiration or earlier termination of this
Lease, such possession shall be a month-to-month tenancy during which time
Tenant shall pay as rental each month, one hundred fifty percent (150%) of
the aggregate of the monthly Minimum Rent payable with respect to the last
Lease Year plus all additional charges accruing during the month and all
other sums, if any, payable by Tenant pursuant to the provisions of this Lease
with respect to the Premises. Nothing contained herein shall constitute the
consent, express or implied, of Landlord to the holding over of Tenant after
the expiration or earlier termination of this Lease, nor shall anything
contained herein be deemed to limit Landlord's remedies pursuant to this
Lease or otherwise available to Landlord at law or in equity.
25. Estoppel Certificates. Tenant shall, at any time upon not less
than five (5) days prior written request by Landlord, execute, acknowledge
and deliver to Landlord or its designee a statement in writing, executed by an
officer or general partner of Tenant, certifying that this Lease is unmodified
and in full force and effect (or, if there have been any modifications, that
this lease is in full force and effect as modified, and setting forth such
modifications), the dates to which Minimum Rent and additional charges
hereunder have been paid, certifying that no default by either Landlord or
Tenant exists hereunder or specifying each such default and as to other
matters as Landlord may reasonably request.
<PAGE>
26. Conveyance by Landlord. If Landlord or any successor
owner of the Premises shall convey the Premises in accordance with the
terms hereof, Landlord or such successor owner shall thereupon be released
from all future liabilities and obligations of Landlord under this Lease arising
or accruing from and after the date of such conveyance or other transfer as to
the Premises and all such future liabilities and obligations shall thereupon be
binding upon the new owner.
27. Waiver of Jury Trial. Landlord and Tenant hereby waive any
rights to trial by jury in any action, proceedings or counterclaim brought by
either of the parties against the other in connection with any matter
whatsoever arising out of or in any way connected with this Lease, including,
without limitation, the relationship of Landlord and Tenant, Tenant's use and
occupancy of the Premises, or any claim of injury or damage relating to the
foregoing or the enforcement of any remedy hereunder.
28. Attorneys' Fees. If Landlord or Tenant brings any action to
interpret or enforce this Lease, or for damages for any alleged breach hereof,
the prevailing party in any such action shall be entitled to reasonable
attorneys' fees and costs as awarded by the court in addition to all other
recovery, damages and costs.
29. Severability. In the event any part or provision of the Lease
shall be determined to be invalid or enforceable, the remaining portion of this
Lease shall nevertheless continue in full force and effect.
30. Counterparts. This Lease may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same agreement.
31. Binding Effect. Subject to the provisions of Section 22 above,
this Lease shall be binding upon and inure to the benefit of Landlord and
Tenant and their respective heirs, personal representatives, successors in
interest and assigns.
32. Waiver and Subrogation. Landlord and Tenant hereby waive
to each other all rights of subrogation which any insurance carrier, or either
of them, may have as to the Landlord or Tenant by reason of any provision
in any policy of insurance issued to Landlord or Tenant, provided such waiver
does not thereby invalidate the policy of insurance.
<PAGE>
33. No Recordation of Lease. The parties hereto agree that
neither this Lease nor any memorandum, affidavit, or any other instrument
regarding this Lease shall be recorded affecting title to the Premises;
provided, however, Landlord shall be permitted to file financing statements
to perfect its security interests created by this Lease.
34. Incorporation of Recitals and Attachments. The recitals and
exhibits, schedules, addenda and other attachments to this Lease are hereby
incorporated into this Lease and made a part hereof.
35. Titles and Headings. The titles and headings of sections of
this Lease are intended for convenience only and shall not in any way affect
the meaning or construction of any provision of this Lease.
36. Nature of Relationship; Usury Savings Clause. The parties
intend that their relationship shall be that of lessor and lessee only. Nothing
contained in this Lease shall be deemed or construed to constitute an
extension of credit by Landlord to Tenant, nor shall this Lease be deemed to
be a partnership or venture agreement between Landlord and Tenant.
Notwithstanding the foregoing, in the event any payment made to Landlord
hereunder is deemed to violate any applicable laws regarding usury, the
portion of any payment deemed to be usurious shall be held by Landlord to
pay the future obligations of Tenant as such obligations arise and, in the event
Tenant discharges and performs all obligations hereunder, such funds will be
reimbursed to Tenant upon the expiration of the Term. No interest shall be
paid on any such funds held by Landlord.
37. Joint and Several. If more than one person or entity is the
Tenant hereunder, the liability and obligations of such persons or entities
under this Lease shall be joint and several.
38. Survival of Representations, Warranties and Covenants.
All of the obligations, representations, warranties and covenants of Tenant
under this Lease shall survive the expiration or earlier termination of the
Term.
39. Interpretation. Both Landlord and Tenant have been
represented by counsel and this Lease has been freely and fairly negotiated.
Consequently, all provisions of this Lease shall be interpreted according to
their fair meaning and shall not be strictly construed against any party.
40. Sale of Premises by Landlord. In the event Landlord ever
<PAGE>
determines that it desires to sell the Premises, Landlord agrees not to market
or sell the Premises without first complying with the provisions of this
Section 40.
40.1 Prior to making any agreement to sell the Premises,
Landlord shall select one (1) qualified appraiser to determine the fair market
value of the Premises as of a date selected by Landlord (hereinafter
designated "Determination Date"); such appraiser must meet the following
qualifications: (i) such appraiser shall be a MAI Appraiser; and (ii) such
appraiser shall not otherwise be disqualified from exercising independent
judgment as to the fair market value determination to be made. Such
appraiser shall be required to prepare a written report (hereinafter designated
"First Appraisal") as to the Premises' fair market value (hereinafter
designated "Appraised Value") as of the Determination Date and the First
Appraisal shall satisfy the professional standards applicable to an MAI
Appraiser for appraisal reports. The First Appraisal must be completed and
issued within thirty (30) days of the Determination Date. For purposes
hereof, "MAI Appraiser" shall mean an appraiser licensed or otherwise
qualified to do business in the State of Texas and who has substantial
experience in performing appraisals of facilities similar to the Premises and
is certified as a member of the American Institute of Real Estate Appraisers
or certified as a SRPA by the Society of Real Estate Appraisers, or, if such
organizations no longer exist or certify appraisers, such successor
organization or such other organization as is approved by Landlord.
40.2 Upon completion of the First Appraisal, Landlord shall
determine whether it is still interested in selling the Premises for cash at a
purchase price equal to or higher than the Appraised Value, and if Landlord
is still interested, Landlord shall deliver a written notice to Tenant
(hereinafter designated "Landlord's Original Notice") advising Tenant that
Landlord desires to sell the Premises for cash at the Appraised Value or a
higher price. A complete copy of the First Appraisal must be provided to
Tenant simultaneous with the delivery of Landlord's Original Notice.
40.3 Tenant shall have thirty (30) days from the date the
Landlord's Original Notice is delivered to Tenant (hereinafter designated
"Original Notice Delivery Date") in which to deliver to Landlord a written
offer (hereinafter designated "Tenant's Original Offer") to purchase the
Premises for cash at a purchase price equal to the Appraised Value and upon
the Agreed Terms (as hereinafter defined). Any offer by Tenant to purchase
the Premises must include the following terms (herein designated "Agreed
Terms"): (i) Tenant shall pay all costs related to obtaining any environmental
<PAGE>
assessment reports (hereinafter collectively designated "Environmental
Reports") related to the Premises; (ii) Tenant shall pay all costs of obtaining
any survey of the Premises; (iii) Landlord shall pay the base premium for
Form T-1 Owner Policy of Title Insurance for the Premises providing
coverage to Tenant comparable to the title insurance policy (hereinafter
designated "Title Insurance") obtained for Landlord in respect to Landlord's
purchase of the Premises (with the exception in such Owner Policy of Title
Insurance relating to discrepancies, conflicts, or shortages in area or boundary
lines, or any encroachments, or protrusions, or any overlapping of
improvements shall be deleted at Tenant's expense to the extent permitted by
the then existing regulations of the State Board of Insurance), and in this
regard, Landlord shall be entitled to select the title insurance agency to close
the sale of the Premises and through which the Title Insurance is to be issued
(hereinafter designated "Title Company"); (iv) each party shall pay for the
attorneys' fees and costs which that party incurs; (v) Tenant and Landlord
shall equally share all other closing costs; (vi) there shall not be any
contingencies or conditions whatsoever to Tenant's obligation to purchase the
Premises; (vii) Tenant shall pay Landlord the full purchase price equal to the
Appraised Value (or Secondary Price or Successive Price, as applicable) for
the Premises in cash at closing; (viii) Tenant shall deposit cash with the Title
Company equal to ten percent (10%) of the Appraised Value (or the
Secondary Price or Successive Price, as applicable) as an earnest money
deposit (hereinafter designated "Earnest Money"), which Earnest Money
shall be nonrefundable and shall be paid to Landlord in the event Tenant fails
to perform its obligations under Tenant's Original Offer (provided that such
Earnest Money shall be applied towards the purchase price of the Premises
if the purchase closes); (ix) the sale of the Premises shall be on an "AS IS,
WHERE IS, WITH ALL FAULTS" basis with no representations or
warranties of Landlord whatsoever; (x) the conveyance shall be by special
warranty deed; and (xi) the closing of the sale and purchase of the Premises
must occur within one hundred twenty (120) days after the Original Notice
Delivery Date.
40.4 In the event Tenant does not timely deliver a Tenant's
Original Offer to Landlord within such thirty (30) day period, Tenant shall be
conclusively deemed to have forfeited any right to purchase the Premises
pursuant to the Landlord's Original Notice; and Landlord shall become
entitled to market and sell the Premises in accordance with the provisions of
Section 40.5 hereof. In the event Tenant timely delivers a Tenant's Original
Offer to Landlord within such thirty (30) day period, Tenant and Landlord
shall each deliver to the Title Company duplicate signed counterparts of the
Tenant's Original Offer (executed by duly authorized representatives of the
Tenant and Landlord, respectively) and Tenant shall pay the Earnest Money
to the Title Company within forty-eight (48) hours of such acceptance.
<PAGE>
40.5 In the event Landlord becomes entitled to market
and/or sell the Premises pursuant to this Section 40.5, Landlord shall be free
for a period of two hundred forty (240) days from the Original Notice
Delivery Date to advertise, list for sale, solicit offers, negotiate contracts
for
the sale of, and sell (hereinafter collectively designated "Sale Activity") the
Premises at the applicable Appraised Value or higher price, and in the event
the Premises is not sold within such two hundred forty (240) day period but
is subject to a Pending Contract, Landlord shall continue to be free to sell the
Premises upon the terms set forth in the Pending Contract. For purposes of
this Section 40.5, the term "Pending Contract" means a bona fide written
contract providing for (i) the sale of the Premises by Landlord to a Person
other than a Person affiliated with Landlord at a sale price at least equal to
the
Appraised Value and (ii) a date for the closing of such sale that is scheduled
to occur within ninety (90) days of the date of such contract. In the event
Landlord does not sell the Premises in accordance with the preceding
provisions of this Section 40.5, Landlord may either:
(a) cease its efforts to sell the Premises (subject to Landlord's
right to again seek to market and/or sell the Premises on such other occasions
as Landlord may determine in its sole and absolute discretion, provided
Landlord again complies with the provisions of this Section 40 upon each
such other occasion); or
(b) deliver a written notice (hereinafter designated "Landlord's
Secondary Notice") to Tenant advising Tenant that Landlord desires to sell
the Premises for cash (i) at a price less than the Appraised Value determined
under the First Appraisal as determined by
Landlord in its sole and absolute discretion or (ii) at the fair market value of
the Premises as determined by an appraisal conducted in the same manner as
the First Appraisal (hereinafter designated "Secondary Appraisal"), with
either of such prices being herein designated "Secondary Price"; and in the
event a Secondary Appraisal is conducted, a complete copy of the written
report prepared in connection with the Secondary Appraisal shall be provided
to Tenant simultaneously with the delivery of the Landlord's Secondary
Notice. Upon delivery of a Landlord's Secondary Notice, Tenant and
Landlord shall have the same rights as set forth in Sections 40.3, 40.4 and
40.5 hereof as though such Landlord's Secondary Notice was a Landlord's
First Notice, including, but not limited to, (i) Tenant making an offer to
purchase the Premises for cash at the Secondary Price and upon the Agreed
Terms, and (ii) Landlord having the right to engage in Sale Activity at the
Secondary Price or a higher price.
<PAGE>
In the event the Landlord delivers a Landlord's Secondary Notice but the
same does not result in the sale of the Premises in the manner contemplated
above, Landlord may either:
(c) cease its efforts to sell the Premises (subject to Landlord's
right to again seek to market and/or sell the Premises on such other occasions
as Landlord may determine in its sole and absolute discretion, provided
Landlord again complies with the provisions of this Section 40 upon each
such other occasion); or
(d) deliver a written notice (hereinafter designated "Landlord's
Successive Notice") to Tenant advising Tenant that Landlord desires to sell
the Premises for cash (i) at a price less than the Secondary Price as
determined by Landlord in its sole and absolute discretion or (ii) at the fair
market value of the Premises as determined by an appraisal conducted in the
same manner as the First Appraisal and Secondary Appraisal (hereinafter
designated "Successive Appraisal"), with either of such prices being herein
designated "Successive Price"; and in the event a Successive Appraisal is
conducted, a complete copy of the written report prepared in connection with
the Successive Appraisal shall be provided to Tenant simultaneously with the
delivery of the Landlord's Successive Notice. Upon delivery of a Landlord's
Successive Notice, Tenant and Landlord shall have the same rights as set
forth in Sections 40.3, 40.4 and 40.5 hereof as though such Landlord's
Successive Notice was a Landlord's Secondary Notice, including, but not
limited to, (i) Tenant making an offer to purchase the Premises for cash at the
Successive Price and upon the Agreed Terms, and (ii) Landlord having the
right to engage in Sale Activity at the Successive Price or a higher price.
In the event the Landlord delivers a Landlord's Successive Notice but the
same does not result in the sale of the Premises in the manner contemplated
above, Landlord may repeat the procedures set forth in this Section 40.5 and
on each occasion of repeating such procedures adopt a new price at which the
Premises may be sold for cash, whether to Tenant pursuant to an written offer
made by Tenant at such new price (and upon the Agreed Terms) or to a
Person not affiliated with Landlord at such new price.
[FOLLOWING PAGE IS SIGNATURE PAGE]
<PAGE>
Landlord and Tenant have executed this Lease as of the date first
indicated above.
LANDLORD:
NH TEXAS PROPERTIES
LIMITED
PARTNERSHIP, a Texas
limited partnership
By: MLD TEXAS
CORPORATION, a Texas
corporation, General
Partner
By:_______________________________________
Name:____________________________________
Title:
____________________________________
TENANT:
STERLING HOUSE
CORPORATION, a Kansas
corporation
By:_______________________________________
Name:____________________________________
Title:
____________________________________
EXHIBIT "A"
<PAGE>
[ATTACH LEGAL DESCRIPTION]
<PAGE>
EXHIBIT "B"
[ATTACH DESCRIPTION OF LANDLORD PERSONAL PROPERTY]
<PAGE>
EXHIBIT "C"
APPRAISAL PROCESS
If Landlord and Tenant are unable to agree upon the Fair Market
Value of the Premises within any relevant period provided in this Lease, each
shall within ten (10) days after written demand by the other select one MAI
Appraiser to participate in the determination of fair market value. For all
purposes under this Lease, the fair market value of the Premises shall be the
fair market value of the Premises unencumbered by this Lease. Within ten
(10) days of such selection, the MAI Appraisers so selected by Landlord and
Tenant shall select a third MAI Appraiser ("Third MAI Appraiser"). The
three (3) selected MAI Appraisers shall each determine the fair market value
of the Premises within thirty (30) days of the selection of the third appraiser.
To the extent consistent with sound appraisal practices as then existing at the
time of any such appraisal, and if requested by Landlord, such appraisal, shall
be made on a basis consistent with the basis on which the Premises was
appraised at the time of its acquisition by Landlord. The fees and expenses of
any MAI Appraiser retained pursuant to this Exhibit shall be borne by the
party retaining such MAI Appraiser, with the exception of the Third MAI
Appraiser whose fees and expenses shall be borne by the Landlord and
Tenant equally.
In the event either Landlord or Tenant fails to select a MAI Appraiser
within the time period set forth in the foregoing paragraph, the MAI
Appraiser selected by the other party shall alone determine the fair market
value of the Premises in accordance with the provisions of this Exhibit and
the fair market value so determined shall be binding upon Landlord and
Tenant.
In the event the MAI Appraisers selected by Landlord and Tenant are
unable to agree upon a third MAI Appraiser within the time period set forth
in the first paragraph of this Exhibit, either Landlord or Tenant shall have the
right to apply at Tenant's expense to the presiding judge of the court of
original trial jurisdiction in the county in which the Premises is located to
name the third MAI Appraiser.
Within five (5) days after completion of the third MAI Appraiser's
appraisal, all three MAI Appraisers shall meet and a majority of the MAI
Appraisers shall attempt to determine the fair market value of the Premises.
If a majority are unable to determine the fair market value at such meeting,
<PAGE>
the three appraisals shall be added together and their total divided by three.
The resulting quotient shall be the fair market value of the Premises. If,
however, either or both of the low appraisal or the high appraisal are more
than ten percent (10%) lower or higher than the middle appraisal, any such
lower or higher appraisal shall be disregarded. If only one appraisal is
disregarded, the remaining two appraisals shall be added together and their
total divided by two, and the resulting quotient shall be such fair market
value. If both the lower appraisal and higher appraisal are disregarded as
provided herein, the middle appraisal shall be such fair market value. In any
event, the result of the foregoing appraisal process shall be final and binding.
"MAI Appraiser" shall mean an appraiser licensed or otherwise
qualified to do business in the State of Texas and who has substantial
experience in performing appraisals of facilities similar to the Premises and
is certified as a member of the American Institute of Real Estate Appraisers
or certified as a SRPA by the Society of Real Estate Appraisers, or, if such
organizations no longer exist or certify appraisers, such successor
organization or such other organization as is approved by Landlord.
<PAGE>
TABLE OF CONTENTS
Page
1. Term 1
1.1 Term 1
1.2 Renewal Terms 1
2. Rent 2
2.1 Initial Term Minimum Rent 2
2.2 Annual Escalation of Minimum Rent during Term 2
2.3 Renewal Term Minimum Rent 4
2.4 Minimum Rent Escalations after Inception of Renewal Term
4
2.5 Total Rent 4
2.6 Proration for Partial Periods 4
2.7 Form for Calculating Minimum Rent 4
2.8 Absolute Net Lease 5
3. Taxes, Assessments and Other Charges 5
3.1 Tenant's Obligations 5
3.2 Proration 5
3.3 Right to Protest 5
3.4 Tax Bills 6
3.5 Other Charges 6
4. Insurance 6
4.1 General Insurance Requirements 6
4.2 Fire and Other Casualty 6
4.3 Public Liability 7
4.4 Professional Liability Insurance 7
4.5 Workers Compensation 7
4.6 7
4.7 Business Interruption Insurance 8
4.8 Deductible Amounts 8
5. Use, Maintenance and Alteration of the Premises 8
5.1 Tenant's Maintenance Obligations 8
5.2 Regulatory Compliance 9
5.3 Permitted Use 10
5.4 Tenant Repurchase Obligation 10
<PAGE>
5.5 No Liens; Permitted Contests 10
5.6 Alterations by Tenant 10
5.7 Capital Improvements Funded by Landlord 11
5.8 Compliance with IRS Guidelines 11
6. Condition and Title of Premises 11
7. Tenant Personal Property 12
7.1 Tenant Personal Property 12
7.2 Landlord's Security Interest 12
7.3 Financing Statements 13
7.4 Intangible Property 13
8. Representations and Warranties 13
8.1 Due Authorization and Execution 13
8.2 Due Organization 14
8.3 No Breach of Other Agreements 14
9. Financial, Management and Regulatory Reports 14
9.1 14
Monthly Facility Reports 14
9.2 14
Annual Financial Statement 14
9.3 Accounting Principles 14
9.4 Regulatory Reports 14
10. Events of Default and Landlord's Remedies 15
10.1 Events of Default 15
10.2 Remedies 17
10.3 Receivership 17
10.4 Late Charges 18
10.5 Remedies Cumulative; No Waiver 18
10.6 Performance of Tenant's Obligations by Landlord 18
11. Security Deposit 19
12. Damage by Fire or Other Casualty 19
12.1 Reconstruction Using Insurance 19
12.2 Surplus Proceeds 19
12.3 No Rent Abatement 19
13. Condemnation 20
<PAGE>
13.1 Complete Taking 20
13.2 Partial Taking 20
13.3 Lease Remains in Effect 20
14. Provisions on Termination of Term 20
14.1 Surrender of Possession 20
14.2 Removal of Personal Property 20
14.3 Title to Personal Property Not Removed 21
14.4 Management of Premises 21
14.5 Correction of Deficiencies 21
15. Notices and Demands 21
16. Right of Entry; Examination of Records 22
17. Landlord May Grant Liens 22
18. Quiet Enjoyment 22
19. Applicable Law 23
20. Preservation of Gross Revenues 23
21. Hazardous Materials 24
21.1 Hazardous Material Covenants 24
21.2 Tenant Notices to Landlord 24
21.3 Extension of Term 25
21.4 Participation in Hazardous Materials Claims 25
21.5 Environmental Activities 25
21.6 Hazardous Materials 25
21.7 Hazardous Materials Claims 26
21.8 Hazardous Materials Laws 26
22. Assignment and Subletting 26
23. Indemnification 26
24. Holding Over 27
25. Estoppel Certificates 27
26. Conveyance by Landlord 27
<PAGE>
27. Waiver of Jury Trial 27
28. Attorneys' Fees 28
29. Severability 28
30. Counterparts 28
31. Binding Effect 28
32. Waiver and Subrogation 28
33. No Recordation of Lease 28
34. Incorporation of Recitals and Attachments 28
35. Titles and Headings 28
36. Nature of Relationship; Usury Savings Clause 28
37. Joint and Several 29
38. Survival of Representations, Warranties and Covenants 29
39. Interpretation 29
40. Sale of Premises by Landlord 29
EXHIBITS
EXHIBIT A - LEGAL DESCRIPTION
EXHIBIT B - LANDLORD PERSONAL PROPERTY
EXHIBIT C - APPRAISAL PROCESS
<PAGE>
LEASE AND SECURITY AGREEMENT
by and between
NH TEXAS PROPERTIES LIMITED PARTNERSHIP,
a Texas limited partnership,
as "Landlord"
and
STERLING HOUSE CORPORATION,
a Kansas corporation,
as "Tenant"
January 14, 1997
STERLING HOUSE OF RICHLAND HILLS
7520 GLENVIEW DRIVE
RICHLAND HILLS, TEXAS
Exhibit 10.73
Schedule of Executed Lease Agreements
By and Between Sterling House Corporation
Schedule of executed lease Agreements by and between Sterling House
Corporation and Nationwide Health Properties, Inc.
Location Date of Lease
4001 S. Aspen Ave. January 14, 1997
Broken Arrow, OK 74011
7535 W. Heffner Rd. January 14, 1997
Oklahoma City, OK 73162
EXHIBIT 10.74
LEASE AND SECURITY AGREEMENT
This Lease and Security Agreement (this "Lease") is made and
entered into as of the ____ day of January, 1997, by and between NATIONWIDE
HEALTH PROPERTIES, INC., a Maryland corporation
("Landlord"), and STERLING HOUSE CORPORATION, a Kansas
corporation ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord is the owner of that certain real property, all
improvements thereon and all appurtenances thereto, presently used and
licensed as a Residential Care Home ("RCH") by the State of Oklahoma for
fifty-six (56) beds, located at 4001 S. Aspen Road, Broken Arrow, Oklahoma
and more specifically described in Exhibit "A" attached hereto, together with
certain of the furniture, machinery, equipment, appliances, fixtures, supplies
and other personal property used in connection therewith as more specifically
described on Exhibit "B" attached hereto ("Landlord Personal Property").
The foregoing property owned by Landlord shall be collectively referred to in
this Lease as the "Premises"; and
WHEREAS, Landlord desires to lease the Premises to Tenant, and
Tenant desires to lease the Premises from Landlord.
NOW THEREFORE, in consideration of the mutual covenants,
conditions and agreements set forth herein, Landlord hereby leases and lets
unto Tenant the Premises for the term and upon the conditions and provisions
hereinafter set forth.
1. Term.
1.1 Term. The term of this Lease shall commence on the
date of this Lease as referenced in the introductory paragraph above ("Lease
Commencement Date") and shall end on January 31, 2009 (the "Initial
Term") unless extended pursuant to Section 1.2 or earlier terminated in
accordance with the provisions hereof. The Initial Term and all Renewal
Terms (as hereinafter defined) are referred to collectively as the "Term".
1.2 Renewal Terms. The Term may be extended for four
(4) separate renewal terms (each a "Renewal Term") of ten (10) years each,
upon the satisfaction of all of the following terms and conditions:
<PAGE>
1.2.1 Not more than thirty (30) days before or after
the date which is fifteen (15) months prior to the end of the then current
Term, Tenant shall give Landlord written notice that Tenant desires to
exercise its right to extend the then current Term for one (1) Renewal Term.
1.2.2 There shall be no Event of Default under this
Lease, either on the date of Tenant's notice to Landlord pursuant to Section
1.2.1 above, or on the last day of the then current Term.
1.2.3 All other provisions of this Lease shall remain
in full force and effect and shall continuously apply throughout the Renewal
Term(s).
1.2.4 It shall be a further condition of Tenant's
exercise of any of its renewal rights hereunder, that Tenant and all Affiliates
of Tenant then leasing property from Landlord or any Affiliate of Landlord
shall have previously, or simultaneous with Tenant's exercise hereunder,
exercised similar extension rights under their respective lease agreements
with Landlord or any Affiliates of Landlord (collectively, all such lease
agreements and future lease agreements with Landlord or any Affiliates of
Landlord are sometimes referred to as the "Affiliate Leases")
2. Rent. During the Initial Term and all Renewal Terms, Tenant
shall pay to Landlord an annual minimum rent ("Minimum Rent"), which
Minimum Rent shall be expressed as an annual amount but shall be paid in
advance in equal monthly installments on the first (1st) day of each calendar
month. The Minimum Rent shall be determined as follows:
2.1 Initial Term Minimum Rent. During the first Lease
Year of the Initial Term, Tenant shall pay to Landlord Minimum Rent equal
to the amount of One Hundred Fifty-Four Thousand One Hundred Fifty-Eight
and 41/100 Dollars ($154,158.41) payable in equal monthly installments of
Twelve Thousand Eight Hundred Forty Six and 53/100 Dollars ($12,846.53).
2.2 Annual Escalation of Minimum Rent during Term.
2.2.1 Computation of Annual Escalations.
<PAGE>
Commencing on February 1, 1998 and continuing on each subsequent February 1
during the Initial Term and Renewal Term, the Minimum Rent
(irrespective of any prorations made pursuant to Section 2.6 of this Lease)
shall increase to an annual amount (which, although expressed as an annual
amount, shall be payable in equal monthly installments) equal to the
Minimum Rent for the immediately preceding Lease Year multiplied by a
fraction, the numerator of which shall be the C.P.I. (as hereinafter defined)
for February 1 of the Lease Year then in effect, and the denominator of which
shall be the C.P.I. for February 1 of the immediately preceding Lease Year;
provided, however, that the product of said multiplication shall not result in
an increase of the Minimum Rent by more than two percent (2%) per year on
a cumulative basis ("Annual Multiplier"); provided, further, if the Annual
Multiplier is less than two percent (2%) in any Lease Year (a "Less Than
2% Lease Year"), then at such time as the Annual Multiplier is being
determined for each subsequent Lease Year, the Minimum Rent for each
preceding Less Than 2% Lease Year shall be retroactively recalculated such
that subsequent Annual Multipliers (whether less than or greater than 2%)
shall be first applied to increase the Annual Multiplier for each Less Than 2%
Lease Year to an amount up to, but not greater than, 2%, with such
recalculations to be made in chronological order beginning with the earliest
Less Than 2% Lease Year and continuing, so long as there is Annual
Multiplier remaining, until recalculations have been made with respect to all
Less Than 2% Lease Years. After each such recalculation has been made, the
shortfall in the Minimum Rent for the newly recalculated Less Than 2%
Lease Years shall be billed to Tenant; and Tenant shall pay such shortfall
amount to Landlord within three (3) days after written notice of such shortfall
from Landlord. Such recalculations and shortfall billings shall be made in
each Lease Year where there remain prior Less Than 2% Lease Years which
have not yet been recalculated to 2%. For purposes of example only, if the
initial Minimum Rent equals $939,120.00, and if (a) the C.P.I. increased
1.5% as of February 1, 1998, the Minimum Rent as of February 1, 1998
would increase to $953,207.00; (b) the C.P.I. increased 1.5% as of February
1, 1999, the Minimum Rent as of February 1, 1999 would increase to
$967,505.00; (c) the C.P.I. increased 6% as of December 1, 1999, the
Minimum Rent as of February 1, 2000 would increase to $996,602.00, which
is the Minimum Rent increased by 2% per year for three years (i.e., the
average annual increases have been 3% [1.5% + 1.5% + 6% for the three
years, respectively], subject to the 2% annual limitation), and the total
shortfall amount to be billed to Tenant would be $4,695.00 for Lease Year
1998 and $9,555.00 for Lease Year 1999. For purposes hereof, "C.P.I." shall
mean and refer to the United States Department of Labor, Bureau of Labor
Statistics Consumer Price Index, United States Average, "All Items" (1982-
<PAGE>
84=100); provided that if compilation of the C.P.I. is discontinued or
transferred to any other governmental department or bureau, then the index
most nearly the same as the C.P.I. shall be used as reasonably chosen by
Landlord. If Landlord is unable to determine the C.P.I. by February 1 of any
Lease Year, Tenant shall continue to pay the Minimum Rent at the rate paid
for the immediately prior Lease Year, and once the C.P.I. for February 1 of
such Lease Year is published, the new Minimum Rent (as increased by the
Annual Multiplier) shall be effective retroactively as of the first day of such
Lease Year and the aggregate amount of any additional Minimum Rent shall
be paid by Tenant to Landlord within three (3) days after written notice
thereof from Landlord. No delay by Landlord in providing notice of any such
increase in Minimum Rent shall be deemed a waiver of Landlord's right to
increase the Minimum Rent as provided hereunder.
2.2.2 "Lease Year" shall be defined as the twelve
(12) month periods commencing on February 1 of each year of the Term.
2.3 Renewal Term Minimum Rent. The Minimum Rent
for the first Lease Year in any Renewal Term shall be equal to the greater of:
2.3.1 the product of the fair market value of the
Premises on the date of Tenant's notice of exercise pursuant to Section 1.2.1
multiplied by a percentage equal to three hundred (300) basis points over the
10-year United States Treasury rate in effect on the date of Tenant's notice
of exercise pursuant to Section 1.2.1 or
2.3.2 the Minimum Rent for the immediately
preceding Lease Year (regardless of whether such immediately preceding Lease
Year is in the Initial Term or a Renewal Term) after such Minimum Rent has been
adjusted for escalation in the manner set forth in Section 2.2.1 of this Lease.
If within ten (10) days of the date of Tenant's notice of exercise pursuant to
Section 1.2.1, Landlord and Tenant are unable to agree on the fair market
value of the Premises for purposes of this calculation, such fair market value
shall be established by the appraisal process described on Exhibit "C"
attached hereto; provided, however, Landlord and Tenant agree to use good
faith and diligent efforts to agree on the fair market value of the Premises
within such ten (10) day period. Landlord and Tenant acknowledge and agree that
this Section is designed to establish a fair market Minimum Rent for the
Premises during the first Lease Year of any applicable Renewal Term.
<PAGE>
2.4 Minimum Rent Escalations after Inception of
Renewal Term. Commencing with the second Lease Year of each Renewal
Term and every Lease Year of such Renewal Term thereafter, the Minimum
Rent shall increase by an escalation adjustment determined in the manner set
forth in Section 2.2.1 of this Lease.
2.5 Total Rent. For all purposes of calculating and paying
Minimum Rent under this Lease, the Minimum Rent payable by Tenant in
any Lease Year will not be less than the Minimum Rent paid by Tenant for
the previous Lease Year.
2.6 Proration for Partial Periods. The rent for any month
during the Term which begins or ends on other than the first or last calendar
day of a calendar month shall be prorated based on actual days elapsed.
2.7 Form for Calculating Minimum Rent. Tenant shall
accompany each installment of Minimum Rent owing in respect to a Lease
Year with Tenant's calculation of the Minimum Rent payable for such Lease
Year, which calculation shall be set forth on a form mutually approved by
Landlord and Tenant.
2.8 Absolute Net Lease. All rent payments shall be
absolutely net to the Landlord free of taxes, assessments, utility charges,
operating expenses, refurnishings, insurance premiums or any other charge or
expense in connection with the Premises. All expenses and charges,
whether for upkeep, maintenance, repair, refurnishing, refurbishing,
restoration, replacement, insurance premiums, taxes, utilities, and other
operating or other charges of a like nature or otherwise, shall be paid by
Tenant. This provision is not in derogation of the specific provisions of this
Lease, but in expansion thereof and as an indication of the general intentions
of the parties hereto. Tenant shall continue to perform its obligations under
this Lease even if Tenant claims that Tenant has been damaged by any act or
omission of Landlord. Therefore, Tenant shall at all times remain obligated
under this Lease without any right of set-off, counterclaim, abatement,
deduction, reduction or defense of any kind. Tenant's sole right to recover
damages against Landlord by reason of a breach or alleged breach of
Landlord's obligations under this Lease shall be to prove such damages in a
separate action against Landlord.
<PAGE>
3. Taxes, Assessments and Other Charges:
3.1 Tenant's Obligations. Tenant agrees to pay and
discharge (including the filing of all required returns) any and all taxes
(including but not limited to real estate and personal property taxes, business
and occupational license taxes, ad valorem, sales, use, single business, gross
receipts, transaction privilege, rent or other excise taxes) and other
assessments levied or assessed against the Premises or any interest therein
during the Term, prior to delinquency or imposition of any fine, penalty,
interest or other cost. Tenant agrees to pay all franchise taxes of Landlord
(but excluding franchise taxes relating to the restructuring of Landlord's
liabilities) assessed or proposed for assessment, including, without limitation,
franchise taxes derived as a result of an appreciation of the fair market value
of the Premises or a change in the method of calculating franchise taxes. In
computing the amount of any franchise tax payable by Tenant, the amount
payable by Tenant shall be equitably apportioned in a manner followed by
taxing authorities. Notwithstanding the foregoing, nothing contained in this
Lease shall be construed to require Tenant to pay (1) any federal, state, or
local income tax assessed against Landlord, or (2) any tax assessed as a result
of the sale, exchange or other disposition by Landlord of the Premises or the
proceeds thereof.
3.2 Proration. At the commencement and at the end of the
Term, all such taxes and assessments shall be prorated.
3.3 Right to Protest. Landlord and/or Tenant shall have
the right, but not the obligation, to protest the amount or payment of any real
or personal property taxes or assessments levied against the Premises;
provided that in the event of any protest by Tenant, Landlord shall not incur
any expense because of any such protest, Tenant shall diligently and
continuously prosecute any such protest and notwithstanding such protest
Tenant shall pay any tax, assessment or other charge before the imposition of
any penalty or interest.
3.4 Tax Bills. Landlord shall promptly forward to Tenant
copies of all tax bills and payment receipts relating to the Premises received
by Landlord.
3.5 Other Charges. Tenant agrees to pay and discharge,
punctually as and when the same shall become due and payable without
penalty, all electricity, gas, garbage collection, cable television, telephone,
water, sewer, and other utilities costs and all other charges, obligations or
deposits assessed against the Premises during the Term.
<PAGE>
4. Insurance.
4.1 General Insurance Requirements. All insurance
provided for in this Lease shall be maintained under valid and enforceable
policies issued by insurers of recognized responsibility, licensed and
approved to do business in the State of Oklahoma, having a rating of not less
than "A-X" in the then most current Best's Insurance Report. Any and all
policies of insurance required under this Lease shall name the Landlord as an
additional insured and shall be on an "occurrence" basis. In addition,
Landlord shall be shown as the loss payable beneficiary under the casualty
insurance policy maintained by Tenant pursuant to Section 4.2. All policies of
insurance required herein may be in the form of "blanket" or "umbrella"
type policies which shall name the Landlord and Tenant as their interests may
appear and allocate to the Premises the full amount of insurance required
hereunder. Original policies or satisfactory certificates from the insurers
evidencing the existence of all policies of insurance required by this Lease
and showing the interest of the Landlord shall be filed with the Landlord prior
to the commencement of the Term and shall provide that the subject policy
may not be cancelled except upon not less than ten (10) days prior written
notice to Landlord. If Landlord is provided with a certificate, upon Landlord's
request Tenant shall use its best efforts to provide Landlord with a complete
copy of the insurance policy evidenced by such certificate as soon as possible
after the commencement of the Term but not later than sixty (60) days after
the commencement of the Term. Certificates of the renewal policies from the
insurers evidencing the existence thereof shall be deposited with Landlord not
less than five (5) days prior to the expiration dates of the policies. Upon
Landlord's request Tenant shall use its best efforts to deliver a copy of the
complete renewal policy to Landlord as soon as possible after the expiration
of the replaced policy but not later than sixty (60) days after the expiration
of the replaced policy. Any claims under any policies of insurance described in
this Lease shall be adjudicated by and at the expense of the Tenant or of its
insurance carrier, but shall be subject to joint control of Tenant and Landlord.
4.2 Fire and Other Casualty. Tenant shall keep the
Premises insured against loss or damage from all causes under standard "all
risk" property insurance coverage, without exclusion for fire, lightning,
windstorm, explosion, smoke damage, vehicle damage, sprinkler leakage,
vandalism, malicious mischief or any other risks as are normally covered
under an extended coverage endorsement, in an amount that is not less than
the full insurable value of the Premises including all equipment and personal
property (whether or not Landlord Personal Property) used in the operation
<PAGE>
of the Premises, but in no event less than One Million Five Hundred Ninety-
Seven Thousand Dollars ($1,597,000.00). The term "full insurable value" as used
in this Lease shall mean the actual replacement value of the Premises
(including all improvements) and every portion thereof, including the cost of
compliance with changes in zoning and building codes and other laws and
regulations, demolition and debris removal and increased cost of
construction. In addition, the casualty insurance required under this Section
4.2 will include an agreed amount endorsement such that the insurance carrier
has accepted the amount of coverage and has agreed that there will be no co-
insurance penalty. In the event the Premises is ever reasonably deemed by
Landlord to be in an earthquake prone or flood prone area, then Tenant
agrees, within twenty (20) days after receipt of notice from Landlord, to
purchase flood and/or earthquake insurance, to keep the Premises insured
against loss or damage from flood and earthquake in an amount that is not
less than the full insurable value of the Premises including all equipment and
personal property (whether or not Landlord Personal Property) used in the
operation of the Premises, but in no event less than the amount shown above
in this Section 4.2.
4.3 Public Liability. Tenant shall maintain comprehensive
general public liability insurance coverage against claims for bodily injury,
death or property damage occurring on, in or about the Premises and the
adjoining sidewalks and passageways, such insurance to include a broad form
endorsement and to afford protection to Landlord and Tenant of not less than
One Million Dollars ($1,000,000.00) with respect to bodily injury or death to
any one person, not less than Five Million Dollars ($5,000,000.00) with
respect to any one accident, and not less than One Million Dollars
($1,000,000.00) with respect to property damage; provided, that Landlord
shall have the right at any time hereafter to require such higher limits as may
be reasonable and customary for transactions and properties similar to the
Premises.
4.4 Professional Liability Insurance. Tenant shall
maintain insurance against liability imposed by law upon Tenant for damages
on account of professional services rendered or which should have been
rendered by Tenant or any person for which acts Tenant is legally liable on
account of injury, sickness or disease, including death at any time resulting
therefrom, and including damages allowed for loss of service, in a minimum
amount of One Million Dollars ($1,000,000.00) for each claim and Five
Million Dollars ($5,000,000.00) in the aggregate.
4.5 Workers Compensation. Tenant shall comply with
<PAGE>
all legal requirements regarding worker's compensation, including any
requirement to maintain worker's compensation insurance against claims for
injuries sustained by Tenant's employees in the course of their employment.
4.6 Boiler Insurance In the event any boilers or pressure
vessels are ever located at the Premises, Tenant shall maintain boiler and
pressure vessel insurance, including an endorsement for boiler interruption
insurance, on any fixtures or equipment which are capable of bursting or
exploding, in an amount not less than Five Million and No/100 Dollars
($5,000,000.00) for damage to property, bodily injury or death resulting from
such perils.
4.7 Business Interruption Insurance. Tenant shall
maintain, at its expense, business interruption and extra expense insurance
insuring against loss of rental value for a period of not less than one (1)
year.
4.8 Deductible Amounts. The policies of insurance which
Tenant is required to provide under this Lease will not have deductibles or
self-insured retentions in excess of Fifty Thousand Dollars ($50,000).
5. Use, Maintenance and Alteration of the Premises.
5.1 Tenant's Maintenance Obligations.
5.1.1 Tenant will keep and maintain the Premises in
good appearance, repair and condition and maintain proper housekeeping.
Tenant shall promptly make or cause to be made all repairs, interior and
exterior, structural and nonstructural, ordinary and extraordinary, foreseen
and unforeseen, necessary to keep the Premises in good and lawful order and
condition and in substantial compliance with all requirements for the licensing
of a RCH in the State of Oklahoma or as otherwise required under all applicable
local, state and federal laws. In the event the Premises is ever
certified to participate in Medicare or Medicaid (or any successor programs,
Tenant agrees to keep the Premises in good and lawful order and condition in
compliance with all of the requirements to maintain such Medicare and/or
Medicaid certification.
5.1.2 As part of Tenant's obligations under this
Section 5.1, Tenant shall be responsible to maintain, repair
<PAGE>
and replace all Landlord Personal Property and all Tenant Personal Property
(as defined in Section 7.1 below) in good condition, ordinary wear and tear
excepted, consistent with prudent RCH industry practice.
5.1.3 Without limiting Tenant's obligations to
maintain the Premises under this Lease, within thirty (30) days of the end of
each Lease Year starting with the end of the sixth (6th) Lease Year, Tenant
shall provide Landlord with evidence satisfactory to Landlord in the reasonable
exercise of Landlord's discretion that Tenant has in such Lease Year spent on
Upgrade Expenditures (as hereinafter defined) an annual average amount of at
least Two Hundred and No/100 Dollars ($200.00) (as such amount shall be adjusted
annually at the end of each Lease Year for "Upgrade
Expenditures" is defined to mean upgrades or improvements to the Premises which
have the effect of maintaining or improving the competitive position of the
Premises in its marketplace. Non-exclusive examples of Upgrade
Expenditures are new or replacement wallpaper, tiles, window coverings,
lighting fixtures, painting, upgraded landscaping, carpeting, architectural
adornments, common area amenities and the like. It is expressly understood that
capital improvements or repairs (such as, but not limited to, repairs or
replacements to the structural elements of the walls, parking area, or the
roof or to the electrical, plumbing, HVAC or other mechanical or structural
systems in the Premises) shall not be considered to be Upgrade Expenditures. If
Tenant fails to make at least the above amount of Upgrade Expenditures, Tenant
shall promptly on demand from Landlord (but in no event more than five (5) days)
pay cash to Landlord in the amount of the applicable shortfall in Upgrade
Expenditures. Such shall be deposited by Landlord in its
name in such United States savings accounts or interest bearing investments
as are deemed appropriate therefor by Landlord in its reasonable discretion
from time to time and as are fully insured by an agency of the United States
of America or are issued or guaranteed by the United States of America (the
"Upgrades Reserve Account"). All interest earned on any such deposits shall
be added to such deposits and held in the Upgrades Reserve Account until the
assets thereof are required to be distributed in accordance with the folloing
<PAGE>
provisions of this Section 5.1.3. No other funds shall be deposited into or
commingled with the Upgrade Reserve Account. Funds deposited in the
Upgrade Reserve Account may only be withdrawn in accordance with this
Section 5.1.3. Upon the expiration of the Term or at such other time as
Tenant shall provide the Substantiation (hereinafter defined), the assets in the
Upgrades Reserve Account (if any) shall be refunded to Tenant if Tenant has
provided adequate substantiation in writing to Landlord in reasonable detail
prior to such expiration that Tenant has satisfied all of its obligations
imposed
under the first sentence of this Section 5.1.3 for all Lease Years in the Term
(other than the first five Lease Years of the Initial Term) (the
"Substantiation"), but if Tenant has not provided the Substantiation to
Landlord prior to such expiration, all the assets of the Upgrades Reserve
Account shall be immediately paid to Landlord as additional rent upon such
expiration.
5.2 Regulatory Compliance.
5.2.1 Tenant and the Premises shall comply with all
federal, state and local licensing and other laws and regulations applicable to
the operation of a RCH. Further, Tenant shall ensure that the Premises continue
to be licensed as a RCH with a licensed capacity of fifty-six (56) beds
throughout the Term and at the time the Premises are returned to Landlord at
the termination thereof, all without any suspension, revocation, decertification
or limitation. Further, Tenant shall not commit any act or omission that would
in any way violate any certificate of occupancy affecting the Premises. In the
event the Premises is ever certified to participate in Medicare or Medicaid (or
any successor programs), Tenant shall ensure that the condition of the Premises
is such that the Premises could therafter continue to be fully certified to
participate in Medicare and Medicaid ( or any successor program) throughout the
remainder of the Term and at the time the Premises are returned to Landlord at
the termination therof, all without any suspension, revocation, decertification
or limitation. Notwithstanding
anything to the contrary herein, Tenant shall be entitled to voluntarily cause
the Premises to be decertified from Medicare and/or Medicaid without Landlord's
prior written consent, unless a decertification proceeding is then taking place
in which event Tenant shall be required to obtain Landlord's consent for such
decertification.
<PAGE>
5.2.2 During the Term, all inspection fees, costs and charges
associated with a change of any licensure or certification shall be borne solely
by Tenant. Tenant shall at its sole cost make any additions or alterations to
the Premises necessitated by, or imposed in connection with, a change of
ownership inspection survey for the transfer of operation of the Premises
from Tenant or Tenant's assignee or subtenant to Landlord or Landlord's
designee at the expiration or earlier termination of the Term in accordance
herewith.
5.3 Permitted Use. Tenant shall continuously use and
occupy the Premises during the Term, solely as a fifty-six (56) bed licensed
RCH.
5.4 Tenant Repurchase Obligation. [INTENTIONALLY
DELETED]
5.5 No Liens; Permitted Contests. Tenant shall not cause
or permit any liens, levies or attachments to be placed or assessed against the
Premises or the operation thereof for any reason. However, Tenant shall be
permitted in good faith and at its expense to contest the existence, amount or
validity of any lien upon the Premises by appropriate proceedings sufficient
to prevent the collection or other realization of the lien or claim so contested
as well as the sale, forfeiture or loss of any of the Premises or any rent to
satisfy the same. Tenant shall provide Landlord with security satisfactory to
Landlord in Landlord's reasonable judgment to assure the foregoing. Each
contest permitted by this Section 5.5 shall be promptly and diligently
prosecuted to a final conclusion by Tenant.
5.6 Alterations by Tenant. Subject to Section 12.1
hereof, Tenant shall have the right of altering, improving, replacing,
modifying or expanding the facilities, equipment or appliances in the
Premises from time to time as it may determine is desirable for the continuing
and proper use and maintenance of the Premises under this Lease; provided,
however, that any alterations, improvements, replacements, expansions or
modifications in excess of Two Hundred Fifty Thousand Dollars
($250,000.00) in any rolling twelve (12) month period shall require the prior
written consent of the Landlord. The cost of all such alterations,
improvements, replacements, modifications, expansions or other purchases,
whether undertaken as an on-going licensing, Medicare or Medicaid (or any
successor program) or other regulatory requirement or otherwise shall be
borne solely and exclusively by Tenant (unless funded by Landlord under
<PAGE>
Section 5.7) and shall immediately become a part of the Premises and the
property of the Landlord subject to the terms and conditions of this Lease. All
work done in connection therewith shall be done in a good and workmanlike
manner and in compliance with all existing codes and regulations pertaining
to the Premises and shall comply with the requirements of insurance policies
required under this Lease. In the event any items of the Premises have
become inadequate, obsolete or worn out or require replacement (by direction
of any regulatory body or otherwise), Tenant shall remove such items and
exchange or replace the same at Tenant's sole cost and the same shall become
part of the Premises and property of the Landlord.
5.7 Capital Improvements Funded by Landlord. In the
event Tenant desires to make a capital improvement or a related series of
capital improvements to the Premises and if Tenant desires that Landlord
fund the same, Landlord shall, in its discretion and without obligation, within
thirty (30) days of Tenants' written request therefor, consider Tenant's
request to fund such capital improvements. Each and every capital
improvement funded by Landlord under this Section shall immediately
become a part of the Premises and shall belong to Landlord subject to the
terms and conditions of this Lease. Notwithstanding anything to the contrary
herein, Landlord shall not be required to fund any capital improvements
unless expressly set forth herein.
5.8 Compliance with IRS Guidelines. Any improvement
or modification to the Premises shall satisfy the requirements set forth in
Sections 4(4).02 and .03 of Revenue Procedure 75-21, 1975-1 C.B. 715, as
modified by Revenue Procedure 79-48, 1979-2 C.B. 529. Landlord reserves
the right to refuse to consent to any improvement or modification to the
Premises if, in its judgment, such improvement or modification does not meet
the foregoing requirements.
6. Condition and Title of Premises. Tenant acknowledges that
it is presently engaged in the operation of RCHs in the State of Oklahoma and
has expertise in the RCH industry. Tenant has thoroughly investigated the
Premises, has selected the Premises to its own specifications, and has
concluded that no improvements or modifications to the Premises are
required in order to operate the Premises for its intended use. Tenant accepts
the Premises for use as a RCH under this Lease on an "AS IS, WHERE IS,
WITH ALL FAULTS" basis and will assume all responsibility and cost for
the correction of any observed or unobserved deficiencies or violations. In
making its decision to enter into this Lease, Tenant has not relied on any
representations or warranties, express or implied, of any kind from Landlord.
<PAGE>
Notwithstanding any other provisions of this Lease to the contrary, Tenant
accepts the Premises in their present condition, AS IS, WHERE IS, WITH
ALL FAULTS, and without any representations or warranties whatsoever,
express or implied, including, without limitation, any express or implied
representations or warranties as to the fitness, use, suitability, or
condition of
the Premises. Tenant hereby represents and warrants to Landlord that Tenant
is thoroughly familiar with the Premises and the condition thereof, that
Tenant is relying on Tenant's own personal knowledge of the condition of the
Premises, that neither Landlord nor any person or entity acting or allegedly
acting for or on behalf of Landlord or any other person or entity having or
claiming any interest in the Premises has made any representations,
warranties, agreements, statements, or expressions of opinions in any way or
manner whatsoever related to, connected with, or concerning the Premises,
the condition of the Premises, or any other fact or circumstance whatsoever
on which Tenant is relying, and, to the maximum extent not prohibited by
applicable law, Tenant hereby releases and discharges Landlord and all other
persons and entities having or claiming any interest in the Premises from all
liability, damages, costs, and expenses of every kind and nature whatsoever
in any way or manner arising out of, connected with, related to, or emanating
from the condition of the Premises at any time during the Term of this Lease.
Tenant has examined the condition of title to the Premises prior to the
execution and delivery of this Lease and has found the same to be
satisfactory.
7. Tenant Personal Property.
7.1 Tenant Personal Property. Tenant shall install, affix,
assemble or place on the Premises all items of furniture, fixtures, equipment
and supplies not included as Landlord Personal Property as Tenant reasonably
considers to be appropriate for Tenant's use of the Premises as contemplated
by this Lease (the "Tenant Personal Property"). Tenant shall provide and
maintain during the entire Term all Tenant Personal Property as shall be
necessary in order to operate the Premises in compliance with all
requirements set forth in this Lease. All Tenant Personal Property shall be
and shall remain the property of Tenant and may be removed by Tenant upon
the expiration of the Term. However, if there is any Event of Default, Tenant
will not remove the Tenant Personal Property from the Premises and will on
demand from Landlord, convey the Tenant Personal Property to Landlord by
executing a bill of sale in a form reasonably required by Landlord. In any
event, Tenant will repair all damage to the Premises caused by any removal
of the Tenant Personal Property.
<PAGE>
7.2 Landlord's Security Interest.
7.2.1 The parties intend that if Tenant defaults under
this Lease, Landlord will control the Tenant Personal Property and the
Intangible Property (as defined in Section 7.4 below) so that Landlord or its
designee can operate or re-let the Premises intact for use as a RCH.
7.2.2 Therefore, to implement the intention of the
parties, and for the purpose of securing the payment and performance of Tenant's
obligations under this Lease, Tenant, as debtor, hereby grants to Landlord,
as secured party, a security interest in and an express contractual
lien upon, all of Tenant's right, title and interest in and to the Tenant
Personal
Property and in and to the Intangible Property and any and all products and
proceeds thereof, in which Tenant now owns or hereafter acquires an interest
or right, including any leased Tenant Personal Property. This Lease constitutes
a security agreement covering all such Tenant Personal Property and the
Intangible Property. The security interest granted to Landlord in this Section
7.2.2 is intended by Landlord and Tenant to be subordinate to any security
interest granted in connection with the financing or
thereunder. This security agreement and the security interest created herein
shall survive the termination of this Lease if such termination results from
the occurrence of an Event of Default.
7.3 Financing Statements. If required by Landlord at any
time during the Term, Tenant will execute and deliver to Landlord, in a form
reasonably satisfactory to Landlord, additional security agreements, financing
statements, fixture filings and such other documents as Landlord may
reasonably require to perfect or continue the perfection of Landlord's security
interest in the Tenant Personal Property and the Intangible Property and any
<PAGE>
and all products and proceeds thereof now owned or hereafter acquired by
Tenant. Tenant shall pay all fees and costs that Landlord may incur in filing
such documents in public offices and in obtaining such record searches as
Landlord may reasonably require. In the event Tenant fails to execute any
financing statements or other documents for the perfection or continuation of
Landlord's security interest, Tenant hereby appoints Landlord as its true and
lawful attorney-in-fact to execute any such documents on its behalf, which
power of attorney shall be irrevocable and is deemed to be coupled with an
interest.
7.4 Intangible Property. The term "Intangible Property" means all accounts,
proceeds of accounts, rents, profits, income or revenue derived from the use
of rooms or other space within the Premises
or the providing of services in or from the Premises; documents, chattel
paper, instruments, contract rights, deposit accounts, general intangibles,
choses in action, now owned or hereafter acquired by Tenant (including any
right to any refund of any taxes or other charges heretofore or hereafter paid
to any governmental authority) arising from or in connection with Tenant's
operation or use of the Premises; all licenses and permits now owned or
hereinafter acquired by Tenant, necessary or desirable for Tenant's use of the
Premises under this Lease, including without limitation, if applicable, any
certificate of need or other similar certificate; and the right to use any
trade or other name hereafter associated with the operation of the Premises by
Tenant, excluding any name which includes "Sterling House". The word
"accounts" above shall include, without limitation and to the extent
assignable, accounts to be paid by Medicaid or Medicare (or successor
programs), if any.
8. Representations and Warranties. Landlord and Tenant do
hereby each for itself represent and warrant to each other as follows:
8.1 Due Authorization and Execution. This Lease and all agreements,
instruments and documents executed or to be executed in
connection herewith by either Landlord or Tenant were duly authorized and
shall be binding upon the party that executed and delivered the same.
8.2 Due Organization. Landlord and Tenant are duly
organized, validly existing and in good standing under the laws of the State
of their respective formations and are duly authorized and qualified to do all
things required of the applicable party under this Lease within the State of
Oklahoma.
<PAGE>
8.3 No Breach of Other Agreements. Neither this Lease
nor any agreement, document or instrument executed or to be executed in
connection herewith, violates the terms of any other agreement to which
either Landlord or Tenant is a party.
9. Financial, Management and Regulatory Reports.
9.1 Monthly Facility Reports. Within forty-five (45) days
after the end of each calendar month during the Term, Tenant shall prepare
and deliver monthly financial reports concerning the business conducted at
the Premises to Landlord consisting of a balance sheet and income statement
prepared in accordance with United States Generally Accepted Accounting
Principles ("GAAP"), together with census reports that indicate (a) the
average rent received by Tenant from occupants at the Premises, (b) the
number of occupants, and (c) a breakdown of payment source. These reports
will be accompanied by a statement signed by the President, Chief Financial
Officer, Principal Accounting Officer, Controller, Executive Vice President,
Development, or other officer of Tenant as approved by Landlord in writing,
certifying that said reports are true, correct, and complete in all material
respects after due inquiry.
9.2 Annual Financial Statement. On or before the earlier
of (a) one hundred twenty (120) days after each fiscal year end of Tenant
during the Term or (b) the date Tenant files its Form 10-K with the Securities
and Exchange Commission (the "SEC"), Tenant shall deliver to Landlord (y)
the annual consolidated financial statement of Tenant audited by a reputable
certified public accounting firm and (z) a copy of Tenant's Form 10-K filed
with the SEC pursuant to applicable securities laws during the Term.
Simultaneously with the filing of Tenant's Form 10-Q's with the SEC,
Tenant agrees to deliver to Landlord a copy of same.
9.3 Accounting Principles. All of the reports and
statements required hereby shall be prepared in accordance with GAAP and
Tenant's accounting principles consistently applied.
9.4 Regulatory Reports. In addition, Tenant shall within
five (5) business days of receipt thereof deliver to Landlord all federal, state
and local licensing and reimbursement certification surveys, inspection and
other reports received by Tenant as to the Premises and the operation of
business thereon, including, without limitation, state department of health
licensing surveys, Medicare and Medicaid (and successor programs)
certification surveys if applicable to the Premises or any portion thereof, and
<PAGE>
life safety code reports. Within five (5) business days of receipt thereof,
Tenant shall give Landlord written notice of any violation of any federal, state
or local licensing or reimbursement certification statute or regulation,
including, without limitation, Medicare or Medicaid (or successor programs)
if applicable to the Premises or any portion thereof, any suspension,
termination or restriction placed upon Tenant or the Premises, the operation
of business thereon or the ability to admit patients, or any violation of any
other permit, approval or certification in connection with the Premises or its
business, by any federal, state or local authority, including, without
limitation, Medicare or Medicaid (or successor programs) if applicable to the
Premises or any portion thereof.
10. Events of Default and Landlord's Remedies.
10.1 Events of Default. The occurrence of any of the
following shall constitute an event of default on the part of Tenant hereunder
("Event of Default"):
10.1.1 Tenants's failure to pay Landlord within three (3)
calendar days after Landlord has delivered written notice to Tenant by
facsimile as provided in the last sentence of Section 15 hereof specifying
such failure, any portion of any Minimum Rent, taxes or assessments, utilities,
premiums for insurance or other charges or payments required of Tenant under
this Lease;
10.1.2 A breach by Tenant of any of the representations,
warranties or covenants in favor of Landlord as set forth in the Purchase and
Sale Agreement ("Purchase Agreement") of even date herewith between Tenant, as
seller, and Landlord, as buyer;
10.1.3 A material default by Tenant (or any Affiliate of
Tenant) ("Affiliate" being defined to mean, with respect to any person or
entity, any other person or entity which controls, is controlled by or is under
common control with the first person or entity) under any obligation other than
this Lease owed by Tenant (or any Affiliate of Tenant) to Landlord or any
Affiliate of Landlord (including without limitation any financing agreement or
any other lease or the Letter of Credit Agreement of even date herewith
pursuant to which the letter of credit referenced in
hereinbelow is maintained), which default is not cured within any applicable
cure period provided in the documentation for such obligation;
<PAGE>
10.1.4 A judgment is, or judgments are, obtained against
Tenant in the amount of Five Hundred Thousand and No/100 Dollars
($500,000.00) or more; provided that such judgment is, or judgments are,
uninsured and remain unpaid or not released for more than thirty (30) days.
10.1.5 Any material misstatement or omission of fact in any
written report, notice or communication from Tenant to Landlord with respect
to Tenant or the Premises;
10.1.6 An assignment by Tenant of all or substantially all of
its property for the benefit of creditors;
10.1.7 The appointment of a receiver, trustee, or liquidator
for Tenant or any of the property of Tenant, if within three (3) business days
of such appointment Tenant does not inform Landlord in writing that Tenant
intends to cause such appointment to be discharged or Tenant does not thereafter
diligently prosecute such discharge to completion within sixty (60)
days after the date of such appointment;
10.1.8 The failure to deliver evidence of insurance to
Landlord as required by Section 4 after five (5) days notice of such failure
from Landlord by facsimile as provided in the last sentence of Section 15
hereof;
10.1.9 The failure to maintain insurance as required herein
without any notice, grace, or opportunity to cure rights whatsoever.
10.1.10 The filing by Tenant of a voluntary petition under
any federal bankruptcy law or under the law of any state to be adjudicated as
bankrupt or for any arrangement or other debtor's relief, or in the alternative,
if any such petition is involuntarily filed against Tenant by any other party
and Tenant does not within three (3) business days of any such filing inform
Landlord in writing of the intent by Tenant to cause such petition to be
dismissed, if Tenant does not thereafter diligently prosecute such dismissal,
or if such filing is not dismissed within ninet
10.1.11 The failure to perform or comply with any other term
or provision of this Lease (other than those provisions set forth in Sections
10.1.9 and 10.1.12) not requiring the payment of money,
<PAGE>
including, without limitation, the failure to comply with the provisions hereof
pertaining to the use, operation and maintenance of the Premises or the
breach of any representation or warranty of Tenant in this Lease; provided,
however, the default described in this Section 10.1.11 is curable and shall be
deemed cured, if: (i) within three (3) business days of Tenant's receipt of a
notice of default from Landlord, Tenant gives Landlord notice of its intent to
cure such default; and (ii) Tenant cures such default within thirty (30) days
after such notice from Landlord, unless such default cannot with due
diligence be cured within a period of thirty (30) days because of the nature of
the default or delays beyond the control of Tenant, and cure after such thirty
(30) day period will not have a material and adverse effect upon the Premises,
in which case such default shall not constitute an Event of Default if Tenant
uses its best efforts to cure such default by promptly commencing and
diligently pursuing such cure to the completion thereof, provided, however,
no such default shall continue for more than one hundred twenty (120) days
from Tenant's receipt of a notice of default from Landlord;
10.1.12 There shall be no cure period in the event of the
breach by Tenant of (i) the provisions of Section 10.1.9 hereof, (ii) the
provisions of Section 20 hereof, or (iii) the provisions of Section 22 hereof
with respect to assignments and other related matters; and
10.1.13 All notice and cure periods provided herein shall run
concurrently with any notice or cure periods provided by applicable law.
10.2 Remedies. Upon the occurrence of an Event of
Default, Landlord may exercise all rights and remedies under this Lease and
the laws of the State of Oklahoma available to a lessor of real and personal
property in the event of a default by its lessee, and as to the Tenant Personal
Property and the Intangible Property all remedies granted under the laws of
such State to a secured party under its Uniform Commercial Code. Without
limiting the foregoing, Landlord shall have the right to do any of the
following:
10.2.1 Sue for the specific performance of any covenant of
Tenant under this Lease as to which Tenant is in breach;
10.2.2 Upon compliance with the requirements of applicable
law, Landlord may do any of the following: enter upon the Premises,
terminate this Lease, dispossess Tenant from the Premises and/or
<PAGE>
collect money damages by reason of Tenant's breach, including without
limitation all rent which would have accrued after such termination and all
obligations and liabilities of Tenant under this Lease which survive the
termination of the Term;
10.2.3 Elect to leave this Lease in place and sue for rent
and/or other money damages as the same come due;
10.2.4 Before or after repossession of the Premises pursuant
to Section 10.2.2, and whether or not this Lease has been terminated,
Landlord shall have the right (but shall be under no obligation) to relet any
portion of the Premises to such tenant or tenants, for such term or terms
(which may be greater or less than the remaining balance of the Term), for
such rent, or such conditions (which may include concessions or free rent) and
for such uses, as Landlord, in its absolute discretion, may determine, and
Landlord may collect and receive any rents payable by reason of such reletting.
Landlord shall have no duty to mitigate damages unless required by applicable
law and shall not be responsible or liable for any failure to relet any of the
Premises or for any failure to collect any rent due upon any such
reletting. Tenant agrees to pay Landlord, immediately upon demand, all
expenses incurred by Landlord in obtaining possession and in reletting any of
the Premises, including fees, commissions and costs of attorneys, architects,
agents and brokers;
10.2.5 Sell the Tenant Personal Property and/or the Intangible
Property in a non-judicial foreclosure sale.
10.3 Receivership. Tenant acknowledges that one of the
rights and remedies available to Landlord under applicable law is to apply to
a court of competent jurisdiction for the appointment of a receiver to take
possession of the Premises, to collect the rents, issues, profits and income of
the Premises and to manage the operation of the Premises. Tenant further
acknowledges that the revocation, suspension or material limitation of the
certification of the Premises for provider status (in the event the Premises is
ever certified for such provider status) under Medicare or Medicaid (or
successor programs) and/or the revocation, suspension or material limitation
of the license of the Premises as a fifty-six (56) bed RCH under the laws of
the State of Oklahoma will materially and irreparably impair the value of
Landlord's investment in the Premises. Therefore, in any of such events, and
in addition to any other right or remedy of Landlord under this Lease, Tenant
hereby consents to the appointment of such a receiver to enter upon and take
<PAGE>
possession of the Premises, to manage the operation of the Premises, to
collect and disburse all rents, issues, profits and income generated thereby
and to preserve or replace to the extent possible the RCH license and provider
certification of the Premises or to otherwise substitute the licensee or
provider thereof. The receiver shall be entitled to a reasonable fee for its
services as a receiver. All such fees and other expenses of the receivership
estate shall be added to the monthly rent due to Landlord under this Lease.
Tenant hereby irrevocably stipulates to the appointment of a receiver under
such circumstances and for such purposes and agrees not to contest such
appointment.
10.4 Late Charges. Tenant acknowledges that the late
payment of any Minimum Rent will cause Landlord to lose the use of such
money and incur costs and expenses not contemplated under this Lease,
including, without limitation, administrative and collection costs and
processing and accounting expenses, the exact amount of which is extremely
difficult to ascertain. Therefore, if any installment of Minimum Rent is not
paid within five (5) calendar days after the due date for such rent payment,
then Tenant shall thereafter pay to Landlord on demand a late charge equal to
ten percent (10%) of the amount of any installment of Minimum Rent not
paid on the due date. Landlord and Tenant agree that this late charge
represents a reasonable estimate of such costs and expenses and is fair
compensation to Landlord for the loss suffered from such nonpayment by
Tenant.
10.5 Remedies Cumulative; No Waiver. No right or
remedy herein conferred upon or reserved to Landlord is intended to be
exclusive of any other right or remedy, and each and every right and remedy
shall be cumulative and in addition to any other right or remedy given
hereunder or now or hereafter existing at law or in equity. No failure of
Landlord to insist at any time upon the strict performance of any provision of
this Lease or to exercise any option, right, power or remedy contained in this
Lease shall be construed as a waiver, modification or relinquishment thereof
as to any similar or different breach (future or otherwise) by Tenant. A receipt
by Landlord of any rent or other sum due hereunder (including any late
charge) with knowledge of the breach of any provision contained in this
Lease shall not be deemed a waiver of such breach, and no waiver by
Landlord of any provision of this Lease shall be deemed to have been made
unless expressed in a writing signed by Landlord.
10.6 Performance of Tenant's Obligations by Landlord.
If Tenant at any time shall fail to make any payment or perform any act on its
<PAGE>
part required to be made or performed under this Lease, then Landlord may,
without waiving or releasing Tenant from any obligations or default of
Tenant hereunder, make any such payment or perform any such act for the
account and at the expense of Tenant, and may enter upon the Premises for
the purpose of taking all such action thereon as may be reasonably necessary
therefor. No such entry shall be deemed an eviction of Tenant. All sums so
paid by Landlord and all necessary and incidental costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses)
incurred in connection with the performance of any such act by Landlord,
together with interest at the rate of the Prime Rate as reported daily by the
Wall Street Journal plus 5% (or if said interest rate is violative of any
applicable statute or law, then the maximum lawful non-usurious interest rate
allowable) from the date of the making of such payment or the incurring of
such costs and expenses by Landlord, shall be payable by Tenant to Landlord
on demand.
11. Security Deposit. Tenant shall deposit with Landlord a sum
equal to one-third (1/3) of the Minimum Rent for the Initial Term in cash
representing a security deposit against the faithful performance of the terms
and conditions contained in this Lease. Tenant shall have the right to
substitute a letter of credit for such cash deposit on terms and issued by a
financial institution acceptable to Landlord. Landlord shall not be deemed a
trustee as to such deposit and shall have the right to commingle said
security deposit with its own or other funds. Interest on any cash deposit
shall be paid by Landlord to Tenant on a quarterly basis in arrears (i) if
Landlord segregates such deposit from its general funds, at the average rate
earned in such period on Landlord's cash and cash equivalent investments,
and (ii) if Landlord does not segregate such deposit from its general funds,
at the average cost of funds for Landlord for short term borrowings for such
period.
12. Damage by Fire or Other Casualty.
12.1 Reconstruction Using Insurance. In the event of the
damage or destruction of the Premises, Tenant shall forthwith notify Landlord
and diligently repair or reconstruct the same to a like or better condition than
existed prior to such damage or destruction. Any net insurance proceeds
payable with respect to the casualty shall be used for the repair or
reconstruction of the Premises pursuant to reasonable disbursement controls
in favor of Landlord. If such proceeds are insufficient for such purposes,
Tenant shall provide the required additional funds.
<PAGE>
12.2 Surplus Proceeds. If there remains any surplus of
insurance proceeds after the completion of the repair or reconstruction of the
Premises, such surplus shall belong to and be paid to Tenant.
12.3 No Rent Abatement. The rent payable under this
Lease shall not abate by reason of any damage or destruction of the Premises
by reason of an insured or uninsured casualty. Tenant hereby waives all rights
under applicable law to abate, reduce or offset rent by reason of such damage
or destruction.
13. Condemnation.
13.1 Complete Taking. If during the Term all or
substantially all of the Premises is taken or condemned by any competent
public or quasi-public authority, then Tenant may, at Tenant's election, made
within thirty (30) days of such taking by condemnation, terminate this Lease,
and the current Minimum Rent shall be prorated as of the date of such
termination. The award payable upon such taking shall be allocated between
Landlord and Tenant as so allocated by the taking authority. In the absence of
such allocation by the taking authority, the award shall be allocated as
agreed by Landlord and Tenant. Failing such agreement within thirty (30)
days after the effective date of such taking, the award shall be allocated
between Landlord and Tenant pursuant to the appraisal procedure described
on Exhibit "C" attached hereto.
13.2 Partial Taking. In the event such condemnation
proceeding or right of eminent domain results in a taking of less than all or
substantially all of the Premises, the Minimum Rent thereto shall be abated to
the same extent as the diminution in the fair market value of the Premises
by reason of the condemnation. Such diminution in the fair market value shall
be as agreed between Landlord and Tenant, but failing such agreement within
thirty (30) days of the effective date of the condemnation such fair market
value will be determined by appraisal pursuant to Exhibit "C" attached
hereto. Landlord shall be entitled to receive and retain any and all awards for
the partial taking and damage and Tenant shall not be entitled to receive or
retain any such award for any reason.
13.3 Lease Remains in Effect. Except as provided above,
this Lease shall not terminate and shall remain in full force and effect in the
event of a taking or condemnation of the Premises, or any portion thereof,
and Tenant hereby waives all rights under applicable law to abate, reduce or
offset rent by reason of such taking.
<PAGE>
14. Provisions on Termination of Term.
14.1 Surrender of Possession. Tenant shall, on or before
the last day of the Term, or upon earlier termination of this Lease, surrender
to Landlord the Premises (including all patient charts and resident records
along with appropriate patient and resident consents) in good condition and
repair, ordinary wear and tear excepted.
14.2 Removal of Personal Property. If Tenant is not then
in default hereunder Tenant shall have the right in connection with the
surrender of the Premises to remove from the Premises all Tenant Personal
Property but not the Landlord Personal Property (including the Landlord
Personal Property replaced by Tenant or required by the State of Oklahoma or any
other governmental entity to operate the Premises for the purpose set
forth in Section 5.3 above). Any such removal shall be done in a
workmanlike manner leaving the Premises in good and presentable condition
and appearance, including repair of any damage caused by such removal. At
the end of the Term or upon the earlier termination of this Lease, Tenant shall
return the Premises to Landlord with the Landlord Personal Property (or
replacements thereof) in the same condition and utility as was delivered to
Tenant at the commencement of the Term, normal wear and tear excepted.
14.3 Title to Personal Property Not Removed. Title to
any of Tenant Personal Property which is not removed by Tenant upon the
expiration of the Term shall, at Landlord's election, vest in Landlord;
provided, however, that Landlord may remove and dispose of any or all of
such Tenant Personal Property which is not so removed by Tenant, at
Tenant's expense, without obligation or accounting to Tenant.
14.4 Management of Premises. Upon the expiration or
earlier termination of the Term, Landlord or its designee, upon written notice
to Tenant, may elect to assume the responsibilities and obligations for the
management and operation of the Premises and Tenant agrees to cooperate
fully with Landlord or its designee to accomplish the transfer of such
management and operation without interrupting the operation of the
Premises. Tenant shall not commit any act or be remiss in the undertaking of
any act that would jeopardize any licensure or certification of the facility,
and
Tenant shall comply with all requests for an orderly transfer of the RCH
license, Medicare and Medicaid (or any successor program) certifications (if
any) and possession at the time of any such surrender. Upon the expiration or
earlier termination of the Term, Tenant shall promptly deliver copies of all
of Tenant's books and records relating to the Premises and its operations to
Landlord.
<PAGE>
14.5 Correction of Deficiencies. Upon termination or
cancellation of this Lease, Tenant shall indemnify Landlord for any loss,
damage, cost or expense incurred by Landlord to correct all deficiencies of a
physical nature identified by the Oklahoma Department of Health and/or the
Oklahoma Department of Human Services or any other government agency
or Medicare or Medicaid (or any successor program) providers in the course
of the change of ownership inspection and audit.
15. Notices and Demands. All notices and demands, certificates,
requests, consents, approvals, and other similar instruments under this Lease
shall be in writing and shall be deemed to have been properly given upon
actual receipt thereof or within three (3) business days of being placed in the
United States certified or registered mail, return receipt requested, postage
prepaid (a) if to Tenant, addressed to Sterling House Corporation, 453 S.
Webb Road, Suite 500, Wichita, KS 67207, Attention: Steven L. Vick, Fax
No. (316) 681-1517 with a copy to Crockett & Gilhousen, 1005 N. Market,
Wichita, Kansas 67214-2971, Attention: David G. Crockett, Fax No. (316)
263-7220, or at such other address as Tenant from time to time may have
designated by written notice to Landlord, (b) if to Landlord, addressed to
Nationwide Health Properties, Inc., 4675 MacArthur Court, Suite 1170,
Newport Beach, CA 92660, Attention: President, Fax No. (714) 644-7757
with a copy to Cordray & Goodrich, 5847 San Felipe, 22nd Floor, Houston,
Texas 77057, Attention: Howard F. Cordray, Jr., Fax No. (713) 787-6175, or
at such address as Landlord may from time to time have designated by written
notice to Tenant. Refusal to accept delivery shall be deemed delivery. If
Tenant is not an individual, notice may be made to any officer, general
partner or principal thereof. Notwithstanding anything to the contrary herein,
any notice given pursuant to the terms of Sections 10.1.1 or 10.1.8 hereof
shall be deemed to have been properly given upon either (a) the manner of
delivery contained in the first two (2) sentences of this Section 15 or (b) by
facsimile transmission to Sterling House Corporation, Attention: Steven L.
Vick, Fax No. (316) 681-1517 with a copy sent by facsimile transmission to
Crockett & Gilhousen, Attention: David G. Crockett, Fax No. (316) 263-7220.
16. Right of Entry; Examination of Records. Landlord and its
representative may enter the Premises at any reasonable time after reasonable
notice to Tenant for the purpose of inspecting the Premises for any reason
including, without limitation, Tenant's default under this Lease, or to exhibit
the Premises for sale, lease or mortgage financing, or posting notices of
<PAGE>
default, or non-responsibility under any mechanic's or materialman's lien law
or to otherwise inspect the Premises for compliance with the terms of this
Lease. Any such entry shall not unreasonably interfere with residents,
patients, patient care, or any other of Tenant's operations. Upon the
occurrence of any Event of Default or in the event Tenant does not exercise
its then current option to renew the Term for a Renewal Term, Landlord and
Landlord's representatives, inspectors and consultants shall have the right to
examine all contracts, books and records relating to Tenant's operations at the
Premises, including, without limitation, Tenant's financial records, during
normal business hours, if such records are maintained at the Premises; and
any records maintained in the normal course of business at some other
location shall be available for inspection by Landlord during any normal
business hours. Notwithstanding anything to the contrary herein, Landlord
shall only be entitled to inspect financial books and records and contracts
relating to the Premises.
17. Landlord May Grant Liens. Without the consent of Tenant,
Landlord may, subject to the terms and conditions set forth below in this
Section 17, from time to time, directly or indirectly, create or otherwise cause
to exist any lien, encumbrance or title retention agreement ("Encumbrance")
upon the Premises, or any portion thereof or interest therein (including this
Lease), whether to secure any borrowing or other means of financing or
refinancing or otherwise. Any such Encumbrance shall provide that it is
subject to the rights of Tenant under this Lease, and shall further provide that
so long as no Event of Default shall have occurred under this Lease, Tenant's
occupancy hereunder, including but without limitation Tenant's right of quiet
enjoyment provided in Section 18, shall not be disturbed in the event any
such lienholder or any other person takes possession of the Premises through
foreclosure proceeding or otherwise. Upon the request of Landlord, Tenant
shall subordinate this Lease to the lien of a new Encumbrance on the
Premises, on the condition that the proposed lender agrees not to disturb
Tenant's rights under this Lease so long as Tenant is not in default hereunder.
18. Quiet Enjoyment. So long as there is no Event of Default by
Tenant, Landlord covenants and agrees that Tenant shall peaceably and
quietly have, hold and enjoy the Premises for the Term, free of any claim or
other action not caused or created by Tenant (excepting, however, intrusion
of Tenant's quiet enjoyment occasioned by condemnation or destruction of
the property as referred to in Sections 12 and 13 hereof).
19. Applicable Law. This Lease shall be governed by and
construed in accordance with the internal laws of the State of Oklahoma without
regard to the conflict of laws rules of such State.
<PAGE>
20. Preservation of Gross Revenues.
20.1 Tenant acknowledges that a fair return to Landlord on
its investment in the Premises is dependent, in part, on Tenant's
concentration on the Premises during the Term of the RCH business of
Tenant and its Affiliates in the geographical area of the Premises. Tenant
further acknowledges that the diversion of residents and/or patient care
activities from the Premises to other facilities owned or operated by Tenant or
its Affiliates at or near the end of the Term will have a material adverse
impact on the value and utility of the Premises.
20.1.1 Therefore, Tenant agrees that during the Term,
and for a period of one (1) year thereafter, neither Tenant nor any of its
Affiliates shall, without the prior written consent of Landlord, operate, own,
participate in or otherwise receive revenues from any other facility or
institution providing services or similar goods to those provided on or in
connection with the Premises and the permitted use thereof as contemplated
under this Lease, within a three (3) mile radius of the Premises.
20.1.2 In addition, in the event Tenant does not
exercise any option to renew the Term for a Renewal Term, Tenant hereby
covenants and agrees that for a period of one (1) year prior to the
expiration or earlier termination of this Lease and for a period of one (1)
year following the expiration or earlier termination of this Lease, neither
Tenant nor any of
its Affiliates shall, without prior written consent of Landlord, solicit for
hire, hire, engage or otherwise employ any management or supervisory personnel
working on or in connection with the Premises.
20.2 Except in the ordinary course of business or as
required for medically appropriate reasons, prior to Lease termination, neither
Tenant nor any of its Affiliates will recommend or solicit the removal or
transfer of any resident or patient from the Premises to any other personal
care facility, any other nursing or health care facility, or to any senior
housing
or retirement housing facility. After Lease termination, neither Tenant nor
any of its Affiliates will recommend or solicit the removal or transfer of any
resident or patient from the Premises to any other personal care facility, any
other nursing or health care facility, or to any senior housing or retirement
housing facility.
<PAGE>
20.3 Tenant hereby specifically acknowledges and agrees
that the temporal, geographical and other restrictions contained in this
Section 20 are reasonable and necessary to protect the business and prospects
of Landlord, and that the enforcement of the provisions of this Section 20 will
not work an undue hardship on Tenant. Tenant further agrees that in the event
either the length of time, geographical or any other restrictions, or portion
thereof, set forth in this Section 20 is overly restrictive and unenforceable in
any court proceeding, the court may reduce or modify such restrictions, but
only to the extent necessary, to those which it deems reasonable and
enforceable under the circumstances, and the parties agree that the restrictions
of this Section 20 will remain in full force and effect as reduced or modified.
Tenant further agrees and acknowledges that Landlord does not have an
adequate remedy at law for the breach or threatened breach by Tenant of the
covenants contained in this Section 20, and Tenant therefore specifically
agrees that Landlord may, in addition to other remedies which may be
available to Landlord hereunder, file a suit in equity to enjoin Tenant from
such breach or threatened breach, without the necessity of posting any bond.
Tenant further agrees, in the event that any provision of this Section 20 is
held to be invalid or against public policy, the remaining provisions of this
Section 20 and the remainder of this Lease shall not be affected thereby.
21. Hazardous Materials.
21.1 Hazardous Material Covenants. Tenant's use of the
Premises shall comply with all Hazardous Materials Laws. In the event any
Environmental Activities occur or are suspected to have occurred in violation
of any Hazardous Materials Laws or if Tenant has received any Hazardous
Materials Claim against the Premises, Tenant shall promptly obtain all
permits and approvals necessary to remedy any such actual or suspected
problem through the removal of Hazardous Materials or otherwise, and upon
Landlord's approval of the remediation plan, remedy any such problem to the
satisfaction of Landlord and all applicable governmental authorities, in
accordance with all Hazardous Materials Laws and good business practices.
21.2 Tenant Notices to Landlord. Tenant shall
immediately advise Landlord in writing of:
21.2.1 any Environmental Activities known or
believed by Tenant to be in violation of any Hazardous Materials Laws;
<PAGE>
21.2.2 any Hazardous Materials Claims against Tenant or the
Premises;
21.2.3 any remedial action taken by Tenant in
response to any Hazardous Materials Claims or any Hazardous Materials on,
under or about the Premises in violation of any Hazardous Materials Laws;
21.2.4 Tenant's discovery of any occurrence or
condition on or in the vicinity of the Premises that materially increase the
risk that the Premises will be exposed to Hazardous Materials; and
21.2.5 all communications to or from Tenant, any
governmental authority or any other person relating to Hazardous Materials Laws
or Hazardous Materials Claims with respect to the Premises, including copies
thereof.
21.3 Extension of Term. Notwithstanding any other
provision of this Lease, in the event any Hazardous Materials are discovered
on, under or about the Premises in violation of any Hazardous Materials Law,
the Term shall be automatically extended and this Lease shall remain in full
force and effect until the earlier to occur of the completion of all remedial
action or monitoring, as approved by Landlord, in accordance with all
Hazardous Materials Laws, or the date specified in a written notice from
Landlord to Tenant terminating this Lease (which date may be subsequent to
the date upon which the Term was to have expired).
21.4 Participation in Hazardous Materials Claims. Landlord shall have the
right to join and participate in, as a party if it so
elects, any legal proceedings or actions initiated in connection with any
Hazardous Materials Claims.
21.5 Environmental Activities shall mean the use,
generation, transportation, handling, discharge, production, treatment,
storage, release or disposal of any Hazardous Materials at any time to or from
the Premises or located on or present on or under the Premises. Nothing
contained in the foregoing or elsewhere in this Section 21 is intended to, nor
shall it, limit the liability of Tenant, if any, to Landlord with respect to any
representation or warranty given by Tenant to Landlord with respect to
Hazardous Materials or environmental matters generally as set forth in the
Purchase Agreement.
<PAGE>
21.6 Hazardous Materials shall mean (i) any petroleum
products and/or by-products (including any fraction thereof), flammable
substances, explosives, radioactive materials, hazardous or toxic wastes,
substances or materials, known carcinogens or any other materials,
contaminants or pollutants which pose a hazard to the Premises or to persons
on or about the Premises or cause the Premises to be in violation of any
Hazardous Materials Laws; (ii) asbestos in any form which is friable; (iii)
urea formaldehyde in foam insulation or any other form; (iv) transformers or
other equipment which contain dielectric fluid containing levels of
polychlorinated biphenyls in excess of fifty (50) parts per million or any other
more restrictive standard then prevailing; (v) medical wastes and biohazards
which pose a hazard to the Premises or to persons on or about the Premises or
cause the Premises to be in violation of any Hazardous Materials Laws;
(vi) radon gas which poses a hazard to the Premises or to persons on or about
the Premises or cause the Premises to be in violation of any Hazardous
Materials Laws; and (vii) any other chemical, material or substance, exposure
to which is prohibited, limited or regulated by any governmental authority or
may or could pose a hazard to the health and safety of the occupants of the
Premises or the owners and/or occupants of property adjacent to or
surrounding the Premises, including, without limitation, any materials or
substances that are listed in the United States Department of Transportation
Hazardous Materials Table (49 CFR 172.101) as amended from time to time.
21.7 Hazardous Materials Claims shall mean any and all
enforcement, clean-up, removal or other governmental or regulatory actions
or orders threatened, instituted or completed pursuant to any Hazardous
Material Laws, together with all claims made or threatened by any third party
against the Premises, Landlord or Tenant relating to damage, contribution,
cost recovery compensation, loss or injury resulting from any Hazardous
Materials.
21.8 Hazardous Materials Laws shall mean any laws,
ordinances, regulations, rules, orders, guidelines or policies relating to the
environment, health and safety, Environmental Activities, Hazardous
Materials, air and water quality, waste disposal and other environmental
matters.
22. Assignment and Subletting. Tenant shall not, without the
prior written consent of Landlord, which may be withheld at Landlord's sole
discretion, voluntarily or involuntarily assign, mortgage, encumber or
hypothecate this Lease or any interest herein or sublet the Premises or any
<PAGE>
part thereof. For the purposes of this Lease, a management or similar
agreement shall be considered to be an assignment of this Lease by Tenant.
Any of the foregoing acts without such consent shall be void but shall, at the
option of Landlord in its sole discretion, constitute an Event of Default giving
rise to Landlord's right, among other things, to terminate this Lease. Without
limiting the foregoing, this Lease shall not, nor shall any interest of Tenant
herein, be assigned or encumbered by operation of law without the prior
written consent of Landlord which may be withheld at Landlord's sole
discretion. Notwithstanding the foregoing, Tenant may without Landlord's
consent assign this Lease or sublet the Premises or any portion thereof to a
wholly-owned subsidiary of Tenant, provided that such subsidiary fully
assumes the obligations of Tenant under this Lease, Tenant remains fully
liable under this Lease, the use of the Premises remains unchanged, and no
such assignment or sublease shall be valid and no such subsidiary shall take
possession of the Premises until an executed counterpart of such assignment
or sublease has been delivered to Landlord. Anything contained in this Lease
to the contrary notwithstanding, Tenant shall not sublet the Premises on any
basis such that the rental to be paid by the sublessee thereunder would be
based, in whole or in part, on either the income or profits derived by the
business activities of the sublessee, or any other formula, such that any
portion of the sublease rental received by Landlord would fail to qualify as
"rents from real property" within the meaning of Section 856(d) of the U.S.
Internal Revenue Code, or any similar or successor provision thereto.
Nothing herein shall require Landlord's consent to lease agreements or rental
agreements with residents in the ordinary course of Tenant's business.
23. Indemnification. To the fullest extent permitted by law,
Tenant agrees to protect, indemnify, defend and save harmless Landlord, its
directors, officers, shareholders, agents and employees from and against any
and all foreseeable or unforeseeable liability, expense loss, costs, deficiency,
fine, penalty, or damage (including, without limitation, punitive or
consequential damages) of any kind or nature, including reasonable attorneys'
fees, from any suits, claims or demands, on account of any matter or thing,
action or failure to act arising out of or in connection with this Lease
(including, without limitation, the breach by Tenant of any of its obligations
hereunder), the Premises, or the operations of Tenant on the Premises,
including without limitation all Environmental Activities on the Premises, all
Hazardous Materials Claims or any violation by Tenant of a Hazardous
Materials Law with respect to the Premises. Upon receiving knowledge of
any suit, claim or demand asserted by a third party that Landlord believes is
covered by this indemnity, Landlord shall give Tenant notice of the matter.
Tenant shall defend Landlord against such matter at Tenant's sole cost and
<PAGE>
expense with legal counsel reasonably satisfactory to Landlord. In the event
Tenant chooses legal counsel that is not reasonably satisfactory to Landlord,
Landlord may elect to defend the matter with its own counsel at Tenant's
expense.
24. Holding Over. If Tenant shall for any reason remain in
possession of the Premises after the expiration or earlier termination of this
Lease, such possession shall be a month-to-month tenancy during which time
Tenant shall pay as rental each month, one hundred fifty percent (150%) of
the aggregate of the monthly Minimum Rent payable with respect to the last
Lease Year plus all additional charges accruing during the month and all
other sums, if any, payable by Tenant pursuant to the provisions of this Lease
with respect to the Premises. Nothing contained herein shall constitute the
consent, express or implied, of Landlord to the holding over of Tenant after
the expiration or earlier termination of this Lease, nor shall anything
contained herein be deemed to limit Landlord's remedies pursuant to this
Lease or otherwise available to Landlord at law or in equity.
25. Estoppel Certificates. Tenant shall, at any time upon not less
than five (5) days prior written request by Landlord, execute, acknowledge
and deliver to Landlord or its designee a statement in writing, executed by an
officer or general partner of Tenant, certifying that this Lease is unmodified
and in full force and effect (or, if there have been any modifications, that
this
Lease is in full force and effect as modified, and setting forth such
modifications), the dates to which Minimum Rent and additional charges
hereunder have been paid, certifying that no default by either Landlord or
Tenant exists hereunder or specifying each such default and as to other
matters as Landlord may reasonably request.
26. Conveyance by Landlord. If Landlord or any successor
owner of the Premises shall convey the Premises in accordance with the
terms hereof, Landlord or such successor owner shall thereupon be released
from all future liabilities and obligations of Landlord under this Lease arising
or accruing from and after the date of such conveyance or other transfer as to
the Premises and all such future liabilities and obligations shall thereupon be
binding upon the new owner.
27. Waiver of Jury Trial. Landlord and Tenant hereby waive any
rights to trial by jury in any action, proceedings or counterclaim brought by
either of the parties against the other in connection with any matter
whatsoever arising out of or in any way connected with this Lease, including,
without limitation, the relationship of Landlord and Tenant, Tenant's use and
occupancy of the Premises, or any claim of injury or damage relating to the
foregoing or the enforcement of any remedy hereunder.
<PAGE>
28. Attorneys' Fees. If Landlord or Tenant brings any action to
interpret or enforce this Lease, or for damages for any alleged breach hereof,
the prevailing party in any such action shall be entitled to reasonable
attorneys' fees and costs as awarded by the court in addition to all other
recovery, damages and costs.
29. Severability. In the event any part or provision of the Lease
shall be determined to be invalid or enforceable, the remaining portion of this
Lease shall nevertheless continue in full force and effect.
30. Counterparts. This Lease may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same agreement.
31. Binding Effect. Subject to the provisions of Section 22 above,
this Lease shall be binding upon and inure to the benefit of Landlord and
Tenant and their respective heirs, personal representatives, successors in
interest and assigns.
32. Waiver and Subrogation. Landlord and Tenant hereby waive
to each other all rights of subrogation which any insurance carrier, or either
of them, may have as to the Landlord or Tenant by reason of any provision in
any policy of insurance issued to Landlord or Tenant, provided such waiver
does not thereby invalidate the policy of insurance.
33. No Recordation of Lease. The parties hereto agree that
neither this Lease nor any memorandum, affidavit, or any other instrument
regarding this Lease shall be recorded affecting title to the Premises;
provided, however, Landlord shall be permitted to file financing statements
to perfect its security interests created by this Lease.
34. Incorporation of Recitals and Attachments. The recitals and
exhibits, schedules, addenda and other attachments to this Lease are hereby
incorporated into this Lease and made a part hereof.
35. Titles and Headings. The titles and headings of sections of
this Lease are intended for convenience only and shall not in any way affect
the meaning or construction of any provision of this Lease.
36. Nature of Relationship; Usury Savings Clause. The parties
<PAGE>
intend that their relationship shall be that of lessor and lessee only. Nothing
contained in this Lease shall be deemed or construed to constitute an
extension of credit by Landlord to Tenant, nor shall this Lease be deemed to
be a partnership or venture agreement between Landlord and Tenant.
Notwithstanding the foregoing, in the event any payment made to Landlord
hereunder is deemed to violate any applicable laws regarding usury, the
portion of any payment deemed to be usurious shall be held by Landlord to
pay the future obligations of Tenant as such obligations arise and, in the event
Tenant discharges and performs all obligations hereunder, such funds will be
reimbursed to Tenant upon the expiration of the Term. No interest shall be
paid on any such funds held by Landlord.
37. Joint and Several. If more than one person or entity is the
Tenant hereunder, the liability and obligations of such persons or entities
under this Lease shall be joint and several.
38. Survival of Representations, Warranties and Covenants.
All of the obligations, representations, warranties and covenants of Tenant
under this Lease shall survive the expiration or earlier termination of the
Term.
39. Interpretation. Both Landlord and Tenant have been
represented by counsel and this Lease has been freely and fairly negotiated.
Consequently, all provisions of this Lease shall be interpreted according to
their fair meaning and shall not be strictly construed against any party.
40. Sale of Premises by Landlord. In the event Landlord ever
determines that it desires to sell the Premises, Landlord agrees not to market
or sell the Premises without first complying with the provisions of this
Section 40.
40.1 Prior to making any agreement to sell the Premises,
Landlord shall select one (1) qualified appraiser to determine the fair market
value of the Premises as of a date selected by Landlord (hereinafter
designated "Determination Date"); such appraiser must meet the following
qualifications: (i) such appraiser shall be a MAI Appraiser; and (ii) such
appraiser shall not otherwise be disqualified from exercising independent
judgment as to the fair market value determination to be made. Such
appraiser shall be required to prepare a written report (hereinafter designated
"First Appraisal") as to the Premises' fair market value (hereinafter
designated "Appraised Value") as of the Determination Date and the First
Appraisal shall satisfy the professional standards applicable to an MAI
<PAGE>
Appraiser for appraisal reports. The First Appraisal must be completed and
issued within thirty (30) days of the Determination Date. For purposes
hereof, "MAI Appraiser" shall mean an appraiser licensed or otherwise
qualified to do business in the State of Oklahoma and who has substantial
experience in performing appraisals of facilities similar to the Premises and
is certified as a member of the American Institute of Real Estate Appraisers
or certified as a SRPA by the Society of Real Estate Appraisers, or, if such
organizations no longer exist or certify appraisers, such successor
organization or such other organization as is approved by Landlord.
40.2 Upon completion of the First Appraisal, Landlord shall
determine whether it is still interested in selling the Premises for cash at a
purchase price equal to or higher than the Appraised Value, and if Landlord is
still interested, Landlord shall deliver a written notice to Tenant
(hereinafter designated "Landlord's Original Notice") advising Tenant that
Landlord desires to sell the Premises for cash at the Appraised Value or a
higher price. A complete copy of the First Appraisal must be provided to
Tenant simultaneous with the delivery of Landlord's Original Notice.
40.3 Tenant shall have thirty (30) days from the date the
Landlord's Original Notice is delivered to Tenant (hereinafter designated
"Original Notice Delivery Date") in which to deliver to Landlord a written
offer (hereinafter designated "Tenant's Original Offer") to purchase the
Premises for cash at a purchase price equal to the Appraised Value and upon
the Agreed Terms (as hereinafter defined). Any offer by Tenant to purchase
the Premises must include the following terms (herein designated "Agreed
Terms"): (i) Tenant shall pay all costs related to obtaining any environmental
assessment reports (hereinafter collectively designated "Environmental
Reports") related to the Premises; (ii) Tenant shall pay all costs of obtaining
any survey of the Premises; (iii) Landlord shall pay the base premium for
Form T-1 Owner Policy of Title Insurance for the Premises providing
coverage to Tenant comparable to the title insurance policy (hereinafter
designated "Title Insurance") obtained for Landlord in respect to Landlord's
purchase of the Premises (with the exception in such Owner Policy of Title
Insurance relating to discrepancies, conflicts, or shortages in area or boundary
lines, or any encroachments, or protrusions, or any overlapping of
improvements shall be deleted at Tenant's expense to the extent permitted by
the then existing regulations of the State Board of Insurance), and in this
regard, Landlord shall be entitled to select the title insurance agency to close
the sale of the Premises and through which the Title Insurance is to be issued
(hereinafter designated "Title Company"); (iv) each party shall pay for the
attorneys' fees and costs which that party incurs; (v) Tenant and Landlord
<PAGE>
shall equally share all other closing costs; (vi) there shall not be any
contingencies or conditions whatsoever to Tenant's obligation to purchase the
Premises; (vii) Tenant shall pay Landlord the full purchase price equal to the
Appraised Value (or Secondary Price or Successive Price, as applicable) for
the Premises in cash at closing; (viii) Tenant shall deposit cash with the Title
Company equal to ten percent (10%) of the Appraised Value (or the
Secondary Price or Successive Price, as applicable) as an earnest money
deposit (hereinafter designated "Earnest Money"), which Earnest Money
shall be nonrefundable and shall be paid to Landlord in the event Tenant fails
to perform its obligations under Tenant's Original Offer (provided that such
Earnest Money shall be applied towards the purchase price of the Premises if
the purchase closes); (ix) the sale of the Premises shall be on an "AS IS,
WHERE IS, WITH ALL FAULTS" basis with no representations or
warranties of Landlord whatsoever; (x) the conveyance shall be by special
warranty deed; and (xi) the closing of the sale and purchase of the Premises
must occur within one hundred twenty (120) days after the Original Notice
Delivery Date.
40.4 In the event Tenant does not timely deliver a Tenant's
Original Offer to Landlord within such thirty (30) day period, Tenant shall be
conclusively deemed to have forfeited any right to purchase the Premises
pursuant to the Landlord's Original Notice; and Landlord shall become
entitled to market and sell the Premises in accordance with the provisions of
Section 40.5 hereof. In the event Tenant timely delivers a Tenant's Original
Offer to Landlord within such thirty (30) day period, Tenant and Landlord
shall each deliver to the Title Company duplicate signed counterparts of the
Tenant's Original Offer (executed by duly authorized representatives of the
Tenant and Landlord, respectively) and Tenant shall pay the Earnest Money
to the Title Company within forty-eight (48) hours of such acceptance.
40.5 In the event Landlord becomes entitled to market
and/or sell the Premises pursuant to this Section 40.5, Landlord shall be free
for a period of two hundred forty (240) days from the Original Notice
Delivery Date to advertise, list for sale, solicit offers, negotiate contracts
for
the sale of, and sell (hereinafter collectively designated "Sale Activity") the
Premises at the applicable Appraised Value or higher price, and in the event
the Premises is not sold within such two hundred forty (240) day period but is
subject to a Pending Contract, Landlord shall continue to be free to sell the
Premises upon the terms set forth in the Pending Contract. For purposes of
this Section 40.5, the term "Pending Contract" means a bona fide written
contract providing for (i) the sale of the Premises by Landlord to a Person
other than a Person affiliated with Landlord at a sale price at least equal
to the
<PAGE>
Appraised Value and (ii) a date for the closing of such sale that is scheduled
to occur within ninety (90) days of the date of such contract. In the event
Landlord does not sell the Premises in accordance with the preceding
provisions of this Section 40.5, Landlord may either:
(a) cease its efforts to sell the Premises (subject to Landlord's
right to again seek to market and/or sell the Premises on such other occasions
as Landlord may determine in its sole and absolute discretion, provided
Landlord again complies with the provisions of this Section 40 upon each such
other occasion); or
(b) deliver a written notice (hereinafter designated "Landlord's
Secondary Notice") to Tenant advising Tenant that Landlord desires to sell the
Premises for cash (i) at a price less than the Appraised Value determined under
the First Appraisal as determined by Landlord in its sole and absolute
discretion or (ii) at the fair market value of the Premises as determined by
an appraisal conducted in the same manner as the First Appraisal (hereinafter
designated "Secondary Appraisal"), with either of such prices being herein
designated "Secondary Price"; and in the event a Secondary Appraisal is
conducted, a complete copy of the written report prepared in connection with
the Secondary Appraisal shall be provided to Tenant simultaneously with the
delivery of the Landlord's Secondary Notice. Upon delivery of a Landlord's
Secondary Notice, Tenant and Landlord shall have the same rights as set forth
in Sections 40.3, 40.4 and 40.5 hereof as though such Landlord's Secondary
Notice was a Landlord's First Notice, including, but not limited to, (i)
Tenant making an offer to purchase the Premises for cash at the Secondary
Price and upon the Agreed Terms, and (ii) Landlord having the right to engage
in Sale Activity at the Secondary Price or a higher price.
In the event the Landlord delivers a Landlord's Secondary Notice but the
same does not result in the sale of the Premises in the manner contemplated
above, Landlord may either:
(c) cease its efforts to sell the Premises (subject to Landlord's
right to again seek to market and/or sell the Premises on such other occasions
as Landlord may determine in its sole and absolute discretion, provided
Landlord again complies with the provisions of this Section 40 upon each such
other occasion); or
<PAGE>
(d) deliver a written notice (hereinafter designated "Landlord's
Successive Notice") to Tenant advising Tenant that Landlord desires to sell
the Premises for cash (i) at a price less than the Secondary Price as
determined by Landlord in its sole and absolute discretion or (ii) at the
fair market value of the Premises as determined by an appraisal conducted in
the same manner as the First Appraisal and Secondary Appraisal (hereinafter
designated "Successive Appraisal"), with either of such prices being herein
designated "Successive Price"; and in the event a Successive Appraisal is
conducted, a complete copy of the written report prepared in connection with
the Successive Appraisal shall be provided to Tenant simultaneously with the
delivery of the Landlord's Successive Notice. Upon delivery of a Landlord's
Successive Notice, Tenant and Landlord shall have the same rights as set forth
in Sections 40.3, 40.4 and 40.5 hereof as though such Landlord's Successive
Notice was a Landlord's Secondary Notice, including, but not limited to, (i)
Tenant making an offer to purchase the Premises for cash at the Successive
Price and upon the Agreed Terms, and (ii) Landlord having the right to engage in
Sale Activity at the Successive Price or a higher price.
In the event the Landlord delivers a Landlord's Successive Notice but the
same does not result in the sale of the Premises in the manner contemplated
above, Landlord may repeat the procedures set forth in this Section 40.5 and
on each occasion of repeating such procedures adopt a new price at which the
Premises may be sold for cash, whether to Tenant pursuant to an written offer
made by Tenant at such new price (and upon the Agreed Terms) or to a
Person not affiliated with Landlord at such new price.
[FOLLOWING PAGE IS SIGNATURE PAGE]
<PAGE>
Landlord and Tenant have executed this Lease as of the date first
indicated above.
LANDLORD:
NATIONWIDE HEALTH
PROPERTIES, INC.,
a Maryland corporation
By:_______________________________________
Name:____________________________________
Title:
____________________________________
TENANT:
STERLING HOUSE
CORPORATION, a Kansas
corporation
By:_______________________________________
Name:____________________________________
Title:
____________________________________
<PAGE>
EXHIBIT "A"
[ATTACH LEGAL DESCRIPTION]
<PAGE>
EXHIBIT "B"
[ATTACH DESCRIPTION OF LANDLORD PERSONAL PROPERTY]
<PAGE>
EXHIBIT "C"
APPRAISAL PROCESS
If Landlord and Tenant are unable to agree upon the Fair Market
Value of the Premises within any relevant period provided in this Lease, each
shall within ten (10) days after written demand by the other select one MAI
Appraiser to participate in the determination of fair market value. For all
purposes under this Lease, the fair market value of the Premises shall be the
fair market value of the Premises unencumbered by this Lease. Within ten
(10) days of such selection, the MAI Appraisers so selected by Landlord and
Tenant shall select a third MAI Appraiser ("Third MAI Appraiser"). The
three (3) selected MAI Appraisers shall each determine the fair market value
of the Premises within thirty (30) days of the selection of the third appraiser.
To the extent consistent with sound appraisal practices as then existing at the
time of any such appraisal, and if requested by Landlord, such appraisal, shall
be made on a basis consistent with the basis on which the Premises was
appraised at the time of its acquisition by Landlord. The fees and expenses of
any MAI Appraiser retained pursuant to this Exhibit shall be borne by the
party retaining such MAI Appraiser, with the exception of the Third MAI
Appraiser whose fees and expenses shall be borne by the Landlord and
Tenant equally.
In the event either Landlord or Tenant fails to select a MAI Appraiser
within the time period set forth in the foregoing paragraph, the MAI
Appraiser selected by the other party shall alone determine the fair market
value of the Premises in accordance with the provisions of this Exhibit and
the fair market value so determined shall be binding upon Landlord and
Tenant.
In the event the MAI Appraisers selected by Landlord and Tenant are
unable to agree upon a third MAI Appraiser within the time period set forth
in the first paragraph of this Exhibit, either Landlord or Tenant shall have the
right to apply at Tenant's expense to the presiding judge of the court of
original trial jurisdiction in the county in which the Premises is located to
name the third MAI Appraiser.
Within five (5) days after completion of the third MAI Appraiser's
appraisal, all three MAI Appraisers shall meet and a majority of the MAI
Appraisers shall attempt to determine the fair market value of the Premises.
If a majority are unable to determine the fair market value at such meeting,
<PAGE>
the three appraisals shall be added together and their total divided by three.
The resulting quotient shall be the fair market value of the Premises. If,
however, either or both of the low appraisal or the high appraisal are more
than ten percent (10%) lower or higher than the middle appraisal, any such
lower or higher appraisal shall be disregarded. If only one appraisal is
disregarded, the remaining two appraisals shall be added together and their
total divided by two, and the resulting quotient shall be such fair market
value. If both the lower appraisal and higher appraisal are disregarded as
provided herein, the middle appraisal shall be such fair market value. In any
event, the result of the foregoing appraisal process shall be final and binding.
"MAI Appraiser" shall mean an appraiser licensed or otherwise
qualified to do business in the State of Oklahoma and who has substantial
experience in performing appraisals of facilities similar to the Premises and
is certified as a member of the American Institute of Real Estate Appraisers
or certified as a SRPA by the Society of Real Estate Appraisers, or, if such
organizations no longer exist or certify appraisers, such successor
organization or such other organization as is approved by Landlord.
<PAGE> TABLE OF CONTENTS
Page
1. Term 1
1.1 Term 1
1.2 Renewal Terms 1
2. Rent 2
2.1 Initial Term Minimum Rent 2
2.2 Annual Escalation of Minimum Rent during Term 2
2.3 Renewal Term Minimum Rent 4
2.4 Minimum Rent Escalations after Inception of Renewal Term
4
2.5 Total Rent 4
2.6 Proration for Partial Periods 4
2.7 Form for Calculating Minimum Rent 4
2.8 Absolute Net Lease 5
3. Taxes, Assessments and Other Charges 5
3.1 Tenant's Obligations 5
3.2 Proration 5
3.3 Right to Protest 5
3.4 Tax Bills 6
3.5 Other Charges 6
4. Insurance 6
4.1 General Insurance Requirements 6
4.2 Fire and Other Casualty 6
4.3 Public Liability 7
4.4 Professional Liability Insurance 7
4.5 Workers Compensation 7
4.6 7
4.7 Business Interruption Insurance 8
4.8 Deductible Amounts 8
5. Use, Maintenance and Alteration of the Premises 8
5.1 Tenant's Maintenance Obligations 8
5.2 Regulatory Compliance 9
5.3 Permitted Use 10
5.4 Tenant Repurchase Obligation 10
<PAGE>
5.5 No Liens; Permitted Contests 10
5.6 Alterations by Tenant 10
5.7 Capital Improvements Funded by Landlord 11
5.8 Compliance with IRS Guidelines 11
6. Condition and Title of Premises 11
7. Tenant Personal Property 12
7.1 Tenant Personal Property 12
7.2 Landlord's Security Interest 12
7.3 Financing Statements 13
7.4 Intangible Property 13
8. Representations and Warranties 13
8.1 Due Authorization and Execution 13
8.2 Due Organization 14
8.3 No Breach of Other Agreements 14
9. Financial, Management and Regulatory Reports 14
9.1 14
Monthly Facility Reports 14
9.2 14
Annual Financial Statement 14
9.3 Accounting Principles 14
9.4 Regulatory Reports 14
10. Events of Default and Landlord's Remedies 15
10.1 Events of Default 15
10.2 Remedies 17
10.3 Receivership 17
10.4 Late Charges 18
10.5 Remedies Cumulative; No Waiver 18
10.6 Performance of Tenant's Obligations by Landlord 18
11. Security Deposit 19
12. Damage by Fire or Other Casualty 19
12.1 Reconstruction Using Insurance 19
12.2 Surplus Proceeds 19
12.3 No Rent Abatement 19
13. Condemnation 20
<PAGE>
13.1 Complete Taking 20
13.2 Partial Taking 20
13.3 Lease Remains in Effect 20
14. Provisions on Termination of Term 20
14.1 Surrender of Possession 20
14.2 Removal of Personal Property 20
14.3 Title to Personal Property Not Removed 21
14.4 Management of Premises 21
14.5 Correction of Deficiencies 21
15. Notices and Demands 21
16. Right of Entry; Examination of Records 22
17. Landlord May Grant Liens 22
18. Quiet Enjoyment 22
19. Applicable Law 23
20. Preservation of Gross Revenues 23
21. Hazardous Materials 24
21.1 Hazardous Material Covenants 24
21.2 Tenant Notices to Landlord 24
21.3 Extension of Term 25
21.4 Participation in Hazardous Materials Claims 25
21.5 Environmental Activities 25
21.6 Hazardous Materials 25
21.7 Hazardous Materials Claims 26
21.8 Hazardous Materials Laws 26
22. Assignment and Subletting 26
23. Indemnification 26
24. Holding Over 27
25. Estoppel Certificates 27
26. Conveyance by Landlord 27
<PAGE>
27. Waiver of Jury Trial 27
28. Attorneys' Fees 28
29. Severability 28
30. Counterparts 28
31. Binding Effect 28
32. Waiver and Subrogation 28
33. No Recordation of Lease 28
34. Incorporation of Recitals and Attachments 28
35. Titles and Headings 28
36. Nature of Relationship; Usury Savings Clause 28
37. Joint and Several 29
38. Survival of Representations, Warranties and Covenants 29
39. Interpretation 29
40. Sale of Premises by Landlord 29
EXHIBITS
EXHIBIT A - LEGAL DESCRIPTION
EXHIBIT B - LANDLORD PERSONAL PROPERTY
EXHIBIT C - APPRAISAL PROCESS
<PAGE>
LEASE AND SECURITY AGREEMENT
by and between
NATIONWIDE HEALTH PROPERTIES, INC.,
a Maryland corporation,
as "Landlord"
and
STERLING HOUSE CORPORATION,
a Kansas corporation,
as "Tenant"
January ____, 1997
STERLING HOUSE OF BROKEN ARROW
4001 S. ASPEN ROAD
BROKEN ARROW, OKLAHOMA
EXHIBIT 10.75
JOINT VENTURE AGREEMENT
This Agreement is made as of the 21st day of February, 1997, by and
among Coventry Corporation, a Kansas corporation ("SGH-SUB") and a
subsidiary of SGH, and STERLING HOUSE CORPORATION., a Kansas
corporation ("SGH") and SDR Development, Inc., a Florida corporation
("JOINT VENTURE PARTNER").
R E C I T A L S:
A. SGH-SUB and JOINT VENTURE PARTNER have agreed to
form a joint venture for the purpose of developing, constructing and operating
one (1) or more STERLING HOUSE residences; and
B. The parties are entering into this Agreement to set forth their
mutual understanding and agreements with respect to the terms and
conditions of such joint venture.
NOW, THEREFORE, in consideration of the mutual covenants and
promises set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE 1
DEFINITIONS
In addition to the other definitions contained herein, the following
definitions shall apply for purposes of this Agreement:
1.1 Affiliate. "Affiliate," when such term is used with
respect to another Person which is a legal entity, means (a) any Person who
(together with Family Members) directly or indirectly Controls, is Controlled
by or is under common Control with such other Person, (b) any Person who is a
director or officer of a privately-owned company, member in or trustee
of, or who serves in a similar capacity with respect to, such other Person, or
(c) any Person who directly or indirectly is the beneficial owner of 20% or
more of such other Person. When the term "Affiliate" is used with respect to
another Person who is an individual, it means (i) any Family Member of such
Person, or (ii) any corporation, partnership, limited liability company, trust
or other entity of which such other Person serves as an officer, director,
general partner, manager, trustee or in a similar capacity.
1.2 Ancillary Agreements. "Ancillary Agreements"
means all of the agreements executed and delivered by SGH-SUB or SGH and/or
JOINT VENTURE PARTNER (or any JOINT VENTURE PARTNER
Affiliate), pursuant to this Agreement or in connection with the transactions
contemplated by this Agreement.
<PAGE>
1.3 Business. "Business" means the business of
developing or acquiring, and owning, operating and financing, the Facilities,
and activities related or incidental thereto.
1.4 Call Option Price. "Call Option Price" means the
purchase price payable upon SGH's exercise of the Call Option as set forth
on the attached Schedule 3.8(B).
1.5 Capital Investment Schedule. "Capital Investment
Schedule" means the schedule attached as Exhibit 3.2.
1.6 Closing. "Closing" means the closing of the
transactions provided for in this Agreement, which shall take place on the
Closing Date at the offices of SGH in Wichita, Kansas or such other place as
the parties may agree upon.
1.7 Closing Date. "Closing Date" means the date on
which a Closing occurs.
1.8 Control. "Control" as applied to a Person means the
direct or indirect ownership of more than 50% of the voting common stock
(in the case of a corporation) or other voting interests (in the case of a legal
entity which is not a corporation);
1.9 Development Term. "Development Term" means the
five (5) year period commencing on the date of execution of this Agreement.
However, either party may terminate this Agreement during the Development
Term immediately upon written notice if no contract has been entered into for
the acquisition of a Facility or site for a Facility (or an option to acquire a
Facility or a site for a Facility) during any consecutive twelve (12) month
period commencing after the date of this Agreement. Providing such
termination shall not affect the obligations of JOINT VENTURE PARTNER
and SGH to complete any Facilities then under development.
1.10 Facility. "Facility" means the land and improvements
constituting an assisted living residence facility which is developed pursuant
to or as contemplated by this Agreement.
1.11 Family Member. "Family Member" means, with
respect to any individual, (a) the spouse of such individual, (b) any child of
such individual, or any parent, grandparent, brother or sister living in the
same house as such individual, or the spouse of any of the foregoing individuals
described in this clause (b), (c) a custodian, guardian or personal
representative of an individual described in clause (a) or (b); or (d) a trust
for the exclusive benefit of one or more of the individuals described in clause
(a) or (b).
1.12 Initial Closing Date. "Initial Closing Date" means the
date on which the first Closing takes place.
1.13 JOINT VENTURE PARTNER Affiliate. "JOINT
VENTURE PARTNER Affiliate" means any Affiliate of JOINT VENTURE
PARTNER.
<PAGE>
1.14 JOINT VENTURE PARTNER Ancillary
Agreements. "JOINT VENTURE PARTNER Ancillary Agreements" means
any Ancillary Agreement to which JOINT VENTURE PARTNER or any
Affiliate of JOINT VENTURE PARTNER is a party.
1.15 JOINT VENTURE PARTNER's Responsibilities
Schedule. "JOINT VENTURE PARTNER's Responsibilities Schedule"
means the schedule attached as Exhibit 3.4(B).
1.16 License Agreement. "License Agreement" means a
License Agreement is substantially thef orm of the License Agreement
together with changes to properly reflect the identity and location of the
Facility being licensed, attached as Exhibit 3.6(A).
1.17 Licensing Date. "Licensing Date" means the date
when a license to operate a Facility as an adult congregate living and/or
extended congregate, care facility or an equivalent license is issued for the
Facility by the applicable state agency.
1.18 Management Agreement. "Management Agreement"
means a Management Agreement in substantially the form of the
Management Agreement, together with changes to properly reflect the
identity and location of the Facility being managed, substantially in the form
attached as Exhibit 3.5.
1.19 Operating Agreement. "Operating Agreement"
means an Operating Agreement in substantially the form of the Operating
Agreement, together with changes to properly reflect the identity and location
of the Facility being managed, substantially in the form attached as Exhibit
3.1.
1.20 Percentage Interest. "Percentage Interest" means, as
applied to any Project Entity, the ownership interest of SGH-SUB or JOINT
VENTURE PARTNER in such Entity.
1.21 Person. "Person" means a natural person, corporation,
trust, partnership, limited liability company, governmental entity (or agency,
branch or department thereof) or any other legal entity.
1.22 Project Agreements. The agreements entered into by
SGH-SUB, JOINT VENTURE PARTNER and/or their Affiliates in
connection with the formation of a Project Entity, including without
limitation any Operating Agreement or other organizational documents.
1.23 Project Entity. "Project Entity" means any limited
liability company or other entity which owns a Facility.
1.24 SGH Affiliate. "SGH Affiliate" means any Affiliate
of SGH, including BCI.
1.25 SGH-SUB Ancillary Agreements. "SGH-SUB
Ancillary Agreements" means any Ancillary Agreement to which SGH-SUB
is a party.
<PAGE>
1.26 SGH-SUB Responsibilities Schedule. "SGH-SUB
Responsibilities Schedule" means the schedule attached as Exhibit 3.4(A).
1.27 Territory. "Territory" means the geographic area
described on the attached Exhibit 1.27.
1.28 Third Party Developer. "Third Party Developer"
means any Partner who is not SGH, an SGH Affiliate, JOINT VENTURE
PARTNER, or a JOINT VENTURE affiliate.
ARTICLE 2
PURPOSE OF JOINT VENTURE
The parties are entering into the joint venture contemplated by this
Agreement in order for SGH-SUB and JOINT VENTURE PARTNER,
through jointly owned limited liability companies or other entities agreed
upon by the parties, to develop or acquire, and own, operate and finance, the
Facilities in targeted market areas throughout the Territory. The number of
Facilities that shall be developed hereunder and the respective deadlines for
commencing and completing construction of the same are set forth on the
attached Exhibit 2. Upon execution of this Agreement and in consideration
of development opportunities to be deferred or relinquished, JOINT
VENTURE PARTNER shall pay to SGH, in addition to any other sums due
hereunder, the sum of Seventy-Five Thousand Dollars ($75,000).
ARTICLE 3
COVENANTS
3.1 Formation and Capitalization of Project Entities.
At each Closing, SGH-SUB and JOINT VENTURE PARTNER shall form
one of the Project Entities contemplated by this Agreement by entering into
an Operating Agreement. A Project Entity shall be formed at least as soon as
a site for a Facility has been identified by SGH. Unless the parties agree
otherwise, the Project Entity shall be a limited liability company, and the
parties shall enter into an Operating Agreement with respect to each such site
selected. Capital contributions shall be made by SGH-SUB and JOINT
VENTURE PARTNER or a JOINT VENTURE PARTNER Affiliate in such
proportions, at such times and in such amounts as the parties agree on, as
more fully set forth in the Capital Investment Schedule.
3.2 Capitalization of Project Entities. During the
Development Term, the parties shall make mandatory initial capital
contributions to each Project Entity as more fully set forth in the Operating
Agreement for such Project Entity. The mandatory initial capital
contributions for all Project Entities shall each be subject to a contribution
schedule which shall not exceed in the aggregate the amounts shown in the
Capital Investment Schedule, unless the parties otherwise agree. Neither
SGH-SUB nor JOINT VENTURE PARTNER shall have any obligation to
make any expenditure, provide capital or loan funds to any Project Entity
except as may specifically be required by this Agreement, any Ancillary
Agreement (including any Operating Agreement), by applicable law, or as
otherwise agreed by SGH-SUB and JOINT VENTURE PARTNER from time
to time.
<PAGE>
3.3 Project Financing. The parties will use their best
efforts to cause each Project Entity to obtain the necessary construction and
permanent financing for the Facility owned by it. The parties will use their
best efforts to cause each Project Entity to obtain permanent financing (i.e.,
mortgage financing or sale leaseback) when a Facility reaches a level of 90%
of full occupancy. SGH-SUB along with SGH and the Project Entity shall be the
guarantors of such construction and permanent financing if a guaranty
is required, but JOINT VENTURE PARTNER shall not be required to
personally guaranty any financing for any such Facility, nor shall JOINT
VENTURE PARTNER, in the event that SGH-SUB, SGH or such Entity are
called upon to pay such obligations pursuant to their guaranties, be required
to compensate or otherwise reimburse SGH-SUB, SGH or such Entity, as the
case may be, for any loss or costs incurred by any of them under any such
guaranty. It is understood that SGH-SUB and SGH reserve the right to secure
the repayment of any funds loaned to a Project Entity by the use of a first
mortgage or similar security device.
3.4 Responsibilities of the Parties.
A) SGH-SUB shall be responsible for the duties and activities set
forth on the SGH-SUB Responsibilities Schedule.
B) JOINT VENTURE PARTNER shall be responsible for the
duties and activities set forth on the JOINT VENTURE PARTNER's Responsibilities
Schedule. To the extent that JOINT VENTURE PARTNER is to be reimbursed or
compensated for such services, the terms and conditions of same shall be set
forth on the JOINT VENTURE PARTNER Responsibilities Schedule.
C) All charges associated with the foregoing services provided
by SGH-SUB or JOINT VENTURE PARTNER or any Affiliate including, without
limitation, premarketing, pre-opening, operating, pre-development, third party,
overhead and aborted project costs, shall be paid by the specific Project
Entity benefiting from such services or as agreed on by both parties in writing.
3.5 Construction. SGH-SUB reserves the right and
option to appoint BCI Construction, Inc. ("BCI"), an SGH Affiliate, to
provide development and construction supervision services to any Project
Entity which develops a Facility. A construction agreement shall be
executed by the applicable Project Entity and BCI or another construction
company selected by SGH-SUB, for such Facilities when the respective
Project Entity is formed. Such construction agreement shall provide that such
Project Entity will pay BCI a construction fee, if BCI is selected by SGH-
SUB to be the Construction Manager, and/or a development fee. The
construction fee payable to BCI shall be payable in accordance with the
applicable construction agreement. SGH-SUB reserves the right to appoint
itself, any SGH Affiliate, any JOINT VENTURE PARTNER affiliate, or a
THIRD PARTY DEVELOPER as the developer of record for any proposed
Project Facility.
<PAGE>
3.6 Project Management. In addition to the provisions
of Section 3.4(A), SGH-SUB shall perform management services for each
Project Entity, as more fully set forth in the applicable Operating Agreement.
SGH-SUB shall enter into an Operating Agreement for each Project Entity
when it is formed. SGH-SUB shall be entitled to charge one-time
compensation of up to $50,000 and as manager of each Project Facility shall
be entitled to receive a management fee equal to seven percent (7%) of such
entities gross revenues in accordance with the terms of each Management
Agreement; such agreement shall be executed by SGH-SUB or an Affiliate of
SGH-SUB and the respective Project Entity upon the purchase of the real
estate to be developed for each Project Facility.
In addition, SGH-SUB shall be entitled to be reimbursed for all costs and
overhead expenses relating to the development, construction and start-up
activities of each Project Facility. SGH-SUB or an Affiliate of SGH-SUB
shall be entitled to charge a monthly fee of up to $500 per month per Project
Facility in return for providing accounting services to each Project Facility.
SGH and the respective Project Entity shall also execute a License
Agreement upon the purchase of the real estate to be developed for each
Project Facility.
3.7 Restrictions on Transferability of Interests. From
and after the Closing Date, neither SGH-SUB, JOINT VENTURE
PARTNER or any JOINT VENTURE PARTNER Affiliate shall transfer its
ownership interest in any Project Entity except to the other party; provided,
however, that SGH-SUB may transfer a portion of its interest to an Affiliate
prior to the exercise of a put or call option pursuant to Section 3.8 so as to
preserve the existence of the Project Entity following such purchase. A
transfer means any disposition of an interest or any interest therein,
including,
without limitation, any sale, gift, assignment, pledge or encumbrance,
whether such disposition occurs voluntarily, by operation of law or otherwise.
The organizational documents of JOINT VENTURE PARTNER shall
provide at all times that the beneficial ownership interests of each beneficial
owner shall be subject to a right of first refusal in favor of JOINT VENTURE
PARTNER, and to the extent not exercised then to the other owners of
JOINT VENTURE PARTNER, and then to the extent not exercised to SGH-SUB.
Further, at the time of each Closing, JOINT VENTURE PARTNER
shall obtain from each such owner, written assurance in a form acceptable to
SGH-SUB, that such owner is not subject to any litigation, arbitration,
proceeding, governmental investigation, citation or action of any kind
pending, or to the knowledge of such Person, proposed or threatened against
them which could have a material adverse effect on the transactions
contemplated hereby.
3.8 Options to Sell or Purchase Ownership Interests.
A) SGH hereby grants to JOINT VENTURE PARTNER the
right ("put option") to sell JOINT VENTURE PARTNER's ownership interest in any
one or more Project Entities to SGH at the respective fair market value
(determined as set forth below) of such Project Entity or Entities. The put
option for each Project Entity shall be exercisable commencing on the ten (10)
month anniversary of the Licensing Date of the Facility owned by such Project
<PAGE>
Entity and any time thereafter prior to the tenth (10th) anniversary of the
Licensing Date. Such option shall be exercised by written notice from JOINT
VENTURE PARTNER to SGH prior to such tenth (10th) anniversary. The exercise
by JOINT VENTURE PARTNER of its put option for one Project Entity shall not
preclude JOINT VENTURE PARTNER from later exercising one or more put options
for additional Project Entities.
B) JOINT VENTURE PARTNER hereby grants to SGH the
right ("call option") to purchase JOINT VENTURE PARTNER's ownership interest
in each Project Entity at the Call Option Price of such Project Entity or
Entities. The call option for each Project Entity shall be exercisable on the
six (6) month anniversary of the Licensing Date of such Facility owned by such
Project Entity and any time thereafter prior to the tenth (10th) anniversary
of the Licensing Date of such Facility. Such option shall be exercised by
written notice from SGH to JOINT VENTURE PARTNER prior to such tenth (10th)
anniversary. The exercise by SGH from later exercising one or more call options
for additional Project Entities.
C) The fair market value of JOINT VENTURE PARTNER's
ownership interest in each Project Entity shall be based upon the fair market
value of such Project Entity (including all of its assets and liabilities),
determined as of the end of the calendar month preceding the date on which a
put option is exercised. The fair market value of a Project Entity shall be
the fair market value of such Project Entity as established by an appraiser
agreed on by the parties. SGH and Joint Venture Partner shall each give the
other party notice of the name of an acceptable appraiser 15 days after the
giving of notice of their intent to exercise an option. The two appraisers will
then select a third appraiser within an additional 5 days. Within 5 days after
designation, each appraiser shall submit a resume to SGH and Joint Venture
Partner, setting forth such appraiser's qualifications, including education
and experience with similar properties. A notice of objections to the
qualifications of any appraiser shall be given within 10 days after receipt of
such resume. If either party fails to timely object to the qualifications of
an appraiser, then the appraiser shall be conclusively deemed satisfactory.
If a party gives a timely notice of objection to the qualifications of an
appraiser,
then the disqualified appraiser shall be replaced by an appraiser selected by
the qualified appraisers or, if all appraisers are disqualified, then by an
appraiser selected by a commercial arbitrator acceptable to SGH and Joint
Venture. The "fair market value" shall be determined by the appraisers
within 60 days thereafter as follows. Each of the appraisers shall be
instructed to prepare an appraisal of the Project Facility in accordance with
the following instructions:
The Project Facility is to be valued upon the
three conventional approaches to estimate value known as the Income, Sales
Comparison and Cost Approaches. Once the approaches are completed, the
appraiser correlates the individual approaches into a final value conclusion.
<PAGE>
The Three approaches to estimate value are summarized as
follows:
Income Approach: This valuation approach recognizes that
the value of the operating tangible and intangible asset can be represented
by the expected economic viability of the business giving returns on and of
the assets and shall use a management fee of 7%.
Sales Comparison Approach: This valuation approach is
based upon the principal of substitution. When a facility is replaceable in
the market, the market approach assumes that value tends to be set at the
price of acquiring an equally desirable substitute facility. Since health
care market
conditions change and frequently are subject to regulatory and financing
environments, adjustments need to be considered. These adjustments also
consider the operating differences, such as services and demographics.
Cost Approach: This valuation approach estimates the value
of the tangible assets only. Value is represented by the market value of the
land plus the depreciated reproduction cost of all improvements and equipment.
In general, the Income and Sales Comparison Approaches are
to be considered the best representation of value, because they cover both
tangibles and intangible assets, consider the operating characteristics of the
business and have the most significant influence on attracting potential
investors.
The appraised values submitted by the three appraisers shall
be ranked from highest value to middle value to lowest value, the appraised
value (highest or lowest) which is furthest from the middle appraised value
shall be discarded, and the remaining two appraised values shall be averaged
to arrive at fair market value.
In determining the fair market value of a Project Entity, the
assumption shall be made that the Management Agreement will continue
indefinitely and that the percentage management fee would continue to be
charged to the applicable Project Entity. Each appraiser selected hereunder
shall be a reputable appraisal firm which has substantial experience in
appraising commercial real estate, which shall mean that at a minimum the
appraiser must be state certified, a member in good standing with the American
Institute of Real Estate Appraisers and a member in good standing with the
Appraisal Institute. All appraisers shall have complete access to the
relevant books and records of the Project Entity they are appraising during
the conduct of their appraisals. If the fair market value of a Project Entity
is finally determined in accordance with this Section 3.8(C), and a put or call
option is exercised within four (4) months from the date of such final
determination, then such fair market value shall be used in connection with
the purchase and sale occurring as a result of such exercise.
<PAGE.
D) If JOINT VENTURE PARTNER exercises its put option,
SGH may elect to pay the purchase price in either cash or SGH common stock.
SGH shall make such election by written notice to JOINT VENTURE PARTNER within
thirty (30) days following the date on which JOINT VENTURE PARTNER exercises its
put option or, if later, within ten (10)
days following the final determination of the fair market value of the SGH
stock if such election is made by SGH after the exercise of the put option as
hereafter provided.
If SGH exercises its call option, SGH may elect to tender the
purchase price in either cash, or SGH common stock. SGH shall make such
election by written notice to JOINT VENTURE PARTNER within thirty (30) days
following the date on which SGH exercises its call option or, if later, within
ten (10) days following the final determination of the fair market value of the
SGH stock if such election is made by SGH after the exercise of the call
option as hereafter provided.
E) If shares of SGH common stock are delivered as the purchase
price for an interest in a Project Entity, the number of shares to be delivered
to JOINT VENTURE PARTNER shall equal the purchase price divided by the value
per share of SGH common stock. The value per share shall be equal to the
average of the daily trading price for each day during the ten (10) business
days preceding the date of notice on which such shares are traded. If the fair
market value of SGH common stock is determined pursuant to this Section 3.9(e)
and a put or call option is exercised within thirty (30) days from the date
such final determination, such fair market value shall be used in connection
with the purchase and sale occurring as a result of such exercise.
F) The closing of a purchase and sale pursuant to this Section 3.8
shall take place within ninety (90) days following the exercise of a put or
call option hereunder, provided that such ninety (90) day period shall be
extended as reasonably necessary to permit completion of any appraisal required
by this Section 3.8. At such closing, (i) JOINT VENTURE PARTNER shall
deliver to SGH the interest in the Project Entity being purchased, free and
clear of all security interests, liens and restrictions (other than restrictions
imposed by this Agreement and the Ancillary Agreements), together with such
other documents as SGH may reasonably request, and (ii) SGH shall deliver to
JOINT VENTURE PARTNER the purchase price together with such other documents
as JOINT VENTURE PARTNER may reasonably request. The shares of any SGH stock
shall be fully paid and nonassessable. In the event that at the time of the
exercise of an option, JOINT VENTURE
PARTNER has guaranteed any financing of a Project Entity, SGH-SUB and SGH will
use their best efforts to obtain a release of JOINT VENTURE PARTNER of such
guaranty. If SGH-SUB and SGH are unable to obtain such a release, and following
the Closing there occurs a default in the payment or performance of such
financing, SGH-SUB and SGH will jointly and severally indemnify JOINT VENTURE
PARTNER for any damages, costs and expenses (including reasonable attorneys'
fees) which JOINT VENTURE PARTNER incurs pursuant to its guaranty as provided
in Section 9.2(C).
<PAGE>
H) Notwithstanding any provision contained in this Section 3.8
to the contrary:
(i) if a put or call option is exercised, such purchase may
be made by an Affiliate of SGH so as to preserve the legal existence of the
Project Entity, but no such assignment shall relieve SGH from any obligations
to JOINT VENTURE PARTNER;
(ii) any real estate transfer fee which arises in connection
with any purchase and sale hereunder shall be borne equally by the parties;
(iii) equitable adjustments shall be made (in the case of the
value of a project Entity) for any distributions or capital contributions
which occur between the date of the determination of the fair market value of
the Project Entity and the closing and (in the case of the value of the SGH
stock) for any dividends, stock splits, stock dividends, recapitalizations or
reorganizations which occur between the date of the determination of the fair
market value of SGH and the closing;
(iv) JOINT VENTURE PARTNER shall not be entitled to
exercise its put option for a Project Entity if the Project Entity is in
default in the financing for any Facility owned by such Project Entity; or
(v) if SGH is required to obtain any exemption from
federal or state securities laws to enable the shares of SGH-SUB stock to be
issued to JOINT VENTURE PARTNER, the costs thereof (including attorneys' fees)
shall be borne equally by the parties.
I) In the event that an Affiliate of JOINT VENTURE
PARTNER is designated by JOINT VENTURE PARTNER to own an interest in a Project
Entity, then as a condition thereto the Project Entity shall execute in form
and substance reasonably satisfactory to SGH-SUB an agreement in which the
JOINT VENTURE PARTNER Affiliate agrees to be bound by the provisions of this
Agreement applicable to such JOINT VENTURE PARTNER Affiliate, including
without limitation the provisions of this Section 3.8.
3.9 Investment Intent. Any shares of SGH stock acquired
pursuant to Section 3.8 will be acquired by JOINT VENTURE PARTNER or the
appropriate JOINT VENTURE PARTNER Affiliate for investment
only and not with a view to resell or otherwise distribute them, and JOINT
VENTURE PARTNER or the appropriate JOINT VENTURE PARTNER
Affiliate shall not sell, transfer, give, pledge or otherwise transfer or
dispose of the shares, or any of them, unless and until, in the written
opinion of counsel to JOINT VENTURE PARTNER or the appropriate JOINT
VENTURE PARTNER Affiliate reasonably acceptable to SGH, such sale,
transfer, pledge or other disposition of the shares, or any of them, does not
contravene any provision of the federal securities laws or applicable state
securities laws. JOINT VENTURE PARTNER and each appropriate JOINT
VENTURE PARTNER Affiliate acknowledges that SGH may cause the
stock certificate(s) representing the shares to have the following legend
printed or typed thereon:
<PAGE>
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"), or the
securities laws of any state. No transfer of the shares represented by
this certificate may be made without compliance with or exemption
from the Act and other applicable securities laws, as evidenced by a
written opinion of counsel to the holder hereof reasonably acceptable
to SGH.
3.10 Noncompetition.
A) During the Development Term, without the prior written
consent of SGH or SGH-SUB, neither JOINT VENTURE PARTNER nor any JOINT
VENTURE PARTNER Affiliate shall directly or indirectly own, operate, develop,
construct, manage or participate in the ownership, development, construction,
operation or management of an assisted living, dementia or other specialty
care facility for the elderly located in the Territory. In addition, as long
as SGH, SGH-SUB or JOINT VENTURE PARTNER or any JOINT VENTURE PARTNER Affiliate
jointly own equity interests in any Project Entity, and for a period of one (1)
year thereafter, neither JOINT VENTURE PARTNER or JOINT VENTURE
PARTNER Affiliate will, without the prior written consent of SGH or SGH-SUB,
directly or indirectly own, operate, develop, construct, manage or participate
in the ownership, development, construction, operation or management of an
assisted living, dementia or other specialty care facility for the elderly
located within twenty-five (25) miles from any Facility owned by such Project
Entity.
B) The restrictions on JOINT VENTURE PARTNER set forth in Section 3.10 (A)
shall also apply to the shareholders of
JOINT VENTURE PARTNER and their Family Members, and any entities directly or
indirectly Controlled by any one or more of them.
C) The restrictions set forth in Section 3.10 (A) are subject to the following
exceptions:
(i) such restrictions shall not be considered violated by
reason of JOINT VENTURE PARTNER or its members or shareholders, their Family
Members, or entities directly or indirectly Controlled by any of
them, developing, owning and/or constructing skilled nursing home facilities
located in the Territory which requires a certificate of need or the equivalent;
and
(ii) such restrictions shall not be considered violated by
reason of JOINT VENTURE PARTNER or any JOINT VENTURE PARTNER Affiliate owning
less than a five percent (5%) interest in a legal entity that owns, develops,
constructs, operates or manages any assisted care or dementia or other special
care facilities and whose shares of stock are traded on a nationally recognized
stock exchange or traded in the over-the-counter market.
<PAGE>
D) Each party hereby agrees that the restrictions set forth in this
Section 3.10 are founded on valuable consideration and are reasonable in
duration and geographic area in view of the circumstances under which this
Agreement is executed and that such restrictions are necessary to protect the
legitimate interests of the parties. In the event that any provision of this
Section 3.10 is determined to be invalid by any arbitrator or court of competent
jurisdiction, the provisions of this Section 3.10 shall be deemed to have been
amended and the parties agree to execute any documents and take whatever
action is necessary to evidence such amendment, so as to eliminate or modify
any such invalid provision and to carry out the intent of this Section 3.10 to
render the terms of this Section 3.10 enforceable in all respects as so
modified.
E) Each party acknowledges and agrees that irreparable injury
may result to the other party and/or a Project Entity if the other party
breaches any covenant contained in this Section 3.10 and that the remedy at
law for the breach of any such covenant will be inadequate. Therefore, if
any party shall
engage in any act in violation of any of the provisions of this Section 3.10,
the other party and the affected Project Entity (or either of them) shall be
entitled, in addition to such other remedies and damages as may be available
to either or both of them at law or under this Agreement, to injunctive relief
to enforce the provisions of this Section 3.10.
3.11 Confidentiality. The parties will at all times hold and
cause their consultants and advisors to hold in confidence the information
contained in this Agreement. In addition, each party (the "receiving party")
will at all times hold and cause its advisors and representatives to hold in
strict confidence all documents, materials and other information concerning
the other parties (the "disclosing party"), which have been or will be
furnished by the disclosing party to the receiving parties or their employees,
advisors and representatives in connection with the transactions contemplated
by this Agreement and which are designated as confidential. All such
information shall be disclosed by a receiving party only to its employees,
advisors and representatives engaged in the evaluation of such information.
If the transactions contemplated by this Agreement are not consummated,
regardless of the reason therefor, such confidence will be maintained by the
receiving party, except to the extent such information (a) was previously
known to the receiving party prior to disclosure by the disclosing party, (b)
is in the public domain through no fault of the receiving party, (c) is lawfully
acquired by the receiving party from a third party under no obligation of
confidence to the disclosing party, or (d) is required by any law or by any
governmental or judicial body to be disclosed. Such documents and
information will not be used to the detriment of the disclosing party or
otherwise in any manner and all documents, materials and other written
information provided by the disclosing party to the receiving party, including
all copies and extracts thereof, will be returned to the disclosing party
immediately upon its written request.
<PAGE>
3.12 Further Assurances. Following each Closing, each
party shall execute such further documents and perform such further acts as
may be reasonably necessary to consummate the transactions contemplated
by this Agreement and the Ancillary Agreements in accordance with the
terms hereof and thereof and to more effectively carry out the transactions
contemplated hereby and thereby.
3.13 Liens and Encumbrances. Each of SGH-SUB and
JOINT VENTURE PARTNER, and any JOINT VENTURE PARTNER
Affiliate acquiring an interest in a Project Entity, agrees to keep its
ownership interest in each such entity free and clear from any and all
security interests, liens and restrictions in favor of third parties.
3.14 Public Statement. JOINT VENTURE PARTNER
shall consult with SGH prior to issuing any press release or making any other
public statement (including, direct communications with third parties or
family members) with respect to the transactions contemplated hereby, and
will not issue any such release or make any such statement without the
approval of SGH (which may be denied in the sole discretion of SGH),
except as required pursuant to any state or federal securities law or by the
rules and regulations of any relevant securities exchange or quotation system
upon which a party's securities are then traded. JOINT VENTURE
PARTNER acknowledges that its breach of the provisions of this Section
3.14, may result in the assessment of fines, penalties and/or civil liabilities
by the Securities and Exchange Commission, state securities commissions, and
others.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES AND ADDITIONAL
COVENANTS
OF SGH-SUB AND SGH
SGH-SUB and SGH, jointly and severally, hereby represent and
warrant to JOINT VENTURE PARTNER, as of the date of this Agreement
and each further covenants that SGH and SGH-SUB shall hereafter represent
and warrant to JOINT VENTURE PARTNER as of each Closing Date that:
4.1 Organization. SGH-SUB is a corporation validly
existing and in good standing under the laws of the State of Kansas and has
full corporate power and corporate authority to conduct its business as
presently conducted and to become an owner of the Project Entities. SGH-SUB
is duly qualified to transact business as a foreign corporation in the State
of domicile of each Project Entity.
4.2 Authorization; Enforceability. The execution,
delivery and performance by SGH and SGH-SUB of this Agreement and the
SGH-SUB Ancillary Agreements are within the corporate power of SGH-SUB and
SGH, respectively, and have been duly authorized by all necessary
corporate action by SGH and SGH-SUB. This Agreement and the SGH-SUB
Ancillary Agreements, when executed and delivered by SGH-SUB, will be
the valid and binding obligations of SGH-SUB, enforceable against SGH-SUB in
accordance with their respective terms.
<PAGE>
4.3 No Violation or Conflict. The execution, delivery
and performance by SGH and SGH-SUB of this Agreement and the SGH-SUB Ancillary
Agreements will not conflict with or violate any law,
judgment, order, or decree, the Articles of Incorporation or Bylaws of SGH-SUB
or SGH, or any contract or agreement to which either is a party or by
which it is respectively bound.
4.4 Brokers. Neither SGH or SGH-SUB nor any Affiliate
of SGH has incurred any brokers', finders' or any similar fee in connection
with the transactions contemplated by this Agreement or the SGH Ancillary
Agreements other than usual and customary fees and commissions paid to
third party brokers in connection with the acquisition of real estate.
4.5 Litigation. There is no litigation, arbitration,
proceeding, governmental investigation, citation or action of any kind
pending or, to the knowledge of SGH-SUB or SGH, proposed or threatened,
against SGH which could have a material adverse effect on the transactions
contemplated hereby. There is no action, suit or proceeding against either
SGH-SUB or SGH by any person or entity which questions the validity,
legality or propriety of the transactions contemplated by this Agreement or
the SGH Ancillary Agreements.
4.6 Governmental Approvals. No permission, approval,
determination, consent or waiver by, or any declaration, filing or registration
with, any governmental or regulatory authority is required on the part of
SGH-SUB or SGH in connection with its execution and delivery of this
Agreement and the Ancillary Agreements and the consummation by it of the
transactions contemplated hereby and thereby.
4.7 Required Consents. There are no approvals or
consents which SGH-SUB or SGH are required to obtain from any third
parties to enter into this Agreement or the SGH-SUB Ancillary Agreements
which have not been obtained.
4.8 Representations and Warranties True and Correct
at Closing. Except as specifically disclosed by SGH-SUB and/or SGH to
JOINT VENTURE PARTNER in writing prior to or at the Initial Closing
Date with respect to matters arising after the date of this Agreement, the
representations and warranties of SGH-SUB and SGH set forth in this Article
4 shall be true and correct as of each Closing.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES AND ADDITIONAL COVENANTS
OF JOINT VENTURE PARTNER
JOINT VENTURE PARTNER hereby represents and warrants to
SGH-SUB and SGH, respectively, as of the date of this Agreement and
further covenants that JOINT VENTURE PARTNER shall hereinafter
represent and warrant to SGH as of each Closing Date that:
5.1 Organization. JOINT VENTURE PARTNER is a
corporation, validly existing and in good standing under the laws of the State
of Florida and has full power and authority to conduct its business as
presently conducted and to become an owner of the Project Entities. Exhibit 5.1
<PAGE>
contains a correct list of the current owners of JOINT VENTURE
PARTNER and also includes which Affiliates of JOINT VENTURE
PARTNER, if any, which are currently expected to be a party to any
Ancillary Agreement.
5.2 Authorization; Enforceability. The execution,
delivery and performance by JOINT VENTURE PARTNER of this
Agreement and the JOINT VENTURE PARTNER Ancillary Agreements are
within the power of JOINT VENTURE PARTNER (and will be within the
power of the JOINT VENTURE PARTNER Affiliate which is a party
thereto) and have been duly authorized by all necessary action by JOINT
VENTURE PARTNER (and will be duly authorized by any JOINT
VENTURE PARTNER Affiliate prior to the execution thereof). This
Agreement, and the JOINT VENTURE PARTNER Ancillary Agreements
when executed and delivered by JOINT VENTURE PARTNER and its
Affiliates, as applicable, will be the valid and binding obligations of JOINT
VENTURE PARTNER and/or its Affiliates, enforceable against them in
accordance with their respective terms.
5.3 No Violation or Conflict. The execution, delivery
and performance by JOINT VENTURE PARTNER of this Agreement and
the JOINT VENTURE PARTNER Ancillary Agreements will not conflict
with or violate any judgment, order or decree, the Articles of Organization or
Operating Agreement of JOINT VENTURE PARTNER, or any contract or
agreement to which JOINT VENTURE PARTNER is a party or by which
JOINT VENTURE PARTNER is bound.
5.4 No Broker. Neither JOINT VENTURE PARTNER
nor any Affiliate of JOINT VENTURE PARTNER has incurred any brokers',
finders' or any similar fee in connection with the transactions contemplated
by this Agreement or the JOINT VENTURE PARTNER Ancillary
Agreements other than usual and customary fees and commissions paid to
third party brokers in connection with the acquisition of real estate.
5.5 No Litigation. There is no litigation, arbitration,
proceeding, governmental investigation, citation or action of any kind
pending or, to the knowledge of JOINT VENTURE PARTNER, proposed or
threatened, against JOINT VENTURE PARTNER which could have a
material adverse effect on the transactions contemplated hereby. There is no
action, suit or proceeding by any person or governmental agency against
JOINT VENTURE PARTNER or any JOINT VENTURE PARTNER
Affiliate which questions the legality, validity or propriety of the
transactions contemplated by this Agreement or the JOINT VENTURE PARTNER
Ancillary Agreements.
5.6 Governmental Approvals. No permission, approval, determination, consent
or waiver by, or any declaration, filing or registration
with, any governmental or regulatory authority is required on the part of
JOINT VENTURE PARTNER in connection with its execution and delivery
of this Agreement and the JOINT VENTURE PARTNER Ancillary
Agreements and the consummation by it of the transactions contemplated
hereby and thereby.
5.7 Required Consents. There are no approvals or
consents which JOINT VENTURE PARTNER is required to obtain from
third parties to enter into this Agreement or the JOINT VENTURE
PARTNER Ancillary Agreements which have not been obtained.
<PAGE>
5.8 Representations and Warranties True and Correct at
Closing. Except as specifically disclosed by JOINT VENTURE PARTNER
to SGH-SUB and SGH in writing prior to or at the Initial Closing Date with
respect to matters arising after the date of this Agreement, the representations
and warranties of JOINT VENTURE PARTNER set forth in this Article 5
shall be true and correct as of each Closing.
ARTICLE 6
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
JOINT VENTURE PARTNER
Each and every obligation of JOINT VENTURE PARTNER to be
performed on any Closing Date shall be subject to the satisfaction prior to or
at each Closing of the following conditions:
6.1 Compliance with Agreement. SGH-SUB and SGH
shall each have performed and complied with all of its obligations under this
Agreement which are to be performed or complied with by it prior to or at
such Closing.
6.2 Proceedings and Instruments Satisfactory. All
proceedings, corporate or otherwise, to be taken by SGH-SUB or SGH in
connection with the transactions contemplated by this Agreement, and all
documents incident thereto, shall be reasonably satisfactory in form and
substance to JOINT VENTURE PARTNER, and SGH-SUB and SGH shall
have made available to JOINT VENTURE PARTNER for examination the
originals or true and correct copies of all documents which JOINT
VENTURE PARTNER may reasonably request and SGH-SUB and SGH can
reasonably obtain in connection with the transactions contemplated by this
Agreement.
6.3 No Litigation. No investigation, suit, action or other proceeding shall
be threatened or pending before any court or governmental
agency that seeks restraint, prohibition, damages or other relief in connection
with this Agreement or the consummation of the transactions contemplated
hereby.
6.4 Representations and Warranties. The
representations and warranties made by SGH-SUB and SGH in this
Agreement shall be true and correct as of each Closing Date with the same
force and effect as though such representations and warranties had been made
on each Closing Date.
6.5 Deliveries at Closing. SGH-SUB and SGH shall have
delivered or caused to be delivered to JOINT VENTURE PARTNER the
documents provided for in this Agreement, together with such certificates and
documents of officers of SGH-SUB and/or SGH and of public officials as
shall be reasonably requested by JOINT VENTURE PARTNER's counsel to
establish the existence and status of SGH-SUB and SGH and the due
authorization by SGH-SUB and SGH of this Agreement, the Ancillary
Agreements to which either is a party and the consummation by SGH-SUB
and/or SGH of the transactions contemplated hereby and thereby.
<PAGE>
ARTICLE 7
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF SGH-SUB AND SGH
Each and every respective obligation of SGH-SUB and SGH to be
performed on the Closing Date shall be subject to the satisfaction prior to or
at each Closing of the following conditions:
7.1 Compliance with Agreement. JOINT VENTURE
PARTNER and/or its Affiliates shall have performed and complied with all
of its obligations under this Agreement which are to be performed or
complied with by it prior to or at such Closing.
7.2 Proceedings and Instruments Satisfactory. All
proceedings to be taken by JOINT VENTURE PARTNER and/or its
Affiliates in connection with the transactions contemplated by this
Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to SGH-SUB, and JOINT VENTURE
PARTNER and/or its Affiliates shall have made available to SGH-SUB and
SGH for examination the originals or true and correct copies of all documents
which SGH-SUB may reasonably request and JOINT VENTURE PARTNER
can reasonably obtain in connection with the transactions contemplated by
this Agreement.
7.3 No Litigation. No investigation, suit, action or other
proceeding shall be threatened or pending before any court or governmental
agency that seeks restraint, prohibition, damages or other relief in connection
with this Agreement or the consummation of the transactions contemplated
hereby.
7.4 Representations and Warranties. The
representations and warranties made by JOINT VENTURE PARTNER in
this Agreement shall be true and correct as of each Closing Date with the
same force and effect as though such representations and warranties had been
made on each Closing Date.
7.5 Deliveries at Closing. JOINT VENTURE PARTNER
and/or JOINT VENTURE PARTNER's Affiliates shall have delivered or
caused to be delivered to SGH-SUB or SGH, as the case may be, the
documents provided for in this Agreement, together with such certificates and
documents of officers of JOINT VENTURE PARTNER and/or JOINT
VENTURE PARTNER's Affiliates and of public officials as shall be
reasonably requested by SGH's or SGH-SUB's counsel to establish the
existence and status of JOINT VENTURE PARTNER and/or JOINT
VENTURE PARTNER's Affiliates and the due authorization by JOINT
VENTURE PARTNER and/or JOINT VENTURE PARTNER's Affiliates of
this Agreement, each Ancillary Agreement to which it is a party and the
consummation by JOINT VENTURE PARTNER and/or JOINT VENTURE
PARTNER's Affiliates of the transactions contemplated hereby or thereby.
<PAGE>
ARTICLE 8
CLOSING; DELIVERIES AT CLOSING
8.1 Closing. Each Closing shall occur on such date as the
parties hereto may mutually agree upon in writing, but the first of the same
shall occur no later than the Initial Closing Date, at such place as the
parties hereto may mutually upon.
8.2 Actions at Closing. At the Closing, SGH-SUB, SGH
and/or JOINT VENTURE PARTNER or its Affiliates, as applicable, shall
take or cause to be taken the following actions:
A) Operating Agreement. SGH-SUB and JOINT VENTURE
PARTNER shall enter into the Operating Agreement pursuant to which SGH-SUB
and JOINT VENTURE PARTNER or JOINT VENTURE PARTNER's Affiliate shall form a
Project Entity. In addition, at the Closing, SGH-SUB and JOINT VENTURE
PARTNER or its Affiliate shall remit the capital contributions to such Project
Entity referred to in the Capital Investment Schedule.
B) Other Actions and Deliveries. Each party shall have deliver
or cause to be delivered to the other party such other certificates and
documents as may be reasonably requested by such other party's counsel to
establish the existence and status of the first party, the due authorization
by the first party of this Agreement and the Ancillary Agreements to which the
first party is a party and the consummation by the first party of the
transactions contemplated hereby and thereby.
ARTICLE 9
INDEMNIFICATION
9.1 JOINT VENTURE PARTNER's Indemnity.
JOINT VENTURE PARTNER hereby agrees to indemnify SGH, SGH-SUB
and/or the SGH-Affiliates for and hold them harmless from and against any
and all losses, damages, costs, expenses, liabilities, obligations and claims of
any kind (including, without limitation, reasonable attorneys' fees and other
reasonable legal costs and expenses) which they may at any time suffer or
incur, or become subject to, as a result of or in connection with:
A) any breach or inaccuracy of any of the representations and
warranties made by JOINT VENTURE PARTNER or any JOINT VENTURE PARTNER
Affiliate in this Agreement or in any Ancillary Agreement;
B) any failure by JOINT VENTURE PARTNER or any JOINT
VENTURE PARTNER Affiliate to carry out, perform, satisfy or discharge any of
its covenants, agreements, undertakings, liabilities or obligations under
this Agreement or under any Ancillary Agreement;
<PAGE>
C) any payments by SGH-SUB or SGH with respect to any
obligations of a Project Entity which is jointly owned by SGH-SUB and JOINT
VENTURE PARTNER or an Affiliate of JOINT VENTURE PARTNER, which at the time
of payment have been jointly guaranteed by SGH-SUB and/or SGH and JOINT
VENTURE PARTNER and/or JOINT VENTURE PARTNER's Affiliates, to the extent such
payments by either or both of them exceed SGH-SUB's proportionate share of
such obligations, based on its Percentage Interest in such Project Entity; or
D) any suit, action or other proceeding brought by any Person
against SGH-SUB, SGH, any SGH Affiliate or the Company arising out of, or in
any way related to, any of the matters referred to in Section 9. 1 (A), 9. 1 (B)
or 9. 1 (C) hereof.
9.2 SGH-SUB's and SGH's Indemnity. SGH-SUB and
SGH hereby agree to jointly and severally indemnify JOINT VENTURE
PARTNER, and/or JOINT VENTURE PARTNER's Affiliates for and hold
them harmless from and against any and all losses, damages, costs, expenses,
liabilities, obligations and claims of any kind (including without limitation,
reasonable attorneys' fees and other reasonable legal costs and expenses)
which they may at any time suffer or incur, or become subject to, as a result
of or in connection with:
A) any breach or inaccuracy of any of the representations and
warranties made by SGH-SUB or SGH in this Agreement or in any Ancillary
Agreement;
B) any failure by SGH-SUB or SGH to carry out, perform,
satisfy or discharge any of their covenants, agreements, undertakings,
liabilities or obligations under this Agreement or under any Ancillary
Agreement;
C) any payments by JOINT VENTURE PARTNER or any of its
Affiliates with respect to any obligations of Project Entity which have been
jointly guaranteed by JOINT VENTURE PARTNER or any of its Affiliates and
SGH-SUB or SGH, to the extent such payments exceed JOINT VENTURE PARTNER's or
such Affiliate's proportionate share of such
obligations, based on its Percentage Interest in such Project Entity (or
after JOINT VENTURE PARTNER or its Affiliate has sold its interest in such
Project Entity to SGH pursuant to Section 3.8, to the extent of all such
payments by JOINT VENTURE PARTNER or such Affiliate); or
D) any suit, action or other proceeding brought by any Person
against JOINT VENTURE PARTNER, any JOINT VENTURE PARTNER Affiliate or the
Company arising out of, or in any way related to, any of the matters referred
to in Section 9.2(A), 9.2(B) or 9.2(C) hereof.
9.3 Provisions Regarding Indemnities.
A) The indemnification obligations of JOINT VENTURE
PARTNER, JOINT VENTURE PARTNER's Affiliates, SGH-SUB and SGH under Sections
9.1 and 9.2, respectively, shall survive for the applicable statute of
<PAGE>
limitations. Delivery of any written demand for indemnification by an
indemnified party shall toll the survival period for the subject of the
particular demand and, once notice is given, the indemnified party may pursue
the particular claim to its conclusion to the extent permitted by applicable
law.
B) The indemnified party shall promptly notify the indemnifying
party in writing and in reasonable detail of any claim, demand, action or
proceeding for which indemnification will be sought under Section 9.1 or
Section 9.2 of this Agreement, and if such claim, demand, action or proceeding
is a third party claim, demand, action or proceeding, the indemnifying party
will have the right at its expense to assume the defense
thereof using counsel reasonably acceptable to the indemnified party. The
indemnified party shall have the right to participate, at its own expense,
with respect to any such third party claim, demand, action or proceeding. In
connection with any such third party claim, demand, action or proceeding, the
parties shall cooperate with each other and provide each other with access to
relevant books and records in their possession. No such third party claim,
demand, action or proceeding shall be settled without the prior written
consent of the indemnified party, such consent not to be unreasonably withheld
or delayed.
ARTICLE 10
TERMINATION
10.1 Termination. The parties acknowledge that time is of the essence hereof.
In addition to the termination rights set forth in
Section 1.15, this Agreement may be terminated and the transactions
contemplated hereby may be abandoned at any time hereafter as follows:
A) by mutual written agreement of SGH-SUB and JOINT
VENTURE PARTNER;
B) by JOINT VENTURE PARTNER if any of the conditions set
forth in Article 6 of this Agreement have not been timely fulfilled by SGH-SUB;
C) by SGH-SUB if any of the conditions set forth in Article 7 of
this Agreement have not been timely fulfilled by JOINT VENTURE PARTNER; or
D) by SGH-SUB, at any time upon sixty (60) days prior written
notice to JOINT VENTURE PARTNER.
In the event of termination by JOINT VENTURE PARTNER or SGH-SUB
pursuant to Section 10.1(B) or 10.1(C), respectively, as a result of a breach
by the other party of any of its representations, warranties, agreements or
obligations contained herein, the terminating party shall be entitled to any
remedies available to it at law or in equity.
<PAGE>
ARTICLE 11
MISCELLANEOUS
11.1 Entire Agreement; Amendment. This Agreement
and the other agreements and documents executed in connection herewith,
constitute the entire agreement between the parties pertaining to the subject
matter of this Agreement, and supersedes all prior agreements, promises,
covenants, arrangements, communications, representations or warranties,
whether oral or written, by any officer, employee or representative of any
party hereto. No amendment, supplement, modification or waiver of this
Agreement shall be binding unless executed in writing by the party to be
bound thereby.
11.2 Fees and Expenses. Whether or not the transactions
contemplated by this Agreement are consummated, and except as expressly
provided herein or in any Ancillary Agreement, each of the parties hereto
shall pay the fees and expenses of its respective counsel, accountants,
brokers, consultants, investment bankers and other experts incident to the
negotiation and preparation of this Agreement and the consummation of the
transactions contemplated by this Agreement.
11.3 Applicable Law. All questions concerning the
construction, validity, and interpretation of this Agreement and the
performance of the obligations imposed by this Agreement shall be governed
by the internal law, not the law of conflicts, of the State of Kansas.
11.4 Binding Effect; Assignment. This Agreement and all
of the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, but neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto without the prior written consent of the
other party, whether by operation of law or otherwise.
1 1.5 Notices. Each notice, request, demand or other
communication ("Notice") by either party to the other party pursuant to this
Agreement shall be in writing and shall be personally delivered or sent by U.S.
certified mail, return receipt requested, postage prepaid, or by nationally
recognized overnight commercial courier, charges prepaid, or by facsimile
transmission (but each such Notice sent by facsimile transmission shall be
confirmed by sending an original thereof to the other party by U.S. mail or
commercial courier as provided herein no later than the following business
day), addressed to the address of the receiving party set forth below or to such
other address as such party shall have communicated to the other party in
accordance with this Section. Any Notice hereunder shall be deemed to have
been given and received on the date when personally delivered, on the date of
sending when sent by facsimile, on the third business day following the
date of sending when sent by mail or on the first business day following the
date of sending when sent by commercial courier.
<PAGE>
If to JOINT VENTURE PARTNER: SDR Development, Inc.
4 Sawgrass Village Drive, Suite 200 E
Ponte Vedra Beach, Florida 32082
with a copy to: ____________________________
____________________________
____________________________
If to SGH-SUB Coventry Corporation
c/o STERLING HOUSE CORPORATION
453 S. Webb Road, Suite 500
Wichita, Kansas
Attn: Mr. Timothy Buchanan
Fax: (316) 681-1517
If to SGH STERLING HOUSE CORPORATION
453 S. Webb Road, Suite 500
Wichita, Kansas
Attn: Mr. Timothy Buchanan
Fax: (316) 681-1517
11.6 Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed an original, but such
counterparts shall together constitute but one and the same Agreement.
11.7 Headings. The Article and Section headings shall
be deemed an original, but such counterparts shall together constitute but
one and the same Agreement.
11.8 Construction. Common nouns shall be deemed to
refer to the masculine, feminine, neuter, singular and plural, as the identity
of the person may in the context require. References to Sections herein
include all subsections which are subsidiary to the Section referred to. No
provision of this Agreement shall be construed in favor of or against any
party hereto by reason of the extent to which any such party or its counsel
participated in the drafting thereof.
11.9 Severability. If any provision, clause or part of this
Agreement, or the application thereof under certain circumstances, is held
invalid, the remainder of this Agreement, or the application of such
provision, clause or part under other circumstances, shall not be affected
thereby unless such invalidity materially impairs the ability of the parties
to consummate the transactions contemplated by this Agreement.
<PAGE>
11.10 Knowledge. Any representation, warranty,
covenant or statement which is made to the knowledge of any party to this
Agreement shall require that such party make reasonable investigation and
inquiry with respect thereto to ascertain the correctness and validity
thereof.
11.11 Survival. All representations and warranties of the
parties contained in this Agreement or made pursuant to this Agreement
shall survive the Closing Date and the consummation of the transactions
contemplated by this Agreement for the applicable statute of limitations.
All obligations under this Agreement which expressly or implicitly by
their nature survive the expiration or termination of this Agreement shall
continue in full force and effect subsequent to and notwithstanding the
expiration or termination of this Agreement and until they are satisfied in
full or by their nature expire.
11.12 Waiver of Compliance. Any failure of SGH-SUB,
SGH or JOINT VENTURE PARTNER or JOINT VENTURE
PARTNER's Affiliate, to comply with any obligation, covenant, agreement
or condition contained herein may be expressly waived in writing by
JOINT VENTURE PARTNER or JOINT VENTURE PARTNER's
Affiliate, or SGH-SUB or SGH, respectively, but such waiver or failure to
insist upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
11.13 Third Parties. Except as specifically set forth or
referred to herein, nothing herein expressed or implied is intended or shall
be construed to confer upon or give to any Person other than the parties
hereto and their successors or assigns, any rights or remedies under or by
reason of this Agreement.
11.14 Trademark and/or Service Marks. SGH shall
have the right to monitor and control the quality of the goods and services
associated with its trademarks and service. All goodwill and other benefits
accruing through the use of such marks shall inure solely to the benefit of
SGH.
11.15 Additional Remedies. In addition to, and not in
lieu of any legal remedies to which SGH might otherwise be entitled, in
the event that JOINT VENTURE PARTNER or any affiliate of JOINT
VENTURE PARTNER fails to make any capital contribution required
under the terms of the Capital Investment Schedule, SGH-SUB shall be
entitled following ten (10) days written notice to such defaulting entity to
cancel the membership interest in any Project Entity of such defaulting
entity. By execution of this Agreement, JOINT VENTURE PARTNER
does hereby appoint SGH-SUB as it's attorney-in-fact to cause any
membership certificate that may have been issued to such defaulting party
to be canceled. Thereupon, such defaulting party shall no longer be
deemed to be a member of, or to otherwise hold any beneficial interest in,
such Project Entity (or its assets) and shall forfeit all claims to any
distributions to which such defaulting party may have otherwise been
entitled and to all capital contributions that may have been previously
remitted.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement
to be duly executed as of the day and year first above written.
STERLING HOUSE CORPORATION
By: ___________________________________
Timothy J. Buchanan
Its: Chief Executive Officer
"SGH"
COVENTRY CORPORATION
By:
Steven L. Vick
Its: President
"SGH-SUB"
SDR DEVELOPMENT, INC.
By:
Stephen D. Russell
Its: President
"JOINT VENTURE PARTNER"
<PAGE>
EXHIBIT 1.27
NON-EXCLUSIVE TERRITORY
The States of: Florida
Indiana
North Carolina
Ohio
Oklahoma
South Carolina
or such other locations, in such other states, as the parties may agree
<PAGE>
EXHIBIT 3.1
OPERATING AGREEMENT
<PAGE>
EXHIBIT 3.2
CAPITAL INVESTMENT SCHEDULE
A) $100,000 upon execution of the Joint Venture Agreement, with
such funds to be held in trust to fund the capital contributions required
hereunder and applied at the rate of $20,000 per Facility toward the payments
otherwise required under B (1) below, until exhausted;
B) As to each Project Facility:
1) $20,000 upon closing of the purchase of the real estate*;
2) up to an aggregate of $100,000 upon the issuance of the
Facility's Certificate of Occupancy upon the request of the Manager of the
Limited Liability Company*;
3) up to an aggregate of $150,000 within 90 days following
the issuance of Facility's Certificate of Occupancy upon the request of the
Manager of the Limited Liability Company*; and
4) up to an aggregate of $200,000 within 180 days following
the issuance of the Facility's Certificate of Occupancy upon the request of
the Manager of the Limited Liability Company.
<PAGE>
EXHIBIT 3.6
MANAGEMENT AGREEMENT
<PAGE>
EXHIBIT 3.6(A)
LICENSE AGREEMENT
<PAGE>
EXHIBIT 3.4(A)
SGH-SUB RESPONSIBILITIES SCHEDULE
(i) market research for purposes of obtaining debt and/or equity
capital for any Project Entity;
(ii) preliminary site approval, and addressing and attempting to resolve
acquisition issues and zoning and use issues presented by Joint Venture Partner;
(iii) obtaining construction financing;
(iv) approving of all necessary consultants for building design and
construction; and
(v) sales, pre-marketing and ongoing marketing services for each
Project Entity or Facility;
(vi) obtaining state (and, if applicable, federal) licensing for Project
Entities or Facilities, and thereafter maintaining state (and, if applicable,
federal) regulatory compliance for Project Entities or Facilities.
<PAGE>
EXHIBIT 3.4(B)
JOINT VENTURE PARTNER'S RESPONSIBILITIES SCHEDULE
<PAGE>
EXHIBIT 2
FACILITIES DEVELOPMENT
Such Facilities as the parties may agree upon from time to time, during the
term of this Agreement.
<PAGE>
SCHEDULE 3.8(B)
CALL OPTION PRICE
An amount equal to the lesser of:
(i) 1.22 x Initial Capital Contribution of such member or
(ii) the amount necessary to provide such member with an
annualized Internal Rate of Return of 40% on their Initial Capital Contribution.
<PAGE>
EXHIBIT 5.1
OWNERSHIP
NAME NATURE AND
PERCENTAGE OF OWNERSHIP
Stephen D. Russell Common Stock 100%
Exhibit 21
STERLING HOUSE CORPORATION
Subsidiaries of the Company
Assisted Living Properteries, Inc.
A Kansas Corporation
BCI Construction, Inc.
A Kansas Corporation
Coventry Corporation
A Kansas Corporation
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in 1) the Registration Statement
(Form S-3 No. 333-15329) of Sterling House Corporation and in the related
Prospectus pertaining to the registration of $35,000,000 of 6.75% Convertible
Subordinated Debentures due 2006 and to shares of Common Stock issuable upon
conversion of such debentures and 2) the Registration Statement (Form S-8 No.
333-03687) pertaining to the 1995 Stock Option Plan and Director's Stock Option
Agreements of Sterling House Corporation of our report dated February 10, 1997,
with respect to the consolidated financial statements of Sterling House
Corporation included in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
ERNST & YOUNG LLP
Wichita, Kansas
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains information extracted from the consolidated balance
sheet and the consolidated statement of operations filed as part of the
annual report on Form 10-K and is qualified in its entirety by reference
to such quarterly report on Form 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 13,658,827
<SECURITIES> 0
<RECEIVABLES> 4,408,605
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,966,892
<PP&E> 53,936,003
<DEPRECIATION> (829,966)
<TOTAL-ASSETS> 77,818,418
<CURRENT-LIABILITIES> 12,850,400
<BONDS> 39,589,497
0
0
<COMMON> 28,216,042
<OTHER-SE> (3,706,094)
<TOTAL-LIABILITY-AND-EQUITY> 77,818,418
<SALES> 0
<TOTAL-REVENUES> 16,038,242
<CGS> 0
<TOTAL-COSTS> 17,687,616
<OTHER-EXPENSES> (513,532)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,135,842)
<INCOME-TAX> 409,363
<INCOME-CONTINUING> (726,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (726,479)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
