-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IeLxZP7YzEDZPgCizjQmzifMJkhg8rGqqqG5ZQKptdXRDLVfhwpk6xkvUlUvt8XH 3C1aWRwrm8z77rcDgmxyRw== 0001000185-97-000005.txt : 19970401 0001000185-97-000005.hdr.sgml : 19970401 ACCESSION NUMBER: 0001000185-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING HOUSE CORP CENTRAL INDEX KEY: 0001000185 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 481097141 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-96288 FILM NUMBER: 97571512 BUSINESS ADDRESS: STREET 1: 453 S WEBB RD STE 500 CITY: WICHITA STATE: KS ZIP: 67207 MAIL ADDRESS: STREET 1: 453 S WEBB RD STREET 2: STE 500 CITY: WICHITA STATE: KS ZIP: 67207 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X]Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. 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. 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 2 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. 3 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. 4 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. 5 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 6 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. 7 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 8 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 9 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 10 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 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 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 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 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 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 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 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 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 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 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.
Owned/Leased Managed/Franchised Under Construction Under Development ------------ ------------------ ------------------ ----------------- 1995 1996 1995 1996 1995 1996 1995 1996 ----- ----- ----- ----- ----- ----- ----- ----- 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 ==== ===== === === === ===== ===== =====
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 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. 21 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, 22 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. 23 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 24 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 25 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 26 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. 27 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. 28 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. 29 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 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 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 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 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
Sterling House Corporation Consolidated Balance Sheets December 31, 1996 1995 ---- ---- 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 =========== ===========
See accompanying notes. F-3
Sterling House Corporation Consolidated Balance Sheets December 31, 1996 1995 ____ ____ 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 ========== ==========
See accompanying notes. F-4
Sterling House Corporation Consolidated Statements of Operations Year Ended December 31, 1996 1995 1994 ____ ____ ____ 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
See accompanying notes. F-5 Sterling House Corporation Consolidated Statements of Stockholders' Equity
Preferred Common Stock Accumulated Stock Number Amount Deficit Total 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 ========================================================
See accompanying notes. F-6 Sterling House Corporation Consolidated Statements of Cash Flows
Year Ended December 31, 1996 1995 1994 ______________________________________ 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)
F-7 Sterling House Corporation Consolidated Statements of Cash Flows Year Ended December 31,
1996 1995 1994 ------------------------------- 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
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 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 Corridor Properties, L.L.P. 60.0% 100.0% 119,111 ------- 523,606 ======= F-9 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 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 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 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 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 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 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 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 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 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 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 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 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 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:
December 31, 1996 December 31, 1995 Carrying Amount Fair Value Carrying Amount Fair Value -------------------------------------------------------- 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 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 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:
1996 1995 Weighted Weighted Average Average Exercise Exercise Options Price Options Price -------------------------------------------------------------- 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 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 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 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 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.
EX-10 2 Exhibit 10.64 STERLING HOUSE FRANCHISE AGREEMENT (Lincoln, Nebraska) Great Plains Assisted Living, L. L. C. ___________________________________________ Franchisee ____________________________________________ Date of Agreement 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 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 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 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 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 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: 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 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 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 (365) days after the date of this Agreement, each item to be accomplished by no later than the respective deadlines set forth in Schedule "1" of this Agreement: A) Secure a suitable site for the Residence in accordance with the provisions of Section 2.01; B) Secure all financing required to fully develop the Residence; C) Obtain all required building, utility, sign, health, sanitation, business permits and residential care licenses, and any other required permits and licenses and commence construction; D) Construct the Residence in compliance with the Plans; E) Purchase and install all required fixtures, equipment, furniture, furnishings, supplies, signs, and other items necessary for completion and opening of the Residence as specified in the Plans and the Operations Manual; F) Commence initial marketing activities as required by the Operations Manual; G) The Director and the staff successfully complete all training; and H) Open the Residence for business in accordance with the provisions of Section 1.04. In the event Franchisee fails to do or cause to be done any of the above within the time periods specified above, Franchisee shall pay to Company weekly, as liquidated damages, the amount of One Hundred Dollars ($100) per day (i) until such time as Franchisee is in compliance with this Section 2.03 or (ii) until such time as Company shall notify Franchisee that Company has elected to exercise its rights to terminate this Agreement in accordance with the terms and conditions of ARTICLE XV. Franchisee and Company each acknowledge and agree that time is of the essence. 2.04 Residence Opening. Franchisee shall notify Company not less than sixty (60) days prior to the date when Franchisee reasonably believes that construction of the Residence will be completed. Further, Franchisee shall immediately notify Company when construction of the Facility has been completed. Issuance of an operating license, occupancy permit, or comparable governmental authorization shall presumptively evidence that construction has 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 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) 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 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 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 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 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. 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 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"). 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 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: 1) continuous and thorough cleaning and sanitation of the interior and exterior of the Premises; 2) continuous and workmanlike interior and exterior repair of the Premises; 3) maintenance of all equipment at peak efficiency; 4) replacement of worn out or obsolete improvements, fixtures, furniture, furnishings, equipment, and signs, with duly approved improvements or replacements thereof; 5) periodic painting and redecorating; and 6) continuously maintain, repair, or replace (as needed) all life safety systems and components thereof. D) Upgrade and/or remodel the Residence licensed under this Agreement (i) to keep same in compliance with all applicable laws and regulations, and (ii) provided Franchisee will have a reasonable time period remaining under the term of this Agreement to amortize the costs of such improvements at reasonable intervals determined by Company, to reflect changes in the image, 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 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 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 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 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 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 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. 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 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. 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 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 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 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 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. 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 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 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 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 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 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 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 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 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 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 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 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. 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" 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" EX-10 3 Exhibit 10.65 STERLING HOUSE FRANCHISE AGREEMENT (Lenexa II, Kansas) Great Plains Assisted Living, L. L. C. ___________________________________________ Franchisee ____________________________________________ Date of Agreement 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 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 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 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 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 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: 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 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 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 (365) days after the date of this Agreement, each item to be accomplished by no later than the respective deadlines set forth in Schedule "1" of this Agreement: A) Secure a suitable site for the Residence in accordance with the provisions of Section 2.01; B) Secure all financing required to fully develop the Residence; C) Obtain all required building, utility, sign, health, sanitation, business permits and residential care licenses, and any other required permits and licenses and commence construction; D) Construct the Residence in compliance with the Plans; E) Purchase and install all required fixtures, equipment, furniture, furnishings, supplies, signs, and other items necessary for completion and opening of the Residence as specified in the Plans and the Operations Manual; F) Commence initial marketing activities as required by the Operations Manual; G) The Director and the staff successfully complete all training; and H) Open the Residence for business in accordance with the provisions of Section 1.04. In the event Franchisee fails to do or cause to be done any of the above within the time periods specified above, Franchisee shall pay to Company weekly, as liquidated damages, the amount of One Hundred Dollars ($100) per day (i) until such time as Franchisee is in compliance with this Section 2.03 or (ii) until such time as Company shall notify Franchisee that Company has elected to exercise its rights to terminate this Agreement in accordance with the terms and conditions of ARTICLE XV. Franchisee and Company each acknowledge and agree that time is of the essence. 2.04 Residence Opening. Franchisee shall notify Company not less than sixty (60) days prior to the date when Franchisee reasonably believes that construction of the Residence will be completed. Further, Franchisee shall immediately notify Company when construction of the Facility has been completed. Issuance of an operating license, occupancy permit, or comparable governmental authorization shall presumptively evidence that construction has 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 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) 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 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 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 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 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. 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 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"). 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 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: 1) continuous and thorough cleaning and sanitation of the interior and exterior of the Premises; 2) continuous and workmanlike interior and exterior repair of the Premises; 3) maintenance of all equipment at peak efficiency; 4) replacement of worn out or obsolete improvements, fixtures, furniture, furnishings, equipment, and signs, with duly approved improvements or replacements thereof; 5) periodic painting and redecorating; and 6) continuously maintain, repair, or replace (as needed) all life safety systems and components thereof. D) Upgrade and/or remodel the Residence licensed under this Agreement (i) to keep same in compliance with all applicable laws and regulations, and (ii) provided Franchisee will have a reasonable time period remaining under the term of this Agreement to amortize the costs of such improvements at reasonable intervals determined by Company, to reflect changes in the image, 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 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 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 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 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 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 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. 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 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. 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 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 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 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 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. 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 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 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 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 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 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 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 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 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 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 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 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. 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" 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" EX-10 4 Exhibit 10.66 STERLING HOUSE FRANCHISE AGREEMENT (Sioux City, Iowa) Great Plains Assisted Living, L. L. C. ___________________________________________ Franchisee ____________________________________________ Date of Agreement 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 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 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 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 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 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: 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 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 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 (365) days after the date of this Agreement, each item to be accomplished by no later than the respective deadlines set forth in Schedule "1" of this Agreement: A) Secure a suitable site for the Residence in accordance with the provisions of Section 2.01; B) Secure all financing required to fully develop the Residence; C) Obtain all required building, utility, sign, health, sanitation, business permits and residential care licenses, and any other required permits and licenses and commence construction; D) Construct the Residence in compliance with the Plans; E) Purchase and install all required fixtures, equipment, furniture, furnishings, supplies, signs, and other items necessary for completion and opening of the Residence as specified in the Plans and the Operations Manual; F) Commence initial marketing activities as required by the Operations Manual; G) The Director and the staff successfully complete all training; and H) Open the Residence for business in accordance with the provisions of Section 1.04. In the event Franchisee fails to do or cause to be done any of the above within the time periods specified above, Franchisee shall pay to Company weekly, as liquidated damages, the amount of One Hundred Dollars ($100) per day (i) until such time as Franchisee is in compliance with this Section 2.03 or (ii) until such time as Company shall notify Franchisee that Company has elected to exercise its rights to terminate this Agreement in accordance with the terms and conditions of ARTICLE XV. Franchisee and Company each acknowledge and agree that time is of the essence. 2.04 Residence Opening. Franchisee shall notify Company not less than sixty (60) days prior to the date when Franchisee reasonably believes that construction of the Residence will be completed. Further, Franchisee shall immediately notify Company when construction of the Facility has been completed. Issuance of an operating license, occupancy permit, or comparable governmental authorization shall presumptively evidence that construction has 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 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) 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 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 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 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 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. 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 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"). 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 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: 1) continuous and thorough cleaning and sanitation of the interior and exterior of the Premises; 2) continuous and workmanlike interior and exterior repair of the Premises; 3) maintenance of all equipment at peak efficiency; 4) replacement of worn out or obsolete improvements, fixtures, furniture, furnishings, equipment, and signs, with duly approved improvements or replacements thereof; 5) periodic painting and redecorating; and 6) continuously maintain, repair, or replace (as needed) all life safety systems and components thereof. D) Upgrade and/or remodel the Residence licensed under this Agreement (i) to keep same in compliance with all applicable laws and regulations, and (ii) provided Franchisee will have a reasonable time period remaining under the term of this Agreement to amortize the costs of such improvements at reasonable intervals determined by Company, to reflect changes in the image, 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 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 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 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 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 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 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. 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 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. 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 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 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 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 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. 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 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 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 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 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 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 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 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 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 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 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 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. 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" 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" EX-10 5 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 EX-10 6 Exhibit 10.68 LEASE Dated December 27, 1996 BETWEEN LTC PROPERTIES, INC., as Lessor and STERLING HOUSE CORPORATION, as Lessee 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 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 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 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 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 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; 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. 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 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 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 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. 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% 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 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 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 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 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 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 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, 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. 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, 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. 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). 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. 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, 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 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: 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 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. 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. 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 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 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 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 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 "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 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, 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: (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. 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 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 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 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. 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, 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. 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. 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 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: (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 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 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 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. 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 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. 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:_______________________________________ 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. EXHIBIT "B" ENVIRONMENTAL REPORT [attached hereto] EXHIBIT "C" SHORT FORM LEASE [attached hereto] 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. 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:____________________________________ 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:________________________________ Name:______________________________ Title:_______________________________ [My Appointment expires____________________] EX-10 7 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 EX-10 8 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: 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 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 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. 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 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 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 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 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 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. 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 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. 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. 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 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: 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. 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 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; 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; 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 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. 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. 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. 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. 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 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. 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 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; 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 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 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 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. 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 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. 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 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 (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 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] 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: ____________________________________ EXHIBIT "A" [ATTACH LEGAL DESCRIPTION] EXHIBIT "B" [ATTACH DESCRIPTION OF LANDLORD PERSONAL PROPERTY] 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, 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. 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 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 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 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 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 EX-10 9 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 EX-10 10 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: 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. 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 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 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. 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. 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 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. 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. 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 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] 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 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 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 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 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. 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 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 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 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; 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. 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 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. 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 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 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 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 (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 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). 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 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, 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. 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. 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 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 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. 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. 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] 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" [ATTACH LEGAL DESCRIPTION] EXHIBIT "B" [ATTACH DESCRIPTION OF LANDLORD PERSONAL PROPERTY] 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, 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. 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 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 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 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 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 EX-10 11 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 EX-10 12 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: 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. 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- 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. 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. 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. 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 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 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 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 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. 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 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. 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. 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 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. 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 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; 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, 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 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 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 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. 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. 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. 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 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. 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. 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; 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. 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 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 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. 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 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 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 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 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 (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] 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: ____________________________________ EXHIBIT "A" [ATTACH LEGAL DESCRIPTION] EXHIBIT "B" [ATTACH DESCRIPTION OF LANDLORD PERSONAL PROPERTY] 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, 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. 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 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 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 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 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 EX-10 13 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. 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. 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. 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. 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. 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 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. 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. 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: 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. 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. 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. 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 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. 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. 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. 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; 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 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. 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. 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. 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. 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" 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 EXHIBIT 3.1 OPERATING AGREEMENT 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. EXHIBIT 3.6 MANAGEMENT AGREEMENT EXHIBIT 3.6(A) LICENSE AGREEMENT 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. EXHIBIT 3.4(B) JOINT VENTURE PARTNER'S RESPONSIBILITIES SCHEDULE EXHIBIT 2 FACILITIES DEVELOPMENT Such Facilities as the parties may agree upon from time to time, during the term of this Agreement. 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. EXHIBIT 5.1 OWNERSHIP NAME NATURE AND PERCENTAGE OF OWNERSHIP Stephen D. Russell Common Stock 100% EX-21 14 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 EX-23 15 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 EX-27 16
5 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. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 13,658,827 0 4,408,605 0 0 19,966,892 53,936,003 (829,966) 77,818,418 12,850,400 39,589,497 0 0 28,216,042 (3,706,094) 77,818,418 0 16,038,242 0 17,687,616 (513,532) 0 0 (1,135,842) 409,363 (726,479) 0 0 0 (726,479) (0.14) (0.14)
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