Contract Review and Recommendation Report

Morrison Service Agreement (2/28/2025)

3/26/25

A.                 Executive Summary

This report follows the format and content as specified in the Procurement Advisory Committee (PAC) Handbook. If the PAC were still a functioning committee, this report would have been issued in advance of the execution of an agreement so that concerns could be addressed prior to the execution of the agreement. Given the significance of this agreement to the SLCC community, a group of concerned SLCC members determined that it was worthwhile to review the completed agreement to reveal any issues that would warrant oversight and/or possible correction over time, rather than just simply hope for the best.  The concerns identified are listed under section B of this document. Some are minor, but many are potentially quite consequential; especially since the Board’s primary expressed purpose for seeking a new service provider for the SLCC Food & Beverage amenity (F&B) was to improve the operational effectiveness and efficiency of the amenity and to ensure that the amount allocated for the amenity was not exceeded. This agreement does not achieve that objective.

This report has little to do with questioning Morrison’s corporate ability to theoretically provide a best-in-class hospitality experience; it raises concerns that are based solely on the lack of an adequate statement of work (SOW) and appropriate operational and financial performance standards defined by the Board. The Board’s designated team, which was charged with the identification of qualified service providers to replace First Service Residential as the F&B service provider, did not believe that an SOW was necessary or that an RFQ was warranted. As a direct result, the agreement also does not contain the specifics and standards necessary to ensure a better performance other than “best efforts”.

The purpose of this report is to provide the SLCC Board and potential Board candidates with an advanced indication of the issues identified, which, if left unaddressed, may lead to a less than desirable financial result for SLCC members. We respectfully recommend that the Board appoint a task force to monitor business relations with Morrison and to make recommendations to modify the existing agreement so that it will require far less micro-management by the Board to protect SLCC members.

Larry Davis: Founding member of PAC: Chair TAI Initiative

Robert Hix: Founding Member and Chair of PAC: Lead member of OPA Task Force-Governing Policy: Director, Pass Action Group

Ken Johnson: Member TAI initiative

Ron Varner: Former FAC Chair; Former Interim Board Treasurer: Founding member of PAC; Member of OPA Task Force

B.                  Specific agreement Issues of Concern:

This section contains the concerns the above group identified in their collective review of the Morrison Food & Beverage Agreement. In the left-hand margin, you will see the reference to the page and section identification. For ease of use, it is followed by a direct extract of the provision from the actual agreement (PDF file) supplied to the group by Chris Mitchell, as instructed by the Board. The comments/concerns are in red bold italicized text immediately following the indicated agreement section.

Pages 1-8 contain the basic business contract provisions anyone would expect to see in most any similar contract. Page 8 is the signature page with Bob Walter as President of SLCC Board of Directors signed on 2/26/25 and Daniel Natterman, CEO Morrison Living on 2/28/25. It is also indicated that Morrison Legal approved as well with initials “AMB”.

            The signature page should have also contained and indication that the agreement had been duly reviewed by SLCC’s attorney. We were verbally advised that the agreement had been reviewed, but it is not clear by whom or to what extent. The concern is that it was not reviewed adequately from a business perspective.

Page 9 begins with EXHIBIT A Service Exhibit

There is nothing in the agreement that addresses the service provider’s performance or requires Morrison to perform any type of periodic consumer opinion monitoring or rating process. This is a major oversight because the issue of F&B performance and quality, in the absence of formal criteria, remains left up to anecdotal stories and rumors to determine whether Morrison is doing a minimally acceptable job or not. We are in no better situation to objectively determine the provider’s performance than under the FSR agreement.

Considering Morrison’s requirement for SLCC to acquire a "state-of-the art" POS system specified by Morrison, one might expect that service level monitoring would be part of it, but the fact remains that the agreement is silent on this point. Added to report 3/26 (r6).

This issue is yet another example of why a proper Statement of Work (SOW) should be required and approved by the Board for all major procurement efforts.

Page 10 C.       Initial Service Levels & Responsibilities.

(1)        Service Provider and Client’s respective sanitation responsibilities relative to the Dining Services Facilities are set forth on Exhibit A-2.

(2)        Prior to the Effective Date, Service Provider and Client will jointly review the opening inventory of Tablewares and Smallwares. In the event that there is not sufficient opening inventory, Service Provider will purchase the necessary Tablewares and Smallwares and charge such costs to Client as Direct Costs. Thereafter, Service Provider will maintain a sufficient inventory of Tablewares and Smallwares as Direct Costs.

This may sound like a simple practical matter, but what is the basis that will be used to substantiate any such Direct Costs to Client? This inappropriately arbitrary since so any variables such as menu, firm hours of operation, and staffing levels have not been determined? There should be a requirement for Service Provider to provide a justification and allow for SLCC Board comment/approval. There is also no mention of a food, beverage inventory to be jointly conducted. SLCC has presumably already paid the previous service provider (FSR). Client should receive an appropriate credit allowance for the actual value of the food and beverage inventory on hand as of April 1, 2025. 

(3)        Client approval for changes to the operations (including changes to the hours of operation, menu offerings, and retail pricing) proposed by Service Provider will not be unreasonably withheld. If the Parties cannot reach a mutual agreement regarding proposed changes to the Dining Services, Service Provider will have the right to implement changes for a trial period of 2 months, after which time the Parties will review the impact of such changes and mutually agree on whether such changes will be incorporated as part of the Dining Services.

What is the definition of “unreasonably withheld”. Is this to be based upon a Service Provider justification statement provided to the SLCC Board or just arbitrary?

Page 11 D.       Dining Services Facilities.

(1)        Client will make available to Service Provider suitable Dining Services Facilities, completely equipped and ready to operate, together with such heat, fuel, refrigeration, and utilities services as may be reasonably required for the efficient performance of this Agreement. Client will provide all pest control services at the Service Location, including for the Dining Services Facilities. The Dining Services Facilities provided by Client will include an office furnished with a desk, chair, table and filing cabinet. The Dining Services Facilities will be thoroughly cleaned prior to the Effective Date by Service Provider as part of the Opening Expenses. Dining Services employees will have access to areas to change into uniforms and adequate restrooms.

            This provision seems a bit over the top since it should be clear to the Service Provider whether or not the facilities offer by SLCC is adequate. There has been ample time and opportunity for Morrison to walk and survey the premises. There should be a specific amount indicated that the Service Provider will charge for the cleaning services (at very least a not to exceed amount).

            The open-end nature is not appropriate.

Page 12/13 E. Computer Systems and Technology.

(2)        dine.OS System. Service Provider will implement its dine.OS resident dining service solution at the Service Location (“dine.OS System”). The dine.OS System will be subject to certain one-time hardware and implementation costs, as well as additional monthly and annual costs based on the service tier and options selected by Client. The Parties have agreed to implement the Standard Edition dine.OS System. Initial implementation costs will be absorbed as part of Service Provider’s Opening Expenses. Monthly and annual costs for the dine.OS System will be considered Direct Costs. Service Provider will be responsible for providing all maintenance, updates and service calls related to the software and hardware furnished by Service Provider for the dine.OS System. All such costs will be considered Direct Costs. Client will be responsible for certain network and connectivity requirements, as well as certain on-going tasks, including but not limited to:

What are the one-time hardware and implementations costs? What are the monthly and annual costs based on the “service tier” and options selected by the Client (Where is that specified?).

Where is it referenced in the agreement?

•          Providing and maintaining a persistent internet connection according to dine.OS application and device requirements

Where has it been verified that our present internet connection is adequate to support dine.OS? Will this be done during the first week of take over? If it is not adequate or needs to be upgraded whose responsibility is it and will it be charged as another Direct cost to SLCC? This is particularly important because SLCC does not currently have an IT staff or contract for such support.  All such services currently fall under the domain of the FSR Master HOA Management Agreement. Has FSR been involved in this discussion?

•          Providing data network cabling, switches, LAN ports & Wi-Fi access points required for all dine.OS devices

Same comment as bullet above. 

•          Ensuring port, domain and IP whitelisting for dine.OS connectivity of hardware, software and remote support access for technical support

Same comment as first bullet above.

•          Maintaining Client network security and taking reasonable steps to prohibit unauthorized access to systems and data

Same comment as first bullet above.

•          Providing project support from Client’s IT team during initial system installation of hardware and connectivity testing

As previously stated, SLCC does not have an IT team. It appears that neither the Client or Service provider discover this as part of the due diligence. The attorney reviewing the contract should have also caught this. This item needs to be resolved as soon as possible. 

•          Engaging Client technology vendor support teams or provide project resources or subject matter experts to assist with initial configuration and testing of application interfaces with the dine.OS system, i.e., EMR systems, accounting/billing systems, resident engagement applications, etc.

Same basic problem as bullet above.

•          Notifying Service Provider immediately of any network compromises or downtime that may impact operation of the dine.OS System

•          Providing Client IT team support as needed for diagnosing and troubleshooting local area network issues impacting use of the dine.OS System

As previously stated, SLCC does not have an IT team.

•          Engaging Client technology vendor support teams to assist with on-going maintenance as well as diagnosing and troubleshooting issues with established application interfaces with the dine.OS System, i.e., EMR systems, accounting/billing systems, resident engagement applications, etc.

As previously stated, SLCC does not have an IT team.

(5)        POS System. Service Provider has recommended the implementation of the GEMpos Point of Sale system (“Client POS System”) to be purchased from Common CENTS Solutions, a Jonas Company. Service Provider will use the Investment (see Exhibit A-1, Section 3) to purchase the hardware and software required for implementation of the Client POS System. An effective Client POS System is required to achieve efficient labor and customer service levels proposed by the Service Provider and shall be capable of the following:

1.   Providing mobile capabilities to input customer orders at the table, sending orders to the kitchen or bar, and accepting credit card or resident identification cards for payments at the table.

2.   Providing sales and labor information to the Service Provider’s analytical information system.

What is the cost of this system? Where will it be installed? Who retains ownership of the license if the agreement is terminated?

In connection with the Client POS System, house accounts will be reestablished and administered by the Service Provider as Direct Costs of the Dining Services. 

At what cost to the Client. Where is this specified in the agreement? If this is the responsibility of the Service Provider why is FSR being asked to support this. Why was this even a requirement established by the Board?

F.            Alcohol Service. The Parties shall execute the Co-License Agreement attached hereto as Exhibit C and made a part hereof by this reference. As a co-licensee, Service Provider will be responsible for the purchasing of alcohol to be sold and served in connection with the Dining Services.

What specific review of the Co-License Agreement has been done to make the SLCC Board satisfied that there will be no difficulty or issue with the state of CA to make sure the license is fully reinstated to SLCC sole control. Did the Board seek advice from a law firm that has specific experience in dealing with acquisition, transfers and co-licensing of liquor licenses in CA?

G.           Business Reviews. Client and Service Provider recognize that regular review of services is critical to a successful business relationship and agree to meet on no less than a quarterly basis to review operation of the Dining Services (“Quarterly Business Review”). The Quarterly Business Review will provide an overview of operations, including financial performance and customer satisfaction, and will give the Parties the opportunity to share ideas and to regularly assess and improve performance. In addition, prior to the Effective Date, Client and Service Provider will have an expectations meeting for Service Provider to answer any pre-opening questions that Client may have and to review Client expectations and opening timeline. Service Provider will prepare and deliver to the Client a Profit & Loss statement in a form mutually agreed upon by the end of the tenth business day after the last day of each month. With reasonable notice Client shall have the right to review supporting documentation in connection with the Profit & Loss statement.

A Quarterly review seems completely inadequate. At very least, the Board should require Service Provider to produce a weekly “flash report” that specifies any personnel, operating, or financial irregularities or exception to the Service Provider’s anticipated plan that may have occurred. The flash reports should be submitted to the Client no later than three days after the close of each week. At least during the initial 90 day period described by Service Provider during their 3/10/25 presentation to SLCC members. This should not be a burden to the Service Provider given the will have a POS system to provide a daily summary of operations. Waiting for three months potentially exposes SLCC to far too great of a financial risk. Especially, when there are no apparent restrictions or limits imposed on the Service Provider for arbitrary use of “working capital”. The Board may want to consider making this task a monthly task of the Financial Advisory Committee (FAC) to serve as a Food & Beverage oversight as was previously the case when FSR managed the amenity.

H.           Change Requests. If Client requests a change and/or additional services (i.e., transfers additional service functions to Service Provider), Client will put such request in writing and, if such change results in increased costs to Service Provider, the Dining Services Costs will be adjusted by an amount mutually agreed by the Parties effective on the date at which the change in services took effect.

What is the process by which the Service Provider will provide documentation of the actual difference in costs?

Page 14 D.       Working Capital. Prior to the commencement of operations, Service Provider will submit to Client an invoice for $75,000 (“Working Capital”). The Working Capital (which is non-interest bearing) may be used to cover cash outflows incurred by Service Provider prior to, and over the course of, an operating period. Upon termination of this Agreement, to the extent that any balance of such Working Capital remains, such balance will be returned to Client after all financial obligations are fulfilled.

What is the purpose of requiring and advance of “Working Capital” when payments are due within 14 days of invoice? This seems excessive and punitive to the Client especially when it is non-interest bearing. Either the Service Provider is confident in the pro forma P&L spreadsheet attached or not.

E. Cost Adjustments.

(1)  The financial terms set forth in this Agreement and the obligations assumed by Service Provider hereunder are based on observations made by Service Provider and representations made by Client and relied upon by Service Provider regarding existing and future conditions, including by way of example, service requirements, hours of operation, Client census, food and supply costs, labor costs, wage rates,, current laws and regulations and Client’s current policies and practices. In the event of a material change in the above conditions or the inaccuracy of any representation by Client, Service Provider may notify Client in writing of such change, and upon receipt of such notice, Service Provider and Client agree to discuss adjustments to the services or costs for a period of up to 15 days thereafter. Should the Parties not be able to agree on any such adjustments, Service Provider may thereafter terminate the Agreement upon 30 days’ written notice to Client.

Rather abrupt termination period, especially when a legitimate difference of opinion is stated. This makes it all the more important for the Service Provide to provide more frequent reporting that quarterly. What will be the process used to ensure an orderly termination?

(2)  Notwithstanding anything herein to the contrary, Service Provider’s Charges will automatically increase each year effective on each anniversary of the Effective Date by the 12-month percentage change over the prior year in the most recently published Consumer Price Index, U.S. All Urban Consumers, Food Away From Home, Not Seasonally Adjusted (“CPI”) and Service Provider’s Management Percentage Rate and Hourly Percentage Rate will increase by the percentage change, if any, during the 12-month period preceding the anniversary of the Effective Date in the Employment Cost Index, Private Industry, Total Benefits, 12-Month Percent Change, Not Seasonally Adjusted – CIU2030000000000A as published by the United States Department of Labor, Bureau of Labor Statistics (the “ECI Benefits Index”).

Automatic increases should not be allowed, if the service levels are less than desirable. There is nothing in the agreement indicating what the minimally acceptable performance or service levels are for Morrison.  This is a major flaw. In other words, how does the Client or Service Provider substantiate that the Hospitality services are indeed “hospitable”? 

Page 14/15 F. Purchasing.

(1)  In connection with its management of the Dining Services, Service Provider will purchase and pay for all food, beverages, Smallwares/Tablewares, equipment and other

 supplies and services utilized in the Dining Services (“Purchased Items”). Client understands that Service Provider has entered into agreements with vendors and suppliers of products which (a) give Service Provider the right to inspect such vendors’ and suppliers’ plants and/or storage facilities and (b) require such vendors and suppliers to adhere to standards to ensure the quality of products purchased by Service Provider for and on behalf of Client. Client will not require Service Provider to use products from non- Service Provider approved vendors. Client acknowledges that Service Provider may receive credits, trade or cash discounts, volume allowances, and/or rebates (“Allowances”) for Purchased Items and those Allowances will accrue to and be retained by Service Provider and will not be credited back to Client. Client acknowledges that financial terms offered to Client under this Agreement rely on Service Provider’s right to exclusively select vendors for the Purchased Items. Client will be responsible for providing Service Provider any applicable exemption or resale certificate(s) related to Service Provider’s services for Client.

It is appropriate for the Client to not require purchases from non-Service Provider approved vendors, but to legitimize kickbacks is not appropriate. Especially, if Client has no guarantee that the costs it is expected to reimburse are indeed price advantaged or reflect most favored nation pricing policy agreements Service Provider has with its approved vendors.

G.         Retail Operations & Sales Revenues.

(1)  As a part of the Dining Services, Service Provider will have the exclusive right to operate all retail food service areas at the Service Location. Client and Service Provider will mutually determine hours of operation, menus, and retail pricing for all of the Venues. Client approval for changes to the retail operations proposed by Service Provider will not be unreasonably withheld. Retail pricing will be reviewed no less than twice annually and adjusted based on the 12-month percentage change over the prior year in the most recently published Consumer Price Index, U.S. All Urban Consumers, Food Away From Home, Not Seasonally Adjusted (“CPI”). These adjustments to retail pricing are aimed at a goal of moving retail pricing to an overall food/beverage cost to price ratio of 31.5% during this 1st year.

During the initial one year term of the agreement the review should be conducted no less frequently than once every two months.

The stated goal of food and beverage cost to price ration of 31.5% seems unrealistic unless the beverage cost dominates the revenue or prices of the food items significantly increase.

(2)  Unless otherwise agreed by the Parties to have Service Provider fund this purchase as a part of the Investment, Client will provide the initial Client POS System. If Service Provider will be using Client’s merchant identification number for payment processing, Client will be responsible for providing any encryption hardware or software (and any interfacing costs) related to the encryption of such payment processors. Any replacement to the initial Client POS System or any upgrade to the Client POS System requested or required by Client will be at Client’s expense, either directly or by way of reimbursement to Service Provider.

What is the cost of the Client POS system? Open ended. This should be quantified or eliminated. Service Provider has substantial experience and should provide adequate qualification of the likely expense.

Page 16 top page, G3.

(3)  Service Provider will collect and deposit all retail revenues collected from the Dinng Services in Service Provider’s accounts. Service Provider will be responsible for collection and payment of appropriate sales tax on retail revenues. The net retail revenues (gross revenues less sales tax) will be applied on a monthly basis against Client’s financial obligation.

Does retail revenue include the receivable amount of any house accounts that Service Provider with create.

Page 18/19 EXHIBIT A-1 Financial Arrangements

The following comments relate to the following Sections 1 through 5 and Exhibit 4-A.  There are numerous cost and fees in this section all of which have cash implications, some of which are substantial.  SLCC has a budget for 2025 and that budget is the basis for operating funds for 2025. Therefore it is necessary to better understand these fees and costs and who controls them to assure we do not run out of cash.

These fees and costs include:

•          Monthly Amenity Fee, this is 1/12 of the total amenity cost in Exhibit A-4 and about $58,000 per month and is paid in cash every month (unlike how amenity loss is managed by FSR for F&B previously).  And if Monthly Charges are paid in cash on a monthly basis the total of the two would be about $70,000 per month and a total use of cash of about $630,000 for the April through December time period.  The beginning HOA fund balance March 1 was about $800,000.

•          Monthly Charges. It is unclear how these are paid, what justifications is provided and when they are charged.

•          Direct Costs are they fixed or variable?

•          Opening Charges

•          Subsidy over and underruns

•          Cost adjustments

Exhibit A-4 needs a full analysis and a compare with the current SLCC Budget from a cash basis and how the above costs and adjustments affect the 2026 budget and HOA fund balance.  It appears there are metrics in the YEAR 1 Profit and Loss Projection that suggest there will be needed cost adjustments.  For example, total labor in 4-A 1s around $1,500,000 and 68% of revenues compared to SLCC actual 2024 of about $1,400,000 and about 100% of revenue.  With expanded hours in the venues and Morrison’s emphasis on Hospitality would suggest that initially Morrison may be understaffed and rewire an adjustment or a reduction in service.  Morrison will cover overruns up t0 there management fee, but unless they are retained or the full 5 years it is a loan.

Lastly, Review and oversight:  This contract suggests a quarterly review, but it is not specific regarding scope, content or financial information to be included.  We should have monthly reviews with detailed financials.  Also, there is no indication of a position within SLCC that Morrison will submit the report to.  Some organization clarification is absolutely necessary. See further comments indicated under section Section G (pages 12/13) above regarding a “flash report”.

1) Dining Services Costs: Commencing on the Effective Date and continuing thereafter, Client will pay

Service Provider pursuant to payment terms as described in Section 2(B) of the Service Exhibit for all

Dining Services Costs, including but not limited to:

a) Compensation for Management Personnel and Hourly Personnel

b) Management Percentage Rate: 35%

c) Hourly Percentage Rate: 33%

d) Management Fee and Overhead Support Allowance Rate: 4% (minimum monthly charge of $7,500)

What is the justification for a minimum monthly charge? If the hours of operation slip below a certain number this could become an outrageous amount. The minimum equates to a payroll of $187,000 per month. Are the Management fee (2.5%) and Administrative Fee (2.5%) indicted in Exhibit A-4 the same as “d” above or is there a separate Administrative Fee and Overhead Support Allowance Fees?

e)   Food Costs at Invoice Price

Earlier in the agreement it states that rebates, special discounts are not passed through to the Client.

f)    Direct Costs

g)   Monthly Charges

i)          MIS Charge                 $2,351 per month

ii)         Training Charge          $4,708 per month

iii)        Insurance Charge        $2,976 per month

iv)        Marketing Charge       $1,225 per month

All the above monthly charges are inadequately defined and therefore subject misapplication requiring an ongoing due diligence. This could have been avoided by requiring a precise description. For example, what training will the Service provider employees be receiving that justifies a fixed monthly charge of $4,708 per month? Does this include best practices training, corporate HR training, safety, and etc.? These should be clearly defined along will all other terms.

None of the above amounts (i-iv) match the corresponding amounts presented on Exhibit A-4! There is also not definition of the Administrative Fee (2.5%) that is present in Exhibit A-4.

What is the purpose of the Dishwasher ($2024/month) indicated in Exhibit A-4?  There is no mention of monthly Dishwasher charge in the agreement.

Entertainment ($5000/month), indicated in Exhibit A-4, was budgeted through First Service and the SLCC Recreation Committee. If this is intended to be a part of this agreement it should be so identified and added to the agreement.

The Training Charge is a recurring monthly charge which could amount to $300,000 over the fill term of the agreement. This amount alone more than offsets any “loan” of working capital. There is no justification provided for this charge. Why is there a need for a monthly charge when the staff already works at SLCC and any new Morrison staff would be presumably trained by Morrison as part of their employment. Will SLCC also be billed for the hourly rate that the employees are paid while in training?

2)         Opening Expenses: Service Provider will waive reimbursement for up to $154,900 in expenses incurred in connection with the opening of Dining Services at the Service Location (“Opening Expenses”). In the event that the Agreement is terminated prior to 60 months from the Commencement Date, Client will reimburse Service Provider on the termination date, the unamortized portion of such Opening Expenses (based on a 60-month straight-line depreciation schedule commencing on the Effective Date), along with interest at a rate of 1.0% per month compounded over the remaining term of the established amortization period. The Parties agree that any amounts due under this paragraph are not intended as a penalty.

This is not a waiver. It is a handcuff to incentivize the Client to stay for the full term. Morrison will be compensated under the terms of the agreement commencing April 1, 2025. Other than any special cleaning and maintenance services rendered, what is the broad justification for another $154,900 in expenses? Any and all anticipated extra opening expenses should be enumerated and described. Failure to do so, places an unwarranted burden on the Client to audit the expenses and waste of time for Morrison to comply. While Morrison claims this is not a penalty, what do you call it otherwise, but an incentive to renew the agreement for five years. Why not call this an early out provision? Perhaps because it would be in violation of Davis-Stirling and the 1 year limit on maximum agreement term.  Furthermore, opening costs should be a known because Morrison claims to have invested so much time in reviewing the amenity in order to make their  proposal to SLCC.

3)         Investment: Service Provider will invest up to $380,000 (“Investment”) toward renovation and expansion/improvement of the Dining Services operations. Service Provider will amortize the amount of the Investment on a straight-line basis over 72 months, commencing on the date of the Investment. Title to any improvements will vest in Client upon completion of the amortization. In the event (a) the Agreement is terminated prior to 72 months or (b) Service Provider ceases to use its national account or other vendor systems for the purchase of the majority of the food and other supplies for the Dining Services due to Client request to use other vendors, Client will reimburse Service Provider, on such date, the unamortized portion of the Investment plus interest on the unamortized portion at a rate of 1.0% per month compounded over the remaining term of the established amortization period and title to any improvements will vest in Client upon such reimbursement. The Parties agree that any amounts due under this paragraph are not intended as a penalty.

Where are the specifics of the “Investment”? This should require Client approval for any expense over a modest amount (individually $5,000 and collectively $50,000). What documentation does Morrison provide that the expenses were warranted and prudent? What is the nonsense of the provision (b) that covers the Service provider ceasing use of its national account or other vendor systems…? What is this if not a penalty in spite of what the “parties” have agreed to not call it. This provision calls for much more clarification. It seems odd that the SLCC attorney did not object to it.

A copy of the “worksheet proposed by Client should be incorporated into the agreement. What is obviously missing is any reference to a Statement of Work and performance metrics provided by the Client. Given that the process by which the Board sought alternative providers for the F&B amenity management did not follow the prescribed procurement process contained in the Board approved Procurement Advisory Handbook the verbal and written information based its assumptions on should be referenced as an attachment. Given Morrison’s reputation in the hospitality space, we assume the agreement was prepared in good faith based upon the information provided by the Board authorized search team. However, the search team has not seen fit to provide a copy of the information they provided Morrison and other candidates nor is it properly incorporated into this agreement other than by vague reference. Furthermore, it does not appear that a formal Board authorization to seek alternative service providers for the F&B amenity was ever created to serve as its official majority authorization    

4)         Year 1 Subsidy: Service provider has provided Client with a Profit and Loss projection for the first year of the Agreement, which is attached hereto as Exhibit A-4. For accurate and meaningful cost tracking and reporting, Client has proposed to Service Provider a suggested worksheet that will present financial performance by venue and in the aggregate. This document will be refined and developed over time as agreed to by both Parties During the initial 12 months from the commencement Date. (“Year 1”), Client will provide a subsidy of the lesser of $696,632 (“Year 1 Subsidy”) or the actual loss (calculated based on the Sales Revenues less Dining Services Costs during Year 1) (Year 1 Actual Loss”). After the close of Year 1, the Parties will reconcile the Year 1 Subsidy by comparing the amount of the Year 1 Actual Loss to the Year 1 Subsidy amount. If the Year 1 Actual Loss is higher than the Year 1 Subsidy (“Year 1 Overage”), then, subject to the terms herein, Service Provider will issue a check to Client an amount equal to the Year 1 Overage, provided that such credit will not exceed the total of Service Provider’s Management Fee charged to Client during Year 1 plus $70,000 (which is estimated to be approximately $106,564 (“Year 1 Risk/Reward”) and Client will be responsible for any amount in excess of the Year 1 Risk/Reward. If Client is not current on its payment obligations to Service Provider at the time of the Year 1 reconciliation is completed, any amounts owed to Client consistent with the Year 1 Risk/Reward will be provided as an invoice credit to satisfy any outstanding balance owed to Service Provider. If there is any excess amount remaining, a check will be provided to Client for the balance. If the Year 1 Actual Loss is less than the Year 1 Subsidy (“Year 1 Savings”), Service Provider will charge Client an amount equal to 25% of the Year 1 Savings, and Client will retain the benefits of any additional Year 1 Savings.

Liked “Client will provide a subsidy of the lesser of $696,632 (“Year 1 Subsidy”) or the actual loss (calculated based on the Sales Revenues less Dining Services Costs during Year 1) (Year 1 Actual

Loss”). The balancing and proper reconciliation and accounting for the actual “loss” seems reasonable. Is this the amount indicated as the last line of Exhibit 4? Where is a copy of the worksheet Client provided?  

5)         Year 2 and Subsequent Year Projections and Subsidy Amounts: Client and Service Provider will develop a projection and related subsidy for each of subsequent year of this Agreement during the last 6 months of the previous contract year, with each subsequent year to be reconciled consistent with Section 4 above. For the avoidance of doubt, unless otherwise agreed by the Parties in writing, the total risk/reward amount for any subsequent contract year will be limited to the total of Service Provider’s Management Fee charged to Client during such contract year. Client and Service provider will agree in writing in an amendment to this Agreement the amount of each subsequent year’s subsidy.

Page 20-23 Exhibits A-2 & A-3 are good.

Page 24 Exhibit A-4 P&L spreadsheet (needs close analysis).

Page 27-39 Co-license

Will this Co-license agreement ensure that SLCC regains full control of license at end of relationship? The Board should get a specific letter of opinion from the SLCC Attorney stating they do not foresee a problem in regaining complete control of our existing license.