Form Of Franchise Agreement

EXHIBIT 10.5


OPTION CARE, INC.
FRANCHISE AGREEMENT


This Franchise Agreement ("Agreement") between Option Care, Inc., a California corporation, with its principal place of business at Bannockburn, Illinois ("Franchisor") and Option Care Camilla, Inc., a Georgia corporation, ("Franchise Owner"), is made and entered into effective the date signed by Franchisor on the signature page hereof (the "Effective Date").


RECITALS


A. Franchisor has developed and owns a proprietary business method and concept (the "System") relating to the operation of an outpatient health care business that compounds pharmaceuticals, dispenses and administers pharmaceuticals and physician prescribed biologicals, nutrients, medications and solutions via parenteral and enteral routes in the home and in, subacute, extended care, and other outpatient settings, furnishes clinical, pharmaceutical and nursing services necessary to the provision of such therapies, sells related products and supplies and sells or leases related equipment. For purposes of this Agreement, "parenteral" shall mean any administration route other than by way of the intestines (e.g., without limitation, inhalation, transdermal and intravenous).


B. The therapies under the System (the "Therapies") are set forth in the Confidential Franchise Operations Manual (the "Manual") and include "Core Therapies" and "Permitted Therapies", both as defined in the Manual.


C. The distinguishing characteristics of the System are set forth in the Manual, which contains, without limitation, policies and procedures for the Therapies; uniform standards, specifications and procedures for operation of the business under the System, including the nature and manner of products and services offered; procedures for quality improvement; training requirements; group purchasing availability; and management, operational, and marketing methods, techniques, materials, assistance and programs.


D. Pursuant to a license from Franchisor, each of Franchisor's franchise owners does business under the name and mark "Option Care," and such other names and marks as Franchisor may designate for use by each franchise owner under the System (collectively, the "Proprietary Marks").


E. Franchise Owner wishes to obtain a franchise in order to operate a business utilizing the System and the Proprietary Marks, as well as to receive the Manual, the training and other assistance provided by Franchisor in connection with the System pursuant to this Agreement.


F. The business to be conducted by Franchise Owner pursuant to and under the license granted by this Agreement is sometimes referred to herein as the "Franchised Business".


G. Franchise Owner understands and acknowledges the importance of Franchisor's high and uniform standards of quality and service and the necessity of operating the Franchised Business in conformity with Franchisor's standards and specifications, including the Manual.


H. Franchise Owner acknowledges that it has received a copy of this Agreement, and the related exhibits and agreements, at least five (5) business days prior to the date on which this Agreement was executed by Franchise Owner. Franchise Owner further acknowledges that it has received the disclosure document required by the Trade Regulation Rule of the Federal Trade Commission, entitled "Offering Circular for Prospective Franchise Owners," at least ten (10) business days prior to the date on which this Agreement was executed.


NOW, THEREFORE, Franchisor and Franchise Owner, in consideration of the undertakings and commitments of each party to the other party set forth herein and the recitals set forth above, which are incorporated into and made a part of this Agreement, mutually agree as follows:


1. GRANT


1.1 Grant of Franchise. Franchisor hereby grants to Franchise Owner, on
------------------ the terms and conditions contained in this Agreement, the right and franchise, and Franchise Owner undertakes the obligation, to operate the Franchised Business and to use solely in connection with the Franchised Business the System and the Proprietary Marks.


1.2 Deliveries on Grant. Contemporaneous with Franchise Owner delivering
------------------- this executed Agreement to Franchisor, it shall also deliver to Franchisor the following:


(a) A check in the amount specified in Section 5.1 hereof;


(b) A copy of the fronts and backs of its issued stock certificates, the backs of which shall contain the following legend: "The transfer of this stock is subject to the terms and conditions of a Franchise Agreement with Option Care, Inc. dated _____________________, 1996";


(c) An executed "Site Selection Addendum; and


(d) A fully executed "Guarantee".


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2. TERRITORY


2.1 Territory Defined. Franchisor hereby grants to Franchise Owner the
----------------- right to operate the Franchised Business during the term of this Agreement within the defined area (the "Territory") described on attached Exhibit A, which Exhibit is incorporated herein by reference thereto. Franchise Owner acknowledges and agrees that this Agreement affords it no right, title or interest in or to additional franchises or any right to acquire additional franchises or territory, nor does it obligate Franchisor in any way to grant or sell any additional franchises or territory to Franchise Owner.


2.2 Patient Freedom of Choice. Notwithstanding the grant of the Territory,
------------------------- Franchise Owner acknowledges and agrees that (i) patients residing within the Territory are entitled to the freedom to choose their health care provider and may seek health care services of the type provided by Franchise Owner from others, including another franchise owner of Franchisor; and (ii) health care referral sources may refer patients residing within the Territory to health care providers of their choosing, including to another franchise owner of Franchisor.


2.3 Marketing Efforts in Territory. Franchise Owner agrees to devote its
------------------------------ best efforts to serving patients that reside within the Territory. Except as otherwise permitted herein or as approved in advance and in writing by Franchisor, Franchise Owner's marketing and promotional activities shall be directed only toward obtaining patients who reside within the Territory. Franchise Owner acknowledges and agrees that Franchisor, as part of its business strategy, may advertise or market on behalf of the System in the Territory and may maintain itself, or through its affiliates, a presence in the Territory for the purpose of providing a managed care program offering services of the type provided by the Franchised Business. Franchise Owner agrees to abide by Franchisor's then current policies on marketing outside of the Territory, and on cooperating with neighboring Option Care franchisees, as the same may be set forth from time to time in the Manual.


2.4 Presence in Territory. Franchise Owner shall maintain such manner and
--------------------- degree of presence in the Territory as from time to time required by the Manual. Such presence requires Franchise Owner to maintain an I.V. pharmacy within the Territory unless Franchise Owner has the prior written approval of Franchisor to utilize the I.V. pharmacy services of another Option Care Franchise and utilize such services on the basis approved by Franchisor. Even if Franchise Owner is not required to itself maintain an I.V. pharmacy in the Territory, it must maintain a physical presence in the Territory consistent with Franchisor's requirements therefor as then set forth in the current Manual. The initial pharmacy and/or office site must be selected by Franchise Owner and disclosed to Franchisor at the time of filing the application for a franchise, but not later than sixty (60) days after execution of the Franchise Agreement. A location shall be selected by Franchise Owner in accordance with the then-current Site Selection Addendum. The Franchise Owner's presence within the Territory shall


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at all times comply with Franchisor's reasonable standards and conditions and any relocations of a physical pharmacy or office or change in the manner or degree of presence must be approved in advance in writing by Franchisor. Franchise Owner shall not relocate any part of the Franchised Business without the prior written consent of Franchisor. Franchise Owner agrees that disapproval of a location will not be unreasonable if the proposed location does not meet Franchisor's reasonable standards, including spacing between franchised offices.


2.5 Servicing Unowned Territory. Franchise Owner acknowledges that while
--------------------------- it is granted the right hereunder only to the Territory, Franchise Owner may provide goods and services to patients in unowned areas until such time as those areas are granted by Franchisor to a party. Franchise Owner acknowledges and agrees that it is obligated to pay royalties to Franchisor, in accordance with Section 5 hereof, on all Gross Receipts (as hereafter defined), whether from patients residing within or outside the Territory. Franchise Owner further acknowledges and agrees that neither the ability to service nor the grant of our permission to service patients residing outside the Territory affords it any right, title or interest in or to such area whatsoever (including any right to acquire such area or any right of first refusal as to such area).


3. TERM ; RENEWAL; CONSEQUENCES OF EXPIRATION (NON-RENEWAL)


3.1 Term. Unless sooner terminated as hereinafter provided, this Agreement
---- shall expire twenty (20) years from the Effective Date of this Agreement. If this Agreement reaches the end of its term and is not renewed, it will be said to have "expired" and the "consequences of expiration" set forth at Section 3.3, below, shall apply.


3.2 Renewal. If Franchise Owner, in Franchisor's sole interpretation,
------- meets all of the requirements described in this Section 3.2, then Franchise Owner shall have the right to extend the right to operate the Franchised Business for one (1) consecutive additional period of ten (10) years. To exercise the right to extend, Franchise Owner shall send to Franchisor, at least one six (6) months, but not more than twelve (12) months, prior to the expiration date of this Agreement a written notice of intention to extend. At the time of the notice and at the time of the execution of the renewal franchise agreement, Franchise Owner must satisfy the following conditions:


3.2.1 Franchise Owner shall not be in default of any provision of this Agreement and shall have substantially complied with all the terms and conditions of this Agreement, as amended, throughout its term;


3.2.2 Franchise Owner shall have satisfied all of its monetary obligations to Franchisor and Franchisor's affiliates and shall have met those obligations in a timely manner throughout the term of this Agreement;


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3.2.3 Franchise Owner shall execute Franchisor's then-current form of renewal franchise agreement for the renewal term, which franchise agreement may have terms different from the terms of this Agreement, and such other ancillary agreements as Franchisor may require for the Franchised Business. The Territory described in this Agreement shall remain the same;


3.2.4 Franchise Owner shall pay, in lieu of an initial fee, a renewal fee not to exceed the conversion fee that would then be charged a conversion candidate for this Territory;


3.2.5 Franchise Owner shall execute a general release, in a form prescribed by Franchisor, of any and all claims against Franchisor and Franchisor's affiliates, and their respective shareholders, partners, directors, officers, employees and agents, in this capacity and in their individual capacities, to the fullest extent permitted by law; and


3.2.6 Franchise Owner shall comply with Franchisor's then-current qualification and training requirements.


3.3 Consequences of Expiration. If either Franchise Owner or Franchisor
-------------------------- elects not to renew this Agreement, then, upon expiration of its term, all rights granted Franchisor Owner by this Agreement shall terminate, and Franchise Owner shall immediately:


3.3.1 Cease to operate the Franchised Business and not, directly or indirectly, represent itself as a franchise owner of Franchisor;


3.3.2 Permanently cease to use, in any manner whatsoever, any Confidential Information associated with the System, as well as the Proprietary Marks and all signs, equipment, marketing materials, stationery, forms and other items which display the Proprietary Marks;


3.3.3 Pay all liquidated or ascertainable sums owing from Franchise Owner to Franchisor, without set-off or other reduction on account of unliquidated claims, including, without limitation, any fees accruing after the expiration of the term on Gross Receipts attributable to accounts receivable from goods or services furnished during the term of this Agreement;


3.3.4 Deliver to Franchisor via U.P.S. or comparable carrier, via first class service, the Manual, all patient file lists and business records (other than prescriptions, patient records, tax returns and bank statements), files and brochures, and any and all other materials relating to the operation of the Franchised Business, all of which are acknowledged to be Franchisor's property, and shall retain no copy or record of any of the foregoing, except Franchise Owner's copy of this Agreement and any other agreements with Franchisor or any


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affiliate, copies of any correspondence between the parties, and any copies of other documents which Franchise Owner reasonably needs for compliance with any provision of law; and


3.3.5 Comply with the applicable covenants contained in Section 9 of this Agreement, which covenants shall survive the expiration of this Agreement.


4. DUTIES OF FRANCHISOR


4.1 Provide the Manual. Franchisor shall provide to Franchise Owner one
------------------ copy of the Manual for Franchise Owner's use during the term of this Agreement. Franchisor shall also provide Franchise Owner with updates to the Manual. The Manual, updates and all copies thereof shall be promptly returned to Franchisor upon expiration or termination of this Agreement, unless this Agreement is renewed. The Manual is proprietary to the Franchisor, and is provided for use exclusively by Franchise Owner and its employees in the operation of the Franchised Business and is subject to the provisions of Sections 8.1-8.5 below.


4.2 Policies and Procedures. Franchisor shall include within the Manual
----------------------- policies and procedures on Therapies and Services encompassed within the System. Franchisor shall make available such clinical consultative support services for the System as Franchisor deems appropriate.


4.3 Training Opportunities. Franchisor shall provide such training and
---------------------- educational opportunities including training on newly designated core and permitted therapies, and initial franchise training as deemed necessary by Franchisor.


4.4 Install Program. Franchisor shall provide to Franchise Owner guidance
--------------- in, and a specific program for, the opening and start-up of the Franchised Business (the "Install Program"), as currently described in the Manual.


4.5 Accreditation Assistance. Franchisor shall counsel and assist
------------------------ Franchise Owner in complying with the certification or accreditation or standard requirements of those organizations whose accreditation is deemed necessary by Franchisor to the operation of the Franchised Business.


4.6 Management Advice. Franchisor shall provide consultation and
----------------- assistance to Franchise Owner on a continuing basis on such terms and conditions as Franchisor deems advisable, concerning the management and operation of the Franchised Business.


4.7 Referral Opportunity. Franchisor shall provide Franchise Owner with an
-------------------- opportunity to participate in such referral arrangements as are established by Franchisor from time to time which are applicable to the Franchised Business.


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4.8 Sales, Marketing Advice. Franchisor shall provide, on such terms and
----------------------- conditions as Franchisor deems advisable, advice and consultation to Franchise Owner in the preparation of sales, marketing and promotional campaigns and materials.


4.9 Group Purchasing Opportunity. Franchisor shall provide Franchise Owner
---------------------------- with an opportunity to participate in such group purchasing plans as Franchisor may provide from time to time.


5. FEES; ROYALTY; PAYMENT


5.1 Initial Fee. Franchise Owner shall pay an initial fee of______________
----------- _________________________________________ Dollars ($ __________________) for the grant of this franchise. Upon execution of this Agreement, Franchise Owner shall deliver the initial fee to Franchisor in cash or other immediately available funds or, if permitted by Franchisor, execute and deliver to Franchisor a promissory note in form and substance satisfactory to Franchisor. The initial fee, whether financed or not, is fully earned by Franchisor upon execution and delivery of this Agreement by Franchisor and is not refundable under any circumstances.


5.2 Continuing Royalty. In addition to the initial fee, during the initial
------------------ term of this Agreement, and for so long thereafter as Franchise Owner realizes Gross Receipts (as defined in Section 5.7), Franchise Owner agrees to pay to Franchisor a continuing monthly royalty fee (the "Continuing Monthly Royalty Fee") in the amount equal to nine percent (9%) of the first $1,000,000 of Gross Receipts during each calendar year, seven percent (7%) of the next $1,000,000 of Gross Receipts during each calendar year, and five percent (5%) of all Gross Receipts in excess of $2,000,000 during each calendar year. The dollar amounts subject to the 9%, 7% and 5% royalty percentage rates ("Dollar Amounts") shall be subject to annual revision as provided herein. On each January 1st, the Dollar Amounts shall be multiplied by a fraction (the "Fraction") determined as follows: The numerator shall be equal to the Consumer Price Index for all Urban Consumers, Medical Care Component ("index"), published for the preceding October by the United States Bureau of Labor Statistics. The denominator shall be the index published for the month one (1) year prior to the month used in calculating the numerator. The Dollar Amounts shall be replaced with the product resulting from multiplying each Dollar Amount by such Fraction rounded down to the nearest One Dollar ($1.00), but not less than the then-existing Dollar Amounts. All royalty payments due Franchisor during the calendar year of the adjustment shall be calculated based on the replacement Dollar Amounts. If the index is changed such that the base year differs for the two months used in determining the Fraction, the index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the index is discontinued or revised during the term of this Agreement, such other governmental index or computation with which it is replaced shall be used to obtain substantially the same result as would be obtained if the index had not been discontinued or revised.


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5.3 Minimum Royalty. If the total of the Continuing Monthly Royalty Fees
--------------- owed Franchisor for any period during the term of this Agreement is less than the minimum royalty fee (the "Minimum Royalty Fee") applicable to that period, Franchise Owner also agrees to pay to Franchisor the difference between the Minimum Royalty Fee applicable to that period and the total Continuing Monthly Royalty Fees owed for that period. The Minimum Royalty Fee is the following amounts:


5.3.1 During the period commencing with the first full month following Franchisor's execution of the Agreement and continuing through December 31st of the second calendar year of this Agreement, the Minimum Royalty Fee shall be Two Hundred Dollars ($200.00) per month. For example, if the Agreement is signed by Franchisor on April 15, 1996, then the $200.00 monthly Minimum Royalty Fee shall commence May 1, 1996 and continue through December 31, 1997;


5.3.2 For the third calendar year, the Minimum Royalty Fee shall be a sum equal to the population of the Territory multiplied by three cents;


5.3.3 For the fourth calendar year, the Minimum Royalty Fee shall be a sum equal to the population of the Territory multiplied by six cents;


5.3.4 For the fifth calendar year, the Minimum Royalty Fee shall be a sum equal to the population of the Territory multiplied by nine cents; and


5.3.5 For the sixth and subsequent calendar years, the Minimum Royalty Fee shall be a sum equal to the population of the Territory multiplied by twelve cents.


5.3.6 For purposes of this Section 5.3 and Section 5.4, below, "calendar year" means the period from January 1-December 31, and any partial year. For example, if you sign this Agreement on March 1, 1996, the first calendar ends December 31, 1996 and your second calendar year ends December 31, 1997.


5.3.7 For purposes of this Agreement, the population of the Territory shall be _______________ persons.


5.4 National Fund Contribution. Subject to Section 10.3, below, Franchise
-------------------------- Owner agrees to pay to Franchisor for the National Advertising and Educational Fund (the "National Fund") a monthly contribution in the amount equal to one and one-half percent (1.5%) of the Gross Receipts, but not more than a maximum contribution of $10,000 per calendar year. The National Fund shall be administered as provided in Section 10.3.


5.5 Due Date. The Continuing Monthly Royalty Fee and the National Fund
-------- contribution due Franchisor on Gross Receipts received in a particular month are both due and payable on or before the fifteenth (15th) day of the following month, or on such other day as


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Franchisor may reasonably specify. The Minimum Royalty Fee during calendar years 1 and 2 shall be due and payable and on or before the fifteenth (15th) day of the month. The Minimum Royalty Fee during calendar year 3 and subsequent calendar years shall be due and payable on the January 15th which next follows the close of that calendar year. Each payment shall be accompanied by the reports or statements required by this Agreement or otherwise reasonably required by Franchisor from time to time.


5.6 INTEREST. FRANCHISE OWNER AGREES TO PAY INTEREST TO FRANCHISOR (OR ITS
-------- DESIGNATED AFFILIATE) ON ALL PAYMENTS REQUIRED HEREUNDER THAT ARE OVERDUE. INTEREST SHALL ACCRUE AT THE RATE OF TWO PERCENT (2%) PER MONTH OR AT THE MAXIMUM RATE PERMITTED BY LAW, WHICHEVER IS LESS, STARTING THE DAY FOLLOWING THE DUE DATE AND CONTINUING UNTIL THE OVERDUE AMOUNT IS PAID. ENTITLEMENT TO SUCH INTEREST SHALL BE IN ADDITION TO ANY OTHER REMEDIES FRANCHISOR MAY HAVE.


5.7 Gross Receipts Defined. As used in this Agreement, "Gross Receipts"
---------------------- shall include all amounts received by Franchise Owner in connection with the operation of the Franchised Business other than amounts collected from compounding services rendered for other franchise owners of Franchisor. "Gross Receipts" includes, without limitation, amounts collected for Core Therapies and Permitted Therapies, even if such Therapies are added to the System subsequent to the execution of this Agreement. "Gross Receipts" also include, without limitation, all amounts collected, regardless of whether the patient to whom goods or services were provided resided within or outside of the Territory. "Gross Receipts" shall also include, without limitation, all payments to Franchise Owner under any business interruption insurance or similar insurance policy, and income of every kind and nature related to the Franchised Business. "Gross Receipts" shall not, however, include any taxes collected by Franchise Owner for transmittal to appropriate taxing authorities.


6. DUTIES OF FRANCHISE OWNER


6.1 Preserve Integrity of System. Franchise Owner understands and
---------------------------- acknowledges that every detail of the Franchised Business is important to Franchise Owner, Franchisor, and other franchise owners in order to maintain high and uniform operating standards, to increase the demand for the services offered as part of the System, and to protect the name, reputation and goodwill of the System and Franchisor.


6.2 Commence and Operate Franchised Business. Franchise Owner agrees that
---------------------------------------- time is of the essence both as to its completion of the Install Program and its commencement of operation of the Franchised Business. Franchise Owner shall complete the "Foundation Phase" of the Install Program (as described in the Manual) within four (4) months of signing an initial Franchise Agreement and within two (2) months of signing a conversion or re-sale Franchise Agreement. Franchise Owner shall complete the "Building for Success Phase" of the Install Program (as described in the Manual) within six (6) months of signing an initial Franchise Agreement and within three (3) months of signing a conversion or re- sale Franchise


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Agreement. Franchise Owner acknowledges and agrees that it may accept patients only after receiving a certificate of completion from Franchisor stating that Franchise Owner successfully completed the Foundation Phase of the Install Program and Franchisor's Operations Review (as described in the Manual). Franchise Owner also agrees to operate the Franchised Business continuously throughout the term of this Agreement.


6.3 Manager. Franchise Owner agrees, throughout the term of this
------- Agreement, to designate and retain a full-time Manager for the Franchised Business. The Manager shall be designated in writing to Franchisor and approved by Franchisor, which approval will not be u ...