EXHIBIT 10.6
LETTER OF INTENT
This Letter of Intent is executed by and between Sisters of Charity Health
Care Systems, Inc. ("SCHCS"), an Ohio not-for-profit corporation, and
DevelopMed Operating Company, an Ohio general partnership, dba Karrington
Communities, this 29th day of April, 1996 to signify their intentions with
regard to a certain "Term Sheet: Assisted Living Facility Development Joint
Venture" (the "Term Sheet"), revision of June 14, 1995, as amended from time to
time by agreement of the parties, a copy of which is attached hereto and
expressly made a part hereof. This Letter of Intent shall inure to the benefit
of and shall obligate each party's successors and assigns, to the extent that
assignment may be permitted by the organizational documents of the various
entities, in the same manner and to the same extent as each party hereto is
subject to benefits and obligations hereunder.
The parties agree that the Term Sheet contains terms and conditions that
were negotiated between the parties in good faith and which were intended to
govern the course and development of the relationship between the parties with
respect to the development, construction and management of certain facilities.
The parties further agree that it is their intention to enter into negotiations
in good faith and exercise their best efforts to undertake the activities and
perform the tasks contemplated by the Term Sheet.
The parties agree and acknowledge that certain operating agreements,
management agreements and other organizational documents will need to be drafted
and adopted in order to effectuate the Term Sheet with respect to the
development, construction and management of the facilities contemplated by the
Term Sheet. The parties further agree that each of these agreements or
organizational documents shall be drafted, developed, adopted and construed in
conformity with the Term Sheet.
Each party hereto further represents and warrants that the person executing
this Letter of Intent on its behalf is authorized to do so by its Board of
Trustees or its general partners and that each party intends to be bound by the
terms and conditions of this Letter of Intent.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and for other good valuable consideration, the parties have executed this Letter
of Intent as of the first date written above.
DEVELOPMED OPERATING COMPANY SISTERS OF CHARITY HEALTH CARE
SYSTEMS INC.
By: /s/ Alan B. Satterwhite By: /s/Celestia Kochel, SC
----------------------------------- -------------------------------------
Its: Treasurer/Chief Financial Officer Its: President
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REVISED 4/29/96
TERM SHEET: ASSISTED LIVING FACILITY DEVELOPMENT
JOINT VENTURE
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PARTICIPANT: Sisters of Charity Health Care System ("SCHCS"),
Catholic Health Corporation ("CHC"), (together
"Founding Systems"), Subsidiary Health Care
Corporations of SCHCS and/or CHC ("Qualified
Subsidiaries"), and DevelopMed Operating Company
("DMOC").
Other Catholic Health Care Systems and/or
Affiliates may be considered as Joint Venture
Participants.
PURPOSE OF JOINT VENTURE: The Participants expect to develop, finance, and
operate 6 assisted living facilities ("Projects")
in markets targeted by the Founding Systems over
the next 3 years, which shall constitute the Term
of this agreement. Specific Projects shall be
subject to the review and concurrence of DMOC for
inclusion in the Joint Venture. Additional
projects developed during the Term of this
agreement shall be governed by the terms of this
agreement.
COMMITMENT PROCESS: All preliminary Project review and analysis -
including feasibility studies, site analysis,
market review, etc. - shall be jointly conducted
by the Participants. All direct costs initially
shall be shared 80% by the Founding Systems and
Qualified Subsidiaries and 20% by DMOC. Once all
preliminary development, market and financial
feasibility analyses are completed, a final
development decision will be made (a "Go/No Go
Decision"). At that point, the Participants will
continue to contribute any required equity on a
pro rata basis according to the Ownership
provisions specified below. At the earlier of a)
loan commitment, or b) construction start, all
remaining equity contributions shall be funded.
Final financing terms shall be consistent with the
initial feasibility analysis (i.e., equity
contribution levels, interest rates, amortization,
etc.) but exact terms and financing
structure/sources will be negotiated by the
Founding Systems and subject to majority
shareholder approval.
CORPORATE STRUCTURE: Each Project shall be separately incorporated in a
unified structure ("Newco"). However, the
Founding Systems may create a separate real estate
company ("Newco RE") with a lease payment
structure as indicated under "Lease Payments"
below. If a separate real estate company is
created, the ownership shall be apportioned on a
pro rata basis among all shareholders.
The preferred form of corporate organization shall
be a Limited Liability Corporation ("LLC") unless
prohibited or discouraged by State law.
INITIAL CAPITALIZATION: Each Project shall have eligible Project Costs as
defined below:
(a) acquisition of land and improvements;
(b) construction of improvements;
(c) acquisition of furniture, fixtures, and
equipment;
(d) site preparation, architectural and
engineering fees, approvals, title, legal
financing and other development costs;
(e) interest on any loans funded for up to 6
months beyond expected fill-up;
(f) Working capital equal to certain start-up and
staffing costs (as well as a $25,000 charity
care reserve) until Project reaches
anticipated break-even;
(g) a Development Fee of $250,000 per Project of
more than 53 units) payable as follows:
1) 1/4 as indicated on Appendix V;
2) 1/4 at loan closing;
3) 1/4 at completion of construction;
and
4) 1/4 at positive Cash Flow (defined
as EBITDA minus Debt Service
Payments for one quarter)
(h) DMOC may receive an Incentive Development
Fee based on performance up to $40,000 as
follows:
1) $15,000 for obtaining a
permanent CO ahead of schedule
and for completing Project below
budget;
2) $10,000 for achieving positive
EBITDA by the end of month 7
following opening; and
3) $15,000 for achieving positive
EBDA by month 9 following
opening and maintaining positive
EBDA through months 9-12
following opening.
The Participants agree to contribute in aggregate
no less than 10% and not more than 30% of Project
Costs to fund any specific Project as Equity. The
exact percentage shall be determined at the Go/No
Go Decision Point.
Founding Systems shall be responsible for
obtaining construction and/or permanent loans.
All loans shall be non-recourse to DMOC and
include commercially reasonable terms and
conditions. Where appropriate, the Participants
agree to pursue tax-exempt financing for eligible
Projects on a "best efforts" basis and to make
such alterations to the development and marketing
plans of any Project to so qualify, provided such
alterations are feasible and economic.
OWNERSHIP: The Founding Systems shall own AT LEAST 51% of all
shares of Newco. Qualified Subsidiaries shall
have the right to purchase up to 29.1% of any
Project. DMOC shall own the lesser of (a) 19.9%
or (b) shares equaling the Development Fee.
DEVELOPMENT AGENT: DMOC shall be sole development agent of the joint
venture. DMOC shall be paid a Development Fee and
Incentive Development Fee as outlined above.
MANAGER AND MANAGEMENT
AGREEMENT: DMOC shall be the initial Managing Agent employed
by Newco. The Management Agreement shall run for
a minimum of 10 years; provided, however, that in
the event that DMOC sells its ownership interests
in a Project to The Founding Systems and/or The
Qualified Subsidiaries for any of the reasons
enumerated elsewhere in this agreement, then the
obligations of The Founding Systems under the
Management Agreement shall be terminated
immediately, and The Founding Systems shall have
the right to select another manager for that
Project. The Management Agreement shall also
specify the Manager's duties, responsibilities,
and performance standards. Standards will
include: minimum occupancy levels, maximum bad
debt expense, etc. Compensation for the Manager
under the Joint Venture shall be as follows:
(a) a fixed annual fee (the "Base Management
Fee") of five percent (5%) payable in
monthly installments as a percentage
of Operating Revenue.
(b) an incentive fee (the "Incentive Management
Fee") for each project of an additional 1.00%
of Operating Revenue payable annually
provided (i) average annual occupancy exceeds
95%, (ii) EBITDA exceeds 30% of Total
Revenues for the year; and (iii) no events of
default under the Management Agreement;
provided, however, that if, at the beginning
of the Project, the Founding Systems adopt a
budget and rate structure that, in the
reasonable opinion of the Parties, make the
30% of Total Revenue threshold included in
(ii) above unachievable, then the Parties
shall in good faith negotiate a new incentive
threshold.
All management fees shall be fully subordinated to
debt service and/or lease payments.
The Project administrator shall be a DMOC
employee, paid for by the Facility and subject to
Majority Shareholder approval.
If DMOC is terminated for cause under the
Management Agreement, the Founding Systems and/or
the Qualified Subsidiaries shall purchase DMOC's
shares for a specific Project at FMV. ("FMV"
shall be defined under this JV in accordance with
the Oakwood Agreement, except that during the
first two years of any Project JV, the purchase
price shall be the lower of contributed equity or
FMV.) If DMOC is not renewed as Manager, the
Founding Systems and/or the Qualified Subsidiaries
shall also purchase DMOC shares in a specific
Project at 100% of FMV.
The Management Agreement shall be automatically
renewed for 5-year terms, unless the Founding
Systems elect to terminate DMOC's management
contract and acquire DMOC's shares at FMV.
A key provision in the management agreement shall
be as follows:
"Consistent with its own mission and philosophy,
DMOC in its role as caregiver, employer and
corporate citizen will support the mission and
Relationship Principles (See Appendix I) of the
Founding Systems. In keeping with assurances of
appropriate care of residents, in their living and
in their dying, DMOC will not advocate, allow or
condone euthanasia or assisted-suicide, even were
these practices to be legalized."
LEASE PAYMENTS: If the majority shareholders elect to restructure,
Newco shall make Lease Payments to "Newco RE" at
the earlier of (a)
actual Fill-Up (i.e., 92% occupancy) or (b)
depletion of capitalized interest under initial
mortgage loan.
Annual Lease Payments (unless Recapitalization or
sale/leaseback occurs) shall be an annual return
equivalent to the 10-year U.S. Treasury Note plus
3.5% computed annually on original Project Costs.
All Lease Payments shall be a general obligation
of Newco.
RECAPITALIZATION TO
SALE/LEASEBACK: Upon a majority Shareholder vote, Newco may sell
or assign the real estate, Newco RE and/or its
rights to its lease payments to a qualified
investor provided that:
(a) the proceeds of any such sale or assignment
shall fully extinguish any mortgage loans of
Newco and Newco RE;
(b) any proceeds of any such sale or assignment
in excess of any loans outstanding are
distributed proportionately to the
shareholders of Newco and/or Newco RE;
(c) Newco shall have received the certificate of
a nationally recognized investment banking
firm that such sale or assignment transaction
is a fair and commercially reasonable
transaction and adequately reflects the value
of Newco's lease payments and the underlying
real estate and other asset values of Newco
and/or Newco RE:
(d) Newco shall have pro forma lease payment
coverage of at least 1.35x for the FY
immediately succeeding any recapitalization;
(e) the minimum lease terms (with guaranteed
renewal options) shall not be less than 25
years; and
(f) any lease agreement shall not restrict
Newco's ability to retain DMOC as Manager.
NON-COMPETE: DMOC and its affiliates covenant:
(a) so long as DMOC is a shareholder and/or
Manager in any Newco, DMOC or its affiliates
shall not be an owner, manager, or have any
other business or pecuniary interest in any
assisted living or long-term care facility in
the Market Area (to be defined as the Primary
Service Area ("PSA") in any market
feasibility analysis) of any Project
Facility; and
(b) for the next 3 years, DMOC or its affiliates
shall not develop, own, or operate an
Assisted Living Facility in any Market Area
outlined in Appendix II (see attached) unless
such assisted living facility is developed,
owned and operated according to the terms of
the Joint Venture outlined herein. (Projects
carved out of the non-compete
areas also are specified in Appendix II. The
list may be amended by mutual consent of the
Parties.)
Founding Systems covenant:
(a) for the next 3 years, not to enter into any
assisted living facility development activities in
Market Areas (i.e., PSA) where the Joint Venture
owns and operates an ALF without first offering
DMOC the opportunity to pursue the new ALF under
the then existing Joint Venture structure and
terms.
FRANCHISE FEE: Newco shall be able to advertise the Project as an
affiliated organization of the Founding Systems and/or
the relevant Qualified Subsidiary. After break-even,
the Founding Systems shall receive an annual Franchise
Fee of 0.5% of Operating Revenues. Such fee shall be
subordinated to debt service and/or lease payments as
well as to the Base Management Fee and shall be
excluded in calculating any performance targets or
incentive payments. Payment of the Franchise Fee shall
rank pari passu with the Incentive Management Fee.
GUARANTEE FEE: If the Founding Systems agree to unconditionally
guarantee debt service or lease payments that results
in lower financing costs, Newco shall pay the Founding
Systems a 1% annual guarantee fee (subject to the last
paragraph in this section and computed on the par
amount of outstanding debt guaranteed) for as long as
such guarantee is in effect. Any Guarantee Fee shall
be subordinated to debt service and/or lease payments
as well as to the Base Management Fee and shall be
excluded in calculating any performance targets or
incentive payments. Subject to the next paragraph,
payment of the Guarantee Fee shall rank pari passu with
the Incentive Management Fee.
The Parties agree that the Guarantee Fee shall be equal
to the demonstrated percentage interest reduction
computed on the par amount of outstanding debt
guaranteed, up to a maximum of 1.0% of the debt
guaranteed. By way of illustration, if it can be
demonstrated that a Guarantee by the Founding Systems
results in an interest rate reduction of 0.5% (50 basis
points) on the borrowing costs of the Project, the
Guarantee Fee would equal 0.5% of the par amount of
outstanding debt guaranteed. If the Guarantee by the
Founding Systems results in an interest rate reduction
of 1.25% (125 basis points) on the borrowing costs of
the Project, the Guarantee Fee would be capped at 1.0%
of the par amount of outstanding debt guaranteed.
6
ANCILLARY SERVICES: Subject to applicable law, Newco shall use its "best
efforts" to contract services such as home health care,
rehabilitative or restorative services, and other
health services through the Participating Subsidiaries
or Founding Systems.
Subject to applicable law, the Founding Systems and
Qualified Subsidiaries shall use their "best efforts"
to promote the Project(s) located within their
respective market areas.
TERMINATION/BUY-OUT: At the ten year anniversary (and at the five year
anniversary of each succeeding renewal period) of the
completion of any Project: (i) the Founding Systems
and/or the Qualified Subsidiaries shall have the option
to purchase at FMV the outstanding shares of DMOC i any
Newco; and (ii) DMOC shall have the option to require
the Founding Systems to purchase at FMV the outstanding
shares of DMOC in any Newco, in which case the Founding
Systems may offer to the Qualified Subsidiaries the
right to participate in such purchase.
CHARITY CARE: Charity Care shall equal 1% of Operating Revenues
unless waived by all shareholders. The Founding
Systems reserve the right to support or purchase
additional Charity Care at any facility at their sole
option. The Founding Systems shall contribute an
amount equal to the Franchise Fee and one-half of any
Guarantee Fee to a Fund or Foundation centrally
administered by the Founding Systems which can only be
used to pay for charity care or other like purposes at
any JV Project facility. The participants agree to
develop guidelines for the actual expenditure or
allocation of charity care funds at JV project
facilities.
DISPUTE RESOLUTION: The Participants agree to submit certain material
disputes ("Material Disputes"), as enumerated in
Appendix III attached, arising out of the development,
operations, and/or financing of any Project to Dispute
Resolution as outlined below.
The procedures for Dispute Resolution are as follows:
1. Any shareholder may call a meeting of all
shareholders to adjudicate a Material Dispute upon
30 days' notice. (The shareholder calling the
meeting is hereafter referred to as the "Disputing
Shareholder".);
2. If the Material Dispute cannot be adjudicated
pursuant to the shareholders' meeting, the
Disputing Shareholder may call for non-binding
arbitration within 30 days following the
shareholders' meeting;
7
3. If at the end of 30 days following the rendering
of the arbitrator's decision, the shareholders
still cannot agree on a resolution of the Material
Dispute, the Disputing Shareholder shall offer its
shares in the Project for purchase to the Founding
Systems who shall purchase the shares at FMV.
4. Any shareholder requesting 2 Dispute Resolutions
in a 12-month period or 5 Dispute Resolutions on a
cumulative basis during the life of the Project,
shall be required to tender its shares in the
Project for purchase to any of the Founding
Systems who shall purchase the shares at FMV.
Any direct costs of arbitration will be paid by the
Project. Any and all fees for outside advisors or
legal counsel retained by or on behalf of the Disputing
Shareholder shall be paid by the Disputing Shareholder
who shall hold the Project harmless from such expenses.
NAME OR IDENTIFICATION: Upon sale to any of the Participants or to a third
party, any reference to the Facility associated with
any one of the Participants' proprietary names or
trademarks shall be removed and stricken.
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APPENDIX I
SCHCS Relationship Principles
POLICY
All Sisters of Charity sponsored Institutions contemplating affiliations and/or
joint venture agreements with parties who are not Catholic will articulate those
theological and biblical principles which have shaped the mission and philosophy
of the Sisters of Charity. Essential in negotiating an agreement is the mutual
understanding by all parties of the common value integral to the mission.
Further, the agreement should include a clear understanding that the
Relationship Principles will be integrated into an ongoing evaluation process.
PRINCIPLE I:
The Sisters of Charity sponsored Institutions and their affiliates or joint
venture partners share Respect for Human Rights and a high regard for the
dignity and sacredness of life at all stages.
PRINCIPLE II:
The Sisters of Charity sponsored Institutions and their affiliates or joint
venture partners advocate the exercise of Value-Oriented Management that is
evidenced in the quality of both the work life and the work place.
PRINCIPLE III:
The Sisters of Charity sponsored Institutions and their affiliates or joint
venture partners express a commitment to Excellence and Quality Service that not
only reflects but adds to the current state of the Service.
PRINCIPLE IV:
The Sisters of Charity sponsored Institutions and their affiliates or joint
venture partners provide for assurance of Appropriate Use and Development of
Resources through proper exercise of financial, legal, and moral
responsibilities.
APPENDIX II
AREAS OF NON-COMPETE
SISTERS OF CHARITY HEALTH CARE SYSTEM (SCHCS)
COLORADO
- - Entire State
NEBRASKA
- - Grand Island
- - Kearney
- - Lincoln
OHIO
- - Cincinnati*
- - Dayton*
*Governed by Oakwood Agreement
NEW MEXICO
- - Albuquerque, including Bernililo, Sandoval and Valencia
CATHOLIC HEALTH CORPORATION (CHC)
CALIFORNIA
- - San Francisco Bay area
- - Sacramento commercial area
APPENDIX II
PAGE 2
WESTERN OREGON
- - I-5 Portland to Medford (20 miles on each side)
IDAHO
- - Boise commercial area
ILLINOIS
- - Wheeling, Arlington Heights and Schaumburg areas of NW Cook county
- - DMOC's Right of First Refusal:
During the term of the attached Agreement, the Founding Systems shall
not enter into any assisted living facility development activities in
Wheeling, Arlington Heights or Schaumburg areas of Northwest Cook
County, Illinois, without first offering DMOC the opportunity to
pursue the new ALF under the then existing Joint Venture Structure and
terms.
COLORADO
- - Grand Junction and Durango
IOWA
- - Des Moines, commercial area
NEBRASKA
- - Omaha, commercial area
MISSOURI
- - Joplin
WISCONSIN
- - South Milwaukee
- - Merrill
APPENDIX II
PAGE 3
FRANCISCAN HEALTH SYSTEM (FHS)
In the event that FHS becomes a part of or affiliates with the Founding Systems,
the market area within a 6-mile radius of the following facilities would also be
included as non-compete market areas.
PENNSYLVANIA
- - St. Joseph Hospital, 250 College Ave., Lancaster, PA 17604
- - St. Mary's Hospital, Langhorne-Newton Road, Langhorne, PA 19047
- - St. Joseph Hospital, 215 N. 12 St., P.O. Box 316, Reading, PA 19603
DELAWARE
- - St. Francis Hospital, Inc., 7th and Clayton Sts., P.O. Box 2500,
Wilmington, DE 19805-0500
NEW JERSEY
- - St. Francis Medical Center, 601 Hamilton Ave., Trenton, NJ 08629-1986
MARYLAND
- - St. Joseph Hospital, 7620 York Rd., Towson, MD 21204
KARRINGTON PROJECTS EXCLUDED FROM NON-COMPETE AREAS
NONE
Additional sites upon mutual consent of the Parties.
APPENDIX III
MATERIAL DISPUTE RESOLUTION
A material dispute is a conflict between the members that has a substantial
negative effect on a member's mission, values, or organizational philosophy or
the financial performance of the Project. The Founding Systems' mission and
philosophy are enumerated in Appendix I attached and made a part hereof.
Karrington's mission and philosophy are enumerated in Appendix IV attached and
made a part hereof.
"Material Disputes" may include the following:
- Sale, refinancing or recapitalization of a Project.
- Retention of operating days cash on hand above 45 days operating
expenses
- The funding or reserving of capital expenditures (other than
extraordinary repairs or mandated improvements or repairs) in excess
of $400/unit/year on an annual or rolling forward cumulative basis
- Substantial change in services provided or in rate structure
- Related party operating transactions between the Project and other
Founding Systems or Qualified Subsidiaries which are not executed on
an "arms's length" basis
- Changes in corporate form or tax status of Newco
The Dispute Resolution Process is not intended to be triggered by unanticipated
adverse changes of market forces or conditions, or by actions taken by
Members/Shareholders in response to such occurrences.
APPENDIX IV
KARRINGTON COMMUNITIES
MISSION STATEMENT
"Dedicated to Excellence in Preserving Personal Dignity, Individually,
Independence and Quality of Life."
PHILOSOPHY
OUR GOLDEN RULE:
- Treat everyone as we want to be treated.
EARNINGS:
- Provide favorable returns to investors with consistent growth on
invested capital.
COMMUNICATION:
- Provide timely and informative communications to our residents,
employees, investors and community at all times.
ASSOCIATES:
- Give positive recognition to all deserving associates.
- All associates have the opportunity to improve through continuing
education and training in a secure and rewarding environment.
- Insure fair compensation related directly to performance using
incentives, profit sharing, and recognition.
- Strive to promote qualified individuals from within when positions
become available.
- No job is too small for a Karrington associate if it benefits our
residents.
RESIDENTS:
- A resident's needs are always our number one focus and priority.
- Preservation of personal dignity and quality of life is paramount.
- Fulfilling our commitments to each resident is imperative.
APPENDIX IV
(cont'd)
ORGANIZATION:
- Each residence is a profit center, integral to the success of the
Company.
- Each residence promotes, encourages, and assists other Karrington
Residences.
- Administrators have the responsibility and authority to accomplish the
Company's goals, objectives, and philosophies.
- Unnecessary "home office" procedures will not be established.
- Each residence implements its own operating procedures that are
flexible but consistent with Karrington philosophies and goals.
- We maintain a small home office staff with its primary focus on the
support of each residence.
CITIZENSHIP:
- Karrington associates are good citizens and conduct business in a
professional and ethical manner.
- Karrington associates participate in community affairs and support
worthy causes.
- Each Karrington associate recognizes they represent the Company 24
hours a day.
APPENDIX V
CHI PAYMENT SCHEDULE
PAYMENT
PHASE (FEES TO BE PAID AT COMMENCEMENT OF PHASE)
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INTRODUCTORY PHASE
Meeting between DMO and local affiliate to discuss Expenses only
parameters of the project
PHASE I - SITE SELECTION $20,000 plus expenses
Preliminary Market Study (demographics, competitors, etc.)
Determine zoning process
Determine traffic patterns
Identify site
Preliminary Site Analysis
Site Layout
Analyze demographics of market area
Determine traffic count
Analyze comparable real estate sales
Executive approval of site
Send out purchase agreement
Negotiate purchase agreement
PHASE II - SITE DEVELOPMENT $20,000 plus expenses
Prepare Business Plan
Verify utilities
Order surveys
Order soil studies & environmental tests
Develop preliminary site plan
Meet with City
Order title insurance commitment
Lead architect through schematic design
Review title commitment
Prepare final site plan
Prepare architect agreement
Perform building code & licensure review
Lead architect through design development
Coordinate engineers
Prepare interior design agreement
Get pre-construction estimate
Review design development plans
Get executive approval of plans
PHASE III - ZONING & PRE-CONSTRUCTION $22,500 plus expenses
Review all zoning codes
Attend all zoning meetings
Make all zoning submittals
Lead architect through construction document preparation
Identify general contractor
Coordinate with Owners' vendors (Best, D.A.D., etc.)
Review interior finish presentation
Coordinate with utility companies
Apply for building permit
Begin contractor bidding process
Oversee Value-engineering
Negotiate G.M.P.
Coordinate groundbreaking ceremony
Close on the land
Receive building permits