-----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, IN2yf4DOCVl5VnxwkhHzG65zoqsAbg95yrQFrcpSvCAhYUfR95qYUpUw3Xaghe2r 38BjZnugUlvF7bgWVbCNEQ== 0000950144-01-505896.txt : 20010815 0000950144-01-505896.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950144-01-505896 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVOCAT INC CENTRAL INDEX KEY: 0000919956 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 621559667 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12996 FILM NUMBER: 1711982 BUSINESS ADDRESS: STREET 1: 277 MALLORY STATION RD STREET 2: STE 130 CITY: FRANKLIN STATE: TN ZIP: 37067 BUSINESS PHONE: 6157717575 MAIL ADDRESS: STREET 1: 227 MALLORY STATION ROAD STREET 2: SUITE 130 CITY: FRANKLIN STATE: TN ZIP: 37064 10-Q 1 g71016e10-q.txt ADVOCAT INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q CHECK ONE: [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM --------- TO ---------. COMMISSION FILE NO.: 1-12996 --------- ADVOCAT INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 62-1559667 - ------------------------------- --------------------------------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 277 MALLORY STATION ROAD, SUITE 130, FRANKLIN, TN 37067 - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (615) 771-7575 - -------------------------------------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NONE - -------------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.) 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 THE PAST 90 DAYS. YES X NO 5,493,287 - -------------------------------------------------------------------------------- (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF JULY 31, 2001) 1 2 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ADVOCAT INC. INTERIM CONSOLIDATED BALANCE SHEETS (IN THOUSANDS AND UNAUDITED)
JUNE 30, DECEMBER 31, 2001 2000 --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 2,711 $ 4,496 Receivables, less allowance for doubtful accounts of $5,493 and $5,035, respectively 14,402 15,111 Inventories 525 633 Prepaid expenses and other assets 2,031 2,100 --------- --------- Total current assets 19,669 22,340 --------- --------- PROPERTY AND EQUIPMENT, at cost 90,875 89,567 Less accumulated depreciation and amortization (27,138) (24,418) --------- --------- Net property and equipment 63,737 65,149 --------- --------- OTHER ASSETS: Deferred financing and other costs, net 663 572 Deferred lease costs, net 1,978 2,085 Assets held for sale or redevelopment 1,476 1,476 Investments in and receivables from joint ventures 8,947 8,333 Other 2,000 1,801 --------- --------- Total other assets 15,064 14,267 --------- --------- $ 98,470 $ 101,756 ========= =========
(Continued) 2 3 ADVOCAT INC. INTERIM CONSOLIDATED BALANCE SHEETS (IN THOUSANDS AND UNAUDITED) (CONTINUED)
JUNE 30, DECEMBER 31, 2001 2000 --------- --------- CURRENT LIABILITIES: Current portion of long-term debt $ 59,084 $ 61,229 Trade accounts payable 8,026 6,875 Accrued expenses: Payroll and employee benefits 4,685 5,241 Interest 224 232 Self-insurance reserves 4,352 4,445 Other 4,670 4,387 --------- --------- Total current liabilities 81,041 82,409 --------- --------- NONCURRENT LIABILITIES: Long-term debt, less current portion 4,619 5,016 Self-insurance reserves, less current portion 4,844 3,586 Other 6,258 5,245 --------- --------- Total noncurrent liabilities 15,721 13,847 --------- --------- COMMITMENTS AND CONTINGENCIES SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK authorized 600,000 shares, $.10 par value, 393,658 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively, at redemption value 3,473 3,358 SHAREHOLDERS' EQUITY: Preferred stock, authorized 1,000,000 shares, $.10 par value, none issued and outstanding -- -- Common stock, authorized 20,000,000 shares, $.01 par value, 5,493,000 and 5,492,000 issued and outstanding at June 30, 2001 and December 31, 2000, respectively 55 55 Paid-in capital 15,908 15,907 Accumulated deficit (17,728) (13,820) --------- --------- Total shareholders' equity (deficit) (1,765) 2,142 --------- --------- $ 98,470 $ 101,756 ========= =========
The accompanying notes are an integral part of these interim consolidated balance sheets. 3 4 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
THREE MONTHS ENDED JUNE 30, --------------------- 2001 2000 -------- ------- REVENUES: Patient revenues $ 39,546 $36,702 Resident revenues 10,187 10,384 Management fees 404 1,125 Interest 33 51 -------- ------- Net revenues 50,170 48,262 -------- ------- EXPENSES: Operating 41,140 37,170 Lease 5,180 5,258 General and administrative 3,371 2,879 Interest 1,369 1,436 Depreciation and amortization 1,400 1,141 Non-recurring charges -0- 263 -------- ------- Total expenses 52,460 48,147 -------- ------- INCOME (LOSS) BEFORE INCOME TAXES (2,290) 115 PROVISION FOR INCOME TAXES 76 42 -------- ------- NET INCOME (LOSS) $ (2,366) $ 73 ======== ======= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Basic $ (.43) $ .01 ======== ======= Diluted $ (.43) $ .01 ======== ======= WEIGHTED AVERAGE SHARES: Basic 5,492 5,492 ======== ======= Diluted 5,492 5,492 ======== =======
The accompanying notes are an integral part of these interim consolidated financial statements. 4 5 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS AND UNAUDITED)
THREE MONTHS ENDED JUNE 30, --------------------- 2001 2000 -------- ------- REVENUES: Patient revenues $ 77,858 $72,674 Resident revenues 20,607 20,810 Management fees 1,315 2,026 Interest 79 91 -------- ------- Net revenues 99,859 95,601 -------- ------- EXPENSES: Operating 80,875 73,596 Lease 10,355 10,534 General and administrative 6,606 5,696 Interest 2,885 2,890 Depreciation and amortization 2,811 2,375 Non-recurring charges -0- 263 -------- ------- Total expenses 103,532 95,354 -------- ------- INCOME (LOSS) BEFORE INCOME TAXES (3,673) 247 PROVISION FOR INCOME TAXES 166 89 -------- ------- NET INCOME (LOSS) $ (3,839) 158 ======== ======= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Basic $ (.70) $ .03 ======== ======= Diluted $ (.70) $ .03 ======== ======= WEIGHTED AVERAGE SHARES: Basic 5,492 5,492 ======== ======= Diluted 5,492 5,492 ======== =======
The accompanying notes are an integral part of these interim consolidated financial statements. 5 6 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS AND UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2001 2000 2001 2000 ------- ----- ------- ----- NET INCOME (LOSS) $(2,366) $ 73 $(3,839) $ 158 OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation adjustments 561 (341) (106) (322) Income tax (provision) benefit (202) 123 38 116 ------- ----- ------- ----- 359 (218) (68) (206) ------- ----- ------- ----- COMPREHENSIVE INCOME (LOSS) $(2,007) $(145) $(3,907) $ (48) ======= ===== ======= =====
The accompanying notes are an integral part of these interim consolidated financial statements. 6 7 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS AND UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------- 2001 2000 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(3,839) $ 158 Items not involving cash: Depreciation and amortization 2,811 2,375 Provision for doubtful accounts 1,396 1,419 Provision for self insured professional liability 5,184 3,533 Equity earnings in joint ventures (63) (45) Amortization of deferred balances 236 (200) Amortization of discount on non-interest bearing promissory note 134 -0- Series B redeemable convertible preferred stock dividend 115 -0- Provisions for leases in excess of cash payments 1,019 -0- Changes in other assets and liabilities: Receivables (939) (1,260) Inventories 108 (149) Prepaid expenses and other assets 114 (856) Trade accounts payable and accrued expenses (2,635) (1,396) ------- ------- Net cash provided by operating activities 3,641 3,579 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (1,444) (970) Investment in TDLP (609) -0- Mortgages receivable, net 86 301 Deposits and other deferred balances -0- (334) Investment in and advances (to) from joint ventures, net 84 (433) TDLP partnership distributions 150 105 ------- ------- Net cash used in investing activities (1,733) (1,331) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt obligations (1,233) (888) Net proceeds from (repayment of) bank line of credit (1,404) 609 Advances to TDLP, net (798) (333) Increase in lease obligations -0- 46 Financing costs (258) -0- ------- ------- Net cash used in financing activities (3,693) (566) ------- -------
(Continued) 7 8 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS AND UNAUDITED) (CONTINUED)
SIX MONTHS ENDED JUNE 30, -------------------- 2001 2000 ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(1,785) $ 1,682 CASH AND CASH EQUIVALENTS, beginning of period 4,496 1,913 ------- ------- CASH AND CASH EQUIVALENTS, end of period $ 2,711 $ 3,595 ======= ======= SUPPLEMENTAL INFORMATION: Cash payments of interest $ 2,893 $ 2,914 ======= ======= Cash payments (refunds) of income taxes, net $ 138 $ (133) ======= =======
The accompanying notes are an integral part of these interim consolidated financial statements. 8 9 ADVOCAT INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 1. BUSINESS Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") provides long-term care services to nursing home patients and residents of assisted living facilities in 12 states, primarily in the Southeast, and four Canadian provinces. The Company's facilities provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care facilities, the Company offers a variety of comprehensive rehabilitation services as well as medical supply and nutritional support services. As of June 30, 2001, the Company operates 120 facilities consisting of 64 nursing homes with 7,230 licensed beds and 56 assisted living facilities with 5,425 units. The Company owns seven nursing homes, leases 36 others, and manages 21 nursing homes. The Company owns 16 assisted living facilities, leases 25 others, and manages the remaining 15 assisted living facilities. The Company holds a minority interest in seven of these managed assisted living facilities. The Company operates 51 nursing homes and 33 assisted living facilities in the United States and 13 nursing homes and 23 assisted living facilities in Canada. The Company operates facilities in Alabama, Arkansas, Florida, Georgia, Kentucky, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia, West Virginia and the Canadian provinces of Alberta, British Columbia, Nova Scotia and Ontario. In recent periods, the long-term health care environment has undergone substantial change with regards to reimbursement and other payor sources, compliance regulations, competition among other health care providers and relevant patient liability issues. The Company continually monitors these industry developments as well as other factors that affect its business. See Item 2 for further discussion of recent changes in the long-term health care industry and the related impact on the operations of the Company. 2. BASIS OF FINANCIAL STATEMENTS The interim consolidated financial statements for the three and six month periods ended June 30, 2001 and 2000, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all adjustments necessary to present fairly the financial position at June 30, 2001 and the results of operations for the three and six month periods ended June 30, 2001 and 2000, and the cash flows for the six month periods ended June 30, 2001 and 2000. 9 10 The results of operations for the three and six month periods ended June 30, 2001 and 2000 are not necessarily indicative of the operating results for the entire respective years. These interim consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. The accompanying consolidated financial statements have been prepared assuming that Advocat will continue as a going concern. The Company has incurred operating losses in the three and six month periods ended June 30, 2001 and the years ended December 31, 2000, 1999 and 1998 and has limited resources available to meet its operating, capital expenditure and debt service requirements during 2001. The Company has a net working capital deficit of $62.4 million as of June 30, 2001. Effective March 9, 2001, the Company has also obtained professional liability insurance coverage that, based on historical claims experience, could be substantially less than the claims that may be incurred during 2001. The Company would be obligated to pay any claim in excess of insurance coverage. In addition, the payment of professional liability claims by the Company's insurance carriers is dependent upon the financial solvency of the individual carriers. The Company is aware that one of its insurance carriers providing coverage for prior years claims is currently under rehabilitation proceedings. The ultimate payments by the Company of professional liability claims accrued as of June 30, 2001 and claims that could be incurred during 2001, because such claims exceed the Company's insurance coverage or because of the inability of an insurance carrier to pay such claims, may require cash resources during 2001 that would be in excess of the Company's available cash or other resources. The Company is also not in compliance with certain debt covenants that allow the holders of substantially all of the Company's debt to demand immediate repayment. Although the Company does not anticipate that such demand will be made, the continued forbearance on the part of the Company's lenders cannot be assured at this time. Accordingly, the Company has classified the related debt principal amounts as current liabilities in the accompanying consolidated financial statements as of June 30, 2001 and December 31, 2000. Given that events of default exist under the Company's working capital line of credit, there can be no assurance that the lender will continue to provide working capital advances. Such events of default under the Company's debt agreements could lead to actions by the lenders that would result in an event of default under the Company's lease agreements covering a majority of its United States nursing facilities. Should such a default occur in the related lease agreements, the lessor would have the right to terminate the lease agreements. At a minimum, the Company's cash requirements during 2001 include funding operations (including potential payments related to professional liability claims), capital expenditures, scheduled debt service, and working capital requirements. No assurance can be given that the Company will have sufficient cash to meet its requirements during 2001. The Company is currently discussing potential waiver, amendment and refinancing alternatives with its lenders. If the Company's lenders force immediate repayment, the Company would not be able to repay the related debt outstanding. The Company's management has implemented a plan to enhance revenues related to the operations of the Company's nursing homes and assisted living facilities. Management believes that revenues in future periods will increase as a result of Medicare and certain state Medicaid rate increases. In addition, the Company has emphasized 10 11 attracting and retaining patients and residents. On May 9, 2001, the Company received confirmation that the Arkansas Department of Human Services was implementing a new reimbursement methodology, with an effective date of January 12, 2001. This new methodology resulted in additional revenue to the Company of approximately $1,150,000 and $1,905,000 in the three and six month periods ended June 30, 2001, respectively. The Arkansas Department of Human Services is partially funding this revenue increase by assessing a quality assurance fee to all the Arkansas facilities, with an effective date of March 9, 2001. As a result, the Company recorded as additional operating expenses for the quality assurance fee totaling $459,000 and $574,000 for the three and six month periods ended June 30, 2001. Management has implemented a plan to attempt to minimize future expense increases through the elimination of excess operating costs. Management will also attempt to minimize professional liability claims in future periods by vigorously defending itself against all such claims and through the additional supervision and training of staff employees. The Company is unable to predict if it will be successful in reducing operating losses, in negotiating waivers, amendments, or refinancings of outstanding debt, or if the Company will be able to meet any amended financial covenants in the future. Any demands for repayment by lenders or the inability to obtain waivers or refinance the related debt would have a material adverse impact on the financial position, results of operations and cash flows of the Company. If the Company is unable to generate sufficient cash flow from its operations or successfully negotiate debt or lease amendments, it will explore a variety of other options, including but not limited to other sources of equity or debt financings, asset dispositions, or relief under the United States Bankruptcy code. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset carrying amounts or the amounts and classification of liabilities that might result should the Company be unable to continue as a going concern. 3. INSURANCE MATTERS The entire United States long-term care industry has seen a dramatic increase in personal injury/wrongful death claims based on alleged negligence by nursing homes and their employees in providing care to patients and residents. As a result, the Company has numerous liability claims and disputes outstanding for professional liability and other related issues. Professional liability insurance up to certain limits is carried by the Company and its subsidiaries for coverage of such claims. However, due to the increasing number of claims against the Company and throughout the long-term care industry, the Company's professional liability insurance premiums and deductible amounts have increased substantially during 1999, 2000 and 2001. As a result of the substantial premium increases for the 2001 policy year, effective March 9, 2001, the Company has obtained professional liability insurance coverage for its United States nursing homes that, based on historical claims experience, could be substantially less than the claims to be incurred. For claims made after March 9, 2001, the Company maintains general and professional liability insurance with coverage limits of $2,000,000 per medical incident and total aggregate policy coverage limits of $3,000,000 for its long-term care services. The 2001 policy is on a claims made basis and the Company is self-insured for the first $50,000 per occurrence. 11 12 For claims made during the period March 9, 2000 through March 9, 2001, the Company is self-insured for the first $500,000 per occurrence with no aggregate limit for the Company's United States nursing homes. The policy has coverage limits of $1,000,000 per occurrence, $3,000,000 per location and $12,000,000 in the aggregate. The Company also maintains umbrella coverage of $15,000,000 in the aggregate for claims made during the period March 9, 2000 through March 9, 2001. The Company provides reserves on an actuarial basis for known and expected claims incurred during the policy period. For all policy periods beginning on or after March 9, 2000, all of the Company's professional liability policies are on a claims made basis. Prior to March 9, 2000, all of these policies are on an occurrence basis. For the policy periods January 1, 1998 through February 1, 1999, the Company is self-insured for the first $250,000 per occurrence and $2,500,000 in the aggregate per year with respect to the majority of its United States nursing homes. From February 1, 1999 until March 9, 2000, all United States nursing homes became part of the $250,000/$2,500,000 deductible program. For the policy years 2000 and 1999, the Company expects to ultimately incur the full aggregate deductible amounts and has established reserves based on this expectation. The Company has recorded total liabilities for reported professional liability claims and estimates for incurred but unreported claims of $8,198,000 and $6,859,000 at June 30, 2001 and December 31, 2000, respectively. As discussed in Note 6, in June 2001 the Company became subject to a $78.425 million jury verdict, which judgment the company intends to appeal. This judgment and other contingent claims could eventually exceed the Company's insurance coverage and its recorded liabilities. The ultimate results of the Company's professional liability claims and disputes are unknown at the present time. Any final judgments or settlements above the Company's per occurrence, per location or umbrella coverage could have a material adverse impact on the Company's financial position, cash flows and results of operations. Based on historical claims experience, the Company's professional liability insurance coverage for the period beginning March 9, 2001 could be substantially less than the claims to be incurred during 2001. The Company would be obligated to pay any claims in excess of its insurance coverage. In addition, the payment of professional liability claims by the Company's insurance carriers is dependent upon the financial solvency of the individual carriers. The Company is aware that one of its insurance carriers providing coverage for prior years claims is currently under rehabilitation proceedings. The ultimate payments by the Company of professional liability claims accrued as of June 30, 2001 and claims that could be incurred during 2001, because such claims exceed the Company's insurance coverage or because of the inability of an insurance carrier to pay such claims, could require cash resources during 2001 that would be in excess of the Company's available cash or other resources. 4. OTHER COMPREHENSIVE INCOME The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires the reporting of comprehensive income (loss) in addition to net income (loss) from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. 12 13 Information with respect to the accumulated other comprehensive income (loss) balance is presented below:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 --------- --------- --------- --------- Foreign currency items: Beginning balance $(875,000) $(161,000) $(448,000) $(173,000) Current period change, net of income tax 359,000 (218,000) (68,000) (206,000) --------- --------- --------- --------- Ending balance $(516,000) $(379,000) $(516,000) $(379,000) ========= ========= ========= =========
Positive amounts represent unrealized gains and negative amounts represent unrealized losses. 5. SALE OF CANADIAN SUBSIDIARY The Company signed a letter of intent to sell Diversicare Canada Management Services Co., Inc. ("Diversicare Canada"), Advocat's Canadian subsidiary to Counsel Corporation ("Counsel"). Pursuant to the letter of intent, Counsel is to acquire 100% of the outstanding stock of Diversicare Canada for $8 million. The transaction is subject to receipt of applicable approvals and the approval of a definitive purchase agreement. The letter of intent is subject to a variety of conditions, including the negotiation of definitive agreements and approval by the Company's primary bank lender. Although the letter of intent, by its terms, expired July 31, 2001, the Company is continuing its efforts to seek consents to allow the transaction to close as described. No assurances can be given that the sale of Diversicare Canada will be consummated. Diversicare Canada manages a number of nursing homes for Counsel and other owners in Canada and, additionally, leases five assisted living complexes from Counsel. The proposed sale will consists of all of Advocat's Canadian operations, including 13 nursing homes and 23 assisted living facilities. 6. ARKANSAS JURY AWARD On June 22, 2001, a jury in Mena, Arkansas issued a verdict in a professional liability lawsuit against the Company and certain of its subsidiaries totaling $78.425 million. The Company filed motions with the court, asking the trial judge to overturn or reduce the verdict. On August 3, 2001, the Company's motions were denied. The Company plans to appeal the verdict. The Company and the plaintiffs entered into a 15 day standstill following the verdict, during which the plaintiff's have agreed that they will not execute on the judgment. The Company has requested that its insurance carriers post bond for the verdict and is awaiting a response from them. In the event the Company's insurance carriers do not post the full amount of the bond, the Company does not have the financial resources to post a bond in the amount not covered by insurance. In that case, the Company would have to consider other alternatives, including seeking bankruptcy court protection, in order to stay execution of the judgment. 13 14 7. RECLASSIFICATIONS Certain amounts in the 2000 interim financial statements have been reclassified to conform with the 2001 presentation. 8. NON-RECURRING CHARGES During the second quarter of 2000, the Company recorded non-recurring charges totaling $263,000 in connection with the proposed restructuring of the lease arrangements covering the majority of its United States nursing facilities and the proposed refinancing of certain debt obligations. Information with respect to these charges is presented below: Consulting fees $158,000 Legal fees 90,000 Other 15,000
9. IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") has been issued effective for fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. The Company adopted the provisions of SFAS No. 133, as amended, effective January 1, 2001, as required; however, the Company's adoption of SFAS No. 133, as amended, did not have a material effect on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") regarding revenue recognition in financial statements. SAB 101 was effective January 1, 2000 but implementation was delayed until the fourth quarter of 2000. The Company's implementation of SAB 101 in the fourth quarter of 2000 did not have a material impact on its financial position, results of operations or cash flows on a quarterly or annual basis. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 requires that intangible assets with finite useful lives be amortized, and that goodwill and intangible assets with indefinite lives no longer be amortized, but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." 14 15 The Company is required to adopt the provisions of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized until the adoption of SFAS No. 142. The Company has not determined the impact, if any, the adoption of SFAS No. 141 and SFAS No. 142 will have on its financial statements. 10. OPERATING SEGMENT INFORMATION The Company has three reportable segments: U.S. nursing homes, U.S. assisted living facilities, and Canadian operations, which consists of both nursing home and assisted living services. Management evaluates each of these segments independently due to the geographic, reimbursement, marketing, and regulatory differences between the segments. Management evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses and foreign exchange gains and losses. The following information is derived from the Company's segments' internal financial statements and includes information related to the Company's unallocated corporate revenues and expenses:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- -------------------- 2001 2000 2001 2000 -------- --------- -------- -------- Net revenues: U.S. nursing homes $ 38,510 $ 36,302 $ 76,167 $ 71,678 U.S. assisted living facilities 7,843 8,062 15,943 16,096 Canadian operation 3,817 3,898 7,746 7,828 Corporate -0- -0- 3 (1) -------- --------- -------- -------- Total $ 50,170 $ 48,262 $ 99,859 $ 95,601 ======== ========= ======== ======== Depreciation and amortization: U.S. nursing homes $ 858 $ 601 $ 1,732 $ 1,298 U.S. assisted living facilities 429 423 853 845 Canadian operation 95 98 190 196 Corporate 18 19 36 36 -------- --------- -------- -------- Total $ 1,400 $ 1,141 $ 2,811 $ 2,375 ======== ========= ======== ======== Operating income (loss): U.S. nursing homes $ (1,120) $ 583 $ (2,117) $ 810 U.S. assisted living facilities (870) (866) 5 (99) Canadian operation 356 457 778 845 Corporate (656) (826) (1,468) (1,413) -------- --------- -------- -------- Total $ (2,290) $ 115 $ (3,673) $ 247 ======== ========= ======== ========
15 16
June 30, December 31, 2001 2000 -------- -------- Long-lived assets: U.S. nursing homes $ 33,531 $ 33,178 U.S. assisted living facilities 32,610 33,216 Canadian operation 11,910 12,164 Corporate 750 858 -------- --------- Total $ 78,801 $ 79,416 ======== ========= Total assets: U.S. nursing homes $ 56,287 $ 56,387 U.S. assisted living facilities 35,152 36,075 Canadian operation 16,697 17,154 Corporate 1,909 2,860 Eliminations (11,575) (10,720) -------- --------- Total $ 98,470 $ 101,756 ======== =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") provides long-term care services to nursing home patients and residents of assisted living facilities in 12 states, primarily in the Southeast, and four Canadian provinces. The Company's facilities provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care facilities, the Company offers a variety of comprehensive rehabilitation services as well as medical supply and nutritional support services. The Company completed its initial public offering in May 1994; however, its operational history can be traced to 1980 through common senior management who were involved in different organizational structures. As of June 30, 2001, the Company operates 120 facilities, consisting of 64 nursing homes with 7,230 licensed beds and 56 assisted living facilities with 5,425 units. In comparison, at June 30, 2000, the Company operated 120 facilities composed of 64 nursing homes containing 7,230 licensed beds and 56 assisted living facilities containing 5,472 units. As of June 30, 2001, the Company owns seven nursing homes, leases 36 others and manages the remaining 21 nursing homes. Additionally, the Company owns 16 assisted living facilities, leases 25 others and manages the remaining 15 assisted living facilities. The Company holds a minority interest in seven of these managed assisted living facilities. The Company operates 51 nursing homes and 33 assisted living facilities in the United States and 13 nursing homes and 23 assisted living facilities in Canada. 16 17 Basis of Financial Statements. The Company's patient and resident revenues consist of the fees charged for the care of patients in the nursing homes and residents of the assisted living facilities owned and leased by the Company. Management fee revenues consist of the fees charged to the owners of the facilities managed by the Company. The management fee revenues are based on the respective contractual terms of the Company's management agreements, which generally provide for management fees ranging from 3.5% to 6.0% of the net revenues of the managed facilities. As a result, the level of management fees is affected positively or negatively by the increase or decrease in the average occupancy level rates of the managed facilities. The Company's operating expenses include the costs, other than lease, depreciation and amortization expenses, incurred in the operation of the nursing homes and assisted living facilities owned and leased by the Company. The Company's general and administrative expenses consist of the costs of the corporate office and regional support functions, including the costs incurred in providing management services to other owners. The Company's depreciation, amortization and interest expenses include all such expenses across the range of the Company's operations. RESULTS OF OPERATIONS The following tables present the unaudited interim statements of operations and related data for the three and six months ended June 30, 2001 and 2000.
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30, ---------------------------------- 2001 2000 CHANGE % --------- ------- ------- ------- REVENUES: Patient revenues $ 39,546 $36,702 $ 2,844 7.7 Resident revenues 10,187 10,384 (197) (1.9) Management fees 404 1,125 (721) (64.1) Interest 33 51 (18) (35.3) --------- ------- ------- ------- Net revenues 50,170 48,262 1,908 4.0 EXPENSES: Operating 41,140 37,170 3,970 10.7 Lease 5,180 5,258 (78) 1.5 General and administrative 3,371 2,879 492 17.1 Interest 1,369 1,436 (67) (4.7) Depreciation and amortization 1,400 1,141 259 22.7 Non-recurring charges -0- 263 (263) (100.0) --------- ------- ------- ------- Total expenses 52,460 48,147 4,313 9.0 --------- ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES (2,290) 115 (2,405) INCOME TAX PROVISION 76 42 34 --------- ------- ------- NET INCOME (LOSS) $ (2,366) $ 73 $(2,439) ========= ======= =======
17 18
(IN THOUSANDS) SIX MONTHS ENDED JUNE 30, ---------------------------------- 2001 2000 CHANGE % --------- ------- ------- ------- REVENUES: Patient revenues $ 77,858 $72,674 5,184 7.1 Resident revenues 20,607 20,810 (203) (1.0) Management fees 1,315 2,026 (711) (35.1) Interest 79 91 (12) (13.2) --------- ------- ------- ------- Net revenues 99,859 95,601 4,258 4.5 --------- ------- ------- ------- EXPENSES: Operating 80,875 73,596 7,279 9.9 Lease 10,355 10,534 (179) (1.7) General and administrative 6,606 5,696 910 16.0 Interest 2,885 2,890 (5) (0.2) Depreciation and amortization 2,811 2,375 436 18.4 Non-recurring charges -0- 263 (263) (100.0) --------- ------- ------- ------- Total expenses 103,532 95,354 8,178 8.6 --------- ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES (3,673) 247 (3,920) PROVISION FOR INCOME TAXES 166 89 77 --------- ------- ------- NET INCOME (LOSS) $ (3,839) $ 158 $(3,997) ========= ======= =======
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2001 2000 2001 2000 ----- ----- ----- ----- REVENUES: Patient revenues 78.8% 76.1% 78.0% 76.0% Resident revenues 20.3 21.5 20.6 21.8 Management fees 0.8 2.3 1.3 2.1 Interest 0.1 0.1 0.1 0.1 ----- ----- ----- ----- Net revenues 100.0 100.0 100.0 100.0 ===== ===== ===== ===== OPERATING EXPENSES: Operating 82.0 77.0 81.0 77.0 Lease 10.3 10.9 10.4 11.0 General and administrative 6.7 6.0 6.6 6.0 Interest 2.8 3.0 2.9 3.0 Depreciation and amortization 2.8 2.4 2.8 2.5 Non-recurring charges 0.0 .5 0.0 0.2 ----- ----- ----- ----- Total expenses 104.6 99.8 103.7 99.7 ===== ===== ===== ===== INCOME (LOSS) BEFORE INCOME TAXES (4.6) 0.2 (3.7) 0.3 PROVISION FOR INCOME TAXES 0.1 0.1 0.1 0.1 ----- ----- ----- ----- NET INCOME (LOSS) (4.7)% 0.1 (3.8)% 0.2 ===== ===== ===== =====
18 19 THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000 Revenues. Net revenues increased to $50.2 million in 2001 from $48.3 million in 2000, an increase of $1.9 million, or 4.0%. Patient revenues increased to $39.5 million in 2001 from $36.7 million in 2000, an increase of $2.8 million, or 7.7%. The increase in patient revenues is due to increased Medicaid rates in Arkansas and other states, increased Medicare utilization and Medicare rate increases and a 1.4% increase in occupancy in 2001 as compared to 2000. Partially offsetting these increases, the Company closed a facility in August 2000. On May 9, 2001, the Company received confirmation that the Arkansas Department of Human Services was implementing a new reimbursement methodology, with an effective date of January 12, 2001. This new methodology resulted in additional revenue to the Company of approximately $1,150,000 in the second quarter. The Arkansas Department of Human Services is partially funding this revenue increase by assessing a quality assurance fee to all the Arkansas facilities, with an effective date of March 9, 2001. As a result, the Company recorded as additional operating expenses $459,000 for the quality assurance fee in the second quarter. As a percent of patient revenues, Medicare increased to 23.1% in 2001 from 20.5% in 2000 while Medicaid and similar programs decreased to 64.0% from 64.2% in 2000. Resident revenues decreased to $10.2 million in 2001 from $10.4 million in 2000, a decrease of $197,000, or 1.9%. The Company experienced a 7.2% decline in resident days, partially offset by an increase in rates. Ancillary service revenues, prior to contractual allowances, decreased to $5.4 million in 2001 from $5.7 million in 2000, a decrease of $229,000 or 4.0%. The decrease is primarily attributable to reductions in revenue availability under Medicare and is consistent with the Company's expectations. Although the $1,500 per patient annual ceiling has now been lifted for a two year period on physical, speech and occupational therapy services, the impact of the relief is not expected to be sufficient to offset the substantial losses that have been incurred by the Company and the long-term care industry from the provision of therapy services. The ultimate effect on the Company's operations cannot be predicted at this time because the extent and composition of the ancillary cost limitations are subject to change. Management fee revenue decreased to $404,000 in 2001 from $1.1 million in 2000, a decrease of $721,000, or 64.1%. A management contract covering four nursing facilities includes a defined calculation of the "priority of distribution," which determines the amount of management fees which may be earned by the Company. The Company's management fee is the lesser of 6% of facility revenues or the amount determined by the priority of distribution calculation. The reduction of management fees is a result of increased operating costs of these facilities, including primarily professional liability and provisions for cost report settlements. Operating Expense. Operating expense increased to $41.1 million in 2001 from $37.2 million in 2000, an increase of $4.0 million, or 10.7%. As a percent of patient and resident revenues, operating expense increased to 82.7% in 2001 from 78.9% in 2000. The increase in operating expenses is primarily attributable to cost increases related to wages, professional liability, bed taxes and utilities. The largest component of operating expenses is wages, which increased to $21.7 million in 2001 from $20.4 million in 2000, an increase of $1.3 million, or 6.5%. 19 20 The increase in wages is due to increased costs associated with increased Medicare census and tighter labor markets in most of the areas in which the Company operates, partially offset by reduced costs associated with reduced Medicaid census. The Company's professional liability costs for United States nursing homes and assisted living facilities, including insurance premiums and reserves for self-insured claims, increased to $2.5 million in 2001 from $2.0 million in 2000, an increase of $480,000 or 23.8%. Lease Expense. Lease expense decreased to $5.2 million in 2001 from $5.3 million in 2000, a decrease of $78,000, or 1.5%. Effective October 1, 2000, the Company entered into an amended lease agreement with the primary lessor of the Company's United States nursing homes, which resulted in reduced lease costs. Partially offsetting this decrease, the majority of the Company's lease agreements include annual adjustments generally tied to inflation. General and Administrative Expense. General and administrative expense increased to $3.4 million in 2001 from $2.9 million in 2000, an increase of $492,000, or 17.1%. As a percent of total net revenues, general and administrative expense increased to 6.7% in 2001 from 6.0% in 2000. This increase is attributable to various corporate expenses, including salaries and wages, employee recruitment and relocation, legal and accounting costs. Interest Expense. Interest expense was approximately $1.4 million in both 2001 and 2000. Interest rate reductions on the Company's debt were offset by an increase in the Company's average outstanding debt balance in 2001 as compared to 2000. Depreciation and Amortization. Depreciation and amortization expenses increased to $1.4 million in 2001 from $1.1 million in 2000, an increase of $259,000, or 22.7%. This increase includes depreciation on future capital expenditures required as a result of certain provisions of the lease covering the majority of the Company's United States nursing homes. Non-Recurring Charges. During the second quarter of 2000, the Company recorded non-recurring charges totaling $263,000 in connection with the proposed restructuring of the lease arrangements covering the majority of its United States nursing facilities and the proposed refinancing of certain debt obligations. Of this amount, $158,000 and $90,000 related to consulting and legal fees incurred, respectively. Income Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a result of the above, the income before income taxes was a loss of $2.3 million in 2001 as compared to income of $115,000 in 2000, a decrease of $2.4 million. The income tax provision in 2001 relates to provincial taxes in Canada. The effective combined federal, state and provincial income tax rate was 36.0% in 2000. Net income was a loss of $2.4 million in 2001 as compared to income of $73,000 in 2000, a decrease of $2.4 million. The basic and diluted earnings (loss) per share were $(.43) each in 2001 as compared to $.01 each in 2000. 20 21 SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000 Revenues. Net revenues increased to $99.9 million in 2001 from $95.6 million in 2000, an increase of $4.3 million, or 4.5%. Patient revenues increased to $77.9 million in 2001 from $72.7 million in 2000, an increase of $5.2 million, or 7.1%. The increase in patient revenues is due to increased Medicaid rates in Arkansas, increased Medicare utilization and Medicare rate increases and a 0.8% increase in occupancy in 2001 as compared to 2000. Partially offsetting these increases, the Company closed a facility in August 2000. On May 9, 2001, the Company received confirmation that the Arkansas Department of Human Services was implementing a new reimbursement methodology, with an effective date of January 12, 2001. This new methodology resulted in additional revenue to the Company of approximately $1,905,000 in the six months ended June 30, 2001. The Arkansas Department of Human Services is partially funding this revenue increase by assessing a quality assurance fee to all the Arkansas facilities, with an effective date of March 9, 2001. As a result, the Company recorded as additional operating expenses $574,000 for the quality assurance fee in the six months ended June 30, 2001. As a percent of patient revenues, Medicare increased to 21.5% in 2001 from 20.4% in 2000 while Medicaid and similar programs decreased to 65.1% from 66.8% in 2000. Resident revenues decreased to $20.6 million in 2001 from $20.8 million in 2000, a decrease of $203,000, or 1.0%. The Company experienced a 7.1% decline in resident days, partially offset by an increase in rates. Ancillary service revenues, prior to contractual allowances, decreased to $10.8 million in 2001 from $11.5 million in 2000, a decrease of $689,000 or 6.0%. The decrease is primarily attributable to reductions in revenue availability under Medicare and is consistent with the Company's expectations. Although the $1,500 per patient annual ceiling has now been lifted for a two year period on physical, speech and occupational therapy services, the impact of the relief is not expected to be sufficient to offset the substantial losses that have been incurred by the Company and the long-term care industry from the provision of therapy services. The ultimate effect on the Company's operations cannot be predicted at this time because the extent and composition of the ancillary cost limitations are subject to change. Management fee revenue decreased to $1.3 million in 2001 from $2.0 million, a decrease of $711,000, or 35.1%. A management contract covering four nursing facilities includes a defined calculation of the "priority of distribution", which determines the amount of management fees which may be earned by the Company. The Company's management fee is the lesser of 6% of facility revenues or the amount determined by the priority of distribution calculation. The reduction in management fee revenue is a result of increased operating costs of these facilities, including primarily professional liability and provisions for cost report settlements. Operating Expense. Operating expense increased to $80.9 million in 2001 from $73.6 million in 2000, an increase of $7.3 million, or 9.9%. As a percent of patient and resident revenues, operating expense increased to 82.1% in 2001 from 78.7% in 2000. The increase in operating expenses is primarily attributable to cost increases related to wages, professional liability, bed taxes and utilities. The largest component of operating expenses is wages, which increased to $42.8 million in 2001 from $40.3 million in 2000, an increase of $2.6 million, or 6.3%. The increase in wages is due to tighter labor markets in most of the areas in which the Company operates. The Company's 21 22 professional liability costs for United States nursing homes and assisted living facilities, including insurance premiums and reserves for self-insured claims, increased to $5.2 million in 2001 from $3.6 million in 2000, an increase of $1.6 million or 45.9%. Lease Expense. Lease expense decreased to $10.4 million in 2001 from $10.5 million in 2000, a decrease of $179,000, or 1.7%. Effective October 1, 2000, the Company entered into an amended lease agreement with the primary lessor of the Company's United States nursing homes, which resulted in reduced lease costs. Partially offsetting this decrease, the majority of the Company's lease agreements include annual adjustments generally tied to inflation. General and Administrative Expense. General and administrative expense increased to $6.6 million in 2001 from $5.7 million in 2000, an increase of $910,000, or 16.0%. As a percent of total net revenues, general and administrative expense increased to 6.6% in 2001 from 6.0% in 2000. This increase is attributable to various corporate expenses, including employee recruitment and relocation, legal and accounting costs. Interest Expense. Interest expense was approximately $2.9 million in both 2001 and 2000. Interest rate reductions on the Company's debt were offset by an increase in the Company's average outstanding debt balance in 2001 as compared to 2000. The Company's average outstanding debt balance increased in 2001 as compared to 2000. Depreciation and Amortization. Depreciation and amortization expenses increased to $2.8 million in 2001 from $2.4 million in 2000, an increase of $436,000, or 18.4%. This increase includes depreciation on future capital expenditures required as a result of certain provisions of the lease covering the majority of the Company's United States nursing homes. Non-Recurring Charges. During the second quarter of 2000, the Company recorded non-recurring charges totaling $263,000 in connection with the proposed restructuring of the lease arrangements covering the majority of its United States nursing facilities and the proposed refinancing of certain debt obligations. Of this amount, $158,000 and $90,000 related to consulting and legal fees incurred, respectively. Income Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a result of the above, the income before income taxes was a loss of $3.7 million in 2001 as compared to income of $247,000 in 2000, a decrease of $3.9 million. The income tax provision in 2001 relates to provincial taxes in Canada. The effective combined federal, state and provincial income tax rate was 36.0% in 2000. Net income was a loss of $3.8 million in 2001 as compared to income of $158,000 in 2000, a decrease of $3.9 million. The basic and diluted earnings (loss) per share were $(.70) each in 2001 as compared to $.03 each in 2000. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, the Company had negative working capital of $61.4 million and a current ratio of 0.24, compared with negative working capital of $60.1 million and a current ratio of 0.27 at December 31, 2000. The Company has incurred losses during 2001, 2000, and 1999 and has limited resources available to meet its operating, capital expenditure and debt service requirements during 2001. 22 23 Certain of the Company's debt agreements contain various financial covenants, the most restrictive of which relate to current ratio requirements, tangible net worth, cash flow, net income (loss), and limits on the payment of dividends to shareholders. As of December 31, 2000 and June 30, 2001, the Company was not in compliance with certain of these financial covenants. The Company has not obtained waivers of the non-compliance. Cross-default or material adverse change provisions contained in the debt agreements allow the holders of substantially all of the Company's debt to demand immediate repayment. The Company would not be able to repay this indebtedness if the applicable lenders demanded repayment. Although the Company does not anticipate that such demand will be made, the continued forbearance on the part of the Company's lenders cannot be assured at this time. Given that events of default exist under the Company's working capital line of credit, there can be no assurance that the lender will continue to provide working capital advances. Based on regularly scheduled debt service requirements, the Company has a total of $5.1 million of debt that must be repaid or refinanced during 2001 and an additional $6.7 million that must be repaid or refinanced in January 2002. As a result of the covenant non-compliance and other cross-default provisions, the Company has classified a total of $59.1 million of debt as current liabilities as of June 30, 2001. An event of default under the Company's debt agreements could lead to actions by the lenders that would result in an event of default under the Company's lease agreements covering a majority of its United States nursing facilities. Should such a default occur in the related lease agreements, the lessor would have the right to terminate the lease agreements. The Company is currently discussing potential waiver, amendment and refinancing alternatives with its lenders. Of the total $5.1 million of scheduled debt maturities during 2001, the Company plans to repay $2.1 million from cash generated from operations and intends to refinance the remaining $3 million. The Company's management has implemented a plan to enhance revenues related to the operations of the Company's nursing homes and assisted living facilities. Management believes that revenues in future periods will increase as a result of Medicare and certain state Medicaid rate increases. In addition, the Company has emphasized attracting and retaining patients and residents. Management has implemented a plan to attempt to minimize future expense increases through the elimination of excess operating costs. The Company is unable to predict if it will be successful in reducing operating losses, in negotiating waivers, amendments, or refinancings of outstanding debt, or if the Company will be able to meet any amended financial covenants in the future. Any demands for repayment by lenders or the inability to obtain waivers or refinance the related debt would have a material adverse impact on the financial position, results of operations and cash flows of the Company. As of June 30, 2001, the Company had drawn $2,162,000 under its working capital line of credit. The total maximum outstanding balance of the working capital line of credit, including letters of credit outstanding, is $4,500,000. Of the total $4,500,000 of maximum availability, $1,000,000 is limited to certain maximum time period restrictions. There are certain additional restrictions based on certain borrowing base restrictions. As of June 30, 2001, the Company had $587,000 of letters of credit outstanding with the same bank lender, which further reduce the maximum available 23 24 amount outstanding under the working capital line of credit. As of June 30, 2001, the Company had total additional borrowing availability of $2,114,000 under its working capital line of credit. In conjunction with the Company's execution of the Settlement and Restructuring Agreement with Omega Healthcare Investors, Inc., the Company amended the terms of the working capital line of credit, extending the maturity through January 2004 and modifying the interest rate from LIBOR plus 2.50% to the bank's prime rate plus .50% (up to a maximum of 9.50%) effective October 1, 2000. The Company has signed a letter of intent to sell Diversicare Canada Management Services Co., Inc. ("Diversicare Canada"), Advocat's Canadian subsidiary to Counsel Corporation ("Counsel"). Pursuant to the letter of intent, Counsel is to acquire 100% of the outstanding stock of Diversicare Canada for $8 million. The transaction is subject to receipt of applicable approvals and the approval of a definitive purchase agreement. The letter of intent is subject to a variety of conditions, including the negotiation of definitive agreements and approval by the Company's primary bank lender. Although the letter of intent, by its terms, expired July 31, 2001, the Company is continuing its efforts to seek consents to allow the transaction to close as described. No assurance can be given that the Company will be able to complete the sale of Diversicare Canada. Diversicare Canada manages a number of nursing homes for Counsel and other owners in Canada and, additionally, leases five assisted living complexes from Counsel. The proposed sale will include all of Advocat's Canadian operations, including 13 nursing homes and 23 assisted living facilities. Effective March 9, 2001, the Company has obtained professional liability insurance coverage that, based on historical claims experience, could be substantially less than the claims that could be incurred during 2001. The Company would be obligated to pay any claims in excess of its insurance coverage. In addition, the payment of professional liability claims by the Company's insurance carriers is dependent upon the financial solvency of the individual carriers. The Company is aware that one of its insurance carriers providing coverage for prior years claims is currently under rehabilitation proceedings. The ultimate payments by the Company of professional liability claims accrued as of December 31, 2000 and claims that could be incurred during 2001 because such claims exceed the Company's insurance coverage or because of the inability of an insurance carrier to pay such claims could require cash resources during 2001 that would be in excess of the Company's available cash or other resources. On June 22, 2001, a jury in Mena, Arkansas issued a verdict in a professional liability lawsuit against the Company and certain of its subsidiaries totaling $78.425 million. The Company filed motions with the court, asking the trial judge to overturn or reduce the verdict. On August 3, 2001, the Company's motions were denied. The Company plans to appeal the verdict. The Company and the plaintiffs entered into a 15 day standstill following the verdict, during which the plaintiff's have agreed that they will not execute on the judgment. The Company has requested that its insurance carriers post bond for the verdict and is awaiting a response from them. In the event the Company's insurance carriers do not post the full amount of the bond, the Company does not have the financial resources to post a bond in the amount not covered by insurance. In that 24 25 case, the Company would have to consider other alternatives, including seeking bankruptcy court protection, in order to stay execution of the judgment. The Company will seek to resolve this matter within the insurance limits that were in effect at the time matter arose. Any future operating losses, demands for repayment by lenders, failure to refinance debt maturing during 2001 or payments of professional liability claims judgments in excess of insurance coverage would have a material adverse impact on the financial position, results of operations and cash flows of the Company. If the Company is unable to generate sufficient cash flows from its operations, unable to refinance or repay debt maturities during 2001, or unable to minimize the amount of future professional liability claims payments, it will explore a variety of other options, including but not limited to other sources of equity or debt financing, asset dispositions, or relief under the United States Bankruptcy code. Net cash provided by operating activities totaled $3.6 million for both of the six month periods ended June 30, 2001 and 2000. These amounts primarily represent the cash flows from net operations plus changes in non-cash components of operations and by working capital changes. No assurance can be given that future cash flow will be sufficient to meet the working capital, debt service or capital expenditure requirements of the Company for the next twelve months. Net cash used in investing activities totaled $1.7 million and $1.3 million for the six months periods ended June 30, 2001 and 2000, respectively. These amounts primarily represent purchases of property plant and equipment, investments in and advances to joint ventures and additional investments in TDLP, a limited partnership for which the Company serves as the general partner. The Company has used between $2.7 million and $5.2 million for capital expenditures in the three calendar years ending December 31, 2000. Substantially all such expenditures were for facility improvements and equipment, which were financed principally through working capital. For the year ended December 31, 2001, the Company anticipates that capital expenditures for improvements and equipment for its existing facility operations will be approximately $4.2 million, including $1.0 million for non-routine projects. Net cash used in financing activities totaled $3.7 million and $566,000 for the six month periods ended June 30, 2001 and 2000, respectively. The net cash used in financing activities primarily represents net proceeds from issuance and repayment of debt. RECEIVABLES The Company's operations could be adversely affected if it experiences significant delays in reimbursement of its labor and other costs from Medicare, Medicaid and other third-party revenue sources. The Company's future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on the Company's liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by 25 26 increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by the Company in the processing of its invoices, could adversely affect the Company's liquidity and results of operations. Accounts receivable attributable to the provision of patient and resident services at June 30, 2001 and December 31, 2000, totaled $19.5 million and $18.1 million, respectively, representing approximately 36 and 34 days in accounts receivable, respectively. Accounts receivable from the provision of management services were $216,000 and $721,000 at June 30, 2001 and December 31, 2000, respectively representing approximately 30 and 67 days in accounts receivable, respectively. The allowance for bad debt was $5.5 million and $5.0 million at June 30, 2001 and December 31, 2000, respectively. The Company continually evaluates the adequacy of its bad debt reserves based on patient mix trends, agings of older balances, payment terms and delays with regard to third-party payors, collateral and deposit resources, as well as other factors. The Company continues to evaluate and implement additional procedures to strengthen its collection efforts and reduce the incidence of uncollectible accounts. HEALTH CARE INDUSTRY The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of resident care and Medicare and Medicaid fraud and abuse (collectively, the "Health Care Laws"). Changes in these laws and regulations, such as reimbursement policies of Medicare and Medicaid programs as a result of budget cuts by federal and state governments or other legislative and regulatory actions, could have a material adverse effect on the Company's financial position, results of operations, and cash flows. Future federal budget legislation and federal and state regulatory changes may negatively impact the Company. All of the Company's facilities are required to obtain annual licensure renewal and are subject to annual surveys and inspections in order to be certified for participation in the Medicare and Medicaid programs. In order to maintain their operator's license and their certification for participation in Medicare and Medicaid programs, the nursing facilities must meet certain statutory and administrative requirements. These requirements relate to the condition of the facilities, the adequacy and condition of the equipment used therein, the quality and adequacy of personnel, and the quality of resident care. Such requirements are subjective and subject to change. There can be no assurance that, in the future, the Company will be able to maintain such licenses for its facilities or that the Company will not be required to expend significant sums in order to do so. Recently, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse statutes and regulations. Violations of these laws and regulations could result in exclusion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with the Health Care Laws can be 26 27 subject to both future and retrospective government review and interpretation, as well as regulatory actions unknown or unasserted at this time. The Company is currently a defendant in two pending false claims actions as described below. On October 17, 2000, the Company was served with a civil complaint by the Florida Attorney General's office, in the case of State of Florida ex rel. Mindy Myers v. R. Brent Maggio, et al. In this case, the State of Florida has accused multiple defendants of violating Florida's False Claims Act. The Company, in its capacity as the manager of four nursing homes owned by Emerald Coast Healthcare, Inc. ("Emerald"), is named in the complaint, which accuses the Company of making illegal kickback payments to R. Brent Maggio, Emerald's sole shareholder, and fraudulently concealing such payments in the Medicaid cost reports filed by the nursing homes. At a hearing held April 25, 2001 in the Circuit Court of Leon County, Florida, the Court dismissed the State of Florida's complaint in its entirety based on the State's failure to plead false claims violations with sufficient particularity as required by law. The State was, however, granted 60 days to file an amended complaint, which has subsequently been extended for an additional 90 days. To date, the State of Florida has not filed an amended complaint, nor has it indicated whether the Company will be named as a defendant in any amended complaint that may be filed subsequently. Under the Federal False Claims Act, health care companies may be named as a defendant in an action which is filed under court seal, without being informed of this fact until the government has substantially completed its investigation. In such cases, there sometimes occurs a provision for "partial lifting of the seal," in which the trial court orders that the seal may be lifted for purposes of giving the named defendant the opportunity to informally present its defenses and discuss settlement prospects with the government. In cases in which the judge orders such a "partial lifting of the seal," the defendant becomes aware of the case but is precluded from discussing it publicly. Management is aware of one such case being filed in federal court against the Company regarding billing practices at one of its nursing homes. The Company has retained counsel to defend it in the case and, while cooperating with the government in its investigation of the matter, intends to vigorously pursue its defense of the case. While the Company cannot currently predict with certainty the ultimate impact of either of the above cases on the Company's financial condition, cash flows or results of operations, an unfavorable outcome in any state or federal False Claims Act case could subject the Company to fines, penalties and damages. Moreover, the Company could be excluded from the Medicare, Medicaid or other federally-funded health care programs, which could have a material adverse impact on the Company's financial condition, cash flows or results of operations. In addition to the pending false claims actions described above, the Company has also received notices from the Centers for Medicare and Medicaid Services ("CMMS") concerning post-payment medical reviews of claims for several of the Company's Texas facilities. The reviews have resulted in the denial of previously paid claims for infusion therapy and certain other therapy services rendered by outside providers to patients at the Company's facilities for the years 1997 - 1999. The government has already recovered, and will continue to recover, some of the alleged overpayment amounts by offset against current amounts due the facilities. The Company believes that the medical reviews were imposed as the result of a governmental investigation of Infusion Management Services ("IMS"), an unrelated company that provided infusion therapy services to 27 28 residents at the Company's facilities and which some time ago entered into a settlement agreement with the government regarding allegations of violations of applicable laws. The Company is in the process of appealing the denied claims. The Company also contends that the government has already recovered the payments in question through its settlement with IMS. The Company cannot at this time predict whether its efforts to recover the recouped money and obtain payment of the denied claims will be successful, and the denial of these claims could have a material adverse impact on the Company's financial condition, cash flows or results of operations. During 1999, 2000 and 2001, the Company also experienced the increased regulatory scrutiny that has been exerted on the industry in the form of increased fines and penalties. During 2000, one of the Company's facilities in Texas was decertified from the Medicaid and Medicare programs and, as a result, ceased operations. The Company is actively engaged in the application and appeal process for the recertification and licensure of this facility. Medicare Reimbursement Changes. During 1997, the federal government enacted the Balanced Budget Act of 1997 ("BBA"), which contains numerous Medicare and Medicaid cost-saving measures. The BBA requires that nursing homes transition to a prospective payment system ("PPS") under the Medicare program during a three-year "transition period," commencing with the first cost reporting period beginning on or after July 1, 1998. The BBA also contains certain measures that have and could lead to further future reductions in Medicare therapy reimbursement and Medicaid payment rates. Revenues and expenses have both been reduced significantly from the levels prior to PPS. The BBA has negatively impacted the entire long-term health care industry. During 1999 and 2000, certain amendments to the BBA have been enacted, including the Balanced Budget Reform Act of 1999 ("BBRA") and the Benefits Improvement and Protection Act of 2000 ("BIPA"). The BBRA has provided legislative relief in the form of increases in certain Medicare payment rates during 2000. The BIPA is expected to continue to provide additional increases in certain Medicare payment rates during 2001. Although refinements resulting from the BBRA and the BIPA have been well received by the United States nursing home industry, it is the Company's belief that the resulting revenue enhancements are still significantly less than the losses sustained by the industry due to the BBA. Current levels of or further reductions in government spending for long-term health care would continue to have an adverse effect on the operating results and cash flows of the Company. The Company will attempt to maximize the revenues available from governmental sources within the changes that have occurred and will continue to occur under the BBA. In addition, the Company will attempt to increase revenues from non-governmental sources, including expansion of its assisted living operations, to the extent capital is available to do so, if at all. FOREIGN CURRENCY TRANSLATION The Company has obtained its financing primarily in U.S. dollars; however, it incurs revenues and expenses in Canadian dollars with respect to Canadian management activities and operations of the Company's eight Canadian retirement facilities (three of which are owned) and two owned Canadian nursing homes. Although not material to the Company as a whole, if the currency 28 29 exchange rate fluctuates, the Company may experience currency translation gains and losses with respect to the operations of these activities and the capital resources dedicated to their support. While such currency exchange rate fluctuations have not been material to the Company in the past, there can be no assurance that the Company will not be adversely affected by shifts in the currency exchange rates in the future. STOCK EXCHANGE On November 10, 1999, the Company's stock began being quoted on the NASD's OTC Bulletin Board under the symbol AVCA. Previously, the Company's common stock was traded on the New York Stock Exchange under the symbol AVC. INFLATION Management does not believe that the Company's operations have been materially affected by inflation. The Company expects salary and wage increases for its skilled staff to continue to be higher than average salary and wage increases, as is common in the health care industry. To date, these increases as well as normal inflationary increases in other operating expenses have been adequately covered by revenue increases. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") has been issued effective for fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. The Company adopted the provisions of SFAS No. 133, as amended, effective January 1, 2001, as required; however, the Company's adoption of SFAS No. 133, as amended, did not have a material effect on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") regarding revenue recognition in financial statements. SAB 101 was effective January 1, 2000 but implementation was delayed until the fourth quarter of 2000. The Company's implementation of SAB 101 in the fourth quarter of 2000 did not have a material impact on its financial position, results of operations or cash flows on a quarterly or annual basis. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 requires that intangible assets with finite useful 29 30 lives be amortized, and that goodwill and intangible assets with indefinite lives no longer be amortized, but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company is required to adopt the provisions of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized until the adoption of SFAS No. 142. The Company has not determined the impact, if any, of the adoption of SFAS No. 141 and SFAS No. 142 on its financial statements. FORWARD-LOOKING STATEMENTS The foregoing discussion and analysis provides information deemed by Management to be relevant to an assessment and understanding of the Company's consolidated results of operations and its financial condition. It should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Certain statements made by or on behalf of the Company, including those contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties including, but not limited to, changes in governmental reimbursement, government regulation and health care reforms, the increased cost of borrowing under the Company's credit agreements, covenant waivers from the Company's lenders, possible amendments to the Company's credit agreements, ability to control ultimate professional liability costs, the impact of future licensing surveys, changing economic conditions as well as others. Investors also should refer to the risks identified in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as risks identified in the Company's Form 10-K for the year ended December 31, 2000 for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, the Company can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, cautions investors not to place undue reliance on them. Actual results may differ materially from those described in such forward-looking statements. Such cautionary statements identify important factors that could cause the Company's actual results to materially differ from those projected in forward-looking statements. In addition, the Company disclaims any intent or obligation to update these forward-looking statements. 30 31 PART II -- OTHER INFORMATION Item 3. Defaults Upon Senior Securities. The Company is not currently in compliance with certain covenants of its loan agreements and certain other indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of shareholders was held on June 21, 2001. (b) Matters voted upon at the meeting: 1. Election Of Directors William C. O'Neil, Jr. FOR 3,825,905 AGAINST -0- WITHHELD 1,319,148 ABSTENTIONS -0- ELIGIBLE SHARES 5,145,053 Joseph F. Furlong, III FOR 3,735,305 AGAINST -0- WITHHELD 1,409,748 ABSTENTIONS -0- ELIGIBLE SHARES 5,145,053
(Continuing directors include Charles W. Birkett, Edward G. Nelson, Paul Richardson and J. Bransford Wallace) 2. Amendment To 1994 Nonqualified Stock Option Plan for Directors Increasing Shares Available For Grant FOR 603,339 AGAINST 2,116,436 WITHHELD -0- ABSTENTIONS 9,240 NON-VOTING(1) 2,416,038
3. Amendment To 1994 Incentive And Nonqualified Stock Option Plan For Key Personnel Increasing Shares Available For Grant FOR 591,817 AGAINST 2,127,958 WITHHELD -0- ABSTENTIONS 9,240 NON-VOTING(1) 2,416,038
31 32 4. Amendment To 1994 Employee Stock Purchase Plan FOR 1,270,091 AGAINST 1,421,797 WITHHELD -0- ABSTENTIONS 37,127 NON-VOTING(1) 2,416,038
(1) Including broker non-votes. Item 6. Exhibits and Reports on Form 8-K. (a) The exhibits filed as part of the report on Form 10-Q are listed in the Exhibit Index immediately following the signature page. (b) Reports on Form 8-K: Form 8-K filed June 26, 2001 regarding the jury verdict against they Company in Mena, Arkansas in professional liability lawsuit in the amount of $78.425 million. 32 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVOCAT INC. August 14, 2001 By: /s/ William R. Council, III ---------------------------------------- William R. Council, III Executive Vice-President, Secretary, Principal Financial Officer and Chief Accounting Officer and An Officer Duly Authorized to Sign on Behalf of the Registrant 33 34
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ ----------------------- 3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement No. 33-76150 on Form S-1). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-76150 on Form S-1). 3.3 Amendment to Certificate of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to the Company's Form 8-A filed March 30, 1995). 3.4 Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.4 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2001). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1). 4.2 Rights Agreement dated March 13, 1995, between the Company and Third National Bank in Nashville (incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated March 13, 1995). 4.3 Summary of Shareholder Rights Plan adopted March 13, 1995 (incorporated by reference to Exhibit B of Exhibit 1 to Form 8-A filed March 30, 1995). 4.4 Rights Agreement of Advocat Inc. dated March 23, 1995 (incorporated by reference to Exhibit 1 to Form 8-A filed March 30, 1995). 4.5 Amended and Restated Rights Agreement dated as of December 7, 1998 (incorporated by reference to Exhibit 1 to Form 8-A/A filed December 7, 1998). 10.1 Fifth Amendment to Project Loan Agreement and Comprehensive Amendment of All Other Loan Documents dated as of the 28th day of February 2001, by and between the Company, certain of its subsidiaries and GMAC Commercial Mortgage Corporation. 10.2 Sixth Amendment to and Assumption of Promissory Note dated as of the 28th day of February, 2001, by certain subsidiaries of the Company and GMAC Commercial Mortgage Corporation.
35 10.3 Guaranty Agreement re Pinedale dated as of the 29th day of March, 2001, by the Company, for the benefit of GMAC Commercial Mortgage Corporation. 10.4 Loan Agreement re Pinedale dated as of the 29th day of March, 2001, by and between a subsidiary of the Company, and GMAC Commercial Mortgage Corporation 10.5 Mortgage and Security Agreement re Pinedale dated as of the 29th day of March, 2001, by and between a subsidiary of the Company, and GMAC Commercial Mortgage Corporation 10.6 Promissory Note dated 29th day of March 2001, in the amount of $2,913,000.00 in the favor of GMAC Commercial Mortgage Corporation 10.7 Guaranty Agreement re Windsor House dated as of the 29th day of March, 2001, by the Company, for the benefit of GMAC Commercial Mortgage Corporation. 10.8 Loan Agreement re Windsor House dated as of the 29th day of March, 2001, by and between a subsidiary of the Company, and GMAC Commercial Mortgage Corporation 10.9 Mortgage and Security Agreement re Windsor House dated as of the 29th day of March, 2001, by and between a subsidiary of the Company, and GMAC Commercial Mortgage Corporation 10.10 Promissory Note dated 29th day of March 2001, in the amount of $4,709,000.00 in the favor of GMAC Commercial Mortgage Corporation. 10.11 Employment Agreement effective March 5, 2001, by and between the Company and William R. Council III.
EX-10.1 3 g71016ex10-1.txt LOAN AGREEMENT 1 EXHIBIT 10.1 FIFTH AMENDMENT TO PROJECT LOAN AGREEMENT AND COMPREHENSIVE AMENDMENT OF ALL OTHER LOAN DOCUMENTS THIS FIFTH AMENDMENT TO PROJECT LOAN AGREEMENT AND COMPREHENSIVE AMENDMENT OF ALL OTHER LOAN DOCUMENTS (the "Fifth Amendment") is executed as of the 28th day of February, 2001, by and between GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (the "Lender") and ADVOCAT INC., a Delaware corporation ("Advocat"), DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation and wholly-owned subsidiary of Advocat ("DMSC"), DIVERSICARE LEASING CORP. ("DLC"), a Tennessee corporation and wholly-owned subsidiary of AFI (defined below), ADVOCAT ANCILLARY SERVICES, INC. ("AAS"), a Tennessee corporation and wholly-owned subsidiary of the DMSC, DIVERSICARE CANADA MANAGEMENT SERVICES CO., INC. ("DCMS"), a corporation organized under the laws of Canada and wholly-owned subsidiary of DLC, FIRST AMERICAN HEALTH CARE, INC. ("FAHC"), an Alabama corporation and wholly-owned subsidiary of DLC, DIVERSICARE LEASING CORP. OF ALABAMA ("DLCA"), an Alabama corporation and wholly-owned subsidiary of DLC, ADVOCAT DISTRIBUTION SERVICES, INC. ("ADS"), a Tennessee corporation and wholly-owned subsidiary of DMS, and ADVOCAT FINANCE, INC. ("AFI"), a Delaware corporation and wholly-owned subsidiary of DMS (DLC, AAS, DCMS, FAHC, ADS, DLCA and AFI, together with any other subsidiaries of Advocat or of the Subsidiaries formed or acquired after the date hereof, are sometimes hereinafter referred to collectively as the "Subsidiaries"). RECITALS A. The Lender, DMSC, Advocat and the Subsidiaries entered into that certain Project Loan Agreement dated December 27, 1996, as amended by that certain First Amendment to Project Loan Agreement dated April 30, 2000, by that certain Second Amendment to Project Loan Agreement dated June, 30, 2000, by Memorandum dated September 8, 2000, by that certain Third Amendment to Project Loan Agreement dated September 30, 2000, and by that certain Fourth Amendment to Project Loan Agreement dated December 31, 2000 (the "Loan Agreement"). Unless otherwise defined herein, capitalized terms shall have the meanings assigned to them in the Loan Agreement. Pursuant to the terms of the Loan Agreement, Lender made a Loan to DMSC in the principal amount of $3,750,000 (the "Loan"). B. For the business convenience of DLC, in order to effect a reorganization of certain of its assets into newly formed limited liability companies, DLC transferred, conveyed, and assigned to Diversicare Afton Oaks, LLC, a Delaware limited liability company (the "Borrower") all of DLC's interests in certain real and personal property, both tangible and intangible and other rights and assets of DLC comprising the Property. C. Pursuant to that certain Assumption of Deed of Trust and Security Agreement dated as of December 1, 2000, and of record under Clerk's File No. ###-##-#### in the Real Property Records of Harris County, Texas, the Borrower assumed all of DLC's rights in and to the Property. 2 D. Pursuant to that certain Sixth Amendment to and Assumption of Promissory Note, the Borrower assumed all of the rights and obligations of DMSC in and to that certain Promissory Note dated December 27, 1996, as amended, by and between DMSC and the Lender. The Promissory Note, as amended, is referred to herein as the "Note". E. The Loan, as extended by Memorandum of Lender dated January 26, 2001, matures February 28, 2001. F. The Borrower has requested that the Lender extend the Maturity Date. The Lender has agreed subject to the conditions and terms evidenced herein. AGREEMENT NOW THEREFORE, in consideration of the above Recitals, DSMC, the Borrower and the Lender hereby amend the Loan Agreement and all Other Loan Documents (as defined below) as follows: 1. Assumption. DSMC hereby transfers, conveys and assigns to Borrower all of the rights, obligations and benefits of DSMC in, to and under the Loan Documents and all Other Loan Documents (as more particularly described on Exhibit A attached hereto). The Borrower hereby accepts the transfer, conveyance and assignment of the Loan Agreement and all Other Loan Documents (as more particularly described on Exhibit A attached hereto). The Borrower absolutely and unconditionally assumes and agrees to perform, keep, observe, meet and discharge all of the covenants, agreements, undertakings, liabilities and obligations provided for in the Loan Agreement and Other Loan Documents to be performed, kept, observed, met and discharged by DMSC at the time and in the manner provided, including, but not limited to, the provisions regarding insurance, taxes, licensure, condemnation, maintenance and repair of the Collateral. The Borrower agrees to be bound absolutely and unconditionally, from and after the effective date hereof, by all of the terms, conditions, covenants and agreements in the Loan Agreement and Other Loan Documents in the same manner and to the same extent as though each of them had been originally made, executed and delivered by the Borrower. From and after the effective date hereof, all references to DMSC in the Loan Agreement and Other Loan Documents shall be deemed to mean and include the Borrower, as applicable. 2. Ratification. DMSC and the Borrower each agree that all of the terms and conditions contained and set forth in the Loan Agreement and all Other Loan Documents are, and, as amended by this Fifth Amendment, shall remain, in full force and effect and are hereby ratified, approved and confirmed. DMSC and the Borrower acknowledge and agree that upon the occurrence of an Event of Default under the Loan Agreement or any Other Loan Document, the Lender, and its successors and/or assigns, shall be entitled to exercise any of the rights and remedies set forth in the Loan Agreement or the Other Loan Documents. This Amendment shall in no way be construed to alter or impair any of the rights and remedies of the Lender thereunder upon the occurrence of any such Event of Default. 3. Representations. The Borrower and DMSC represent and warrant to the Lender that the Loan Agreement and all Other Loan Documents are in full force and effect, that there are no 3 amendments or modifications to the Loan Agreement or the Other Loan Documents except as otherwise stated herein, that no uncured breaches or defaults exist under the Loan Agreement or any of the Other Loan Documents as of the day hereof, and that no facts or circumstances exist, which with the giving of notice to, passage of time, or both, would constitute a breach or default on the part of DMSC or the Borrower under the Loan Agreement or any of the Other Loan Documents. 4. No Release. DMSC understands and acknowledges that no release is given by the Lender to DMSC of any of the responsibility or liability of DMSC to the Lender for, and nothing contained herein shall be, is intended to be, or shall be deemed to be a novation, satisfaction or discharge of any of the obligations of DMSC under the Loan Agreement or the Other Loan Documents and DMSC shall remain fully responsible therefore in the event of the failure of the Borrower to perform, keep, observe, meet and discharge the same as and when provided in the Loan Agreement or the Other Loan Documents. 5. In Article 1 of the Loan Agreement, the definition of Maturity Date, is hereby amended to state: "'Maturity Date' means the earlier of: (a) January 1, 2002, or (b) the completion of the HUD refinance of the Loan". 6. In Article 1 of the Loan Agreement, the definition of Loan is hereby amended to state: "'Loan' means the loan in the principal amount up to $3,720,640, subject to the satisfactory review by Lender of the appraisal, prepared in contemplation of the extension of the Maturity Date, which appraisal must establish a loan to value ratio of not more than sixty-nine percent (69%)." 7. In Article 1 of the Loan Agreement, the definition of Nursing Home is hereby amended to state: "'Nursing Home' means the nursing home facility known as "Afton Oaks Nursing Home", presently a 169-licensed bed (162 available) skilled nursing facility located on the Property, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any assisted living facility) now or hereafter operated on the Property." 8. Section 4.4 of the Loan Agreement is hereby amended to increase the required capital expenditure amount from $250 per bed to $300 per bed. 9. All reference in the Loan Agreement to First American National Bank, is hereby amended to refer to "AmSouth Bank, successor by merger to First American National Bank". 10. The Loan Agreement is hereby amended to include the following: "4.5 Occupancy. Maintain or cause to maintain at all times a daily average annual occupancy for the Facility of seventy-five (75%) or higher based upon the number of available beds." 11. Section 4.3 of the Loan Agreement is hereby deleted in its entirety and the following substituted therefor: 4 1. Achieve (commencing with the closing of the Loan), and, within forty-five (45) days after the end of each fiscal quarter of Borrower, provide evidence satisfactory to the Lender of the achievement of, the following Debt Service Coverage ratios: a. a Debt Service Coverage, after deduction of Actual Management Fees, of not less than 1.0 to 1.0, based on a rolling twelve (12) month period, tested quarterly; b. a Debt Service Coverage, after deduction of Assumed Management Fees, of not less than 1.0 to 1.0, based on a rolling twelve (12) month period, tested quarterly; 2. If Borrower fails to achieve or provide evidence of achievement of the Debt Service Coverage for the Facility upon fifteen (15) days written notice to Borrower, Borrower will deposit with Lender additional cash or other liquid collateral in an amount which, when added to the first number of the Debt Service Coverage calculation, would have resulted in the noncomplying Debt Service Coverage requirement having been satisfied. If such failure continues for two (2) consecutive quarters, on the third consecutive quarter, if Borrower again fails to achieve or provide evidence of the achievement of the Debt Service Coverages required above, upon fifteen (15) days written notice to Borrower, Borrower will deposit with Lender additional cash or other liquid collateral (with credit for amounts currently being held by Lender pursuant to the foregoing sentence), in an amount which, if the same had been applied on the first day of the first quarter for which such noncompliance of the Debt Service Coverage requirement occurred to reduce the outstanding principal indebtedness of the Loan Obligations, would have resulted in the noncomplying Debt Service Coverage requirement having been satisfied, and Borrower agrees promptly to provide such additional cash or other liquid collateral, which increased amount will be held by Lender for an additional two (2) consecutive calendar quarters. Such additional Collateral will be held by the Lender in a standard custodial account, and shall constitute additional collateral for the Loan Obligations and an "Account" as defined in this Agreement, and, upon the occurrence of an Event of Default, may be applied by the Lender, in such order and manner as the Lender may elect, to the reduction of the Loan Obligations. Borrower shall not be entitled to any interest earned on such additional Collateral. Provided that there is no outstanding Default or Event of Default, such additional Collateral which has not been applied to the Loan Obligations will be released by the Lender at such time as Borrower provides the Lender with evidence that the required Debt Service Coverage requirements outlined above have been achieved and maintained (without regard to any cash deposited pursuant to this Section 4.12) as of the end of each of two (2) consecutive quarters. 12. All reference to the Borrower in the Loan Agreement and any of the Other Loan Documents is hereby amended to mean Diversicare Afton Oaks, LLC, a Delaware limited liability company. Except as expressly amended hereby, the Loan Agreement and all Other Loan Documents shall be unchanged and shall continue in full force and effect. 5 IN WITNESS WHEREOF, the Borrower, the Guarantor and the Lender have caused this Fifth Amendment to be executed by their duly authorized representatives, as of the date first set forth above. BORROWER: DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company By: Diversicare Leasing Corp., a Tennessee corporation, its Sole Member By: -------------------------------- James F. Mills, Jr., CFO DSMC: DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation By: --------------------------------------- Its: ------------------------------------- LENDER: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation ------------------------------------------ James C. Thompson, Senior Vice President GUARANTOR: ADVOCAT, INC., a Delaware corporation ------------------------------------------ James F. Mills, Jr., CFO 6 EXHIBIT A [Other Loan Documents] 1. Guaranty Agreement dated as of December 27, 1996, by and between Diversicare Leasing Corp. (including its successors, transferees and assigns), a Tennessee corporation ("Guarantor"), for the benefit of GMAC Commercial Mortgage Corporation ("Lender"), a California corporation. 2. Guaranty Agreement dated as of December 27, 1996, by and between Advocat, Inc., a Delaware corporation ("Guarantor"), for the benefit of GMAC Commercial Mortgage Corporation ("Lender"), a California corporation. 3. Collateral Assignment of Management Agreement dated December 27, 1996, by and between Diversicare Leasing Corp., a Tennessee corporation, and GMAC Commercial Mortgage Corporation, a California corporation. 4. Subordination of Management Agreement dated December 27, 1996, by and among Diversicare Management Services Co., Diversicare Leasing Corp., and GMAC Commercial Mortgage Corporation. 5. Loan Closing Certification dated as of December 27, 1996, by Diversicare Leasing Corp., for the benefit of GMAC Commercial Mortgage Corporation. 6. Agreement to Amend or Comply dated December 27, 1996. EX-10.2 4 g71016ex10-2.txt PROMISSORY NOTE 1 EXHIBIT 10.2 SIXTH AMENDMENT TO AND ASSUMPTION OF PROMISSORY NOTE This Sixth Amendment to and Assumption of Promissory Note (this "Sixth Amendment") is executed as of the 28th day of February, 2001, by DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation (the "DMSC"), DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company (the "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (the "Lender"). RECITALS A. DMSC executed to the order of the Lender that certain Promissory Note dated December 27, 1996, in the principal amount of $3,750,000.00, as amended by that certain Amendment to Promissory Note dated November 30, 1999, by that certain Second Amendment to Promissory Note dated April 30, 2000, by that certain Third Amendment to Promissory Note dated June 30, 2000, by Memorandum of Lender dated December 8, 2000, by that certain Fourth Amendment to Promissory Note September 30, 2000, by that certain Fifth Amendment to Promissory Note dated December 31, 2000 and by that certain Memorandum of Lender dated January 26, 2001 (the "Note"). B. For the business convenience of DMSC, in order to effect a reorganization of certain of its assets into newly formed limited liability companies, of which the Borrower is one, and in connection with the renewal, extension and refinancing of the indebtedness owed by DMSC to the Lender, DMSC desires to transfer, convey and assign to the Borrower, and Borrower is willing to assume, all of the rights, obligations and benefits of DMSC in and to the Note. C. Pursuant to that certain Assumption of Deed of Trust and Security Agreement dated as of December 1, 2000, by and between Diversicare Leasing Corp., a Tennessee corporation ("DLC"), and the Borrower, and of record under Clerk's File No. ###-##-#### in the Real Property Records of Harris County, Texas, the Borrower assumed title to the Property, more specifically described in the Deed of Trust and Security Agreement dated as of December 27, 1996, of record under Clerk's File No. S268193 in the Real Property Records of Harris County, Texas (the "Security Instrument"). The Borrower further assumed all rights, obligations, responsibilities, and liabilities contained in the Security Instrument. D. The Note matures on February 28, 2001, and the Borrower has requested that the Lender renew the debt evidenced by the Note and extend the Maturity Date of the Note. This Sixth Amendment is hereby attached to the Note and made a part thereof. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to them in the Note. E. The Lender has agreed to such renewal and extension on certain conditions, one of which is the execution of this Sixth Amendment by DMSC and the Borrower. 1 2 F. As an additional condition to the renewal and extension, the Lender has required that the Borrower pay to the Lender a fee equal to one-half of one percent (0.5%) of the loan ($3,720,640) evidenced by the Note (the "Closing Fee"). One-half of the Closing Fee shall be paid upon execution of this Sixth Amendment. The remainder of the Closing Fee shall be paid to Lender by July 15, 2001. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals, the Borrower and the Lender hereby amend the Note as follows: 1. Assignment and Assumption. DMSC hereby transfers, conveys and assigns to the Borrower all of the rights, obligations and benefits of DMSC in, to and under the Note. The Borrower absolutely and unconditionally assumes and agrees to perform, keep, observe, meet and discharge all of the covenants, agreements, undertakings, liabilities and obligations provided for in the Note to be performed, kept, observed, met and discharged by DMSC. The Borrower agrees to be bound absolutely and unconditionally, from and after the effective date hereof, by all of the terms, conditions, covenants and agreements of the Note in the same manner and to the same extent as though each of them had been originally made, executed and delivered by the Borrower. From and after the effective date hereof, all references to DMSC in the Note shall be deemed to mean and include the Borrower, as applicable. 2. Ratification. DMSC and the Borrower each agree that all of the terms and conditions contained and set forth in the Note are, and as amended by this Sixth Amendment shall remain, in full force and effect and are hereby ratified, approved and confirmed. DMSC and the Borrower acknowledge and agree that upon the occurrence of an Event of Default under the Note, the Lender, and its successors and/or assigns, shall be entitled to exercise any of the rights and remedies set forth in the Note. This Sixth Amendment shall in no way be construed to alter or impair any of the rights and remedies of the Lender thereunder upon the occurrence of any such Event of Default. 3. Representations. The Borrower and DMSC each agree that all of the terms and conditions contained and set forth in the Note are, and as amended by this Sixth Amendment shall remain, in full force and effect and are hereby ratified, approved and confirmed. The Borrower and DMSC represent and warrant to the Lender that the Note is in full force and effect, that there are no amendments or modifications to the Note except as otherwise stated herein, that no uncured breaches or defaults exist under the Note as of the day hereof, and that no facts or circumstances exist, which with the giving of notice or passage of time, or both, would constitute a breach or default on the part of DMSC or the Borrower under the Note. 4. No Release. DMSC understands and acknowledges that no release is given by the Lender to DMSC of any of the responsibility or liability of DMSC to the Lender for, and nothing contained herein shall be, is intended to be, or shall be deemed to be a novation, satisfaction or discharge of any of the obligations of DMSC under the Note and DMSC shall remain fully responsible therefore in the event of the failure of the Borrower to perform, keep, observe, meet and discharge the same as and when provided in the Note. 2 3 5. The face amount of the Note and the definition of the Loan are hereby amended to be $3,720,640, subject to the satisfactory review by Lender of the appraisal, prepared in contemplation of the extension of the Maturity Date (as defined below), which appraisal must establish a loan to value ratio of not more than sixty-nine percent (69%). 6. The Borrower acknowledges that the outstanding principal balance under the Note is $3,708,049.39 on the date hereof. 7. Section 1.1 of the Note is hereby deleted in its entirety and the following substituted therefore: "1.1 Initial Rate and Initial Payment. Interest shall accrue on the outstanding balance of the principal amount outstanding hereunder from time to time from and after the date hereof at the rate of 8.7075% per annum until the first Rate Adjustment Date (as defined below). On each successive Rate Adjustment Date, the rate of interest at which interest accrues shall be adjusted to the then applicable LIBOR Rate (as defined below). Interest for the period beginning on the date of this Note and ending on and including the last day of the month in which this Note is dated shall be payable on the date hereof. Interest shall be paid in arrears and shall be computed on the basis of a 360-day year and actual number of days elapsed for any whole or partial month in which interest on the Loan is being calculated and shall be charged on the principal balance outstanding from time to time." 8. Section 1.2 of the Note is hereby deleted in its entirety and the following substituted therefore: "1.2 Rate Adjustment Date and Payment Adjustment Dates. The interest rate shall be adjusted on the dates (each being a "Rate Adjustment Date") described in this paragraph. The first Rate Adjustment Date shall be March 1, 2001, and subsequent Rate Adjustment Dates shall fall on the first day of each subsequent one month anniversary thereafter. The first payment adjustment date shall be April 1, 2001, and subsequent payment adjustment dates shall fall on the first day of each calendar month thereafter during the term of the Loan." 9. Section 1.4 of the Note is hereby deleted in its entirety and the following substituted therefore: "1.4 LIBOR Rate. The LIBOR Rate shall mean the average of London Interbank Offered Rates ("LIBOR") for a period of one (1) month determined solely by Holder as of each Rate Adjustment Date plus three hundred fifty (350) basis point per annum, determined in the manner herein set forth below. On each Rate Adjustment Date, Holder will obtain the one month LIBOR (in U.S. Dollar Deposits) from the appropriate Bloomberg Display Page available as of the close of business announced in the last business day of the month immediately preceding the Rate Adjustment Date. In the event Bloomberg ceases publication or ceases to publish the one month LIBOR, Holder shall select a comparable publication to determine the one month LIBOR and provide notice thereof to Borrower. LIBOR may or may not be the lowest rate on the market for 3 4 U.S. Dollar Deposits in the London Interbank Eurodollar Market at which the Holder prices loans on the date on which the LIBOR Rate is determined by the Holder as set forth above." 10. By that certain Second Amendment to Promissory Note dated April 30, 2000, Section 2.2 of the Note was amended as follows: "2.2 Principal and Interest Payments. Commencing on May 1, 2000, and continuing on the first day of each calendar month thereafter through and including the Maturity Date (defined below), monthly payments of principal and interest shall be made in such amount as is necessary, taking into account the then effective LIBOR Rate, to fully amortize the unpaid principal balance of the Note on the date that is twenty-five (25) years after the first Rate Adjustment Date". 11. Section 4 of the Note is hereby deleted in its entirety and the following substituted therefore: Section 4. Maturity. Anything in this Note to the contrary notwithstanding, the entire unpaid balance of the principal amount hereof and all interest accrued thereon, to and including the Maturity Date (as defined below), (including interest accruing at the Default Rate) and all Late Fees (as defined below) shall, unless sooner paid, and except to the extent that payment thereof is sooner accelerated, be and become due and payable on the earlier of: (a) January 1, 2002, or (b) the completion of the HUD refinance of the Loan (the "Maturity Date"). Notwithstanding anything contained herein, if repayment of the Loan is funded from the proceeds of any refinancing of the Loan pursuant to which Holder does not receive a contractually agreed upon sum for the arrangement thereof, then Borrower shall pay to Holder a premium equal to one-half of one percent (.05%) of the outstanding principal balance of the Note on the date of such prepayment. 12. Section 5 of the Note is hereby deleted in its entirety and the following substituted therefore: "Section 5. Prepayment. Prepayment of the Loan in full or in part shall be permitted at any time during the term of the Loan without penalty, upon not less than thirty (30) and not greater than forty (40) days prior written notice to Lender specifying the date on which prepayment is to be made. Any such prepayment shall be credited, first, toward any Late Fees due hereunder, second, toward payment of any interest due at the Default Rate, third, toward payment of any interest due hereunder at the LIBOR Rate, and, fourth, toward payment of principal; provided, however, that if any advances made by Holder under the terms of any instruments securing this Note have not been repaid, any payments made may, at the option of Holder, be applied, first, to repay such advances, and interest thereon, with the balance, if any, applied as set forth in the preceding sentence. Notwithstanding anything contained herein, if such prepayment set forth herein is funded from the proceeds of any refinancing of the Loan pursuant to which the Holder does not receive a contractually agreed upon sum for the arrangement thereof, then Borrower shall pay to Holder a repayment premium equal to 4 5 one half of one percent (.05%) of the outstanding principal balance of the Note on the date of such prepayment (which balance shall be calculated exclusive of any voluntary partial prepayment)." Notwithstanding the execution of this Sixth Amendment, the indebtedness evidenced by the Note shall remain in full force and effect, and nothing contained herein shall be interpreted or construed as resulting in a novation of such indebtedness. The Borrower acknowledges and agrees that there are no offsets or defenses to payment of the obligations evidenced by the Note, as hereby amended, and hereby waives any defense, claim or counterclaim of the Borrower regarding the obligations of the Borrower under the Note, as hereby amended. The Borrower represents that there are no conditions of default or facts or consequences which will or could lead to a default under the obligations due from the Borrower under the Note, as amended herein. Except as expressly amended hereby, the Note shall remain in full force and effect in accordance with its terms, including, without limitation, the security and the guaranty for the Note. 5 6 IN WITNESS WHEREOF, the Lender and the Borrower have caused this Sixth Amendment to be executed by their respective duly authorized representatives, as of the date first set forth above. BORROWER: DMSC: DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company By: Diversicare Leasing Corp., its Sole Member By: ------------------------------ Its: ---------------------------- DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation By -------------------------------------- Its ------------------------------------ LENDER: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation By -------------------------------------- James C. Thompson, Senior Vice President The Guarantor joins in the execution of this Sixth Amendment to confirm its acknowledgment and agreement to the terms contained herein. GUARANTOR: ADVOCAT, INC., a Delaware corporation -------------------------------------- James F. Mills, Jr., CFO 6 EX-10.3 5 g71016ex10-3.txt GUARANTY AGREEMENT 1 EXHIBIT 10.3 GUARANTY AGREEMENT THIS GUARANTY AGREEMENT (this "Guaranty") is made as of the 29th day of March, 2001, by ADVOCAT INC., a Delaware corporation ("Guarantor"), for the benefit of GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (including its successors, transferees and assigns, "Lender"). RECITALS A. DIVERSICARE PINEDALE, LLC, a Delaware limited liability company ("Borrower"), has borrowed the sum of TWO MILLION NINE HUNDRED THIRTEEN THOUSAND NO/100 DOLLARS ($2,913,000.00) (the "Loan") from Lender, evidenced by Borrower's Promissory Note of even date herewith (the "Note") and that certain Loan Agreement by and between Lender and Borrower of even date herewith (the "Loan Agreement"), and secured by, among other things, a Mortgage and Security Agreement, of even date herewith (the "Mortgage") granting a first lien on a skilled nursing facility known as Pinedale Nursing and Rehabilitation Center, which is located in the City of Newport, County of Jackson, State of Arkansas (the "Facility"). B. The Note, the Loan Agreement, the Mortgage and the other documents, certificates, instruments and agreements executed by Borrower in connection with the Loan or to otherwise evidence or secure the Loan, and all renewals, supplements, or amendments thereto or a part thereof, are collectively referred to as the "Loan Documents". C. As a condition of making the Loan, Guarantor has agreed to guaranty, absolutely and unconditionally, payment of the Guaranty Obligations (as defined below), subject to the terms and conditions set forth in this Guaranty. AGREEMENT NOW THEREFORE, in consideration of the above and as an inducement to Lender to make the Loan evidenced by the Note and the Loan Agreement, and as security for the payment of the Loan and all interest from time to time accrued and unpaid thereon, and all expenses, fees, charges and other amounts from time to time due and owing to Lender under the Note, and the other Loan Documents, and for the performance of all covenants, agreements and other obligations from time to time owing to, or for the benefit of, Lender pursuant to the Loan Documents (collectively referred to herein as the "Guaranty Obligations"), Guarantor, intending to be legally bound, hereby covenants, agrees, represents and warrants as follows: 1. Guaranty. Guarantor hereby absolutely and unconditionally guarantees to the Lender the full, regular and punctual payment and performance of the Guaranty Obligations within ten (10) days of the Lender's demand therefor. Without limiting the generality of the foregoing, "Guaranty 2 Obligations" is used herein in its most comprehensive sense to include all debts, obligations and indebtedness described in the Loan Documents, whether now or hereafter made, incurred, or created, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and regardless of whether there is any recourse with respect to any portion of such Guaranty Obligations as against Borrower or any member of Borrower. In addition, Guarantor guarantees the full payment of, and agrees to reimburse Lender for, all costs of collection incurred by Lender in enforcing the Guaranty Obligations and pursuing any remedies set forth in the Loan Documents and/or the Guaranty, including, without limitation, court costs and actual attorneys' fees (including, but not limited to, fees in any bankruptcy or appellate proceeding). 2. Payments. All payments to be made by Guarantor to Lender hereunder shall be made in lawful money of the United States of America, in immediately available funds, at 200 Witmer Road, Horsham, Pennsylvania 19044, or such other location designated by Lender in writing, and shall be accompanied by a notice from Guarantor stating that such payments are made under this Guaranty. All payments available to Lender for application in payment or reduction of the Guaranty Obligations may be applied by Lender in such manner and in such amount, and at such time or times and in such order and priority as Lender may see fit and to the payment or reduction of such portion of the Guaranty Obligations as Lender may elect. 3. Subsequent Acts by Lender. Lender may, in its sole discretion and without notice to Guarantor, take any action which might otherwise be deemed a legal or equitable release or discharge of Guarantor's obligations hereunder without either impairing or affecting the liability of Guarantor for payment of the Guaranty Obligations (but in no event shall Lender collect more than the aggregate amount of the Guaranty Obligations), which actions might include, by way of illustration and not limitation: (a) at any time or from time to time, the time for Borrower's performance of or compliance with any provision of the Loan Documents may be extended or such performance or compliance may be waived by Lender; (b) the acceptance of partial payment of the Guaranty Obligations; (c) any of the acts permitted in the Loan Documents may be performed; (d) the Loan Documents may from time to time be amended and/or renewed by Borrower and Lender for the purpose of adding any provisions thereto or changing in any manner the rights of Lender or of Borrower thereunder; (e) the maturity date of the Note may be changed or renewed in whole or in part; (f) the maturity of the Note may be accelerated in accordance with the terms of the Loan Documents or any future agreement between Borrower and Lender or the holder of such Note; 2 3 (g) any collateral security for all or any part of the Guaranty Obligations may be exchanged, released, compromised, consolidated, surrendered or otherwise dealt with, and Lender's interest therein may be released and may or may not be perfected; (h) the settlement, release, compounding, compromise, cancellation, rearrangement or consolidation of any of the Guaranty Obligations; (i) the collection of or other liquidation of any claims Lender may have in respect to the Guaranty Obligations; (j) the granting of indulgences, forbearance, compromises, extensions or adjustments in respect to any covenant or agreement under the Loan Documents; and/or (k) the release from liability of any Guarantor and/or any additional parties who may guarantee payment of the Guaranty Obligations or any portion thereof. 4. Certain Rights, Subordination, Etc. (a) Lender may pursue its rights and remedies under this Guaranty and shall be entitled to payment hereunder notwithstanding any other guaranty of all or any part of the Guaranty Obligations, and notwithstanding any action taken by Lender to enforce any of its rights or remedies under such other guaranty, or any payment received thereunder (but in no event shall Lender collect more than the aggregate amount of the Guaranty Obligations). (b) Any obligation or debt of Borrower now or hereafter held by Guarantor is hereby subordinated to the Guaranty Obligations and, except for the obligations due under the Management Agreement (as defined in the Loan Agreement), which obligations are governed by the Subordination Agreement (as defined in the Loan Agreement), Guarantor shall not enforce or collect any such indebtedness from Borrower. Nevertheless, upon request by Lender, Guarantor shall collect, enforce and receive such indebtedness of Borrower to Guarantor. Any sums collected at Lender's request or collected in contravention of the prohibition set forth herein shall be held by Guarantor as trustee for Lender and shall be paid over to Lender on account of the Guaranty Obligations; provided, however, that such payments shall not impair, reduce or affect in any manner the liability of Guarantor under the other provisions of this Guaranty (but in no event shall Lender collect more than the aggregate amount of Guaranty Obligations). (c) Guarantor agrees that if any Event of Default exists under the Loan Documents ("Event of Default") and is continuing, (i) such Guarantor shall not accept payment from any other guarantor of any Guaranty Obligations by way of contribution or similar rights on account of any payment made hereunder by Guarantor to Lender, all of which rights are hereby subordinated to Guarantor's obligations hereunder to Lender, (ii) Guarantor will not take any action to exercise or enforce any rights to such contribution, and (iii) if Guarantor should receive payment, satisfaction or security for any indebtedness of Borrower to Lender, the same shall be delivered to Lender in the form received, endorsed or signed as may be appropriate for application on account of or as security 3 4 for the indebtedness of Borrower to Lender and, until so delivered, shall be held in trust for Lender as security for the indebtedness of Borrower to Lender. (d) In the event of any default by Borrower with respect to the Guaranty Obligations, Guarantor agrees to pay or perform on demand the Guaranty Obligations in the time and manner as provided in Paragraph 1 hereof. Lender shall not be under a duty to protect, secure or insure or be required to liquidate any security or lien provided by the Mortgage or other such collateral held by Lender prior to making such demand. (e) Notwithstanding any payment or payments made by Guarantor under this Guaranty, Guarantor expressly, irrevocably and unconditionally waives and releases any and all "claims" (as that term is defined in the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. Sections 101 et seq., and the regulations adopted and promulgated pursuant thereto (collectively, the "Bankruptcy Code")) it may now or hereafter have against Borrower, and shall not be entitled to, and hereby expressly waives, any and all rights of subrogation, reimbursement, indemnity, exoneration and contribution against Borrower, which Guarantor may now or hereafter have against Borrower without regard to whether any such right or claim arises expressly; provided, that such waiver and release shall not be effective as to any such claim or entitlement or such subrogation and other rights that accrue after the indefeasible (as determined under the Bankruptcy Code) payment, performance or other satisfaction in full of the Guaranty Obligations. 5. Representations and Warranties. Each Guarantor represents and warrants to Lender that: (a) Existence, Power and Qualification. Guarantor is a duly organized and validly existing corporation, has the power to own its properties and to carry on its business as is now being conducted, and is duly qualified to do business and is in good standing in every jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes its qualification necessary. (b) Power and Authority. Guarantor has full power and authority to incur the Guaranty Obligations provided for herein, all of which have been authorized by all proper and necessary action. (c) Financial Condition. The financial statements of the Guarantor heretofore furnished to Lender are complete and correct and fairly present the financial condition of the Guarantor as of the date thereof. Since the date of said financial statements there has been no material adverse change in the financial condition or operations, or the business taken as a whole, of Guarantor from that set forth therein. (d) Litigation. There are no legal or arbitral proceedings or any proceedings by or before any governmental or regulatory authority or agency now pending or, to the best of Guarantor's knowledge, threatened against Guarantor, in which an adverse decision could materially and adversely affect the financial condition of Guarantor. 4 5 (e) No Breach. The execution and delivery of this Guaranty, the consummation of the transactions herein contemplated and compliance with the terms and provisions hereof will not (i) conflict with or result in a breach of, or require any consent (not heretofore obtained at the time this representation is made) under, any applicable law, administrative proceeding or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which Guarantor is a party or by which Guarantor is bound or to which Guarantor is subject, (ii) constitute a default under any such agreement or instrument or under Guarantor's articles of incorporation or any other agreement or instrument binding upon Guarantor, or (iii) result in the creation or imposition of any lien upon any of the revenues or assets of Guarantor pursuant to the terms of any such agreement or instrument. (f) Approvals. To the best of Guarantor's knowledge, no authorizations, approvals, or consents of (other than those heretofore obtained and in full force and effect), and no filings or registrations with (other than those heretofore obtained and in full force and effect), any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by Guarantor of this Guaranty or for the validity or enforceability thereof. (g) Taxes, etc. Guarantor has filed all United States federal and state tax returns and all other tax returns that are required to be filed by Guarantor and has paid all taxes due pursuant to such returns or pursuant to any assessment received by Guarantor, except such taxes, the payment of which is not yet due, or which if due, is not yet delinquent or is being contested in good faith or which has not been finally determined. (h) Benefit. The making of the Loan by Lender to Borrower will directly benefit Guarantor. 6. Financial Covenants and Other Information. Guarantor shall provide Lender the following financial statements and information on a continuing basis during the term of the Loan: (a) Within one hundred twenty (120) days after the end of each fiscal year of the Guarantor, audited financial statements of Guarantor prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP and shall include a balance sheet and a statement of income and expenses for the year then ended. (b) Within forty-five (45) days of the end of each fiscal quarter of Guarantor, unaudited interim financial statements of Guarantor, prepared in accordance with GAAP, which statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by the chief financial officer of Guarantor as true and correct in all material respects. (c) As soon as available, but in no event more than thirty (30) days after the filing deadline, as may be extended from time to time, copies of all federal, state and local tax returns of Guarantor, together with all supporting documentation and required schedules. 5 6 The Lender further reserves the right to require such other financial information of Guarantor in such form and at such other times (including monthly or more frequently, but not more frequently than reasonable) as Lender shall deem reasonably necessary, and Guarantor agrees promptly to provide or to cause to be provided, such information to Lender. All financial statements must be in form and detail as Lender may from time to time reasonably request. 7. Guaranty is a Continuing Obligation. The obligations of the Guarantor under this Guaranty shall be continuing, absolute, irrevocable and unconditional under all circumstances, and shall remain in full force and effect or be reinstated, until all of the Guaranty Obligations shall have been paid and performed in full, irrespective of the bankruptcy, insolvency, merger, reorganization, termination, discontinuation or dissolution of the Borrower or any assignment for the benefit of creditors by the Borrower. The Guarantor acknowledges and agrees that Guarantor's obligations hereunder shall apply to and continue with respect to any of the obligations of the Borrower under the Loan Documents which are subsequently recovered from the Lender for the reasons set forth below. In the event that any payment by or on the behalf of the Borrower to Lender is held to constitute a preference, fraudulent transfer or other voidable payment under any bankruptcy, insolvency or similar law, or if for any other reason the Lender is required to refund such payment or pay the amount thereof to any other party, including, without limitation, as a result of the appointment of a receiver, intervenor, or conservator of, or trustee or similar officer for, the Borrower or of any substantial part of its property or otherwise, such payment by the Borrower or any other party to the Lender shall not constitute a release of the Guarantor from any liability hereunder, and this Guaranty shall continue to be effective or shall be reinstated (notwithstanding any prior release, surrender or discharge by the Lender of this Guaranty or of the Guarantor), as the case may be, with respect to, and this Guaranty shall apply to, any and all amounts so refunded by the Lender or paid by the Lender to another party (which amounts shall constitute part of the Guaranty Obligations), and any interest paid by the Lender and any attorneys' fees, costs and expenses paid or incurred by the Lender in connection with any such event. It is the intent of the Guarantor and the Lender that the obligations and liabilities of the Guarantor hereunder are absolute and unconditional under any and all circumstances and that until the Guaranty Obligations are fully and finally paid and performed, and not subject to refund or disgorgement, the obligations and liabilities of the Guarantor hereunder shall not be discharged or released, in whole or in part, by any act or occurrence that might, but for the provisions of this Guaranty, be deemed a legal or equitable discharge or release of a guarantor. In the event Lender has reasonable cause to believe that it may have to pay back or return any sums as a result of any ruling under the Bankruptcy Code, the Lender shall be entitled to continue to hold this Guaranty in its possession for a period of one year from the later of (a) the date the Guaranty Obligations are paid and performed in full, or (b) if not paid in accordance with the Guaranty Obligations, the expiration or termination of the Loan, and for so long thereafter as may be necessary to enforce any obligation of the Guarantor hereunder and/or to exercise any right or remedy of the Lender hereunder. 8. This Section Intentionally Deleted. 9. Waiver and Release of Subrogation and Participation. Guarantor shall have no right of subrogation in or under the Guaranty Obligations, and no rights of reimbursement, indemnity or contribution from the Borrower or any other rights by law, equity, statute or contract that would 6 7 give rise to a creditor-debtor relationship between Guarantor and the Borrower. Guarantor shall have no right to participate in any way in any of the collateral which is conveyed under the Loan Documents as security for the Guaranty Obligations. Guarantor hereby explicitly waives and releases any of the above-described rights of subrogation, reimbursement, indemnity, contribution, participation, and any right to require the marshaling of Borrower's assets under any circumstances. 10. Continuing Validity. Guarantor further agrees that the validity of this Guaranty and the obligations of Guarantor hereunder shall in no way be terminated, affected or impaired (a) by reason of the assertion by Lender of any rights or remedies which it may have under or with respect to either the Note, the Mortgage, or the other Loan Documents, against any person obligated thereunder or against the owner of the premises covered by the Mortgage, (b) by reason of any failure to file or record any of such instruments or to take or perfect any security intended to be provided thereby, (c) by reason of the commencement of a case under the Bankruptcy Code by or against any person obligated under the Note, the Mortgage or the other Loan Documents, or the death of any Guarantor, or (d) by reason of any payment made on the Guaranty Obligations or any other indebtedness arising under the Note, the Mortgage or the other Loan Documents, whether made by Borrower or Guarantor or any other person, which is required to be refunded pursuant to any bankruptcy or insolvency law; it being understood that no payment so refunded shall be considered as a payment of any portion of the Guaranty Obligations, nor shall it have the effect of reducing the liability of Guarantor hereunder. It is further understood, that if Borrower shall have taken advantage of, or be subject to the protection of, any provision in the Bankruptcy Code, the effect of which is to prevent or delay Lender from taking any remedial action against Borrower, including the exercise of any option Lender has to declare the Guaranty Obligations due and payable on the happening of any default or event by which under the terms of the Note, the Mortgage or the other Loan Documents, the Guaranty Obligations shall become due and payable, Lender may, as against Guarantor, nevertheless, declare the Guaranty Obligations due and payable and enforce any or all of its rights and remedies against Guarantor provided for herein. 11. Notice. All notices given under this Guaranty shall be in writing and shall be either hand delivered or mailed, by certified U.S. mail, return receipt requested, first class postage prepaid, to the other party, at its address set forth below or at such other address as such party may designate by notice to the other party: (a) If to Guarantor: Advocat Inc. 277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067 Attn: CFO with a copy to: John N. Popham, IV, Esq. 7 8 Harwell, Howard, Hyne, Gabbert & Manner, PC 1800 First American Center 315 Deaderick Street Nashville, Tennessee 37238-1800 (b) If to Lender: GMAC Commercial Mortgage Corporation 200 Witmer Road Horsham, Pennsylvania 19044 Attention: Servicing Department with a copy to: Kay K. Bains, Esq. Walston, Wells, Anderson & Bains, LLP 505 20th Street North, Suite 500 Birmingham, AL 35203 12. No Waiver by Lender; Remedies. No failure on the part of Lender or the holder of the Note to exercise, and no delay in exercising, any right hereunder or thereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right. Guarantor hereby agrees that all rights and remedies that Lender is afforded by reason of this Guaranty are separate and cumulative and may be pursued separately, successively, or concurrently, as Lender deems advisable. In addition, all such rights and remedies are non-exclusive and shall in no way limit or prejudice Lender's ability to pursue any other legal or equitable rights or remedies that may be available. Failure of Lender to insist upon strict performance or observance of any of the terms, provisions and covenants hereof or to exercise any right herein contained shall not be construed as a waiver or relinquishment of the right to demand strict performance at another time. Receipt by Lender of any payment or performance on the Guaranty Obligations shall not be deemed a waiver of the breach of any provision hereof or of any of the Loan Documents. Without limiting the generality of the foregoing, Guarantor agrees that in any action by Lender by reason of the Guaranty Obligations, Lender, at its election, may proceed (a) against Guarantor together with Borrower, (b) against Guarantor and Borrower, individually, or (c) against Guarantor only without having commenced any action against, or having obtained any judgment against, Borrower. 13. Certain Waivers by Guarantor. AS A FURTHER INDUCEMENT TO LENDER TO MAKE THE LOAN AND IN CONSIDERATION THEREOF, GUARANTOR FURTHER COVENANTS AND AGREES THAT SERVICE OF ANY SUMMONS AND COMPLAINT OR OTHER PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE MADE BY REGISTERED OR CERTIFIED MAIL DIRECTED TO GUARANTOR AT GUARANTOR'S ADDRESS HEREINABOVE SET FORTH, GUARANTOR HEREBY WAIVING PERSONAL 8 9 SERVICE THEREOF. GUARANTOR HEREBY WAIVES THE PLEADING OF ANY STATUTE OF LIMITATIONS AS A DEFENSE TO THE OBLIGATIONS HEREUNDER. GUARANTOR HEREBY WAIVES NOTICE OF THE ACCEPTANCE HEREOF, PRESENTMENT, DEMAND FOR PAYMENT, PROTEST, NOTICE OF PROTEST, OR ANY AND ALL NOTICE OF NON-PAYMENT, NON-PERFORMANCE OR NON-OBSERVANCE, OR OTHER PROOF, OR NOTICE OR DEMAND. THE GUARANTOR FURTHER WAIVES AND AGREES NOT TO ASSERT: (A) ANY RIGHT TO REQUIRE LENDER TO PROCEED AGAINST BORROWER OR TO PROCEED AGAINST ANY OTHER GUARANTOR, OR TO PROCEED AGAINST OR EXHAUST ANY SECURITY FOR THE GUARANTY OBLIGATIONS, OR TO PURSUE ANY OTHER REMEDY AVAILABLE TO LENDER, OR TO PURSUE ANY REMEDY IN ANY PARTICULAR ORDER OR MANNER, (B) THE BENEFIT OF ANY STATUTE OF LIMITATIONS AFFECTING GUARANTOR'S LIABILITY HEREUNDER OR THE ENFORCEMENT HEREOF, (C) NOTICE OF THE EXISTENCE, CREATION OR INCURRING OF NEW OR ADDITIONAL INDEBTEDNESS OF BORROWER TO LENDER, (D) THE BENEFITS OF ANY STATUTORY PROVISION LIMITING THE LIABILITY OF A SURETY, (E) ANY DEFENSE ARISING BY REASON OF ANY DISABILITY OR OTHER DEFENSE OF BORROWER OR BY REASON OF THE CESSATION FROM ANY CAUSE WHATSOEVER (OTHER THAN PAYMENT IN FULL) OF THE LIABILITY OF BORROWER FOR THE GUARANTY OBLIGATIONS, (F) THE BENEFITS OF ANY STATUTORY PROVISION LIMITING THE RIGHT OF LENDER TO RECOVER A DEFICIENCY JUDGMENT, OR TO OTHERWISE PROCEED AGAINST ANY PERSON OR ENTITY OBLIGATED FOR PAYMENT OF THE GUARANTY OBLIGATIONS, AFTER ANY FORECLOSURE OR TRUSTEE'S SALE OF ANY SECURITY FOR THE GUARANTY OBLIGATIONS, AND (G) ANY OTHER DEFENSE OR CIRCUMSTANCE WHICH MIGHT OTHERWISE CONSTITUTE A LEGAL OR EQUITABLE DISCHARGE OF GUARANTOR'S LIABILITY HEREUNDER, ARISING FROM OR OUT OF THE LOAN, THE LOAN DOCUMENTS AND/OR THE FACILITY. 14. Waiver of Automatic Stay. GUARANTOR HEREBY AGREES THAT, IN CONSIDERATION OF LENDER'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN, IN THE EVENT THAT GUARANTOR SHALL (A) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED STATES CODE, AS AMENDED ("BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUTE, (B) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE, (C) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR 9 10 DEBTORS, (D) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR, OR (E) BE THE SUBJECT OF AN ORDER, JUDGEMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED AGAINST GUARANTOR FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, SUBJECT TO COURT APPROVAL, LENDER SHALL THEREUPON BE ENTITLED AND GUARANTOR HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE (INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR AGAINST THE EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO LENDER AS PROVIDED IN THIS AGREEMENT AND/OR THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND GUARANTOR HEREBY IRREVOCABLY WAIVES GUARANTOR'S RIGHTS TO OBJECT TO SUCH RELIEF. 15. Guaranty of Payment. This is a guaranty of payment and not of collection and upon any default of Borrower under the Note, the Mortgage, the Loan Agreement or the other Loan Documents, Lender may, at its option, proceed directly and at once, without notice, against Guarantor to collect and recover the full amount of the liability hereunder or any portion thereof, without proceeding against Borrower or any other person, or foreclosing upon, selling, or otherwise disposing of or collecting or applying against any of the Facility or other collateral for the Loan. (a) Joint and Several Liability. The term "Guarantor" as used in this Guaranty shall refer individually and collectively to all signers of this Guaranty. Each undertaking herein contained shall be the joint and several undertaking of each signer hereof if more than one, and it is specifically agreed that Lender may enforce the provisions hereof with respect to one or more of such signers without seeking to enforce the same as to all or any such signers. Guarantor hereby waives any requirement of joinder of all or any other of the parties hereto in any suit or proceeding to enforce the provisions hereof. (b) Assignment. Lender may assign this Guaranty or any rights or powers hereunder, in whole or in part, in connection with the sale of the Note and assignment of the Mortgage. The duties and obligations of Guarantor may not be delegated or transferred by Guarantor without the prior written consent of Lender which may be withheld in its absolute discretion. Each reference herein to Lender shall be deemed to include its successors and assigns, to whose favor the provisions of this Guaranty shall also inure. Each reference herein to Guarantor shall be deemed to include the heirs, executors, administrators, legal representatives, successors and assigns of Guarantor, all of whom shall be bound by the provisions of this Guaranty. If any party 10 11 hereto shall be a partnership or a limited liability company, the agreements and obligations on the part of Guarantor herein contained shall remain in force and application notwithstanding any changes in the individuals or entities composing the partnership or the limited liability company, and the term "Guarantor" shall include any altered or successive partnerships and any altered or successive limited liability companies but the predecessor partnerships and their partners, and the predecessor limited liability companies and their members, shall not thereby be released from any obligations or liability hereunder. 16. Intentionally Deleted. 17. Waiver of Trial by Jury; Service of Process. GUARANTOR HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE GUARANTOR AND THE LENDER MAY BE PARTIES ARISING OUT OF, IN CONNECTION WITH, OR IN ANY WAY PERTAINING TO, THIS AGREEMENT AND/OR ANY OF THE OTHER LOAN DOCUMENTS. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY THE GUARANTOR, AND THE GUARANTOR HEREBY REPRESENTS THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. THE GUARANTOR FURTHER REPRESENTS AND WARRANTS THAT GUARANTOR HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED BY INDEPENDENT LEGAL COUNSEL SELECTED BY GUARANTOR OF GUARANTOR'S OWN FREE WILL, AND THAT GUARANTOR HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. GUARANTOR AGREES TO PAY ALL COURT COSTS AND REASONABLE ATTORNEY'S FEES INCURRED BY LENDER IN CONNECTION WITH ENFORCING ANY PROVISION OF THIS AGREEMENT. NOTWITHSTANDING THE FOREGOING, LENDER AGREES TO USE REASONABLE EFFORTS TO PROVIDE GUARANTOR WITH NOTICE OF THE FILING OF ANY LAWSUIT BY LENDER AGAINST GUARANTOR. 18. Power and Authority. Guarantor (and its representative, executing below, if any) has full power, authority and legal right to execute this Guaranty and to perform all its obligations under this Guaranty. 19. Complete Agreement; Modification; Waiver. All understandings, representations and agreements heretofore had with respect to this Guaranty are merged into this Guaranty which are incorporated herein which alone fully and completely expresses the agreement of Guarantor and Lender. In no event shall any modification or waiver of the provisions of this Guaranty be effective 11 12 unless in writing executed by Lender. Any waiver granted by Lender shall be applicable only in the specific instance for which it is given. 20. Governing Law. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TENNESSEE AND APPLICABLE FEDERAL LAW. 21. Counterparts; Construction. This Guaranty may be executed in any number of counterparts, all of which when taken together shall constitute one and the same instrument. Words of any gender used in this Guaranty shall be held and construed to include the other gender, and words in the singular shall be held and construed to include the plural, and words in the plural shall be held and construed to include the singular, unless this Guaranty or the context otherwise requires. 22. Review by Guarantor. GUARANTOR HAS RECEIVED COPIES OF, AND HAS HAD THE OPPORTUNITY TO REVIEW, ALL OF THE LOAN DOCUMENTS REFERRED TO IN THIS GUARANTY. GUARANTOR HAS DISCUSSED THIS GUARANTY WITH GUARANTOR'S LEGAL COUNSEL, AND GUARANTOR UNDERSTANDS THE NATURE AND EXTENT AND THE LEGAL AND PRACTICAL CONSEQUENCES OF GUARANTOR'S LIABILITY UNDER THIS GUARANTY. 23. No Oral Agreement. To the extent allowed by law, Guarantor agrees to be bound by the terms of the following notice: NOTICE: THIS GUARANTY AND THE OTHER LOAN DOCUMENTS CONSTITUTE A WRITTEN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE LOAN. [SIGNATURES BEGIN ON NEXT PAGE] 13 IN WITNESS WHEREOF, this Guaranty has been duly executed by the undersigned as of the day and year first written above. GUARANTOR: WITNESS: ADVOCAT INC., a Delaware corporation - --------------------------------- ---------------------------------------- By: ------------------------------------- Its: ----------------------------------- STATE OF -------------------- ) COUNTY OF ------------------- ) Before me, a Notary Public in and for said State and County, duly commissioned and qualified, personally appeared _________________, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged him/herself to be _________________ of Advocat Inc., a Delaware corporation, the within named grantee, and that he/she executed the foregoing instrument for the purposes therein contained, by signing the name of the said corporation by himself as _____________. Witness my hand and seal this ____ day of March, 2001. ----------------------------------- Notary Public AFFIX SEAL My commission expires: ------------------- 13 EX-10.4 6 g71016ex10-4.txt LOAN AGREEMENT 1 EXHIBIT 10.4 LOAN AGREEMENT THIS LOAN AGREEMENT (this "Agreement") is made as of the 29th day of March, 2001, by and between DIVERSICARE PINEDALE, LLC, a Delaware limited liability company (together with its successors and assigns, the "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (together with its successors and assigns, the "Lender"). R E C I T A L S: 1. Borrower has requested that the Lender make a loan to Borrower in the principal sum of $2,913,000.00 (the "Loan"). 2. Lender has agreed to make the Loan on the terms and conditions hereinafter set forth. A G R E E M E N T: NOW, THEREFORE, it is hereby agreed as follows: ARTICLE I DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS. 1.1 As used in this Agreement, the following terms shall have the following meanings unless the context hereof shall otherwise indicate: "Accounts" means any rights of Borrower arising from the operation of the Facility to payment for goods sold or leased or for services rendered, not evidenced by an Instrument, including, without limitation, (i) all accounts arising from the operation of the Facility , (ii) all moneys and accounts held by Lender pursuant to Section 4.12 of this Agreement, and (iii) all rights to payment from Medicare or Medicaid programs, or similar state or federal programs, boards, bureaus or agencies and rights to payment from patients, residents, private insurers, and others arising from the operation of the Facility, including rights to payment pursuant to Reimbursement Contracts. Accounts shall include the proceeds thereof (whether cash or noncash, moveable or immoveable, tangible or intangible) received from the sale, exchange, transfer, collection or other disposition or substitution thereof. "Actual Management Fees" means actual management fees paid or incurred in connection with operation of the Facility. 1 2 "Affiliate" means, with respect to any Person, (i) each Person that controls, is controlled by or is under common control with such Person, (ii) each Person that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, any of the Stock of such Person, and (iii) each of such Person's officers, directors, members, joint venturers and partners. "Assignment of Leases and Rents" means that certain Assignment of Leases and Rents of even date herewith executed by Borrower in favor of Lender. "Assumed Management Fees" means assumed management fees of five percent (5%) of net patient revenues of the Facility (after Medicare and Medicaid contractual adjustments). "Business Day" means a day on which commercial banks are not authorized or required by law to close in New York, New York. "Closing Date" means the date on which all or any part of the Loan is disbursed by the Lender to or for the benefit of Borrower. "Collateral" means, collectively, the Property, Improvements, Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money, Permits (to the full extent assignable), Reimbursement Contracts, and all Proceeds, all whether now owned or hereafter acquired, and including replacements, additions, accessions, substitutions, and products thereof and thereto, and all other property which is or hereafter may become subject to a Lien in favor of Lender as security for any of the Loan Obligations. "Combined Debt Service Coverage" shall mean the combined Debt Service Coverage of Borrower and the Related Borrower. "Commitment Letter" means the commitment letter issued by Lender to Borrower dated December 15, 2000. "Cross-Collateralization and Cross-Default Agreement" means that certain Cross-Collateralization and Cross-Default Agreement of even date herewith executed by and among Borrower, Related Borrower and Lender. "Debt Service Coverage" means a ratio in which the first number is the sum of net pre-tax income of the Borrower from the operations of the Facility as set forth in the quarterly statements provided to Lender (without deduction for Actual Management Fees paid or incurred), calculated based upon the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan), plus interest expense, to the extent deducted in determining net income, plus non-cash expenses or allowances for depreciation and amortization of the Facility for said period, less either Assumed Management Fees or Actual Management Fees, as applicable, and the second number is the sum of the scheduled principal amounts due (even if not paid) on the Loan (excluding the amount of any prepayment made during such period) for the applicable period plus 2 3 the interest expense on such Loan for the applicable period. In calculating "pre-tax income", Extraordinary Income and Extraordinary Expenses shall be excluded. "Debt Service Reserve Fund Agreement" means that certain Debt Service Reserve Fund Escrow and Security Agreement of even date herewith between Lender and Borrower. "Default" means the occurrence or existence of any event which, but for the giving of notice or expiration of time or both, would constitute an Event of Default. "Default Rate" shall have the meaning given to that term in the Note. "Environmental Permit" means any permit, license, or other authorization issued under any Hazardous Materials Law with respect to any activities or businesses conducted on or in relation to the Property and/or the Improvements. "Equipment" means all beds, linen, televisions, carpeting, telephones, cash registers, computers, lamps, glassware, rehabilitation equipment, restaurant and kitchen equipment, and other fixtures and equipment of Borrower located on, attached to or used or useful in connection with any of the Property or the Facility and all renewals and replacements thereof and substitutions therefor; provided, however, that with respect to any items which are leased for the benefit of the Facility and not owned by Borrower, the Equipment shall include the leasehold interest only of Borrower together with any options to purchase any of said items and any additional or greater rights with respect to such items which Borrower may hereafter acquire, but the foregoing shall not be construed to mean that such leasing shall be permitted hereunder and under the other Loan Documents. "Event of Default" means any "Event of Default" as defined in Article VII hereof. "Extraordinary Income and Extraordinary Expenses" means material items of a character significantly different from the typical or customary business activities of Borrower which would not be expected to recur frequently and which would not be considered as recurring factors in any evaluation of the ordinary operating processes of Borrower's business, and which would be treated as extraordinary income or extraordinary expenses under GAAP. "Exhibit" means an Exhibit to this Agreement, unless the context refers to another document, and each such Exhibit shall be deemed a part of this Agreement to the same extent as if it were set forth in its entirety wherever reference is made thereto. "Facility" means the facility known as "Pinedale Nursing and Rehabilitation Center," presently a 130-bed licensed skilled nursing facility located on the Property, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any facility), now or hereafter operated on the Property. 3 4 "GAAP" means, as in effect from time to time, generally accepted accounting principles consistently applied as promulgated by the American Institute of Certified Public Accountants. "General Intangibles" means all intangible personal property of Borrower arising out of or connected with the Property or the Facility and all renewals and replacements thereof and substitutions therefor (other than Accounts, Rents, Instruments, Inventory, Money, Permits, and Reimbursement Contracts), including, without limitation, things in action, contract rights and other rights to payment of money. "Governmental Authority" means any board, commission, department or body of any municipal, county, state or federal governmental unit, or any subdivision of any of them, that has or acquires jurisdiction over the Property and/or the Improvements or the use, operation or improvement of the Property. "Guarantor" means Advocat Inc., a Delaware corporation. "Guaranty Agreement" means that certain Guaranty Agreement of even date herewith from Guarantor to Lender. "Hazardous Materials" means petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials; radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or-could become friable; underground storage tanks, whether empty or containing any substance; any substance the presence of which on the Property is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material or substance now or in the future defined as a "hazardous substance," "hazardous material," "hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "pollutant" within the meaning of any Hazardous Materials Law. "Hazardous Materials Laws" means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Borrower or to the Property and/or the Improvements. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, and their state analogs. "Improvements" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Property, including, but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and 4 5 storm sashes, and cleaning apparatus which are or shall be attached to the Property or said buildings, structures or improvements. "Indebtedness" means any (i) obligations for borrowed money, (ii) obligations, payment for which is being deferred by more than thirty (30) days, representing the deferred purchase price of property other than accounts payable arising in connection with the purchase of inventory customary in the trade and in the ordinary course of Borrower's business, (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from the Accounts and/or property now or hereafter owned or acquired, and (iv) the amount of any other obligation (including obligations under financing leases) which would be shown as a liability on a balance sheet prepared in accordance with GAAP. "Instruments" means all instruments, chattel paper, documents or other writings obtained from or in connection with the operation of the Property or the Facility (including, without limitation, all ledger sheets, computer records and printouts, data bases, programs, books of account and files relating thereto). "Intercreditor Agreement" shall mean that certain Amended and Restated Intercreditor Agreement of even date herewith by and among Lender, Borrower and AmSouth Bank. "Inventory" means all inventories of food, beverages and other comestibles held by Borrower for sale or use at or from the Property or the Facility, and soap, paper supplies, medical supplies, drugs and all other such goods, wares and merchandise held by Borrower for sale to or for consumption by guests, patients or residents of the Property or the Facility and all such other goods returned to or repossessed by Borrower. "Lien" means any voluntary or involuntary mortgage, security deed, deed of trust, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, including those contemplated by or permitted in this Agreement and the other Loan Documents. "Loan" means the Loan in the principal sum of $2,913,000.00 made by Lender to Borrower as of the date hereof. "Loan Documents" means, collectively, this Agreement, the Assignment of Leases and Rents, the Note, the Debt Service Reserve Fund Agreement, the Guaranty Agreement, the Mortgage, the Subordination Agreement, the Cross-Collateralization and Cross-Default Agreement and the Intercreditor Agreement, together with any and all other documents executed by Borrower or others, evidencing, securing or otherwise relating to the Loan. "Loan Obligations" means the aggregate of all principal and interest owing from time to time under the Note and all expenses, charges and other amounts from time to time owing under the Note, this Agreement, or the other Loan Documents and all covenants, agreements and other obligations from time to time owing to, or for the benefit of, Lender pursuant to the Loan Documents. 5 6 "Management Agreement" means that certain Management Agreement dated December 1, 2000 by and between Manager and Borrower, obligating the Manager to operate and manage the Facility. "Manager" means Diversicare Management Services, a Tennessee corporation, and any successor manager of the Facility approved by Lender in writing. "Maturity Date" means April 1, 2006. "Medicaid" means that certain program of medical assistance, funded jointly by the federal government and the States, for impoverished individuals who are aged, blind and/or disabled, and/or members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. ss.ss. 1396 et seq.) and the regulations promulgated thereunder. "Medicare" means that certain federal program providing health insurance for eligible elderly and other individuals, under which physicians, hospitals, skilled nursing homes, home health care and other providers are reimbursed for certain covered services they provide to the beneficiaries of such program, which program is more fully described in Title XVIII of the Social Security Act (42 U.S.C. ss.ss. 1395 et seq.) and the regulations promulgated thereunder. "Money" means all monies, cash, rights to deposit or savings accounts or other items of legal tender obtained from or for use in connection with the operation of the Facility. "Mortgage" means that certain Mortgage and Security Agreement, of even date herewith from the Borrower in favor of or for the benefit of Lender and covering the Property. "Note" means the Promissory Note of even date herewith in the principal amount of the Loan payable by Borrower to the order of Lender. "O&M Program" means a written program of operations and maintenance established or approved in writing by Lender relating to any Hazardous Materials in, on or under the Property or Improvements. "Permits" means all licenses, permits and certificates used or necessary in connection with the ownership, operation, use or occupancy of the Property and/or the Facility, including, without limitation, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need and all such other permits, licenses and rights, obtained from any governmental, quasi-governmental or private person or entity whatsoever concerning ownership, operation, use or occupancy. "Permitted Encumbrances" has the meaning given to that term in Section 5.2 hereof. "Person" means any natural person, firm, trust, corporation, partnership, limited liability company, trust and any other form of legal entity. 6 7 "Proceeds" means all proceeds (including proceeds of insurance and condemnation) from the sale, exchange, transfer, collection, loss, damage, disposition, substitution or replacement of any of the Collateral. "Property" means the real estate located in Newport, Jackson County, Arkansas, which is more particularly described in Exhibit "A" hereto, upon which the Facility is located, and which, concurrent with the Closing Date, will be owned by the Borrower. "Reimbursement Contracts" means all third party reimbursement contracts for the Facility which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare, Medicaid and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements. "Related Borrower" means Diversicare Windsor House, LLC, a Delaware limited liability company. "Related Facility" means Windsor House of Huntsville located in Huntsville, Alabama. "Rents" means all rent and other payments of whatever nature from time to time payable pursuant to leases of the Property or the Facility, or for retail space or other space at the Property (including, without limitation, rights to payment earned under leases for space in the Improvements for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians' offices, pharmacies and specialty shops). "Single-Purpose Entity" means a Person which owns no interest or property other than the Collateral. "Stock" means all shares, options, warrants, general or limited partnership interests, membership interests, participating or other equivalents (regardless of how designated) in a corporation, limited liability company, partnership or any equivalent entity, whether voting or nonvoting, including, without limitation, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended). "Subordination Agreement" means that certain Subordination of Management Agreement of even date herewith by and among Borrower, Manager, and Lender. 1.2 Singular terms shall include the plural forms and vice versa, as applicable, of the terms defined. 7 8 1.3 Terms contained in this Agreement shall, unless otherwise defined herein or unless the context otherwise indicates, have the meanings, if any, assigned to them by the Uniform Commercial Code in effect in the State of Alabama. 1.4 All accounting terms used in this Agreement shall be construed in accordance with GAAP, except as otherwise specified. 1.5 All references to other documents or instruments shall be deemed to refer to such documents or instruments as they may hereafter be extended, renewed, modified, or amended and all replacements and substitutions therefor. 1.6 All references herein to "Medicaid" and "Medicare" shall be deemed to include any successor program thereto. ARTICLE II TERMS OF THE LOAN 2.1 THE LOAN. Borrower has agreed to borrow the Loan from Lender, and Lender has agreed to make the Loan to Borrower, subject to Borrower's compliance with and observance of the terms, conditions, covenants, and provisions of this Agreement and the other Loan Documents, and Borrower has made the covenants, representations, and warranties herein and therein as a material inducement to Lender to make the Loan. 2.2 SECURITY FOR THE LOAN. The Loan will be evidenced, secured and guaranteed by the Loan Documents. ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, and to make the Loan to Borrower, Borrower represents and warrants to Lender as follows: 3.1 EXISTENCE, POWER AND QUALIFICATION. Borrower is a duly organized and validly existing Delaware limited liability company, has the power to own its properties and to carry on its business as is now being conducted, and is duly qualified to do business and is in good standing in every jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes its qualification necessary. 3.2 POWER AND AUTHORITY. Borrower has full power and authority to borrow the indebtedness evidenced by the Note and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and limited liability company action on the part of 8 9 Borrower. All consents, approvals, authorizations, orders or filings of or with any court or governmental agency or body, if any, required for the execution, delivery and performance of the Loan Documents by the Borrower have been obtained or made. 3.3 DUE EXECUTION AND ENFORCEMENT. Each of the Loan Documents to which Borrower is a party constitutes a valid and legally binding obligation of Borrower, enforceable in accordance with its respective terms (except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity) and does not violate, conflict with, or constitute any default under any law, government regulation, decree, judgment, Borrower's articles of organization/incorporation, partnership agreement or operating agreement, as applicable, or any other agreement or instrument binding upon Borrower. 3.4 SINGLE PURPOSE ENTITY. Borrower is a Single Purpose Entity. 3.5 PENDING MATTERS. a. Operations; Financial Condition. No action or investigation is pending or, to the best of Borrower's knowledge, threatened before or by any court or administrative agency which might result in any material adverse change in the financial condition, operations or prospects of Borrower or any lower reimbursement rate under the Reimbursement Contracts. The Borrower is not in violation of any agreement, the violation of which might reasonably be expected to have a material adverse effect on its business or assets, and the Borrower is not in violation of any order, judgment, or decree of any court, or any material violation of any statute or governmental regulation, to which it is subject. b. Condemnation or Casualty. There are no proceedings pending, or, to the best of Borrower's knowledge, threatened, to acquire through the exercise of any power of condemnation, eminent domain or similar proceeding any part of the Property, the Improvements or any interest therein, or to enjoin or similarly prevent or restrict the use of the Property or the operation of the Facility in any manner. None of the Improvements is subject to any unrepaired casualty or other damage. 3.6 FINANCIAL STATEMENTS ACCURATE. All financial statements heretofore or hereafter provided by Borrower are and will be true and complete in all material respects as of their respective dates and fairly present the respective financial condition of Borrower, and there are no material liabilities, direct or indirect, fixed or contingent, as of the respective dates of such statements which are not reflected therein or in the notes thereto or in a written certificate delivered with such statements. The financial statements of the Borrower have been prepared in accordance with GAAP. There has been no material adverse change in the financial condition, operations, or prospects of Borrower since the dates of such statements except as fully disclosed in writing with the delivery of such statements. All financial statements of the operations of the Facility heretofore or hereafter provided to Lender are and will be true and complete in all material respects as of their respective dates. 9 10 3.7 COMPLIANCE WITH FACILITY LAWS. The Facility is duly licensed and is currently operated as a 130-bed skilled care nursing home under the applicable laws of the state where the Property is located. Borrower is the lawful owner of all Permits for the Facility, including, without limitation, the Certificate of Need issued by the Arkansas State Health Planning and Development Agency or the Nursing Home License issued by the Arkansas State Board of Health, if applicable, which (a) are in full force and effect, (b) constitute all of the permits, licenses and certificates required for the use, operation and occupancy thereof, (c) have not been pledged as collateral for any other loan or Indebtedness, (d) are held free from restrictions or any encumbrance which would materially adversely affect the use or operation of the Facility, and (e) are not provisional, probationary or restricted in any way. The Borrower and Manager as well as the operation of the Facility are in compliance in all material respects with the applicable provisions of nursing home and/or assisted living facility laws, rules, regulations and published interpretations to which the Facility is subject. No waivers of any laws, rules, regulations, or requirements (including, but not limited to, minimum foot requirements per bed) are required for the Facility to operate at the current licensed bed capacity. All Reimbursement Contracts are in full force and effect with respect to the Facility, and Borrower and Manager are in good standing with all the respective agencies governing such applicable nursing home licenses, program certification, and Reimbursement Contracts. Borrower and Manager are current in the payment of all so-called provider specific taxes or other assessments with respect to such Reimbursement Contracts. Borrower will maintain or cause Manager to maintain (without allowing to lapse) the Certificate of Need, if applicable, and any required Permits. In the event Lender acquires the Facility through foreclosure or otherwise, neither Lender nor a subsequent manager, a subsequent lessee or any subsequent purchaser (through foreclosure or otherwise) must obtain a Certificate of Need prior to applying for and receiving a license to operate the Facility and certification to receive Medicare and Medicaid payments (and its successor programs) for patients having coverage thereunder provided that no service or bed complement is changed. 3.8 MAINTAIN BED CAPACITY. Neither Borrower nor the Manager has granted to any third party the right to reduce the number of licensed beds in the Facility or to apply for approval to transfer the right to any and all of the licensed Facility beds to any other location. 3.9 MEDICARE AND MEDICAID COMPLIANCE. The Facility is in compliance with all requirements for participation in Medicare and Medicaid, including without limitation, the Medicare and Medicaid Patient Protection Act of 1987. The Facility is in conformance in all material respects with all insurance, reimbursement and cost reporting requirements and has a current provider agreement which is in full force and effect under Medicare and Medicaid. 3.10 THIRD-PARTY PAYORS. There is no threatened or pending revocation, suspension, termination, probation, restriction, limitation, or nonrenewal affecting Borrower, Manager or the Facility or any participation or provider agreement with any third-party payor, including Medicare, Medicaid, Blue Cross and/or Blue Shield, and any other private commercial insurance managed care and employee assistance program (such programs, the "Third-Party Payors' Programs") to which Borrower or Manager presently is subject. All Medicare, Medicaid and private insurance cost reports and financial reports submitted by Borrower or Manager are and will be materially accurate and complete and have not been and will not be misleading in any material respects. No cost reports for the Facility remain "open" or unsettled, except as otherwise disclosed. 10 11 3.11 GOVERNMENTAL PROCEEDINGS AND NOTICES. Neither Borrower nor Manager nor the Facility is currently the subject of any proceeding by any governmental agency, and no notice of any violation has been received from a governmental agency that would, directly or indirectly, or with the passage of time: a. Have a material adverse impact on Borrower's ability to accept and/or retain patients or result in the imposition of a fine, a sanction, a lower rate certification or a lower reimbursement rate for services rendered to eligible patients; b. Modify, limit or annul or result in the transfer, suspension, revocation or imposition of probationary use of any of the Permits; or c. Affect Borrower's continued participation in the Medicare or Medicaid programs or any other Third-Party Payors' Programs, or any successor programs thereto, at current rate certifications. 3.12 PHYSICAL PLANT STANDARDS. To the best of Borrower's knowledge, except as disclosed in the Condition of Property Survey prepared for Lender in connection with the Loan the Facility and the use thereof complies in all material respects with all applicable local, state and federal building codes, fire codes, zoning codes, use restrictions, health care, health care facility and other similar regulatory requirements (the "Physical Plant Standards"), and no waivers of Physical Plant Standards exist at the Facility. 3.13 PLEDGES OF RECEIVABLES. With the exception of the pledge of certain Accounts more specifically described in the Intercreditor Agreement, the Borrower has not pledged its Accounts as collateral security for any loan or indebtedness other than the Loan. 3.14 PAYMENT OF TAXES AND PROPERTY IMPOSITIONS. Borrower has filed all federal, state, and local tax returns which it is required to file and has paid, or made adequate provision for the payment of, all taxes which are shown pursuant to such returns or are required to be shown thereon or to assessments received by Borrower, including, without limitation, provider taxes. All such returns are complete and accurate in all respects. Borrower has paid or made adequate provision for the payment of all applicable water and sewer charges, government assessments, ground rents (if applicable) and Taxes (as defined in the Mortgage) with respect to the Property. 3.15 TITLE TO COLLATERAL. Borrower has good and marketable title to all of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning violation, or encumbrance, except Permitted Encumbrances, which Permitted Encumbrances do not and will not materially interfere with the security intended to be provided by the Mortgage or the current use or operation of the Property and or the current ability of the Facility to generate net operating income sufficient to service the Loan. Except as shown on the current as-built survey for the Facility provided by the Borrower to Lender in connection with the Loan (the "Survey"), all Improvements situated on the Property are situated wholly within the boundaries of the Property. 3.16 PRIORITY OF MORTGAGE. The Mortgage constitutes a valid first lien against the real and personal property described therein, prior to all other liens or encumbrances, including those 11 12 which may hereafter accrue, excepting only "Permitted Encumbrances", which Permitted Encumbrances do not and will not materially and adversely affect (a) the ability of the Borrower to pay in full the principal of and interest on the Note when due, (b) the security (and its value) intended to be provided by the Mortgage or (c) the current use of the Property and the Improvements. 3.17 LOCATION OF CHIEF EXECUTIVE OFFICES. The location of Borrower's principal place of business and chief executive office is set forth on Exhibit "B" hereto. 3.18 DISCLOSURE. All information furnished or to be furnished by Borrower to Lender in connection with the Loan or any of the Loan Documents, is, or will be at the time the same is furnished, accurate and correct in all material respects and complete insofar as completeness may be necessary to provide Lender with true and accurate knowledge of the subject matter. 3.19 TRADE NAMES. The Facility, which operates under the trade name Pinedale Nursing and Rehabilitation Center, has not changed its name, been known by any other name, or been a party to a merger, reorganization or similar transaction within the last two (2) years. Borrower and Diversicare Leasing Corp., its sole member, have owned the Facility for the last four (4) years. 3.20 ERISA. Borrower is in compliance with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 3.21 OWNERSHIP. The ownership interests of the Persons comprising the Borrower and each of the respective interests in the Borrower are correctly and accurately set forth on Exhibit "C" hereto. 3.22 COMPLIANCE WITH APPLICABLE LAWS. The Facility and its operations and the Property comply in all material respects with all covenants and restrictions of record and applicable laws, ordinances, rules and regulations, including, without limitation, the Americans with Disabilities Act (to the extent required) and the regulations thereunder, and all laws, ordinances, rules and regulations relating to zoning, setback requirements and building codes and there are no waivers of any building codes currently in existence for the Facility. 3.23 SOLVENCY. Borrower is solvent for purposes of 11 U.S.C. ss. 548, and the borrowing of the Loan will not render Borrower insolvent for purposes of 11 U.S.C. ss. 548. 3.24 OTHER INDEBTEDNESS. Borrower has no outstanding Indebtedness, secured or unsecured, direct or contingent (including any guaranties), other than (a) the Loan, and (b) indebtedness which represents trade payables or accrued expenses incurred in the ordinary course of business of owning and operating the Property; and (c) indebtedness more particularly described as the Intercreditor Agreement; no other debt will be secured (senior, subordinate or pari passu) by the Property. 12 13 3.25 OTHER OBLIGATIONS. Borrower has no material financial obligation under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which Borrower is a party or by which Borrower or the Property is otherwise bound, other than obligations incurred in the ordinary course of the operation of the Property and other than obligations under the Mortgage, the Intercreditor Agreement and the other Loan Documents. 3.26 FRAUDULENT CONVEYANCES. Borrower (1) has not entered into this Agreement or any of the other Loan Documents with the actual intent to hinder, delay, or defraud any creditor and (2) has received reasonably equivalent value in exchange for its obligations under the Loan Documents. Giving effect to the transactions contemplated by the Loan Documents, to the best of Borrower's knowledge the fair saleable value of Borrower's assets exceeds and will, immediately following the execution and delivery of the Loan Documents, be greater than Borrower's probable liabilities, including the maximum amount of its contingent liabilities or its debts as such debts become absolute and mature. Borrower's assets do not and, immediately following the execution and delivery of the Loan Documents will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Borrower does not intend to, and does not believe that it will, incur debts and liabilities (including, without limitation, contingent liabilities and other commitments) beyond its ability to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of Borrower). 3.27 MANAGEMENT AGREEMENT. The Management Agreement is in full force and effect and there are no defaults (either monetary or nonmonetary) by the Manager or the Borrower thereunder. 3.28 REPRESENTATIONS AND WARRANTIES. Borrower agrees that its representations and warranties and covenants contained herein are true and correct as of the date hereof and shall survive closing of the Loan. ARTICLE IV AFFIRMATIVE COVENANTS OF BORROWER Borrower agrees with and covenants unto the Lender that until the Loan Obligations have been paid in full, Borrower shall: 4.1 PAYMENT OF LOAN/PERFORMANCE OF LOAN OBLIGATIONS. Duly and punctually pay or cause to be paid the principal and interest of the Note in accordance with its terms and duly and punctually pay and perform or cause to be paid or performed all Loan Obligations hereunder and under the other Loan Documents. 4.2 MAINTENANCE OF EXISTENCE. Maintain its existence as a limited liability company, and, in each jurisdiction in which the character of the property owned by it or in which the transaction of its business makes qualification necessary, maintain good standing. 13 14 4.3 ACCRUAL AND PAYMENT OF TAXES. During each fiscal year, make accurate provision for the payment of all current tax liabilities of all kinds (including, without limitation, federal and state income taxes, franchise taxes, payroll taxes, provider taxes (to the extent necessary to participate in and receive maximum funding pursuant to Reimbursement Contracts) and Taxes (as defined in the Mortgage)), all required withholding of income taxes of employees, all required old age and unemployment contributions, and all required payments to employee benefit plans, and pay the same when they become due. 4.4 INSURANCE. Maintain the following insurance coverages with respect to the Property and the Facility: a. Insurance against loss or damage by fire, casualty and other hazards as now are or subsequently may be covered by an "all risk" policy or a policy covering "special" causes of loss, with such endorsements as Lender may from time to time reasonably require and which are customarily required by institutional lenders of similar properties similarly situated, including, without limitation, building ordinance law, lightning, windstorm, civil commotion, hail, riot, strike, water damage, sprinkler leakage, collapse, malicious mischief, explosion, smoke, aircraft, vehicles, vandalism, falling objects and weight of snow, ice or sleet, and covering the Facility in an amount equal to 100% of the full insurable replacement value of the Facility (exclusive of footings and foundations below the lowest basement floor) without deduction for depreciation. The determination of the replacement cost amount shall be adjusted annually to comply with the requirements of the insurer issuing the coverage or, at Lender's election, by reference to such indexes, appraisals or information as Lender determines in its reasonable discretion, and, unless the insurance required by this paragraph shall be effected by blanket and/or umbrella policies in accordance with the requirements of this Agreement, the policy shall include inflation guard coverage that ensures that the policy limits will be increased over time to reflect the effect of inflation. Each policy shall, subject to Lender's approval, contain (i) a replacement cost endorsement, without deduction for depreciation, (ii) either an agreed amount endorsement or a waiver of any co-insurance provisions, and (iii) an ordinance or law coverage or enforcement endorsement if the Improvements or the use of the Property constitutes any legal nonconforming structures or uses, and shall provide for deductibles in such amounts as Lender may permit in its sole discretion. b. Commercial general liability insurance under a policy containing "Comprehensive General Liability Form" of coverage (or a comparably worded form of coverage) and the "Broad Form CGL" endorsement (or a policy which otherwise incorporates the language of such endorsement), providing coverage on an occurrence (not "claims made") basis, which policy shall include, without limitation, coverage against claims for personal injury, bodily injury, death and property damage liability with respect to the Facility and the operations related thereto, whether on or off the Property, and the following coverages: Employee as Additional Insured, Product Liability/Completed Operations; Broad Form Contractual Liability, Independent Contractor, Personal Injury and Advertising Injury Protection, Medical Payment (with a minimum limit of $5,000 per person), Broad Form Cross Suits Liability Endorsement, where applicable, hired and 14 15 non-owned automobile coverage (including rented and leased vehicles), and, if any alcoholic beverages shall be sold, manufactured or distributed in the Facility, liquor liability coverage, all of which shall be in such amounts as Lender may from time to time reasonably require, but not less than One Million Dollars ($1,000,000) per occurrence, Two Million Dollars ($2,000,000) in the aggregate and with umbrella coverage not less than Three Million Dollars ($3,000,000). If such policy shall cover more than one property, such limits shall apply on a "per location" basis. If any elevators, health club facilities or swimming pools are located at the Facility, the foregoing amounts shall be increased to Three Million Dollars ($3,000,000), Six Million Dollars ($6,000,000) and Ten Million Dollars ($10,000,000), respectively. Such liability policy shall delete the contractual exclusion under the personal injury coverage, if possible, and if available, shall include the following endorsements: Notice of Accident, Knowledge of Occurrence, and Unintentional Error and Omission. c. Professional liability insurance coverage in an amount equal to not less than One Million Dollars ($1,000,000) per occurrence and Three Million Dollars ($3,000,000) in the aggregate and insuring Borrower for acts occurring prior to the date of the Loan. d. Business interruption insurance, which may be in the form of Blanket Earnings and Extra Expense Coverage, (i) covering the same perils of loss as are required to be covered by the property insurance required under Section 4.4(a) above, (ii) in an amount equal to the projected annual net income from the Facility plus carrying costs and extraordinary expenses of the Property for a period of twelve (12) months, based upon Borrower's reasonable estimate thereof as approved by Lender, (iii) including either an agreed amount endorsement or a waiver of any co-insurance provisions, so as to prevent Borrower, Lender and any other insured thereunder from being a co-insurer, and (iv) providing that any covered loss thereunder shall be payable to Lender. e. During any period of new construction on the Premises, a so-called "Builder's All-Risk Completed Value" or "Course of Construction" insurance policy in non-reporting form for any improvements under construction, including, without limitation, for demolition and increased cost of construction or renovation, in an amount equal to 100% of the estimated replacement cost value on the date of completion, including "soft cost" coverage, and Workers' Compensation Insurance covering all persons engaged in such construction, in an amount at least equal to the minimum required by law. In addition, each contractor and subcontractor shall be required to provide Lender with a certificate of insurance for (i) workers' compensation insurance covering all persons engaged by such contractor or subcontractor in such construction in an amount at least equal to the minimum required by law, and (ii) general liability insurance showing minimum limits of at least $5,000,000, including coverage for products and completed operations. Each contractor and subcontractor also shall cover Borrower and Lender as an additional insured under such liability policy and shall indemnify and hold Borrower and Lender harmless from and against any and all claims, damages, liabilities, costs and expenses arising out of, relating to or otherwise in connection with its performance of such construction. 15 16 f. If the Facility contains steam boilers, steam pipes, steam engines, steam turbines or other high pressure vessels, insurance covering the major components of the central heating, air conditioning and ventilating systems, boilers, other pressure vessels, high pressure piping and machinery, elevators and escalators, if any, and other similar equipment installed in the Improvements, in an amount equal to one hundred percent (100%) of the full replacement cost of the Facility, which policies shall insure against physical damage to and loss of occupancy and use of the Improvements arising out of an accident or breakdown covered thereunder. g. Flood insurance with a deductible not to exceed Three Thousand Dollars ($3,000), or such greater amount as may be satisfactory to Lender in its sole discretion, and in an amount equal to the full insurable value of the Facility or the maximum amount available, whichever is less, from the "flood pool", if the Facility is located in an area designated by the Secretary of Housing and Urban Development or the Federal Emergency Management Agency as having special flood hazards. h. Workers' compensation insurance or other similar insurance which may be required by governmental authorities or applicable legal requirements in an amount at least equal to the minimum required by law, and employer's liability insurance with a limit of Five Hundred Thousand Dollars ($500,000) per accident and per disease per employee, and Five Hundred Thousand Dollars ($500,000) in the aggregate for disease arising in connection with the operation of the Property. i. Such other insurance coverages, in such amounts, and such other forms and endorsements, as may from time to time be required by Lender and which are customarily required by institutional lenders to similar properties, similarly situated, including, without limitation, coverages against other insurable hazards (including, by way of example only, earthquake, sinkhole and mine subsidence), which at the time are commonly insured against and generally available. All insurance required under this Section 4.4 shall have a term of not less than one year and shall be in the form and amount and with deductibles as, from time to time, shall be reasonably acceptable to Lender, under valid and enforceable policies issued by financially responsible insurers either licensed to transact business in the State where the Facility is located, or obtained through a duly authorized surplus lines insurance agent or otherwise in conformity with the laws of such State, with (a) a rating of not less than the third (3rd) highest rating category by either Standard & Poor's Ratings Group, Duff & Phelps Credit Rating Co., Moody's Investors Service, Inc., Fitch Investors Service, Inc. or any successors thereto, or (b) an A:V rating in Best's Key Rating Guide; provided, however, that if the initial principal balance of the Loan is greater than Seven Million Five Hundred Thousand Dollars ($7,500,000.00), such insurer must, in lieu of such Best's rating, have a long term senior debt rating of at least "A" by Standard & Poor's Ratings Group. Originals or certified copies of all insurance policies shall be delivered to and held by Lender. All such policies shall name Lender as an additional insured, shall provide for loss payable solely to Lender and shall contain: (i) standard "non-contributory mortgagee" endorsement or its equivalent relating, inter alia, to recovery by Lender notwithstanding the negligent or willful acts 16 17 or omissions of Borrower and notwithstanding (a) occupancy or use of the Facility for purposes more hazardous than those permitted by the terms of such policy, (b) any foreclosure or other action taken by Lender pursuant to the Mortgage upon the occurrence of an Event of Default, or (c) any change in title or ownership of the Facility; and (ii) a provision that such policies shall not be canceled or amended, including, without limitation, any amendment reducing the scope or limits of coverage, or failed to be renewed, without at least thirty (30) days prior written notice to Lender in each instance. With respect to insurance policies which require payment of premiums annually, not less than thirty (30) days prior to the expiration dates of the insurance policies obtained pursuant to this Agreement, Borrower shall pay such amount, except to the extent Lender is escrowing sums therefor pursuant to the Loan Documents. Not less than thirty (30) days prior to the expiration dates of the insurance policies obtained pursuant to this Agreement, originals or certified copies of renewals of such policies (or certificates evidencing such renewals) bearing notations evidencing the payment of premiums or accompanied by other evidence satisfactory to Lender of such payment, which premiums shall not be paid by Borrower through or by any financing arrangement, shall be delivered by Borrower to Lender. Borrower shall not carry separate insurance, concurrent in kind or form or contributing in the event of loss, with any insurance required under this Section 4.4. If the limits of any policy required hereunder are reduced or eliminated due to a covered loss, Borrower shall pay the additional premium, if any, in order to have the original limits of insurance reinstated, or Borrower shall purchase new insurance in the same type and amount that existed immediately prior to the loss. If Borrower fails to maintain and deliver to Lender the original policies or certificates of insurance required by this Agreement, Lender may, at its option, procure such insurance and Borrower shall pay or, as the case may be, reimburse Lender for, all premiums thereon promptly, upon demand by Lender, with interest thereon at the Default Rate from the date paid by Lender to the date of repayment and such sum shall constitute a part of the Loan Obligations. The insurance required by this Agreement may, at the option of Borrower, be effected by blanket and/or umbrella policies issued to Borrower or to an Affiliate of Borrower covering the Facility and the properties of such Affiliate; provided that, in each case, the policies otherwise comply with the provisions of this Agreement and allocate to the Facility, from time to time, the coverage specified by this Agreement, without possibility of reduction or coinsurance by reason of, or damage to, any other property (real or personal) named therein. If the insurance required by this Agreement shall be effected by any such blanket or umbrella policies, Borrower shall furnish to Lender original policies or certified copies thereof, with schedules attached thereto showing the amount of the insurance provided under such policies which is applicable to the Facility. Neither Lender nor its agents or employees shall be liable for any loss or damage insured by the insurance policies required to be maintained under this Agreement; it being understood that (i) Borrower shall look solely to its insurance company for the recovery of such loss or damage, (ii) such insurance company shall have no rights of subrogation against Lender, its agents or employees, and (iii) Borrower shall use its best efforts to procure from such insurance 17 18 company a waiver of subrogation rights against Lender. If, however, such insurance policies do not provide for a waiver of subrogation rights against Lender (whether because such a waiver is unavailable or otherwise), then Borrower hereby agrees, to the extent permitted by law and to the extent not prohibited by such insurance policies, to waive its rights of recovery, if any, against Lender, its agents and employees, whether resulting from any damage to the Facility, any liability claim in connection with the Facility or otherwise. If any such insurance policy shall prohibit Borrower from waiving such claims, then Borrower must obtain from such insurance company a waiver of subrogation rights against Lender. If loss or damage to the Facility is equal to or less than $25,000 and there shall exist no Default or Event of Default at the time, the insurance proceeds shall be made available to the Borrower for the sole purpose of the repair and restoration of the Facility, to the same quality and condition as existed prior to such loss or damage. If the loss or damage insured by the casualty insurance required to be maintained under this Agreement exceeds $25,000, Lender may make the net proceeds of insurance or condemnation (after payment of Lender's reasonable costs and expenses) available to Borrower for Borrower's repair, restoration and replacement of the Improvements, Equipment and Inventory damaged or taken on the following terms and subject to Borrower's satisfaction of the following conditions: a. The aggregate amount of all such proceeds shall not exceed the aggregate amount of all such Loan Obligations. b. At the time of such loss or damage and at all times thereafter while Lender is holding any portion of such proceeds, there shall exist no Default or Event of Default; c. The Improvements, Equipment, and Inventory for which loss or damage has resulted shall be capable of being restored to its preexisting condition and utility in all material respects with a value equal to or greater than that which existed prior to such loss or damage and such restoration shall be capable of being completed prior to the earlier to occur of (i) the expiration of business interruption insurance as determined by an independent inspector or (ii) the Maturity Date; d. Within thirty (30) days from the date of such loss or damage Borrower shall have given Lender a written notice electing to have the proceeds applied for such purpose; e. Within sixty (60) days following the date of notice under the preceding subparagraph (c) and prior to any proceeds being disbursed to Borrower, Borrower shall have provided to Lender all of the following: 18 19 (i) complete plans and specifications for restoration, repair and replacement of the Improvements, Equipment and Inventory damaged to the condition, utility and value required by (b) above, (ii) if loss or damage exceeds $100,000, fixed-price or guaranteed maximum cost bonded construction contracts for completion of the repair and restoration work in accordance with such plans and specifications, (iii) builder's risk insurance for the full cost of construction with Lender named under a standard mortgagee loss-payable clause, (iv) such additional funds as in Lender's reasonable opinion are necessary to complete such repair, restoration and replacement, and (v) copies of all permits and licenses necessary to complete the work in accordance with the plans and specifications; f. Lender may, at Borrower's expense, retain an independent inspector to review and approve plans and specifications and completed construction and to approve all requests for disbursement, which approvals shall be conditions precedent to release of proceeds as work progresses; g. No portion of such proceeds shall be made available by Lender for architectural reviews or for any other purposes which are not directly attributable to the cost of repairing, restoring or replacing the Improvements, Equipment and Inventory for which a loss or damage has occurred unless the same are covered by such insurance; h. Borrower shall diligently pursue such work and shall complete such work prior to the earlier to occur of the expiration of business interruption insurance or the Maturity Date; i. The Facility continues to achieve the Debt Service Coverage requirements set forth in Section 4.12 below; j. Each disbursement by Lender of such proceeds and deposits shall be funded subject to conditions and in accordance with disbursement procedures which a commercial construction lender would typically establish in the exercise of sound banking practices and shall be made only upon receipt of disbursement requests on an AIA G702/703 form (or similar form approved by Lender) signed and certified by Borrower and, if required by the Lender, its architect and general contractor with appropriate invoices and lien waivers as required by Lender; k. Lender shall have a first lien security interest in all building materials and completed repair and restoration work and in all fixtures and equipment acquired with such 19 20 proceeds, and Borrower shall execute and deliver such mortgages, deeds of trust, security agreements, financing statements and other instruments as Lender shall request to create, evidence, or perfect such lien and security interest; and l. In the event and to the extent such proceeds are not required or used for the repair, restoration and replacement of the Improvements, Equipment and Inventory for which a loss or damage has occurred, or in the event Borrower fails to timely make the election to have insurance proceeds applied to the restoration of the Improvements, Equipment, or Inventory, or, having made such election, fails to timely comply with the terms and conditions set forth herein, or, if the conditions set forth herein for such application are otherwise not satisfied, then Lender shall be entitled without notice to or consent from Borrower to apply such proceeds, or the balance thereof, at Lender's option either (i) to the full or partial payment or prepayment of the Loan Obligations (without premium) in the manner aforesaid, or (ii) to the repair, restoration and/or replacement of all or any part of such Improvements, Equipment and Inventory for which a loss or damage has occurred. Borrower appoints Lender as Borrower's attorney-in-fact to cause the issuance of or an endorsement of any insurance policy to bring Borrower into compliance herewith and, as limited above, at Lender's sole option, to make any claim for, receive payment for, and execute and endorse any documents, checks or other instruments in payment for loss, theft, or damage covered under any such insurance policy; however, in no event will Lender be liable for failure to collect any amounts payable under any insurance policy. 4.5 FINANCIAL AND OTHER INFORMATION. Provide Lender, or cause the Manager to provide to Lender, at its address set forth in Section 8.7 and at GMAC Commercial Mortgage Corporation, 2200 Woodcrest Place, Suite 305, Birmingham, Alabama 35209, the following financial statements and information on a continuing basis during the term of the Loan: a. Within one hundred twenty (120) days after the end of each fiscal year of the Facility and the Borrower (if different from the Facility) and the Guarantor, respectively, unaudited financial statements of the operations of the Facility, unaudited and consolidating financial statements of the Borrower and audited financial statements of the Guarantor, respectively, prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, certified by a financial officer of Borrower and the Guarantor, to be true and correct. b. Within one hundred twenty (120) days after the end of each fiscal year of the Manager, unaudited and consolidating financial statements of the Manager prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, and, shall be certified as true and correct in all material respects by a financial officer of the Manager. 20 21 c. Within forty-five (45) days after the end of each fiscal quarter of the Facility and Borrower (if different from the Facility), unaudited financial statements of the operations of the Facility and Borrower prepared in accordance with GAAP, which statements shall include a balance sheet and statement of income and expenses for the quarter then ended, and shall be certified as true and correct in all material respects by a financial officer of Borrower to be true and correct. d. Within forty-five (45) days after the end of each fiscal quarter of the Manager, unaudited interim financial statements of the Manager, prepared in accordance with GAAP, which shall include a balance sheet and statement of income and expenses for the quarter then ended, and shall be certified as true and correct in all material respects by a financial officer of the Manager to be true and correct. e. Within forty-five (45) days of the end of each calendar quarter, a statement of the number of bed days available and the actual patient days incurred for the quarter, together with quarterly census information of the Facility as of the end of such quarter in sufficient detail to show patient-mix (i.e., private, Medicare, Medicaid, and V.A.) on a daily average basis for such year through the end of such quarter, certified by the chief financial officer of Borrower or Manager to be true and correct. Such statements of the Facility shall be accompanied by the Summary of Financial Statements and Census Data attached hereto as Exhibit "D". f. Within forty-five (45) days after the end of each fiscal quarter of the Facility, unaudited monthly financial statements of the operations of the Facility, prepared in accordance with GAAP, which statements shall include a balance sheet and statement of income and expenses for the month then ended, certified by a financial officer of the Borrower or Manager to be true and correct. g. Upon request by Lender, as soon as available, but in no event more than thirty (30) days after the filing deadline, as may be extended from time to time, copies of all federal, state and local tax returns of Borrower and Guarantor, together with all supporting documentation and required schedules. h. Within twenty (20) days of filing or receipt, all Medicare and/or Medicaid cost reports and any amendments thereto filed with respect to the Facility, and all responses, audit reports, or other inquiries with respect to such cost reports. i. Within ten (10) days of receipt, a copy of the Medicaid Rate Calculation Worksheet (or the equivalent thereof) issued by the appropriate Medicaid Agency for the Facility. j. Within ten (10) business days of receipt, any and all notices (regardless of form) from any and all licensing and/or certifying agencies that the Facility license and/or the Medicare and/or Medicaid certification of the Facility is being downgraded to a substandard category, revoked, or suspended or that any such action is pending or being considered. 21 22 k. Upon Lender's request, evidence of payment by Borrower or Manager of any applicable provider bed taxes or similar taxes, which taxes Borrower agrees to pay. l. Within one hundred twenty (120) days of the Borrower's fiscal year end, and more frequently if reasonably requested by Lender, an aged accounts receivable report of the Facility in sufficient detail to show amounts due from each class of patient-mix (i.e., private, Medicare, Medicaid and V.A.) by the account age classifications of 30 days, 60 days, 90 days, 120 days, and over 120 days. m. Within forty-five (45) days after the end of each calendar quarter, a statement of the number of patient days, if any, for which the Facility has received the Medicare default rate for any applicable period. For purposes herein, "default rate" shall have the meaning ascribed to it in that certain applicable Medicare rate notification letter prepared in connection with any review or survey of the Facility. The Lender reserves the right to require that the annual financial statements of the Borrower and the Manager be audited and prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender if (i) an Event of Default exists, (ii) if required by internal policy or by any investor in any securities backed in whole or in part by the Loan or any rating agency rating such securities, or (iii) if Lender has reasonable grounds to believe that the unaudited financial statements do not accurately represent the financial condition of the Borrower, Guarantor or the Manager, as the case may be. The Lender further reserves the right to require such other financial information of Borrower, Guarantor, Manager and/or the Facility, in such form and at such other times (including monthly or more frequently but not more frequently than reasonable) as Lender shall deem reasonably necessary, and Borrower agrees promptly to provide or to cause to be provided, such information to Lender. All financial statements must be in the form and detail as Lender may from time to time reasonably request. n. Within forty-five (45) days of the end of each calendar quarter, a certificate of a financial officer of the Borrower confirming compliance with the covenants and requirements set forth above. 4.6 COMPLIANCE CERTIFICATE. (a) At the time of furnishing the quarterly operating statements required under the foregoing Section, furnish to Lender a compliance certificate in the form attached hereto as Exhibit "E" executed by the chief financial officer, of the Borrower; (b) Upon Lender's written request, furnish Lender with a certificate stating that Borrower has complied with and is in compliance with all terms, covenants and conditions of the Loan Documents to which Borrower is a party and that there exists no Default or Event of Default or, if such is not the case, that one or more specified events have occurred, and that the 22 23 representations and warranties contained herein are true and correct with the same effect as though made on the date of such certificate. 4.7 BOOKS AND RECORDS. Keep and maintain at all times at the Facility or the management agent's offices, and upon Lender's request shall make available at the Facility, complete and accurate books of account and records (including copies of supporting bills and invoices) adequate to reflect correctly the results of the operation of the Facility, and copies of all written contracts, leases (if any), and other instruments which affect the Property, which books, records, contracts, leases (if any) and other instruments shall be subject to examination and inspection at any reasonable time by Lender (upon reasonable advance notice, which for such purposes only may be given orally, except in the case of an emergency or following an Event of Default, in which case no advance notice shall be required) provided, however, that if an Event of Default has occurred and is continuing, Borrower shall deliver to Lender upon written demand all books, records, contracts, leases (if any) and other instruments relating to the Facility or its operation and Borrower authorizes Lender to obtain a credit report on Borrower at any time. 4.8 PAYMENT OF INDEBTEDNESS. Duly and punctually pay or cause to be paid all other Indebtedness now owing or hereafter incurred by Borrower in accordance with the terms of such Indebtedness, except such Indebtedness owing to those other than Lender which is being contested in good faith and with respect to which any execution against properties of Borrower has been effectively stayed and for which reserves and collateral for the payment and security thereof have been established as determined by Lender in its sole discretion. 4.9 RECORDS OF ACCOUNTS. Maintain all records, including records pertaining to the Accounts of Borrower, at the chief executive office of Borrower as set forth in this Agreement. 4.10 CONDUCT OF BUSINESS. Conduct, or cause the Manager to conduct the operation of the Facility at all times in a manner consistent with the level of operation of the Facility as of the date hereof, including without limitation, the following: (i) to maintain the standard of care for the patients of the Facility at all times at a level necessary to ensure quality care for the patients of the Facility in accordance with customary and prudent industry standards; (ii) to operate the Facility in a prudent manner and in compliance with applicable laws and regulations relating thereto and cause all Permits, Reimbursement Contracts, and any other agreements necessary for the use and operation of the Facility or as may be necessary for participation in the Medicaid, Medicare, or other applicable reimbursement programs to remain in effect without reduction in the number of licensed beds or beds authorized for use in the Medicaid, Medicare, or other applicable reimbursement programs; 23 24 (iii) to maintain sufficient Inventory and Equipment of types and quantities at the Facility to enable Borrower adequately to perform operations of the Facility; (iv) to keep all Improvements and Equipment located on or used or useful in connection with the Facility in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needed and proper repairs, renewals, replacements, additions, and improvements thereto to keep the same in good operating condition; (v) to maintain sufficient cash in the operating accounts of the Facility in order to satisfy the working capital needs of the Facility; and (vi) to keep all required Permits current and in full force and effect. 4.11 PERIODIC SURVEYS. Furnish or cause Manager to furnish to Lender within twenty (20) days of receipt a copy of any Medicare, Medicaid, or other licensing agency survey or report and any statement of deficiencies and/or any other report indicating that any action is pending or being considered to downgrade the Facility to a substandard category, and within the time period required by the particular agency for furnishing a plan of correction also furnish or cause to be furnished to Lender a copy of the plan of correction generated from such survey or report for the Facility, and correct or cause to be corrected any deficiency, the curing of which is a condition of continued licensure or for full participation in Medicaid, Medicare or other reimbursement program pursuant to any Reimbursement Contract for existing patients or for new patients to be admitted with Medicaid or Medicare coverage, by the date required for cure by such agency (plus extensions granted by such agency). 4.12 DEBT SERVICE COVERAGE REQUIREMENTS. a. Achieve (commencing with the closing of the Loan), and, within forty-five (45) days after the end of each fiscal quarter of Borrower, provide evidence satisfactory to the Lender of the achievement of, the following Debt Service Coverage and Combined Debt Service Coverage ratios: (i) a Debt Service Coverage, after deduction of Actual Management Fees, of not less than 1.0 to 1.0, based on a rolling twelve (12) month period, tested quarterly; (ii) a Debt Service Coverage, after deduction of Assumed Management Fees, of not less than 1.0 to 1.0, based on a rolling twelve (12) month period, tested quarterly; 24 25 (iii) a Combined Debt Service Coverage after deduction of Assumed Management Fees, of not less than 1.3 to 1.0, based on a rolling twelve (12) month period, tested quarterly. b. If Borrower fails to achieve or provide evidence of achievement of the Debt Service Coverage for the Facility or the Combined Debt Service Coverage, upon fifteen (15) days written notice to Borrower, Borrower will deposit with Lender additional cash or other liquid collateral in an amount which, when added to the first number of the Debt Service Coverage calculation, would have resulted in the noncomplying Debt Service Coverage requirement having been satisfied. If such failure continues for two (2) consecutive quarters, on the third consecutive quarter, if Borrower again fails to achieve or provide evidence of the achievement of the Debt Service Coverages required above, upon fifteen (15) days written notice to Borrower, Borrower will deposit with Lender additional cash or other liquid collateral (with credit for amounts currently being held by Lender pursuant to the foregoing sentence), in an amount which, if the same had been applied on the first day of the first quarter for which such noncompliance of the Debt Service Coverage requirement occurred to reduce the outstanding principal indebtedness of the Loan Obligations, would have resulted in the noncomplying Debt Service Coverage requirement having been satisfied, and Borrower agrees promptly to provide such additional cash or other liquid collateral, which increased amount will be held by Lender for an additional two (2) consecutive calendar quarters. Such additional Collateral will be held by the Lender in a standard custodial account, and shall constitute additional collateral for the Loan Obligations and an "Account" as defined in this Agreement, and, upon the occurrence of an Event of Default, may be applied by the Lender, in such order and manner as the Lender may elect, to the reduction of the Loan Obligations. Borrower shall not be entitled to any interest earned on such additional Collateral. Provided that there is no outstanding Default or Event of Default, such additional Collateral which has not been applied to the Loan Obligations will be released by the Lender at such time as Borrower provides the Lender with evidence that the required Debt Service Coverage requirements outlined above have been achieved and maintained (without regard to any cash deposited pursuant to this Section 4.12) as of the end of each of two (2) consecutive quarters. 4.13 OCCUPANCY. Maintain or cause to be maintained at all times a daily average annual occupancy for the Facility of seventy-five percent (75%) or higher (based on the number of beds available at the Facility, with the minimum number of beds available at the Facility remaining at or in excess of the number of beds set forth in the Facility description at page 3, herein). 4.14 CAPITAL EXPENDITURES. Maintain the Facility in good condition and make minimum capital expenditures for the Facility in each fiscal year in the amount of $300 per bed (which capital expenditures may include those necessary for ordinary repairs and routine maintenance), and, within forty-five (45) days of the end of such fiscal year, provide evidence thereof satisfactory to Lender. In the event that Borrower shall fail to do so, Borrower shall, upon Lender's written request, immediately establish and maintain a capital expenditures reserve fund with Lender equal to the difference between the required amount per bed and the amount per bed actually spent by the Borrower. Borrower grants to Lender a right of setoff against all moneys in the capital expenditures 25 26 reserve fund, and Borrower shall not permit any other Lien to exist upon such fund. The proceeds of such capital expenditures reserve fund will be disbursed monthly upon Lender's receipt of satisfactory evidence that Borrower has made the required capital expenditures. Upon Borrower's failure to adequately maintain the Facility in good condition, Lender may, but shall not be obligated to, make such capital expenditures and may apply the moneys in the capital expenditures reserve fund for such purpose. To the extent there are insufficient moneys in the capital expenditures reserve fund for such purposes, all funds advanced by Lender to make such capital expenditures shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue interest at the Default Rate until paid. Upon an Event of Default, Lender may apply any moneys in the capital expenditures reserve fund to the Loan Obligations, in such order and manner as Lender may elect. For any partial fiscal year during which the Loan is outstanding, the required expenditure amount shall be prorated by multiplying the total of the required amount per bed [unit] by a fraction, the numerator of which is the number of days during such year for which all or part of the Loan is outstanding and the denominator of which is the number of days in such year. 4.15 MANAGEMENT AGREEMENT. Maintain the Management Agreement in full force and effect and timely perform all of Borrower's obligations thereunder and enforce performance of all obligations of the Manager thereunder and not permit the termination, amendment or assignment of the Management Agreement unless the prior written consent of Lender is first obtained, which consent shall not be unreasonably withheld. Borrower will enter and cause the Manager to enter into the Subordination Agreement. Borrower will not enter into any other management agreement without Lender's prior written consent, which consent shall not be unreasonably withheld, which consent may be in the sole and absolute discretion of Lender. 4.16 UPDATED APPRAISALS. For so long as the Loan remains outstanding, if any Event of Default shall occur hereunder, or if, in Lender's judgment, a material depreciation in the value of the Property shall have occurred, then in any such event, Lender may cause the Property to be appraised by an appraiser selected by Lender, and in accordance with Lender's appraisal guidelines and procedures then in effect, and Borrower agrees to cooperate in all respects with such appraisals and furnish to the appraisers all requested information regarding the Property and the Facility. Borrower agrees to pay all reasonable costs incurred by Lender in connection with such appraisal which costs shall be secured by the Mortgage and shall accrue interest at the Default Rate until paid. 4.17 COMPLY WITH COVENANTS AND LAWS. Comply, in all material respects, with all applicable covenants and restrictions of record and all laws, ordinances, rules and regulations and keep the Facility and the Property in compliance with all applicable laws, ordinances, rules and regulations, including, without limitation, the Americans with Disabilities Act and regulations promulgated thereunder, and laws, ordinances, rules and regulations relating to zoning, health, building codes, setback requirements, Medicaid and Medicare laws and keep the Permits for the Facility in full force and effect. 26 27 4.18 TAXES AND OTHER CHARGES. Subject to Borrower's right to contest the same as set forth in Section 9(c) of the Mortgage, pay all taxes, assessments, charges, claims for labor, supplies, rent, and other obligations which, if unpaid, might give rise to a Lien against property of Borrower, except Liens to the extent permitted by this Agreement. 4.19 COMMITMENT LETTER. Provide all items and pay all amounts required by the Commitment Letter. If any term of the Commitment Letter shall conflict with the terms of this Agreement, this Agreement shall govern and control. As to any matter contained in the Commitment Letter, and as to which no mention is made in this Agreement or the other Loan Documents, the Commitment Letter shall continue to be in effect and shall survive the execution of this Agreement and all other Loan Documents. 4.20 NOTICE OF FEES OR PENALTIES. Immediately notify Lender, upon Borrower's knowledge thereof, of the assessment by any state or any Medicare, Medicaid, health or licensing agency of any fines or penalties against Borrower, Manager or the Facility. 4.21 DEBT SERVICE RESERVE FUND. Pursuant to the Debt Service Reserve Fund Agreement, establish and maintain a debt service reserve fund with Lender equal to approximately three (3) months of debt service payments with respect to the Note as reasonably estimated by Lender, rounded upward to the nearest $1,000.00. 4.22 INTENTIONALLY DELETED. 4.23 INTENTIONALLY DELETED. 4.24 LOAN CLOSING CERTIFICATION. Immediately notify Lender, in writing, in the event any representation, warranty or covenant contained herein or in that certain Loan Closing Certification, executed by Borrower for the benefit of Lender of even date herewith, becomes untrue or there shall have been any material adverse change in any such representation, warranty or covenant. ARTICLE V NEGATIVE COVENANTS OF BORROWER Until the Loan Obligations have been paid in full, Borrower shall not: 5.1 ASSIGNMENT OF LICENSES AND PERMITS. Assign or transfer any of its interest in the Permits, or Reimbursement Contracts (including rights to payment thereunder) pertaining to the Facility, or assign, transfer, or remove or permit any other person to assign, transfer, or remove any records pertaining to the Facility including, without limitation, patient records, medical and clinical records (except for removal of such patient records as directed by the patients owning such records or by governmental or judicial order or direction), without Lender's prior written consent, which consent may be granted or refused in Lender's sole discretion. 27 28 5.2 NO LIENS; EXCEPTIONS. Create, incur, assume or suffer to exist any Lien upon or with respect to the Facility or any of its properties, rights, income or other assets relating thereto, including, without limitation, the Collateral, whether now owned or hereafter acquired, other than the following permitted Liens ("Permitted Encumbrances"): a. Liens at any time existing in favor of the Lender; b. Liens which are listed in Exhibit "F" attached hereto; c. Inchoate Liens arising by operation of law for the purchase of labor, services, materials, equipment or supplies, provided payment shall not be delinquent and, if such Lien is a lien upon any of the Property or Improvements, such Lien must be fully disclosed to Lender and bonded off and removed from the Property and Improvements within thirty (30) days of its creation in a manner satisfactory to Lender; d. Liens incurred in the ordinary course of business in connection with workers' compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for money borrowed or for credit received with respect to property acquired) entered into in the ordinary course of business as presently conducted or to secure obligations for surety or appeal bonds; e. Liens for current year's taxes, assessments or governmental charges or levies not yet due and payable; f. Liens in favor of AmSouth Bank as described and set forth in the Intercreditor Agreement, as amended; g. Liens securing purchase money loans not to exceed $300,000 in the aggregate at any one time outstanding; and h. Intra-Borrower Loans more particularly described in the Cross- Collateralization and Cross-Default Agreement. 5.3 MERGER, CONSOLIDATION, ETC. Except as otherwise provided in the Mortgage, consummate any merger, consolidation or similar transaction, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions), all or substantially all of its assets (whether now or hereafter acquired), without the prior written consent of the Lender, which consent may be granted or refused in Lender's sole discretion. 5.4 MAINTAIN SINGLE-PURPOSE ENTITY STATUS; INDEBTEDNESS. 28 29 a. Dissolve or terminate or materially amend the terms of its certificate of incorporation, articles of organization, operating agreement or partnership agreement, as applicable, the terms of which require Borrower to be a Single-Purpose Entity; b. enter into any transaction of merger or consolidation, or liquidate or dissolve itself (or suffer any liquidation or dissolution), or acquire by purchase or otherwise all or substantially all the business or assets of, or any Stock or other evidence of beneficial ownership of, any Person; c. guarantee or otherwise become liable on or in connection with any obligation of any other Person, except for indebtedness to AmSouth Bank described in the Intercreditor Agreement, as amended; d. at any time own any encumbered asset other than (i) the Collateral, and (ii) incidental personal property necessary for the operation of the Property; e. at any time be engaged directly or indirectly, in any business other than the ownership, management and operation of the Collateral; f. enter into any contract or agreement with any general partner, principal, member or Affiliate of Borrower or any Affiliate of any general partner, principal or member of Borrower (other than the Management Agreement) except upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arm's-length basis with third parties other than an Affiliate; g. incur, create or assume any indebtedness, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than (i) the Loan, (ii) indebtedness which represents trade payables or accrued expenses incurred in the ordinary course of business of owning and operating the Property and (iii) the indebtedness to AmSouth Bank described and set forth in the Intercreditor Agreement, as amended; no other debt will be secured (senior, subordinate or pari passu) by the Property; h. make any loans or advances to any third party (including any Affiliate); i. become insolvent or fail to pay its debts from its assets as the same shall become due; j. fail to do all things necessary to preserve its existence as a Single-Purpose Entity, and will not, nor will any partner, limited or general, member or shareholder thereof, amend, modify or otherwise change its partnership certificate, partnership agreement, articles of organization, operating agreement, articles of incorporation or by-laws in a manner which adversely affects Borrower's existence as a Single-Purpose Entity; 29 30 k. fail to conduct and operate its business as presently conducted and operated; l. fail to maintain books and records and bank accounts separate from those of its Affiliates, including its members, general partners or shareholders, as applicable; m. fail to at all times hold itself out to the public as a legal entity separate and distinct from any other entity (including any Affiliate thereof, including the general partner or any member or shareholder of Borrower or any Affiliate of the general partner or any member or shareholder of Borrower, as applicable); n. Intentionally Deleted; o. fail to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations; p. seek the dissolution or winding up, in whole or in part, of Borrower; q. commingle the funds and other assets of Borrower with those of any general partner, any member, any shareholder, any Affiliate or any other Person, except for daily sweeps to a master account for Borrower and its Affiliates from which necessary operating funds will be disbursed to a control account in the name of Borrower; r. fail to maintain its assets in such a manner that it is not costly or difficult to segregate, ascertain or identify its individual assets from those of any Affiliate or any other Person; and s. hold itself out to be responsible for the debts or obligations of any other Person, other than with respect to the indebtedness to AmSouth described and set forth in the Intercreditor Agreement, as amended. 5.5 CHANGE OF BUSINESS. Make any material change in the nature of its business as it is being conducted as of the date hereof. 5.6 CHANGES IN ACCOUNTING. Change its methods of accounting, unless such change is permitted by GAAP, and provided such change does not have the effect of curing or preventing what would otherwise be an Event of Default or Default had such change not taken place. 5.7 ERISA FUNDING AND TERMINATION. Permit (a) the funding requirements of ERISA with respect to any employee plan to be less than the minimum required by ERISA at any time, or (b) any employee plan to be subject to involuntary termination proceedings at any time. 30 31 5.8 TRANSACTIONS WITH AFFILIATES. Enter into any transaction (other than the Management Agreement) with any Affiliate of Borrower other than in the ordinary course of its business and on fair and reasonable terms no less favorable to Borrower than those it could obtain in a comparable arms-length transaction with a Person not an Affiliate. 5.9 TRANSFER OF OWNERSHIP INTERESTS. Except for the pledge of membership interests to secure the indebtedness to AmSouth Bank as otherwise provided in the Mortgage, permit a change in the ownership interests of the Persons comprising the Borrower unless the written consent of the Lender is first obtained, which consent may be granted or refused in Lender's sole discretion. 5.10 CHANGE OF USE. Alter or change the use of the Facility or permit any management agreement, other than the Management Agreement, or lease for the Facility or enter into any operating lease for the Facility, unless Borrower first notifies Lender and provides Lender a copy of the proposed lease agreement or management agreement, obtains Lender's written consent thereto, which consent may be withheld in Lender's sole discretion, and obtains and provides Lender with a subordination agreement in form satisfactory to Lender, as determined by Lender in its sole discretion, from such manager or lessee subordinating to all rights of Lender. 5.11 PLACE OF BUSINESS. Change its chief executive office or its principal place of business without first giving Lender at least thirty (30) days prior written notice thereof and promptly providing Lender such information and amendatory financing statements as Lender may request in connection therewith. 5.12 ACQUISITIONS. Directly or indirectly, purchase, lease, manage, own, operate, or otherwise acquire any property or other assets (or any interest therein) which are not used in connection with the operation of the Facility. 5.13 INTENTIONALLY DELETED. ARTICLE VI ENVIRONMENTAL HAZARDS 6.1 PROHIBITED ACTIVITIES AND CONDITIONS. Except for matters covered by a written program of operations and maintenance approved in writing by Lender (an "O&M Program") or matters described in Section 6.2, Borrower shall not cause or permit any of the following: a. The presence, use, generation, release, treatment, processing, storage, handling, or disposal-of any Hazardous Materials in, on or under the Property or any Improvements; b. The transportation of any Hazardous Materials to, from, or across the Property; 31 32 c. Any occurrence or condition on the Property or in the Improvements or any other property of Borrower that is adjacent to the Property, which occurrence or condition is or may be in violation of Hazardous Materials Laws; or d. Any violation of or noncompliance with the terms of any Environmental Permit with respect to the Property, the Improvements or any property of Borrower that is adjacent to the Property. The matters described in clauses (a) through (d) above are referred to collectively in this Article VI as "Prohibited Activities and Conditions" and individually as a "Prohibited Activity and Condition." 6.2 EXCLUSIONS. Notwithstanding any other provision of Article VI to the contrary, "Prohibited Activities and Conditions" shall not include the safe and lawful use and storage of quantities of (i) pre-packaged supplies, medical waste, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable Facilities, (ii) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by occupants of the Facility; and (iii) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the Property's parking areas or stored underground or above ground storage tanks used in the operation of the Facility, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Hazardous Materials Laws. 6.3 PREVENTIVE ACTION. Borrower shall take all appropriate steps (including the inclusion of appropriate provisions in any Leases approved by Lender which are executed after the date of this Agreement) to prevent its employees, agents, contractors, tenants and occupants of the Facility from causing or permitting any Prohibited Activities and Conditions. 6.4 O & M PROGRAM COMPLIANCE. If an O&M Program has been established with respect to Hazardous Materials, Borrower shall comply in a timely manner with, and cause all employees, agents, and contractors of Borrower and any other persons present on the Property to comply with the O&M Program. All costs of performance of Borrower's obligations under any O&M Program shall be paid by Borrower, and Lender's out-of-pocket costs incurred in connection with the monitoring and review of the O&M Program and Borrower's performance shall be paid by Borrower upon demand by Lender. Any such out-of-pocket costs of Lender which Borrower fails to pay promptly shall become an additional part of the Loan Obligations. 6.5 BORROWER'S ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender that, except as previously disclosed by Borrower to Lender in writing or in the Phase I Environmental Report prepared for Lender by ESA1 in connection with the Loan (the "Environmental Report"): a. Borrower has not at any time caused or permitted any Prohibited Activities and Conditions. 32 33 b. No Prohibited Activities and Conditions exist or, to best knowledge of Borrower, have existed. c. The Property and the Improvements do not now contain any underground storage tanks, and, to the best of Borrower's knowledge after reasonable and diligent inquiry, the Property and the Improvements have not contained any underground storage tanks in the past. If there is an underground storage tank located on the Property or the Improvements which has been previously disclosed by Borrower to Lender in writing, that tank complies with all requirements of Hazardous Materials Laws, except as disclosed in the Environmental Report. d. Borrower has complied with all Hazardous Materials Laws, including all requirements for notification regarding releases of Hazardous Materials. Without limiting the generality of the foregoing, Borrower has obtained all Environmental Permits required for the operation of the Property and the Improvements in accordance with Hazardous Materials Laws now in effect and all such Environmental Permits are in full force and effect. No event has occurred with respect to the Property and/or Improvements that constitutes, or with the passing of time or the giving of notice would constitute, noncompliance with the terms of any Environmental Permit. e. There are no actions, suits, claims or proceedings pending or, to the best of Borrower's knowledge after reasonable and diligent inquiry, threatened that involve the Property and/or the Improvements and allege, arise out of, or relate to any Prohibited Activity and Condition. f. Borrower has not received any complaint, order, notice of violation or other communication from any Governmental Authority with regard to air emissions, water discharges, noise emissions or Hazardous Materials, or any other environmental, health or safety matters affecting the Property, the Improvements or any other property of Borrower that is adjacent to the Property. The representations and warranties in this Article VI shall be continuing representations and warranties that shall be deemed to be made by Borrower throughout the term of the Loan evidenced by the Note, until the Loan Obligations have been paid in full. 6.6 NOTICE OF CERTAIN EVENTS. Borrower shall promptly notify Lender in writing of any and all of the following that may occur: a. Borrower's discovery of any Prohibited Activity and Condition. b. Borrower's receipt of or knowledge of any complaint, order, notice of violation or other communication from any Governmental Authority or other person with regard to present, or future alleged Prohibited Activities and Conditions or any other environmental, health or safety matters affecting the Property, the Improvements or any other property of Borrower that is adjacent to the Property. c. Any representation or warranty in this Article VI which becomes untrue at any time after the date of this Agreement. 33 34 Any such notice given by Borrower shall not relieve Borrower of, or result in a waiver of, any obligation under this Agreement, the Note, or any of the other Loan Documents. 6.7 COSTS OF INSPECTION. Borrower shall pay promptly the costs of any environmental inspections, tests or audits required by Lender in connection with any foreclosure or deed in lieu of foreclosure, or, if required by Lender, as a condition of Lender's consent to any "Transfer" (as defined in the Mortgage), or required by Lender following a reasonable determination by Lender that Prohibited Activities and Conditions may exist. Any such costs incurred by Lender (including the fees and out-of-pocket costs of attorneys and technical consultants whether incurred in connection with any judicial or administrative process or otherwise) which Borrower fails to pay promptly shall become an additional part of the Loan Obligations. 6.8 REMEDIAL WORK. If any investigation, site monitoring, containment, clean-up, restoration or other remedial work ("Remedial Work") is necessary to comply with any Hazardous Materials Laws or order of any Governmental Authority that has or acquires jurisdiction over the Property, the Improvements or the use, operation or improvement of the Property under any Hazardous Materials Laws, Borrower shall, by the earlier of (1) the applicable deadline required by Hazardous Materials Laws or (2) 30 days after notice from Lender demanding such action, begin performing the Remedial Work, and thereafter diligently prosecute it to completion, and shall in any event complete such work by the time required by applicable Hazardous Materials Laws. If Borrower fails to begin on a timely basis or diligently prosecute any required Remedial Work, Lender may, at its option, cause the Remedial Work to be completed, in which case Borrower shall reimburse Lender on demand for the cost of doing so. Any reimbursement due from Borrower to Lender shall become part of the Loan Obligations. 6.9 COOPERATION WITH GOVERNMENTAL AUTHORITIES. Borrower shall cooperate with any inquiry by any Governmental Authority and shall comply with any governmental or judicial order which arises from any alleged Prohibited Activity and Condition. 6.10 INDEMNITY. a. Borrower shall hold harmless, defend and indemnify (i) Lender, (ii) any successor owner or holder of the Note, (iii) the officers, directors, partners, agents, shareholders, employees and trustees of any of the foregoing, and (iv) the heirs, legal representatives, successors and assigns of each of the foregoing (together, the "Indemnitees") against all proceedings, claims, damages, losses, expenses, penalties and costs (whether initiated or sought by any Governmental Authority or private parties), including fees and out of pocket expenses of attorneys and expert witnesses, investigatory fees, and remediation costs, whether incurred in connection with any judicial or administrative process or otherwise, arising directly or indirectly from any of the following, except to the extent the same relate solely to Hazardous Materials first introduced to the Property or any part thereof by anyone other than Borrower following foreclosure of the Mortgage (or the delivery and acceptance of a deed in lieu of such foreclosure) of the sale or transfer of the Property or any part thereof by Borrower (with Lender's consent subject to the Mortgage): 34 35 1. Any breach of any representation or warranty of Borrower in this Article VI. 2. Any failure by Borrower to perform any of its obligations under this Article VI. 3. The existence or alleged existence of any Prohibited Activity and Condition. 4. The presence or alleged presence of Hazardous Materials in, on, or around under the Property, the Improvements or any property of Borrower that is adjacent to the Property, or 5. Actual or alleged violation of any Hazardous Materials Laws. b. Counsel selected by Borrower to defend Indemnitees shall be subject to the approval of those Indemnitees. Notwithstanding anything contained herein, any Indemnitee may elect to defend any claim or legal or administrative proceeding at the Borrower's expense if such Indemnitee has reason to believe that its interests are not being adequately represented or diverge from other interests being represented by such counsel (but Borrower shall be obligated to bear the expense of at most only one such separate counsel). Nothing contained herein shall prevent an Indemnitee from employing separate counsel in any such action at any time and participating in the defense thereof at its own expense. c. Borrower shall not, without the prior written consent of those Indemnitees who are named as parties to a claim or legal or administrative proceeding (a "Claim") settle or compromise the Claim if the settlement (1) results in the entry of any judgment that does not include as an unconditional term the delivery by the claimant or plaintiff to Lender of a written release of those Indemnitees, satisfactory in form and substance to Lender or (2) may materially and adversely affect any Indemnitee, as determined by such Indemnitee in its sole discretion. d. The liability of Borrower to indemnify the Indemnitees shall not be limited or impaired by any of the following, or by any failure of Borrower or any guarantor to receive notice of or consideration for any of the following: 1. Any amendment or modification of any Loan Document. 2. Any extensions of time for performance required by any of the Loan Documents. 3. The accuracy or inaccuracy of any representations and warranties made by Borrower under this Agreement or any other Loan Document. 35 36 4. The release of Borrower or any other person, by Lender or by operation of law, from performance of any obligation under any of the Loan Documents. 5. The release or substitution in whole or in part of any security for the Loan Obligations. 6. Lender's failure to properly perfect any lien or security interest given as security for the Loan Obligations. e. Borrower shall, at its own cost and expense, do all of the following: 1. Pay or satisfy any judgment or decree that may be entered against any Indemnitee or Indemnitees in any legal or administrative proceeding incident to any matters against which Indemnitees are entitled to be indemnified under this Article VI. 2. Reimburse Indemnitees for any expenses paid or incurred in connection with any matters against which Indemnitees are entitled to be indemnified under this Article VI. 3. Reimburse Indemnitees for any and all expenses, including fees and costs of attorneys and expert witnesses, paid or incurred in connection with the enforcement by Indemnitees of their rights under this Article VI, or in monitoring and participating in any legal or administrative proceeding. f. In any circumstances in which the indemnity under this Article VI applies, Lender may employ its own legal counsel and consultants to prosecute, defend or negotiate any claim or legal or administrative proceeding and Lender, with the prior written consent of Borrower (which shall not be unreasonably withheld, delayed or conditioned) may settle or compromise any action or legal or administrative proceeding. Borrower shall reimburse Lender upon demand for all costs and expenses incurred by Lender, including all costs of settlements entered into in good faith, and the fees and out of pocket expenses of such attorneys and consultants. g. The provisions of this Article VI shall be in addition to any and all other obligations and liabilities that Borrower may have under the applicable law or under the other Loan Documents, and each Indemnitee shall be entitled to indemnification under this Article VI without regard to whether Lender or that Indemnitee has exercised any rights against the Property and/or the Improvements or any other security, pursued any rights against any guarantor, or pursued any other rights available under the Loan Documents or applicable law. If Borrower consists of more than one person or entity, the obligation of those persons or entities to indemnify the Indemnitees under this Article VI shall be joint and several. The obligations of Borrower to indemnify the Indemnitees under this Article VI shall survive any repayment or discharge of the Loan Obligations, any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, and any release of record of the lien of the Mortgage. 36 37 ARTICLE VII EVENTS OF DEFAULT AND REMEDIES 7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an "Event of Default" hereunder: a. The failure by Borrower to pay any installment of principal, interest, or other payments required under the Note, within ten (10) days after the same becomes due; or b. Borrower's violation of any covenant set forth in Article V hereof; or c. Borrower's failure to deliver or cause to be delivered the financial statements and information set forth in Section 4.5 above within the times required and such failure is not cured within thirty (30) days following Lender's written notice to Borrower thereof; or d. The failure of Borrower properly and timely to perform or observe any covenant or condition set forth in this Agreement (other than those specified in (a), (b) and (c) of this Section) or any other Loan Documents which is not cured within any applicable cure period as set forth herein or, if no cure period is specified therefor, is not cured within thirty (30) days of Lender's notice to Borrower of such Default; provided, however, that if such default cannot be cured within such thirty (30) day period, such cure period shall be extended for an additional sixty (60) days, as long as Borrower is diligently and in good faith prosecuting said cure to completion. e. The filing by Borrower or Guarantor or Manager of a voluntary petition, or the adjudication of any of the aforesaid Persons, or the filing by any of the aforesaid Persons of any petition or answer seeking or acquiescing, in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief for itself under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, or if any of the aforesaid Persons should seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator for itself or of all or any substantial part of its property or of any or all of the rents, revenues, issues, earnings, profits or income thereof, or the mailing of any general assignment for the benefit of creditors or the admission in writing by any of the aforesaid Persons of its inability to pay its debts generally as they become due; or f. The entry by a court of competent jurisdiction of an order, judgment, or decree approving a petition filed against Borrower or Guarantor or Manager which petition seeks any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency, or other relief for debtors, which order, judgment or decree remains unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive) from the date of entry thereof, or the appointment of any trustee, receiver or liquidator of any of the aforesaid Persons or of all or any substantial part of its properties or of any or all of the rents, revenues, issues, earnings, 37 38 profits or income thereof, which appointment shall remain unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive); or g. Unless otherwise permitted hereunder or under any other Loan Documents, the sale, transfer, lease, assignment, or other disposition, voluntarily or involuntarily, of the Collateral, or any part thereof, or, except for Permitted Encumbrances as described in Section 5.2 above, any further encumbrance of the Collateral, unless the prior written consent of Lender is obtained; or h. The failure of Borrower to take the corrective measures required in this Agreement within the time periods specified following Lender's demand because the Debt Service Coverage for the Facility has not been met; or i. Any certificate, statement, representation, warranty or audit heretofore or hereafter furnished by or on behalf of Borrower or Guarantor or Manager pursuant to or in connection with this Agreement (including, without limitation, representations and warranties contained herein or in any Loan Documents) or as an inducement to Lender to make the Loan to Borrower, (i) proves to have been false in any material respect at the time when the facts therein set forth were stated or certified, or (ii) proves to have omitted any substantial contingent or unliquidated liability or claim against Borrower, or (iii) on the date of execution of this Agreement there shall have been any material adverse change in any of the facts previously disclosed by any such certificate, statement, representation, warranty or audit, which change shall not have been disclosed to Lender in writing at or prior to the time of such execution; or j. The failure of Borrower to correct or cause the Manager to correct, within the time deadlines set by any applicable Medicare, Medicaid or licensing agency, any deficiency which would result in the following actions by such agency with respect to the Facility: 1. a termination of any Reimbursement Contract or any Permit; or 2. a ban on new admissions generally or on admission of patients otherwise qualifying for Medicare or Medicaid coverage; or k. The Borrower, Manager or the Facility should be assessed fines or penalties by any state or any Medicare, Medicaid, health or licensing agency having jurisdiction over such Persons or the Facility in excess of $50,000; or l. A final judgment shall be rendered by a court of law or equity against Borrower or Manager or Guarantor in excess of $100,000, and the same shall remain undischarged for a period of thirty (30) days, unless such judgment is either (i) fully covered by collectible insurance and such insurer has within such period acknowledged such coverage in writing, or (ii) although not fully covered by insurance, enforcement of such judgment has been effectively stayed, such judgment is being contested or appealed by appropriate proceedings and Borrower or 38 39 Guarantor or Manager, as the case may be, has established reserves adequate for payment in the event such Person is ultimately unsuccessful in such contest or appeal and evidence thereof is provided to Lender; or m. The occurrence of any material adverse change in the financial condition or prospects of Borrower or Guarantor or Manager, or the existence of any other condition which, in Lender's reasonable determination, constitutes a material impairment of any such Person's ability to operate the Facility or of such Person's ability to perform their respective obligations under the Loan Documents, and is not remedied within thirty (30) days after written notice. Notwithstanding anything in this Section, all requirements of notice shall be deemed eliminated if Lender is prevented from declaring an Event of Default by bankruptcy or other applicable law. The cure period, if any, shall then run from the occurrence of the event or condition of Default rather than from the date of notice. 7.2 REMEDIES. Upon the occurrence of any one or more of the foregoing Events of Default, the Lender may, at its option: a. Intentionally Deleted. b. Declare the entire unpaid principal of the Loan Obligations to be, and the same shall thereupon become, immediately due and payable, without presentment, protest or further demand or notice of any kind, all of which are hereby expressly waived. c. Proceed to protect and enforce its rights by action at law (including, without limitation, bringing suit to reduce any claim to judgment), suit in equity and other appropriate proceedings including, without limitation, for specific performance of any covenant or condition contained in this Agreement. d. Exercise any and all rights and remedies afforded by the laws of the United States, the states in which any of the Property or other Collateral is located or any other appropriate jurisdiction as may be available for the collection of debts and enforcement of covenants and conditions such as those contained in this Agreement and the Loan Documents. e. Exercise the rights and remedies of setoff and/or banker's lien against the interest of Borrower in and to every account and other property of Borrower which is in the possession of the Lender or any person who then owns a participating interest in the Loan, to the extent of the full amount of the Loan. f. Exercise its rights and remedies pursuant to any other Loan Documents. 39 40 ARTICLE VIII MISCELLANEOUS 8.1 WAIVER. No remedy conferred upon, or reserved to, the Lender in this Agreement or any of the other Loan Documents is intended to be exclusive of any other remedy or remedies, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity. Exercise of or omission to exercise any right of the Lender shall not affect any subsequent right of Lender to exercise the same. No course of dealing between Borrower and Lender or any delay on the Lender's part in exercising any rights shall operate as a waiver of any of the Lender's rights. No waiver of any Default under this Agreement or any of the other Loan Documents shall extend to or shall affect any subsequent or other then existing Default or shall impair any rights, remedies or powers of Lender. 8.2 COSTS AND EXPENSES. Borrower will bear all taxes, fees and expenses (including actual attorneys' fees and expenses of counsel for Lender) in connection with the Loan, the Note, the preparation of this Agreement and the other Loan Documents (including any amendments hereafter made), and in connection with any modifications thereto and the recording of any of the Loan Documents. If, at any time, a Default occurs or Lender becomes a party to any suit or proceeding in order to protect its interests or priority in any Collateral for any of the Loan Obligations or its rights under this Agreement or any of the Loan Documents, or if Lender is made a party to any suit or proceeding by virtue of the Loan, this Agreement or any Collateral and as a result of any of the foregoing, the Lender employs counsel to advise or provide other representation with respect to this Agreement, or to collect the balance of the Loan Obligations, or to take any action in or with respect to any suit or proceeding relating to this Agreement, any of the other Loan Documents, any Collateral, Borrower, Manager, or any guarantor or to protect, collect, or liquidate any of the security for the Loan Obligations, or attempt to enforce any security interest or lien granted to the Lender by any of the Loan Documents, then in any such events, all of the actual attorney's fees arising from such services, including attorneys' fees for preparation of litigation and in any appellate or bankruptcy proceedings, and any expenses, costs and charges relating thereto shall constitute additional obligations of Borrower to the Lender payable on demand of the Lender. Without limiting the foregoing, Borrower has undertaken the obligation for payment of, and shall pay, all recording and filing fees, revenue or documentary stamps or taxes, intangibles taxes, and other taxes, expenses and charges payable in connection with this Agreement, any of the Loan Documents, the Loan Obligations, or the filing of any financing statements or other instruments required to effectuate the purposes of this Agreement, and should Borrower fail to do so, Borrower agrees to reimburse Lender for the amounts paid by Lender, together with penalties or interest, if any, incurred by Lender as a result of underpayment or nonpayment. Such amounts shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall bear interest at the Default Rate from the date advanced until repaid. 8.3 PERFORMANCE OF LENDER. At its option, upon Borrower's failure to do so, the Lender may make any payment or do any act on Borrower's behalf that Borrower or others are inquired to do to remain in compliance with this Agreement or any of the other Loan Documents, and Borrower agrees to reimburse the Lender, on demand, for any payment made or expense incurred by Lender pursuant to the foregoing authorization, including, without limitation, attorneys' fees, and until so repaid any sums advanced by Lender shall constitute a portion of the Loan Obligations, shall be 40 41 secured by the Mortgage and shall bear interest at the Default Rate from the date advanced until repaid. 8.4 INDEMNIFICATION. Except to the extent caused solely by the gross negligence or willful misconduct or illegal activity of the Indemnified Parties, Borrower shall, at its sole cost and expense, protect, defend, indemnify and hold harmless the Indemnified Parties from and against any and all claims, suits, liabilities (including, without limitation, strict liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses, diminutions in value, fines, penalties, charges, fees, judgments, awards, amounts paid in settlement, punitive damages, foreseeable and unforeseeable consequential damages, of whatever kind or nature (including but not limited to reasonable attorneys' fees and other costs of defense) imposed upon or incurred by or asserted against Lender by reason of (a) ownership of the Note, the Mortgage, the Property or any interest therein or receipt of any Rents; (b) any amendment to, or restructuring of, the Loan Obligations and/or any of the Loan Documents; (c) any and all lawful action that may be taken by Lender in connection with the enforcement of the provisions of the Mortgage or the Note or any of the other Loan Documents, whether or not suit is filed in connection with same, or in connection with Borrower, any guarantor and/or any partner, joint venturer, member or shareholder thereof becoming a party to a voluntary or involuntary federal or state bankruptcy, insolvency or similar proceeding; (d) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (e) any use, nonuse or condition in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (f) any failure on the part of Borrower, or any guarantor to perform or comply with any of the terms of this Agreement or any of the other Loan Documents; (g) any claims by any broker, person or entity claiming to have participated in arranging the making of the Loan evidenced by the Note; (h) any failure of the Property to be in compliance with any applicable laws; (i) performance of any labor or services or the furnishing of any materials or other property with respect to the Property, the Improvements or any part thereof; (j) the failure of any person to file timely with the Internal Revenue Service an accurate Form 1099-b, statement for recipients of proceeds from real estate, broker and barter exchange transactions, which may be required in connection with the Mortgage, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the transaction in connection with which the Loan is made; (k) any misrepresentation made to Lender in this Agreement or in any of the other Loan Documents; (l) any tax on the making and/or recording of the Mortgage, the Note or any of the other Loan Documents; (m) the violation of any requirements of the Employee Retirement Income Security Act of 1974, as amended; (n) any fines or penalties assessed or any corrective costs incurred by Lender if the Facility or any part of the Property is determined to be in violation of any covenants, restrictions of record, or any applicable laws, ordinances, rules or regulations; or (o) the enforcement by any of the Indemnified Parties of the provisions of this Section 8.4. Any amounts payable to Lender by reason of the application of this Section 8.4 shall become immediately due and payable and shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue interest at the Default Rate. The obligations and liabilities of Borrower under this Section 8.4 shall survive any termination, satisfaction, assignment, 41 42 entry of a judgment of foreclosure or exercise of a power of sale or delivery of a deed in lieu of foreclosure of the Mortgage except to the extent such obligations and liabilities arise solely out of events or circumstances first occurring after any termination, satisfaction, foreclosure or delivery of a deed in lieu of foreclosure of the Mortgage or the transfer or sale of the Property by the Borrower with Lender's consent subject to the Mortgage. For purposes of this Section 8.4, the term "Indemnified Parties" means Lender and any Person who is or will have been involved in the origination of the Loan, any Person who is or will have been involved in the servicing of the Loan, any Person in whose name the encumbrance created by the Mortgage is or will have been recorded, any Person who may hold or acquire or will have held a full or partial interest in the Loan (including, without limitation, any investor in any securities backed in whole or in part by the Loan) as well as the respective directors, officers, shareholder, partners, members, employees, agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries, participants, successors and assigns of any and all of the foregoing (including, without limitation, any other Person who holds or acquires or will have held a participation or other full or partial interest in the Loan or the Property, whether during the term of the Mortgage or as a part of or following a foreclosure of the Loan and including, without limitation, any successors by merger, consolidation or acquisition of all or a substantial portion of Lender's assets and business). 8.5 HEADINGS. The headings of the Sections of this Agreement are for convenience of reference only, are not to be considered a part hereof, and shall not limit or otherwise affect any of the terms hereof. 8.6 SURVIVAL OF COVENANTS. All covenants, agreements, representations and warranties made herein and in certificates or reports delivered pursuant hereto shall be deemed to have been material and relied on by Lender, notwithstanding any investigation made by or on behalf of Lender, and shall survive the execution and delivery to Lender of the Note and this Agreement. 8.7 NOTICES, ETC. Any notice or other communication required or permitted to be given by this Agreement or the other Loan Documents or by applicable law shall be in writing and shall be deemed received (a) on the date delivered, if sent by hand delivery (to the person or department if one is specified below) with receipt acknowledged by the recipient thereof, (b) three (3) Business Days following the date deposited in the U.S. mail, certified or registered, with return receipt requested, or (c) one (1) Business Day following the date deposited with Federal Express or other national overnight carrier, and in each case addressed as follows: If to Borrower: Diversicare Pinedale, LLC c/o Advocat Inc. 277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067 Attn: CFO 42 43 If to Lender: GMAC Commercial Mortgage Corporation 200 Witmer Road Horsham, Pennsylvania 19044 Attn: Servicing Department with a copy to: Kay K. Bains, Esq. Walston, Wells, Anderson & Bains, LLP 505 20th Street North, Suite 500 Birmingham, Alabama 35203 Either party may change its address to another single address by notice given as herein provided, except any change of address notice must be actually received in order to be effective. 8.8 BENEFITS. All of the terms and provisions of this Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. No Person other than Borrower or Lender shall be entitled to rely upon this Agreement or be entitled to the benefits of this Agreement. 8.9 PARTICIPATION. Borrower acknowledges that Lender may, at its option, sell participation interests in the Loan or to other participating banks or Lender may (but shall not be obligated to) assign its interest in the Loan to its affiliates or to other assignees (the "Assignee") to be included as a pool of properties to be financed in a proposed Real Estate Mortgage Investment Conduit (REMIC). Borrower agrees with each present and future participant in the Loan or Assignee of the Loan that if an Event of Default should occur, each present and future participant or Assignee shall have all of the rights and remedies of Lender with respect to any deposit due from the Borrower. The execution by a participant of a participation agreement with Lender, and the execution by the Borrower of this Agreement, regardless of the order of execution, shall evidence an agreement between Borrower and said participant in accordance with the terms of this Section. If the Loan is assigned to the Assignee, the Assignee will engage an underwriter (the "Underwriter"), who will be responsible for the due diligence, documentation, preparation and execution of certain documents required in connection with the offering of interests in the REMIC. Borrower agrees that Lender may, at its sole option and without notice to or consent of the Borrower, assign its interest in the Loan to the Assignee for inclusion in the REMIC and, in such event, Borrower agrees to provide the Assignee with such information as may be reasonably required by the Underwriter in connection therewith or by an investor in any securities backed in whole or in part by the Loan or any rating agency rating such securities. Borrower irrevocably waives any and all right it may have under applicable law to prohibit such disclosure, including, but 43 44 not limited to, any right of privacy, and consents to the disclosure of such information to the Underwriter, to potential investors in the REMIC, and to such rating agencies. 8.10 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and the instruments referred to herein supersede and incorporate all representations, promises, and statements, oral or written, made by Lender in connection with the Loan. This Agreement may not be varied, altered, or amended except by a written instrument executed by an authorized officer of the Lender. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, but such counterparts shall together constitute one and the same instrument. 8.11 LOAN AGREEMENT GOVERNS. The Loan is governed by terms and provisions set forth in this Loan Agreement and the other Loan Documents and in the event of any irreconcilable conflict between the terms of the other Loan Documents and the terms of this Loan Agreement, the terms of this Loan Agreement shall control; provided, however, that in the event there is any apparent conflict between any particular term or provision which appears in both this Loan Agreement and the other Loan Documents, and it is possible and reasonable for the terms of both this Loan Agreement and the Loan Documents to be performed or complied with, then, notwithstanding the foregoing, both the terms of this Loan Agreement and the other Loan Documents shall be performed and complied with. 8.12 CONTROLLING LAW. THE PARTIES HERETO AGREE THAT THE VALIDITY, INTERPRETATION, ENFORCEMENT AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TENNESSEE AND THE PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE PERSONAL JURISDICTION IN THE STATE OF TENNESSEE OR ARKANSAS, FOR THE ENFORCEMENT OF ANY AND ALL OBLIGATIONS UNDER THE LOAN DOCUMENTS. 8.13 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE ANY RIGHT THAT THEY MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE LOAN OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF EITHER PARTY'S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. BORROWER AND LENDER AGREE THAT EITHER PARTY MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE 44 45 KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF EITHER PARTY HERETO TO IRREVOCABLY WAIVE THEIR RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF LENDER TO MAKE THE LOAN AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. 8.14 ASSUMPTIONS. The Loan will be assumable one time only during the term of the Loan subject to Lender's prior written approval and the payment of an assumption fee of one percent (1%) of the outstanding principal balance of the Loan. Lender's approval shall be based, among other things, upon the transferee's financial strength and experience in owning and operating properties similar to the Facility (but in no event may a transferee be a non-United States entity). Lender may condition the consent required to the transfer and assumption upon (i) the modification of the Loan Documents, (ii) the assumption of the Loan Documents as modified, by the proposed transferee, (iii) the payment of the transfer fee referred to above, (iv) the payment by Borrower of all of Lender's out-of-pocket expenses, including, without limitation, all of Lender's attorneys' fees, (v) the approval by a Rating Agency of the proposed transferee, (vi) the proposed transferee's continued compliance with the Single-Purpose Entity requirements set forth above, and (vii) such other conditions as Lender may reasonably require at the time of such consent is sought. 8.15 INTEREST LIMITATION. Notwithstanding anything to the contrary contained herein or in the Mortgage or in any other of the Loan Documents, the effective rate of interest on the obligation evidenced by the Note shall not exceed the lawful maximum rate of interest permitted to be paid. Without limiting the generality of the foregoing, in the event that the interest charged under the Note results in an effective rate of interest higher than that lawfully permitted to be paid, then such charges shall be reduced by the sum sufficient to result in an effective rate of interest permitted and any amount which would exceed the highest lawful rate already received and held by the Lender shall be applied to a reduction of principal and not to the payment of interest. Borrower agrees that for the purpose of determining highest rate permitted by law, any non principal payment (including, without limitation, late fees and other fees) shall be deemed, to the extent permitted by law, to be an expense, fee or premium rather than interest. This provision shall control every other provision of the Note and the other Loan Documents with respect to the charging, collecting and payment of interest on the indebtedness evidenced by the Note. [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 45 46 IN WITNESS WHEREOF, the Borrower and the Lender have caused this Agreement to be properly executed, by their respective duly authorized representatives, as of the date first above written. WITNESS: BORROWER: DIVERSICARE PINEDALE, LLC, a Delaware limited liability company - ------------------------------ By: Diversicare Leasing Corp., a Tennessee corporation, its sole member - ------------------------------ [Print Name] By: ------------------------------------ James F. Mills, Jr., Senior Vice President WITNESS: LENDER: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation - ------------------------------ - ------------------------------ -------------------------------------------- [Print Name] James C. Thompson, Senior Vice President 47 EXHIBIT "A" [LEGAL DESCRIPTION] 48 EXHIBIT "B" BORROWER'S CHIEF EXECUTIVE OFFICE Diversicare Windsor House, LLC c/o Advocat Inc. 277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067 Attn: CFO BORROWER'S PRINCIPAL PLACES OF BUSINESS Diversicare Pinedale, LLC c/o Advocat Inc. 1311 North Pecan Street Newport, Arkansas 72112 49 EXHIBIT "C" OWNERSHIP INTERESTS DIVERSICARE LEASING CORP.------100% MEMBERSHIP INTEREST 50 EXHIBIT "D" SUMMARY OF FINANCIAL STATEMENTS AND CENSUS DATA Facility Name: Pinedale Nursing and Rehabilitation Center Report Date: ___________________________________________________
QUARTER QUARTER QUARTER 12 MONTH ENDING ENDING ENDING ENDING (DATE) (DATE) (DATE) (DATE) CENSUS DATA Total Number of Beds [UNITS]: _______ _______ _______ _______ Number of Days in Period: _______ _______ _______ _______ Total Patient Days Available: _______ _______ _______ _______ Patient Utilization Days: Medicaid _______ _______ _______ _______ Private _______ _______ _______ _______ Medicare _______ _______ _______ _______ Other _______ _______ _______ _______ Total Utilization Days: _______ _______ _______ _______ CASH FLOW ANALYSIS Total Routine Patient Revenue: _______ _______ _______ _______ Total Net Revenues: _______ _______ _______ _______ Total Expenses: _______ _______ _______ _______
51 Pre-Tax Income: _______ _______ _______ _______ ADD BACK Depreciation and Amortization: _______ _______ _______ _______ Interest on Mortgage: _______ _______ _______ _______ Facility Lease Expense (if applicable): _______ _______ _______ _______ Management Fees: _______ _______ _______ _______ Extraordinary Items: _______ _______ _______ _______ Net Operating Income: _______ _______ _______ _______
I hereby certify the above to be true and correct. Dated this ____ day of ________________, 200_. By: _______________________________ Its: ______________________________ 52 EXHIBIT "E" COMPLIANCE CERTIFICATE GMAC Commercial Mortgage Corporation 2200 Woodcrest Place, Suite 305 Birmingham, Alabama 35209 RE: Loan Agreement dated __________, 2001 (together with amendments, if any, the "Loan Agreement") by and between GMAC Commercial Mortgage Corporation, as Lender, and Diversicare Pinedale, LLC, as Borrower The undersigned officer of the above named Borrower, does hereby certify that for the quarterly financial period ending ____________________: 1. No Default or Event of Default has occurred or exists except ______________. 2. The Debt Service Coverage after deduction of Actual Management Fees for the preceding twelve (12) months (or such lesser period as shown have elapsed following the closing of the Loan) through the end of such period was: Required: _____ to 1.0 Actual: _____ to 1.0 The manner of calculation is attached. 3. The Debt Service Coverage after deduction of Assumed Management Fees for the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan) through the end of such period was: Required: _____ to 1.0 Actual: _____ to 1.0 The manner of calculation is attached. 4. The Combined Debt Service Coverage for the Facility and Related Facility after deduction of Assumed Management Fees for the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan) through the end of such period was: Required: 1.30 to 1.0 Actual: ____ to 1.0 53 The manner of this calculation is attached. 5. The fiscal year to date average daily occupant for the Facility: Required: Not less than ___0% Actual: __________ 6. The capital expenditures per bed was: Required: $______ per bed. Actual: $______ per bed. Evidence of such capital expenditures is attached. 7. All representations and warranties contained in the Loan Agreement and other Loan Documents are true and correct in all material respects as though given on the date hereof, except ________________________________________________. 8. All information provided herein is true and correct. 9. Capitalized terms not defined herein shall have the meanings given to such terms in the Loan Agreement. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Dated this the _____ day of _____________________________. 54 EXHIBIT "F" PERMITTED ENCUMBRANCES [Insert Schedule B exceptions in Title Insurance Policy] EX-10.5 7 g71016ex10-5.txt MORTGAGE AND SECURITY AGREEMENT 1 EXHIBIT 10.5 THIS INSTRUMENT WAS PREPARED BY, AND UPON RECORDING SHOULD BE RETURNED TO: Kay K. Bains, Esq. Walston, Wells, Anderson & Bains, LLP 505 20th Street North, Suite 500 Birmingham, AL 35203 205-251-9600 - -------------------------------------------------------------------------------- STATE OF ARKANSAS ) COUNTY OF JACKSON ) MORTGAGE AND SECURITY AGREEMENT THIS MORTGAGE AND SECURITY AGREEMENT (this "Instrument"), is made as of the 29th day of March, 2001, by and between DIVERSICARE PINEDALE, LLC, a Delaware limited liability company ("Mortgagor"), whose address is 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067, and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (together with its successors and assigns, "Mortgagee"), whose address is 200 Witmer Road, Horsham, Pennsylvania 19044. RECITALS A. Mortgagor is indebted to Mortgagee for money loaned in the principal sum of Two Million Nine Hundred Thirteen Thousand and No/100 Dollars ($2,913,000.00) (the "Loan"), as is evidenced by that certain Promissory Note of even date herewith from Mortgagor, payable to the order of Mortgagee in installments of principal and/or interest thereon, such final installment being due on April 1, 2006. B. As a condition precedent to making the Loan, Mortgagee has required that Mortgagor execute this Instrument as security for the Loan and the other Indebtedness (as hereinafter defined). GRANTING CLAUSES NOW, THEREFORE, for and in consideration of the Indebtedness, and to secure the prompt payment thereof, Mortgagor does hereby irrevocably grant, bargain, sell, convey, assign, transfer, mortgage, pledge and set over unto Mortgagee, its successors and assigns forever, and grants to Mortgagee a security interest in and to, the Mortgaged Property (as hereinafter defined). 2 TO HAVE AND TO HOLD the Mortgaged Property and all parts thereof unto Mortgagee, its successors and assigns forever, subject however to the terms and conditions herein: PROVIDED, HOWEVER, that if Mortgagor shall pay to Mortgagee the entire Indebtedness, at the times and in the manner stipulated herein, in the Note (as hereinafter defined) and in the other Loan Documents (as hereinafter defined), all without any deduction or credit for taxes or other similar charges paid by Mortgagor, and shall cause all other obligated parties to, keep, perform, and observe all and singular the covenants and promises herein, in the Note and in each of the other Loan Documents to be kept, performed, and observed, all without fraud or delay, then this Instrument, and all the properties, interests, and rights hereby granted, bargained, and sold shall cease, terminate, and be void, but shall otherwise remain in full force and effect. AGREEMENT AND Mortgagor and Mortgagee covenant and agree as follows: 1. DEFINITIONS. The following terms, when used in this Instrument (including when used in the above recitals), shall have the following meanings: (a) "1933 ACT" has the meaning given to that term in Section 13. (b) "ACCOUNTS" means any rights of Mortgagor arising from the operation of the Facility to payment for goods sold or leased or for services rendered, not evidenced by an Instrument, including, without limitation, (i) all accounts arising from the operation of the Facility, (ii) all moneys and accounts, if any, held by Mortgagee pursuant to this Instrument or any other Loan Document, and (iii) all rights to payment from Medicare or Medicaid programs or similar state or federal programs, boards, bureaus or agencies, and rights to payment from patients, residents, private insurers, and others arising from the operation of the Facility, including rights to payment pursuant to Reimbursement Contracts. Accounts shall include the Proceeds thereof. (c) "AFFILIATE" means, with respect to any Person, (i) each Person that controls, is controlled by or is under common control with such Person, (ii) each Person that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, any of the Stock of such Person, and (iii) each of such Person's officers, directors, members, joint venturers and partners. (d) "APPURTENANT RIGHTS" means all air rights, development rights, zoning rights, easements, rights-of-way, strips and gores of land, vaults, streets, roads, alleys, tenements, passages, sewer rights, waters, water courses, water rights and powers, minerals, flowers, shrubs, crops, trees, timber and other emblements now or hereafter appurtenant to, or used or useful in connection with, or located on, under or above the Land, or any part or parcel thereof, and all ground leases, estates, rights, titles, interests, privileges, liberties, tenements, hereditaments and appurtenances, reversions, and remainders whatsoever, in any way belonging, relating or appertaining to the Land, or any part thereof, now or hereafter. 2 3 (e) "ASSIGNMENT OF LEASES AND RENTS" means that certain Assignment of Leases and Rents of even date herewith executed by Mortgagor for the benefit of Mortgagee. (f) "ASSIGNMENT OF LICENSES" means that certain Assignment of Licenses, Permits and Contracts of even date herewith executed by Mortgagor for the benefit of Mortgagee. (g) "BUSINESS DAY" means a day, other than Saturday, Sunday or legal holidays, when Mortgagee is open for business. (h) "COLLATERAL AGREEMENTS" means collectively, as applicable, the Debt Service Reserve Escrow and Security Agreement of even date herewith by and between Mortgagor and Mortgagee. (i) "CONDEMNATION" has the meaning given to that term in Section 12. (j) "CONTRACTS" means all license agreements, operating contracts, and all management, service, employment, supply and maintenance contracts and agreements, and any other agreements, licenses or contracts of any nature whatsoever now or hereafter obtained or entered into by Mortgagor with respect to the acquisition, construction, renovation, expansion, ownership, occupancy, use, operation, maintenance and administration of the Facility and/or the Mortgaged Property, including, without limitation, (i) any and all contracts, authorizations, agreements and/or consents executed by, or on behalf of any patient or other Person seeking services from Mortgagor pursuant to which Mortgagor provides or furnishes skilled nursing care and related services at the facility, including the consent to treatment and assignment of payment of benefits by third party and (ii) any and all contracts between Mortgagor and any resident of the Facility giving the resident certain rights of occupancy in the Facility and providing for certain services to such resident. (k) "CROSS COLLATERALIZATION AND CROSS-DEFAULT AGREEMENT" means that certain Cross Collateralization and Cross-Default Agreement of even date herewith executed by Mortgagor, Mortgagee and Diversicare of Windsor House, LLC. (l) "DEFAULT RATE" has the meaning given to that term in the Note. (m) "EQUIPMENT" means all beds, linen, televisions, carpeting, telephones, cash registers, computers, lamps, glassware, rehabilitation equipment, restaurant and kitchen equipment, and other fixtures and equipment of Mortgagor located on, attached to or used or useful in connection with any of the Mortgaged Property or the Facility and all renewals and replacements thereof and substitutions therefor; provided, however, that with respect to any items which are leased for the benefit of the Facility and not owned by Mortgagor, the Equipment shall include the leasehold interest only of Mortgagor together with any options to purchase any of said items and any additional or greater rights with respect to such items which Mortgagor may hereafter acquire, but the foregoing shall not be construed to mean that such leasing shall be permitted hereunder and under the other Loan Documents. (n) "EVENT OF DEFAULT" means the occurrence of any event listed in Section 14. 3 4 (o) "FACILITY" means the facility known as "Pinedale Nursing and Rehabilitation Center," presently a 130-bed licensed skilled nursing facility located on the Land, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any skilled nursing facility), now or hereafter operated on the Land. (p) "FIXTURES" means all property which is now or hereafter so attached to the Land or the Improvements as to constitute a fixture under applicable law and all renewals and replacements thereof and substitutions therefor, including, without limitation: machinery, equipment, engines, boilers, incinerators, installed building materials; systems and equipment for the purpose of supplying or distributing heating, cooling, electricity, gas, water, air, or light; antennas, cable, wiring and conduits used in connection with radio, television, security, fire prevention, or fire detection or otherwise used to carry electronic signals; telephone systems and equipment; elevators and related machinery and equipment; fire detection, prevention and extinguishing systems and apparatus; security and access control systems and apparatus; plumbing systems; water heaters, ranges, stoves, microwave ovens, refrigerators, dishwashers, garbage disposers, washers, dryers and other appliances; light fixtures, awnings, storm windows and storm doors; pictures, screens, blinds, shades, curtains and curtain rods; mirrors; cabinets, paneling, rugs and floor and wall coverings; fences, trees and plants; and exercise equipment. (q) "GENERAL INTANGIBLES" means all intangible personal property of Mortgagor arising out of or connected with the Mortgaged Property or the Facility and all renewals and replacements thereof and substitutions therefor (other than Accounts, Rents, Instruments, Inventory, Money, Permits and Reimbursement Contracts), including, without limitation, things in action, contract rights and other rights to payments of Money. (r) "GOVERNMENTAL AUTHORITY" means any board, commission, department or body of any municipal, county, state or federal governmental unit, or any subdivision of any of them, that has or acquires jurisdiction over the Mortgaged Property and/or the Improvements or the use, operation or improvement of the Mortgaged Property. (s) "GUARANTOR" means Advocat Inc., a Delaware corporation. (t) "GUARANTY AGREEMENT" means that certain Guaranty Agreement of even date herewith executed by Guarantor for the benefit of Mortgagee. (u) "IMPOSITIONS" and "IMPOSITION DEPOSITS" have the meanings given to those terms in Section 4. (v) "IMPROVEMENTS" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Land, including but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and storm sashes, and cleaning apparatuses which are or shall be attached to the Land or said buildings, structures or improvements. 4 5 (w) "INDEBTEDNESS" means the aggregate of the principal of and interest on the Note due and owing from time to time and all expenses, charges and other amounts due and owing from time to time under the Note, the Loan Agreement, this Instrument or any other Loan Document, including, without limitation, prepayment premiums, late charges, default interest and advances to protect the security of this Instrument under Section 7, if any. (x) "INSTRUMENTS" means all instruments, chattel paper, documents or other writings obtained by Mortgagor from or in connection with the operation of the Mortgaged Property or the construction and operation of the Facility (including without limitation, all ledger sheets, computer records and printouts, data bases, programs, books of account, trademarks or trade names, utility contracts, maintenance and service contracts and files of Mortgagor relating thereto). (y) "INVENTORY" means all inventories of food, beverages and other comestibles owned and held by Mortgagor for sale or use at or from the Mortgaged Property or the Facility, and soap, paper supplies, medical supplies, drugs and all other such goods, wares and merchandise held by Mortgagor for sale to or for consumption by residents, guests or patients of the Land or the Facility and all such other goods returned to or repossessed by Mortgagor. (z) "LAND" means the land described in Exhibit "A" attached hereto and incorporated herein. (aa) "LEASES" means all present and future leases, subleases, licenses, concessions or grants or other possessory interests now or hereafter in force, whether oral or written, covering or affecting the Mortgaged Property and/or the Facility, or any portion of the Mortgaged Property and/or the Facility and all modifications, extensions or renewals thereof. (ab) "LIEN" means any voluntary or involuntary mortgage, security deed, deed of trust, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, including those contemplated by or permitted in this Instrument, the Loan Agreement and the other Loan Documents. (ac) "LOAN" has the meaning given to that term in the recitals. (ad) "LOAN AGREEMENT" means that certain Loan Agreement of even date herewith by and between Mortgagor and Mortgagee. (ae) "LOAN DOCUMENTS" means the Note, the Loan Agreement, this Instrument, the Assignment of Leases and Rents, the Assignment of Licenses, the Guaranty Agreement, all Collateral Agreements, O&M Programs, the Subordination Agreement, the Cross-Collateralization and Cross-Default Agreement, and any other documents now or in the future executed by Mortgagor, any guarantor or any other Person in connection with the Loan evidenced by the Note, as such documents may be amended from time to time. 5 6 (af) "MANAGED CARE PLANS" means any health maintenance organization, preferred provider organization, individual practice association, competitive medical plan, or similar arrangement, entity, organization, or Person. (ag) "MEDICAID" means that certain program of medical assistance, funded jointly by the federal government and the States, for impoverished individuals who are aged, blind and/or disabled, and/or members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. ss.ss. 1396 et seq.) and the regulations promulgated thereunder. (ah) "MEDICARE" means that certain federal program providing health insurance for eligible elderly and other individuals, under which physicians, hospitals, skilled nursing homes, home health care, and other providers are reimbursed for certain covered services they provide to the beneficiaries of such program, which program is more fully described in Title XVIII of the Social Security Act (42 U.S.C. ss.ss. 1395 et seq.) and the regulations promulgated thereunder. (ai) "MONEY" means all monies, cash, rights to deposit or savings accounts, or other items of legal tender obtained from or for use in connection with the operation of the Facility. (aj) "MORTGAGED PROPERTY" means all of Mortgagor's present and future right, title and interest in and to all of the following: (i) the Land; (ii) all Appurtenant Rights; (iii) all Equipment; (iv) all Improvements; (v) all Fixtures; (vi) all Accounts; (vii) all Contracts; (viii) all General Intangibles; (ix) all Permits (to the extent assignment is permitted by law); (x) all Money; (xi) all Instruments; (xii) all Inventory; (xiii) all Reimbursement Contracts (to the extent assignment is permitted by law); (xiv) all Rents; (xv) all Personalty; (xvi) all Leases; (xvii) all Proceeds; (xviii) all contracts, options and other agreements for the sale of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property entered into by Mortgagor now or in the future, including cash or securities deposited to secure performance by parties of their obligations; 6 7 (xix) all Imposition Deposits; (xx) all refunds or rebates of Impositions by any municipal, state or federal authority or insurance company (other than refunds applicable to periods before the real property tax year in which this Instrument is dated); (xxi) all names under or by which any of the above Mortgaged Property may be operated or known (other than the right to the use of the name "Diverscare"), and all trademarks, trade names, and goodwill relating to any of the Mortgaged Property; and (xxii) all renewals, replacements and Proceeds of any of the foregoing and any substitutions therefor. (ak) "MORTGAGEE" means the entity identified as "Mortgagee" in the first paragraph of this Instrument, or any subsequent holder of the Note. (al) "MORTGAGOR" means all persons or entities identified as "Mortgagor" in the first paragraph of this Instrument, together with their successors and assigns. (am) "NOTE" means the note evidencing the Loan, including all schedules, riders, allonges, endorsements, addenda or amendments together with any renewals, replacements, substitutions, or extensions thereof. (an) "NOTICE" has the meaning given to that term in Section 24. (ao) "O&M PROGRAMS" has the meaning given to such term in the Loan Agreement. (ap) "OPINION OF COUNSEL" means an opinion or opinions in writing signed by independent legal counsel to Mortgagor, designated by Mortgagor, and reasonably satisfactory to Mortgagee. (aq) "PARENT" means, with respect to a corporation, any other corporation owning or controlling, directly or indirectly, fifty percent (50%) or more of the voting stock of the corporation. (ar) "PERMITS" means all licenses, permits and certificates used or necessary in connection with the construction, ownership, operation, use or occupancy of the Mortgaged Property and/or the Facility, including, without limitation, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need and all such other permits, licenses and rights, obtained from any governmental, quasi-governmental or private person or entity whatsoever concerning ownership, operation, use or occupancy. (as) "PERMITTED ENCUMBRANCES" has the meaning given to that term in Section 5.2 of the Loan Agreement. 7 8 (at) "PERSON" means any natural person, firm, trust, corporation, partnership, limited liability company and any other form of legal entity. (au) "PERSONALTY" means all furniture, furnishings, Equipment, machinery, building materials, appliances, goods, supplies, tools, books, records (whether in written or electronic form), computer equipment (hardware and software) and other tangible personal property (other than Fixtures) which are used now or in the future in connection with the ownership, management or operation of the Land or the Improvements or are located on the Land or in the Improvements, and any operating agreements relating to the Land or the Improvements, and any surveys, plans and specifications and contracts for architectural, engineering and construction services relating to the Land or the Improvements. (av) "PRIOR LIEN" has the meaning given to that term in Section 26. (aw) "PROCEEDS" means all awards, payments, earnings, royalties, issues, profits, liquidated claims and proceeds (including proceeds of insurance and condemnation and any conveyance in lieu thereof), whether cash or noncash, moveable or immoveable, tangible or intangible, from the sale, conversion (whether voluntary or involuntary), exchange, transfer, collection, loss, damage, condemnation, disposition, substitution or replacement of any of the Mortgaged Property. (ax) "PROPERTY JURISDICTION" means the jurisdiction in which the Mortgaged Property is located. (ay) "REIMBURSEMENT CONTRACTS" means all third-party reimbursement contracts for the Facility which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare and Medicaid, Managed Care Plans and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements, now or hereafter existing. (az) "RENTS" means all rent and other payments of whatever nature from time to time payable pursuant to the Leases (including, without limitation, rights to payment earned under leases for space in the Improvements for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians' offices, pharmacies and specialty shops). (ba) "SINGLE-PURPOSE ENTITY" means a Person which owns no interest or property other than the Mortgaged Property. (bb) "STOCK" means all shares, options, warrants, general or limited partnership interests, membership interests, participations or other equivalents (regardless of how designated) in a corporation, limited liability company, partnership or any equivalent entity, whether voting or nonvoting, including, without limitation, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended). 8 9 (bc) "SUBORDINATION AGREEMENT" means that certain Subordination of Management Agreement of even date herewith by and among Borrower, Diversicare Management Services, a Tennessee corporation, and Lender. (bd) "TAXES" means all taxes, assessments, vault rentals and other charges, if any, general, special or otherwise, including all assessments for schools, public betterments and general or local improvements, which are levied, assessed or imposed by any public authority or quasi-public authority, and which, if not paid, will become a lien, on the Land or the Improvements. (be) "TRANSFER" shall mean the conveyance, assignment, sale, transfer, mortgaging, collateral assignment, encumbrance, pledging, alienation, hypothecation, granting of a security interest in, granting of options with respect to, or other disposition of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record) all or any portion of any legal or beneficial interest (i) in all or any portion of the Mortgaged Property; (ii) in the Stock of any corporation which is Mortgagor, a member of Mortgagor (if Mortgagor is a limited liability company), a partner of Mortgagor or, if applicable, a partner of a general partner of Mortgagor; and (iii) in Mortgagor (or any trust of which Mortgagor is a trustee), or, if Mortgagor is a limited or general partnership, limited liability company, joint venture, trust, nominee trust, tenancy in common or other unincorporated form of business association or form of ownership interest, in any Person having a direct legal or beneficial ownership in Mortgagor, excluding any legal or beneficial interest in any constituent limited partner or member of Mortgagor but including the interest of such limited partner or member itself and further including any legal or beneficial interest in any constituent general partner of Mortgagor, if applicable, in any general partner of any constituent general partner of Mortgagor, or, if Mortgagor is a limited liability company, in any constituent corporate member of Mortgagor. The term "Transfer" shall also include, without limitation, the following: an installment sales agreement wherein Mortgagor agrees to sell the Mortgaged Property or any part thereof or any interest therein for a price to be paid in installments; an agreement by Mortgagor leasing all or a substantial part of the Mortgaged Property to one or more Persons pursuant to a single transaction or related transactions, or a sale, assignment or other transfer of, or the grant of a security interest in, Mortgagor's right, title and interest in and to any Leases or any Rent; any instrument subjecting the Mortgaged Property to a condominium regime or transferring ownership to a cooperative corporation or other form of multiple ownership or governance; the dissolution or termination of Mortgagor, any general partner of Mortgagor, any general partner of any general partner of Mortgagor, if applicable, or, if Mortgagor is a limited liability company, any corporate member of Mortgagor; the issuance of new Stock in any corporation which is Mortgagor, a member of Mortgagor (if Mortgagor is a limited liability company), a partner of Mortgagor or, if applicable, a partner of a general partner of Mortgagor; and the merger or consolidation with any other Person of Mortgagor, any general partner of Mortgagor, any general partner of any general partner of Mortgagor, if applicable, or, if Mortgagor is a limited liability company, any corporate member of Mortgagor. (bf) "UCC COLLATERAL" has the meaning given to that term in Section 2. 9 10 2. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument is also a security agreement under the Uniform Commercial Code as adopted in the State of Arkansas for any of the Mortgaged Property which, under applicable law, may be subject to a security interest under the Uniform Commercial Code as adopted in the State of Arkansas, whether acquired now or in the future, and all products and cash and non-cash Proceeds thereof (collectively, "UCC Collateral"), and Mortgagor hereby grants to Mortgagee a security interest in the UCC Collateral. Mortgagor shall execute and deliver to Mortgagee promptly for the filing of such financing statements and any extensions, renewals and amendments thereof, of any termination statements and, upon Mortgagee's request, financing statements, continuation statements and amendments, in such form as Mortgagee may require to perfect or continue the perfection of this security interest. Mortgagor shall pay all filing costs and all costs and expenses of any record searches for financing statements that Mortgagee may require. Without the prior written consent of Mortgagee, Mortgagor shall not create or permit to exist any other lien or security interest in any of the UCC Collateral. If an Event of Default has occurred and is continuing, Mortgagee shall have the remedies of a secured party under the Uniform Commercial Code as adopted in the State of Arkansas, in addition to all remedies provided by this Instrument or existing under applicable law. In exercising any remedies, Mortgagee may exercise its remedies against the UCC Collateral separately or together and in any order, without in any way affecting the availability of Mortgagee's other remedies hereunder and/or under applicable law. 3. LEASES. Mortgagor shall not, without the prior written consent and approval of Mortgagee which consent will not be unreasonably withheld, enter into any Lease (except for admission of Facility patients or residents), or enter into or permit any management agreement of or affecting any part of the Mortgaged Property, except for the Management Agreement (as defined in the Loan Agreement). 4. DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES. If (i) any reduction occurs in the Debt Reserve Fund below three (3) months of debt service payments or upon evidence that Mortgagor has failed to pay Taxes, insurance premiums or other similar charges affecting the Mortgaged Property on a timely basis, (ii) Mortgagor does not establish a Debt Reserve Fund on the Closing Date, or (iii) an Event of Default occurs under the Loan Documents, then: (a) Mortgagor shall deposit with Mortgagee on the day monthly installments of principal and/or interest, or both, are due under the Note (or on another day designated in writing by Mortgagee), until the Indebtedness is paid in full, an additional amount sufficient to accumulate with Mortgagee the entire sum required to pay, when due (i) to the extent applicable, the yearly water and sewer charges which may be levied on all or any part of the Mortgaged Property, (ii) the premiums for fire and other hazard insurance, business interruption insurance and such other insurance as Mortgagee may require under the Loan Agreement, (iii) the yearly Taxes, and (iv) amounts for other charges and expenses which Mortgagee at any time reasonably deems necessary to protect the Mortgaged Property, to prevent the imposition of liens on the Mortgaged Property, or otherwise to protect Mortgagee's interests, all as reasonably estimated from time to time by Mortgagee, plus one-sixth of such estimate. The amounts deposited under the preceding sentence 10 11 are collectively referred to in this Instrument as the "Imposition Deposits". The obligations of Mortgagor for which the Imposition Deposits are required are collectively referred to in this Instrument as "Impositions". The amount of the Imposition Deposits shall be sufficient to enable Mortgagee to pay each Imposition before the last date upon which such payment may be made without any penalty or interest charge being added plus one-sixth of such estimate. Mortgagee shall maintain records indicating how much of the monthly Imposition Deposits and how much of the aggregate Imposition Deposits held by Mortgagee are held for the purpose of paying property taxes, insurance premiums and each other obligation of Mortgagor for which Imposition Deposits are required. Any waiver by Mortgagee of the requirement that Mortgagor remit Imposition Deposits to Mortgagee may be revoked by Mortgagee, in Mortgagee's discretion, at any time upon notice to Mortgagor. (b) Imposition Deposits shall be held in an institution (which may be Mortgagee, if Mortgagee is such an institution) whose deposits or accounts are insured or guaranteed by a federal agency. Mortgagee shall not be obligated to open additional accounts or deposit Imposition Deposits in additional institutions when the amount of the Imposition Deposits exceeds the maximum amount of the federal deposit insurance or guaranty. Mortgagee shall apply the Imposition Deposits to pay Impositions so long as no Event of Default has occurred and is continuing. Unless applicable law requires, Mortgagee shall not be required to pay Mortgagor any interest, earnings or profits on the Imposition Deposits, but any interest, earnings or profits earned on the Imposition Deposits shall belong to Grantor and shall be credited against future installments of Imposition Deposits due. Mortgagor hereby pledges and grants to Mortgagee a security interest in the Imposition Deposits as additional security for all of Mortgagor's obligations under this Instrument and the other Loan Documents. Any amounts deposited with Mortgagee under this Section 4 shall not be trust funds, nor shall they operate to reduce the Indebtedness, unless applied by Mortgagee for that purpose under Section 4(e). (c) Mortgagor shall direct the applicable Governmental Authority to deliver the invoices and bills for all Impositions to Mortgagee. If Mortgagee receives a bill or invoice for an Imposition, Mortgagee shall pay the Imposition from the Imposition Deposits held by Mortgagee. Mortgagee shall have no obligation to pay any Imposition to the extent it exceeds Imposition Deposits then held by Mortgagee, unless Mortgagor challenges such Impositions in accordance with Section 9(d), below. Mortgagee may pay an Imposition according to any bill, statement or estimate from the appropriate public office or insurance company without inquiring into the accuracy of the bill, statement or estimate or into the validity of the Imposition. (d) If at any time the amount of the Imposition Deposits held by Mortgagee for payment of a specific Imposition exceeds the amount reasonably deemed necessary by Mortgagee plus one-sixth of such estimate, the excess shall be credited against future installments of Imposition Deposits. If at any time the amount of the Imposition Deposits held by Mortgagee for payment of a specific Imposition is less than the amount reasonably estimated by Mortgagee to be necessary plus one-sixth of such estimate, Mortgagor shall pay to Mortgagee the amount of the deficiency within fifteen (15) days after notice from Mortgagee. 11 12 (e) If an Event of Default has occurred and is continuing, Mortgagee may apply any Imposition Deposits, in any amounts and in any order as Mortgagee determines, in Mortgagee's discretion, to pay any Impositions or as a credit against the Indebtedness. Upon payment in full of the Indebtedness, Mortgagee shall refund to Mortgagor any Imposition Deposits (together with any interest, earnings or profits thereon) held by Mortgagee. 5. APPLICATION OF PAYMENTS. If at any time Mortgagee receives, from Mortgagor or otherwise, any amount applicable to the Indebtedness which is less than all amounts due and payable at such time, then Mortgagee may apply that payment to amounts then due and payable in the manner set forth in the Note. Neither Mortgagee's acceptance of an amount which is less than all amounts then due and payable nor Mortgagee's application of such payment in the manner authorized in the immediately preceding sentence shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. Notwithstanding the application of any such amount to the Indebtedness, Mortgagor's obligations under this Instrument and the Note shall remain unchanged. 6. USE OF PROPERTY. Unless required by applicable law, Mortgagor shall not (a) except for any change in use approved by Mortgagee, allow changes in the use for which all or any part of the Mortgaged Property is being used at the time this Instrument was executed, (b) convert any part of the Facility to commercial use, or (c) initiate or acquiesce in a change in the zoning classification of the Mortgaged Property which would prohibit the continued use of the Mortgaged Property as the same is being used at the time of this Instrument. 7. PROTECTION OF MORTGAGEE'S SECURITY. (a) If Mortgagor fails to perform any of its obligations under this Instrument or any other Loan Document, or if any action or proceeding is commenced which purports to affect the Mortgaged Property, Mortgagee's security or Mortgagee's rights under this Instrument, including eminent domain, insolvency, code enforcement, civil or criminal forfeiture, enforcement of Hazardous Materials Laws, fraudulent conveyance or reorganizations or proceedings involving a bankrupt or decedent, then Mortgagee at Mortgagee's option and upon notice to Mortgagor may make such appearances, disburse such sums and take such actions as Mortgagee reasonably deems necessary to perform such obligations of Mortgagor and to protect Mortgagee's interest, including (i) disbursement of fees and out of pocket expenses of attorneys, accountants, inspectors and consultants, (ii) entry upon the Mortgaged Property to make repairs or secure the Mortgaged Property, (iii) procurement of the insurance coverages required under the Loan Agreement, and (iv) payment of amounts which Mortgagor has failed to pay under Section 9. (b) Any amounts disbursed by Mortgagee under this Section 7, or under any other provision of this Instrument, or under any of the other Loan Documents, that treats such disbursement as being made under this Section 7, shall be added to, and become part of the Indebtedness, shall be immediately due and payable and shall bear interest from the date of disbursement until paid at the Default Rate. 12 13 (c) Nothing in this Section 7 shall require Mortgagee to incur any expense or take any action. 8. INSPECTION. Mortgagee, its agents, representatives, and designees may make or cause to be made entries upon and inspections of the Mortgaged Property (including environmental inspections and tests) during normal business hours, or at any other reasonable time, upon reasonable advance notice to Mortgagor (which may be oral) except in an emergency or during the continuance of an Event of Default. Grantor may have a representative present during such entry and inspection and any such entry and inspection shall be subject to the right of any patients/residents of the Mortgaged Property. 9. TAXES; OPERATING EXPENSES. (a) Subject to the provisions of Section 9(c) and Section 9(d), Mortgagor shall pay, or cause to be paid, all Taxes when due and before the addition of any interest, fine, penalty or cost for nonpayment. (b) Subject to the provisions of Section 9(c), Mortgagor shall pay or cause to be paid the expenses of operating, managing, maintaining and repairing the Mortgaged Property (including insurance premiums, utilities, repairs and replacements) before the last date upon which each such payment may be made without any penalty or interest charge being added or lien imposed. (c) As long as no Event of Default has occurred and is continuing, Mortgagor shall not be obligated to pay Taxes, insurance premiums or any other individual Imposition to the extent that Imposition Deposits are held by Mortgagee for the purpose of paying that specific Imposition. If an Event of Default exists, Mortgagee may exercise any rights Mortgagee may have with respect to Imposition Deposits without regard to whether Impositions are then due and payable. (d) Mortgagor, at its own expense, may contest by appropriate legal proceedings, conducted diligently and in good faith, the amount or validity of any Imposition other than insurance premiums, if (i) Mortgagor notifies Mortgagee of the commencement or expected commencement of such proceedings, (ii) the Mortgaged Property is not in danger of being sold or forfeited, as determined by Mortgagee, (iii) if requested by Mortgagee, Mortgagor deposits with Mortgagee cash reserves or other collateral sufficient to pay the contested Imposition, (iv) Mortgagor furnishes whatever security is required in the proceedings or is reasonably requested by Mortgagee, which may include the delivery to Mortgagee of the reserves established by Mortgagor to pay the contested Imposition, as additional security, and (v) such contest operates to suspend enforcement of such Imposition. (e) Upon request by Mortgagee for a specific Imposition Mortgagor shall promptly deliver to Mortgagee a copy of all notices of, and invoices for, Impositions, and if Mortgagor pays any Imposition directly, Mortgagor shall promptly furnish to Mortgagee receipts evidencing such payments. 13 14 (f) In the event of the passage of any law subsequent to the date of this Instrument in any manner changing or modifying the laws now in force governing the taxation of deeds of trust or mortgages or debts secured by deeds of trust or mortgages or the manner of collecting any such taxes so as to adversely affect Mortgagee (including, without limitation, a requirement that internal revenue stamps be affixed to this Instrument or any of the other Loan Documents), Mortgagor will promptly pay any such tax. If Mortgagor fails to make such prompt payment, or if any law prohibits Mortgagor from making such payment or would penalize Mortgagee if Mortgagor makes such payment, then the entire unpaid balance of the Indebtedness shall, without notice, immediately become due and payable at the sole option of Mortgagee. In no event, however, shall any income taxes of Mortgagee or franchise taxes of Mortgagee measured by income, or taxes in lieu of such income taxes or franchise taxes, be required to be paid by Mortgagor. 10. LIENS; ENCUMBRANCES. Mortgagor acknowledges that the existence of any Lien on the Mortgaged Property, other than Permitted Encumbrances, whether voluntary, involuntary or by operation of law, not discharged and released or bonded off and removed from the Mortgaged Property within thirty (30) days of its creation is a "Transfer" which constitutes an Event of Default as provided under Section 14, and will subject Mortgagor to personal liability under the Note. 11. PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY. Mortgagor (a) shall not commit waste or permit impairment or deterioration of the Mortgaged Property, (b) shall not abandon the Facility, (c) shall restore or repair promptly, in a good and workmanlike manner, any damaged part of the Mortgaged Property to the equivalent of its original condition, or such other condition as Mortgagee may approve in writing, whether or not insurance proceeds or condemnation awards are available to cover any costs of such restoration or repair, except to the extent Mortgagee applies such insurance proceeds or condemnation awards to reduce the Indebtedness, (d) shall keep the Mortgaged Property in good repair, including the replacement of Personalty and Fixtures with items of equal or better function and quality, (e) shall provide for professional management of the Mortgaged Property by a manager satisfactory to Mortgagee, in its sole discretion, under a contract approved by Mortgagee in writing, and (f) shall give notice to Mortgagee of and, unless otherwise directed in writing by Mortgagee, shall appear in and defend any action or proceeding purporting to affect the Mortgaged Property, Mortgagee's security or Mortgagee's rights under this Instrument. Mortgagor shall not (and shall not permit any other person to) remove, demolish or alter the Mortgaged Property or any part of the Mortgaged Property except in connection with the replacement of tangible Personalty. 12. CONDEMNATION. (a) Mortgagor shall promptly notify Mortgagee of any action or proceeding relating to any condemnation or other taking, or conveyance in lieu thereof, of all or any part of the Mortgaged Property, whether direct or indirect (a "Condemnation"). Mortgagor shall appear in and prosecute or defend any proceeding relating to any Condemnation unless otherwise directed by Mortgagee in writing. Mortgagor authorizes and appoints Mortgagee as attorney-in-fact for Mortgagor to commence, appear in and prosecute, in Mortgagee's or Mortgagor's name, any action 14 15 or proceeding relating to any Condemnation and to settle or compromise any claim in connection with any Condemnation. This power of attorney is coupled with an interest and therefore is irrevocable. However, nothing contained in this Section 12 shall require Mortgagee to incur any expense or take any action. Mortgagor hereby transfers and assigns to Mortgagee all right, title and interest of Mortgagor in and to any award or payment with respect to (i) any Condemnation, or any conveyance in lieu of Condemnation, and (ii) any damage to the Mortgaged Property caused by governmental action that does not result in a Condemnation. (b) Subject to the provisions of Section 4.5 of the Loan Agreement, Mortgagee, in its sole discretion, may apply such awards or proceeds, after the deduction of Mortgagee's expenses incurred in the collection of such amounts, at Mortgagee's option, to the restoration or repair of the Mortgaged Property or to the payment of the Indebtedness, with the balance, if any, to Mortgagor. Unless Mortgagee otherwise agrees in writing, any application of any awards or proceeds to the Indebtedness shall not extend or postpone the due date of any monthly installments referred to in the Note, Section 4 of this Instrument or any Collateral Agreement, or change the amount of such installments. Mortgagor agrees to execute such further evidence of assignment of any awards or proceeds as Mortgagee may require. 13. TRANSFERS OF THE MORTGAGED PROPERTY OR BENEFICIAL INTERESTS IN MORTGAGOR. Except as otherwise permitted under this Section 13, no Transfer of any part of the Mortgaged Property or any beneficial interest of Mortgagor shall be permitted without Mortgagee's prior written consent which may be withheld in Mortgagee's sole and absolute discretion. Any transfer made in violation of this Section shall constitute an Event of Default. Notwithstanding any provision of this Section to the contrary, in no event shall a Transfer resulting in a change of control of Mortgagor or the Mortgaged Property are permitted without Mortgagee's prior written consent which may be withheld in Mortgagee's sole and absolute discretion. The following Transfers shall be permitted, subject to Beneficiary's prior written consent, which consent shall not be unreasonably withheld or delayed, provided that (1) no such Transfer (in a series of one or more transactions) shall result in a change in control of Grantor, (2) in no event shall Grantor or, if Grantor is a limited partnership, the general partner of Grantor (or the general partner of the general partner of Grantor) or, if Grantor is a limited liability company, any corporate member of Grantor which is a Single-Purpose Entity, cease to be a Single-Purpose Entity, and (3) in no event shall any such Transfer result in the dissolution or termination of Grantor, any general partner of Grantor or any general partner of any general partner of Grantor, if applicable, or, if Grantor is a limited liability company, any corporate member of Grantor: (1) Transfers of Stock in any corporation which is Grantor, any general or limited partner or member of Grantor or any Person holding an interest therein; (2) Transfers of limited partnership interests in any limited partnership which is Grantor, any general or limited partner or member of Grantor or any Person holding an interest therein; and 15 16 (3) Transfers of membership interests in any limited liability company which is Grantor, any general or limited partner or member of Grantor or any Person holding an interest therein. (4) Notwithstanding any provision herein to the contrary, no Transfer otherwise permitted under this Section 13 shall occur unless Grantor shall have given Beneficiary not less than ten (10) Business Days prior notice of the intended Transfer together with a certificate of the financial officer of Grantor stating (i) the nature and size of the interest to be the subject of the Transfer, (ii) the name and address of the Person to which such interest shall be conveyed, sold or transferred unless such interest is to be conveyed, sold or transferred pursuant to a registered public sale pursuant to applicable securities laws, and (iii) that the proposed transaction is a bona fide sale, transfer or conveyance solely for cash or equivalent consideration, if applicable. Beneficiary reserves the right to condition any consent required pursuant to this Section 13 with respect to a Transfer upon (A) the payment of all expenses incurred by Beneficiary as set forth below and, in connection with the Transfer of any fee interest in the Security Property, an assumption fee equal to one percent (1.0%) of the outstanding balance of the Loan, (B) Beneficiary's approval of the financial condition, managerial capabilities and ownership structure of the proposed transferee, including requiring that the transferee of any fee interest in the Security Property be a Single-Purpose Entity, (C) if the Transfer shall result in a change in control of Grantor or the Security Property, execution of an assumption agreement by the proposed transferee, in form and content acceptable to Beneficiary, (D) the Loan being in good standing and free from any Event of Default, and (E) if required by Beneficiary, receipt of an Opinion of Counsel reasonably satisfactory to Beneficiary stating that, if effected, the proposed Transfer would have no effect on the enforceability of the Mortgage or the other Loan Documents, and would not result in the dissolution or termination of Grantor, the managing member of Grantor, if applicable, any general partner of Grantor or any general partner of any general partner of Grantor, if applicable. Grantor agrees to pay on demand all expenses (including, without limitation, reasonable attorney's fees and disbursements, title search costs and title insurance endorsement premiums) incurred by Beneficiary in connection with the review, approval and documentation of any Transfer. In no event shall any Transfer otherwise permitted under this Section occur if such Transfer is required to be registered under the Securities Act of 1933, as amended (the "1933 Act"), or any state securities or Blue Sky laws, or offered pursuant to Rule 144A under the 1933 Act. (5) Notwithstanding any other provision of this Section 13 to the contrary, Transfers of partnership interests, membership interests or corporate shares in Grantor or any Person holding an interest in Grantor between or among partners, members or shareholders existing as such on the date hereof, or Transfers of such interests to immediate family members of existing partners, members or shareholders or to trusts for estate planning purposes for the benefit of existing partners, members or shareholders or members of the transferor's immediate family shall be permitted without Beneficiary's consent, provided that in no event shall Grantor and any Person holding an interest in Grantor who is a Single-Purpose Entity cease to be a Single-Purpose Entity and provided no such Transfer results in a change of control of Grantor. 14. EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an Event of Default under this Instrument: 16 17 (a) any failure by Mortgagor to pay or deposit within ten (10) days after the same becomes due any amount required by the Note, this Instrument or any other Loan Document; (b) any failure by Mortgagor to maintain the insurance coverage required under the Loan Agreement which continues beyond the applicable cure period; if any, provided therein; (c) any failure by Mortgagor to comply with the provisions of Section 25; (d) fraud or material misrepresentation or material omission by Mortgagor, any of its officers, directors, trustees, general partners or managers or any guarantor in connection with (i) the application for or creation of the Indebtedness, (ii) any financial statement, financial report, certification, or other report or information required under the Loan Agreement required to be provided to Mortgagee during the term of the Indebtedness, or (iii) any request for Mortgagee's consent to any proposed action, including a request for disbursement of funds under any Collateral Agreement; (e) a failure of Mortgagor to comply with the provisions of Section 13; (f) the commencement of a forfeiture action or proceeding, whether civil or criminal, which, in Mortgagee's reasonable judgment, could result in a forfeiture of the Mortgaged Property or otherwise materially impair the lien created by this Instrument or Mortgagee's interest in the Mortgaged Property; (g) any failure by Mortgagor to perform any of its obligations under this Instrument (other than those specified in Sections 14 (a) through (f)) hereof and other than those specified in Sections 7.1(a), (b) and (c) of the Loan Agreement), as and when required, which continues for a period of thirty (30) days after notice of such failure by Mortgagee to Mortgagor; provided, however, that if such default cannot be cured within such thirty (30) day period, then such cure period shall be extended for an additional sixty (60) days as long as Mortgagor is diligently and in good faith prosecuting such cure to completion. However, no such notice or grace period shall apply in the case of any such failure which could, in Mortgagee's judgment, absent immediate exercise by Mortgagee of a right or remedy under this Instrument, result in harm to Mortgagee, impairment of the Note or this Instrument or any other security given under any other Loan Document; (h) any failure by Mortgagor to perform any of its obligations as and when required under any Loan Document other than this Instrument which continues beyond the applicable cure period, if any, specified in that Loan Document; (i) any exercise by the holder of any debt instrument secured by a mortgage, deed of trust or deed to secure debt on the Mortgaged Property of a right to declare all amounts due under that debt instrument immediately due and payable; (j) the Mortgaged Property becomes part of a bankrupt debtor's estate pursuant to any chapter of the Federal Bankruptcy Code or the Mortgaged Property otherwise becomes 17 18 subject to any reorganization, receivership (other than a receivership proceeding instituted by Mortgagee) or insolvency proceeding or any similar proceeding pursuant to any federal, state or foreign law affecting debtor and creditor rights; or (k) if any representation or warranty made by Mortgagor in that certain Loan Closing Certification executed in connection with the Loan is not true and correct in any material respect at the time when the facts therein set forth were stated or certified, or upon Mortgagor's breach of any covenant made in that Loan Closing Certification and, if susceptible of cure, such breach remains uncured of thirty (30) days after Mortgagee gives written notice of such breach to Mortgagor. 15. REMEDIES. (a) Acceleration of Maturity. If an Event of Default shall have occurred, then the entire Indebtedness shall, at the option of Mortgagee, immediately become due and payable without notice or demand, time being of the essence of this Instrument, and no omission on the part of Mortgagee to exercise such option when entitled to do so shall be construed as a waiver of such right. (b) Right to Enter and Take Possession. (1) If an Event of Default shall have occurred and is continuing, Grantor, upon demand of Mortgagee, shall forthwith surrender to Mortgagee the actual possession of the Mortgaged Property and, if and to the extent permitted by law, Mortgagee itself, or by such officers or agents as it may appoint, may enter and take possession of all or any part of the Mortgaged Property without the appointment of a receiver or an application therefor, and may exclude Grantor and its agents and employees wholly therefrom, and take possession of the books, papers and accounts of Grantor relating thereto; (2) If Grantor shall for any reason fail to surrender or deliver possession of the Mortgaged Property or any part thereof after such demand by Mortgagee, Mortgagee may obtain a judgment or decree conferring upon Mortgagee the right to immediate possession or requiring Grantor to deliver immediate possession of the Mortgaged Property to Mortgagee. Grantor will pay to Mortgagee, upon demand, all expenses of obtaining such judgment or decree, including costs and expense incurred by Mortgagee, its attorneys and agents, and all such expenses and costs shall, until paid, become part of the Indebtedness and shall be secured by this Instrument; (3) To the extent permitted by applicable law, upon every such entering or taking of possession, Mortgagee may hold, store, use, operate, manage and control the Mortgaged Property and conduct the business thereof, and, from time to time (i) make all necessary and proper maintenance, repairs, renewals, replacements, additions, betterments and improvements thereto and thereon and purchase or otherwise acquire additional Fixtures, Personalty and Equipment; (ii) insure or keep the Mortgaged Property insured; (iii) manage and operate the Mortgaged Property and exercise all of the rights and powers of Grantor to the same extent as Grantor could in its own name; and/or (iv) enter into any and all agreements with respect to the exercise by others of any of the 18 19 powers herein granted to Mortgagee, all as Mortgagee from time to time may determine to be in its best interest. Mortgagee may collect and receive all the Rents, including those past due as well as those accruing thereafter, and, after deducting (A) all expenses of taking, holding, managing and operating the Mortgaged Property (including compensation for the services of all persons employed for such purposes); (B) the cost of all such maintenance, repairs, renewals, replacements, additions, betterments, improvements, purchases and acquisitions; (C) the cost of such insurance deemed necessary by Grantor; (D) such taxes, assessments and other similar charges as Mortgagee may at its option pay; (E) other proper charges upon the Mortgaged Property or any part thereof; and (F) reasonable fees, expenses and disbursements of the attorneys and agents of Mortgagee, Mortgagee shall apply the remainder of the monies and proceeds so received by Mortgagee, first, to the payment of accrued interest; second, to the payment of Imposition Deposits and to other sums required to be paid hereunder; and third, to the payment of overdue installments of principal and any other unpaid Indebtedness then due. Anything in this Section to the contrary notwithstanding, Mortgagee shall not incur any liability as a result of any exercise by Mortgagee of its rights under this Instrument, and Mortgagee shall be liable to account only for the Rents actually received by Mortgagee; (4) Mortgagor agrees to use commercially reasonably efforts to cause the licensed operator of the Facility to promptly notify all of its account debtors, including the Medicaid and Medicare agencies and other account debtors pursuant to all Reimbursement Contracts, to the extent permitted under applicable law, to make payments to one or more such deposit accounts upon Mortgagee's request and as designated by Mortgagee, and, to the extent permitted under any law applicable to Medicare and Medicaid, Mortgagor agrees to provide any necessary endorsements to checks, drafts and other forms of payment so that such payments will be properly deposited in such accounts. Mortgagee may require that the deposit accounts be established so as to comply with any applicable Medicaid, Medicare and other requirements applicable to payments of any accounts receivable. Mortgagee may cause moneys to be withdrawn from such deposit accounts and applied to the Indebtedness in such order as Mortgagee may elect. Mortgagor appoints Mortgagee as Mortgagor's attorney-in-fact, which appointment is coupled with an interest and is irrevocable, to provide, after the occurrence of an Event of Default and so long as such default is continuing, any notice, endorse any check, draft or other payment for deposit, or take any other action which Mortgagor agrees to undertake in accordance with this Section 18(f)(4), to the extent permitted under any law applicable to Medicare and Medicaid; and (5) Whenever all the Indebtedness shall have been paid and all Events of Default shall have been cured, Mortgagee shall surrender possession of the Mortgaged Property to Grantor, its successors and/or assigns. The same right of taking possession, however, shall exist if any subsequent Event of Default shall occur and be continuing. (c) Performance by Mortgagee. Upon the occurrence of an Event of Default, Mortgagee may, at its sole option, pay, perform or observe the same, and all payments made or costs or expenses incurred by Mortgagee in connection therewith, with interest thereon at the Default Rate (as defined in the Note) or at the maximum rate from time to time allowed by applicable law, whichever is less, shall be secured hereby and shall be, without demand, immediately repaid by 19 20 Mortgagor to Mortgagee. Notwithstanding anything to the contrary herein, Mortgagee shall have no obligation, explicit or implied to pay, perform, or observe any term, covenant, or condition. (d) Receiver. If any Event of Default shall have occurred and be continuing, Mortgagee, upon application to a court of competent jurisdiction, shall be entitled as a matter of strict right, without notice and without regard to the sufficiency or value of any security for the Indebtedness or the solvency of any party bound for its payment, to the appointment of a receiver to take possession of and to operate the Facility and to collect and apply the Rents. The receiver shall have all the rights and powers permitted under the laws of the Property Jurisdiction. Mortgagor will pay unto Mortgagee upon demand all expenses, including receiver's fees, actual attorney's fees, costs and agent's compensation, incurred pursuant to the provisions of this Section, and upon any Mortgagor's failure to pay the same, any such amounts shall be added to the Indebtedness and shall be secured by this Instrument. (e) Mortgagee's Power of Enforcement. If an Event of Default shall have occurred and be continuing, Mortgagee may, either with or without entry or taking possession as hereinabove provided or otherwise, proceed by suit or suits at law in equity or any other appropriate proceeding or remedy (i) to enforce payment of the Note or the performance of any term thereof or any other right, (ii) to foreclose this Instrument and to sell, as an entirety or in separate lots or parcels, the Mortgaged Property, as provided by applicable Arkansas law, and (iii) to pursue any other remedy available to it, all as Mortgagee shall deem most effectual for such purposes. Mortgagee shall take action either by such proceedings or by the exercise of its powers with respect to entry or taking possession, as Mortgagee may determine. (f) Power of Sale. Upon the occurrence of an Event of Default, the Mortgagee, is authorized, pursuant to the Arkansas Statutory Foreclosure Act and, to the extent not inconsistent therewith, and empowered to sell the Mortgaged Property or any part thereof situated in the State of Arkansas at the courthouse of any county in the State of Arkansas in which any part of the Mortgaged Property is situated, at public vendue to the highest bidder for cash between the hours of 9:00 a.m. and 4:00 p.m. on any day which is not a Saturday, Sunday or legal holiday after having given notice of such sale in accordance with the statutes of the State of Arkansas then in force governing sales of real estate under powers of sale. Any sale may be adjourned by announcement at the time and place appointed for such sale without further notice except as may be required by law. After each sale, the Mortgagee shall make to the purchaser or purchasers at such sale good and sufficient conveyances in the name of Grantor, conveying the property so sold to the purchaser or purchasers in fee simple with general warranty of title, and shall receive the proceeds of said sale or sales and apply the same as herein provided. Payment of the purchase price to the Mortgagee shall satisfy the obligation of purchaser at such sale therefor, and such purchaser shall not be responsible for the application thereof. The power of sale granted herein shall not be exhausted by any sale held hereunder by the Mortgagee, and such power of sale may be exercised from time to time and as many times as the Mortgagee may deem necessary until all of the Mortgaged Property has been duly sold and all secured indebtedness has been fully paid. In the event any sale hereunder is not completed or is defective in the opinion of the Mortgagee, such sale shall not exhaust the power of sale hereunder and the Mortgagee shall have the right to cause a subsequent sale or sales to be made hereunder. Any and all statements of fact or other recitals made in any deed or deeds 20 21 given by the Mortgagee as to nonpayment of the indebtedness secured hereby, or as to the occurrence of any default, or as to the Mortgagee having declared all of such indebtedness to be due and payable, or as to the request to sell, or as to notice of time, place and terms of sale and of the properties to be sold having been duly given, or as to any other act or thing having been duly done by the Mortgagee, shall be taken as prima facie evidence of the truth of the facts so stated and recited. The Mortgagee may appoint or delegate any one or more persons as agent to perform any act or acts necessary or incident to any sale held by the Mortgagee, including the posting of notices and the conduct of sale, but in the name and on behalf of the Mortgagee. Mortgagee shall apply the proceeds from such sale - First, to the payment of all costs and expenses of such sale, including attorney and trustee fees and expenses incurred in connection with the sale and Grantor's default; Second, to the payment of the Indebtedness, including any and all advances made under the terms hereof with interest thereon; Third, the surplus, if any, to the parties legally entitled thereto. In the event the Mortgagee cannot determine to Mortgagee's satisfaction the person or persons to whom the surplus should be paid or a controversy exists with respect to the surplus, the Mortgagee may pay the surplus into a court of competent jurisdiction in an interpleader action and all expenses of such action, including legal fees incurred by Mortgagee, shall be paid from the surplus or, if the surplus is insufficient, by Grantor. Mortgagee or Mortgagee's designee may purchase the Mortgaged Property at any sale. In the event Mortgagee purchases the Mortgaged Property at the foreclosure sale, to the extent Mortgagee's bid price exceeds the Indebtedness, Mortgagee shall pay cash equal to such excess to the person or persons legally entitled thereto. The Mortgaged Property or any part thereof may be sold in one parcel, or in such parcels, manner or order as Mortgagee in its sole discretion may elect, and one or more exercises of the power herein granted shall not extinguish or exhaust the power unless the entire Mortgaged Property is sold or the Indebtedness paid in full. The Mortgagee may sell the Land and Improvements thereon together with the Personal Property subject to the provisions of the security agreement set forth in this Instrument, or the Mortgagee may sell the Personal Property separately, provided, however, that Grantor shall never have any right to require the sale of less than the whole of the Mortgaged Property but the Mortgagee shall have the right, at its sole election, to sell less than the whole of the Mortgaged Property. Grantor further agrees that in case of any sale hereunder, it will at once surrender possession of the Mortgaged Property, and will from that moment become and be the tenant at will of the purchaser, and removable by process as upon a forcible and unlawful detainer suit, hereby agreeing to pay such purchaser the reasonable rental value of the Mortgaged Property after such sale plus all expenses, including legal fees, incurred by the purchaser. (g) Purchase by Mortgagee. Upon any foreclosure sale, Mortgagee may bid for and purchase the Mortgaged Property and shall be entitled to apply all or any part of the Indebtedness as a credit to the purchase price. (h) Application of Proceeds of Sale. In the event of a foreclosure or other sale of all or any portion of the Mortgaged Property, the proceeds of said sale shall be applied, first, to 21 22 the expenses of such sale and of all proceedings in connection therewith, including actual attorney's fees and expenses (and attorney's fees and expenses shall become absolutely due and payable whenever foreclosure is commenced); then to insurance premiums, liens, assessments, Impositions and charges, including utility charges and any other amounts advanced by Mortgagee hereunder, and interest thereon; then to payment of the Indebtedness in such order of priority as Mortgagee shall determine, in its sole discretion; and finally the remainder, if any, shall be paid to Mortgagor, or to the person or entity lawfully entitled thereto. (i) Mortgagor as Tenant Holding Over. In the event of any such foreclosure sale, Mortgagor (if Mortgagor shall remain in possession) shall be deemed a tenant holding over and shall forthwith deliver possession to the purchaser or purchasers at such sale or be summarily dispossessed according to provisions of law applicable thereto. (j) Waiver of Appraisement, Valuation, Etc. Mortgagor agrees, to the full extent permitted by law, that in case of an Event of Default on the part of Mortgagor hereunder, neither Mortgagor nor anyone claiming through or under Mortgagor will assert, claim or seek to take advantage of any appraisement, redemption, valuation, stay, homestead, extension, exemption or laws now or hereafter in force, in order to prevent or hinder the enforcement of foreclosure of this Instrument, or the absolute sale of the Mortgaged Property, or the delivery of possession thereof immediately after such sale to the purchaser at such sale. Without limiting the foregoing, Mortgagor expressly waives all rights of redemption conferred by the Act passed by The General Assembly of Arkansas on May 8, 1899, and all acts amendatory thereof. (k) Discontinuance of Proceedings. In case Mortgagee shall have proceeded to enforce any right, power or remedy under this Instrument by foreclosure, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to Mortgagee, then in every such case, Mortgagor and Mortgagee shall be restored to their former positions and rights hereunder, and all rights, powers and remedies of Mortgagee shall continue as if no such proceedings had occurred. (l) Waiver. (i) No delay or omission by Mortgagee or by any holder of the Note to exercise any right, power or remedy accruing upon any default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of any such default, or acquiescence therein, and every right, power and remedy given by this Instrument to Mortgagee may be exercised from time to time and as often as may be deemed expedient by Mortgagee. No consent or waiver expressed or implied by Mortgagee to or of any breach or default by Mortgagor in the performance of the obligations of Mortgagor hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of the same or any other obligations of Mortgagor hereunder. Failure on the part of Mortgagee to complain of any act or failure to act or failure to 22 23 declare an Event of Default, irrespective of how long such failure continues, shall not constitute a waiver by Mortgagee of its rights hereunder or impair any rights, powers or remedies of Mortgagee hereunder. (ii) No act or omission by Mortgagee shall release, discharge, modify, change or otherwise affect the original liability under the Note, this Instrument, other Loan Documents or any other obligation of Mortgagor or any subsequent purchaser of the Mortgaged Property or any part thereof, or any maker, co-signer, endorser, surety or guarantor, nor preclude Mortgagee from exercising any right, power or privilege herein granted or intended to be granted in any Event of Default then existing or of any subsequent default, nor alter the lien of this Instrument, except as expressly provided in an instrument or instruments executed by Mortgagee. Without limiting the generality of the foregoing, Mortgagee may (A) grant forbearance or an extension of time for the payment of all or any portion of the Indebtedness; (B) take other or additional security for the payment of any of the Indebtedness; (C) waive or fail to exercise any right granted herein, in the Note or in other Loan Documents; (D) release any part of the Mortgaged Property from the security interest or lien of this Instrument or otherwise change any of the terms, covenants, conditions or agreements of the Note, this Instrument or other Loan Documents; (E) consent to the filing of any map, plat or replat affecting the Land; (F) consent to the granting of any easement or other right affecting the Mortgaged Property; (G) make or consent to any agreement subordinating the security title or lien hereof, or (H) take or omit to take any action whatsoever with respect to the Note, this Instrument, the other Loan Documents, the Mortgaged Property or any document or instrument evidencing, securing or in any way related to the Instrument, all without releasing, discharging, modifying, changing or affecting any such liability, or precluding Mortgagee from exercising any such right, power or privilege with respect to the lien of this Instrument. In the event of the sale or transfer by operation of law or otherwise of all or any part of the Mortgaged Property, Mortgagee, without notice, is hereby authorized and empowered to deal with any such vendee or transferee with respect to the Mortgaged Property or the Indebtedness, or with reference to any of the terms, covenants, conditions or agreements hereof, as fully and to the same extent as it might deal with the original parties hereto and without in any way releasing or discharging any liabilities, obligations or undertakings of Mortgagor, any guarantor of the Indebtedness or others. 23 24 (iii) Mortgagor waives and relinquishes any and all rights it may have, whether at law or equity, to require Mortgagee to proceed to enforce or exercise any rights, powers and remedies it may have under the Loan Documents in any particular manner, in any particular order, or in any particular state or other jurisdiction. Mortgagor expressly waives and relinquishes any and all rights and remedies that Mortgagor may have or be able to assert by reason of the laws of the state of jurisdiction pertaining to the rights and remedies of sureties. Mortgagor makes these arrangements, waivers and relinquishments knowingly and as a material inducement to Mortgagee in making the Loan, after consulting with and considering the advice of independent legal counsel selected by Mortgagor. (m) Suits to Protect the Mortgaged Property. Mortgagee shall have power to institute and maintain such suits and proceedings as it may deem expedient (i) to prevent any impairment of the Mortgaged Property by any acts which may be unlawful or constitute an Event of Default under this Instrument; (ii) to preserve or protect its interest in the Mortgaged Property and in the Rents arising therefrom; and (iii) to restrain the enforcement of or compliance with any legislation or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid, if the enforcement of or compliance with such enactment, rule or order would materially impair the security hereunder or be prejudicial to the interest of Mortgagee. (n) Proofs of Claim. In the case of any receivership, insolvency, bankruptcy, reorganization, arrangement, adjustment, composition or other proceedings affecting Mortgagor, its creditors or its properties, Mortgagee, to the extent permitted by law, shall be entitled to file such proofs of claim and other documents as may be necessary or advisable in order to have the claims of Mortgagee allowed in such proceedings for the entire amount due and payable by Mortgagor under this Instrument at the date of the institution of such proceedings and for any additional amount which may become due and payable by Mortgagor hereunder after such date. (o) Actions Without Mortgagor's Consent. Mortgagor agrees that Mortgagee may do any one or all of the following without notice to or the consent of Mortgagor and without affecting Mortgagee's rights or remedies against Mortgagor: (i) accept partial payment of, compromise, settle, renew, extend the time for payment or performance of, or refuse to enforce any of Mortgagor's Indebtedness to Mortgagee under or in connection with this Instrument or any of the other Loan Documents; (ii) grant any indulgence or forbearance to Guarantor or any other Person under or in connection with any or all of the Loan Documents; (iii) release, waive, substitute or add any or all collateral securing payment of any or all of the Indebtedness; (iv) release, substitute or add any one or more endorsers or guarantors of any or all of the Indebtedness; and (v) exercise any right or remedy with respect to the Indebtedness or any collateral securing the Indebtedness, notwithstanding any effect on or impairment of Mortgagor's subrogation, reimbursement or other rights against Guarantor or any other Person under or in connection with any or all of the Loan Documents. 24 25 16. REMEDIES CUMULATIVE. Each right and remedy provided in this Instrument is distinct from all other rights or remedies under this Instrument or any other Loan Document or afforded by applicable law, and each shall be cumulative and may be exercised concurrently, independently, or successively, in any order. 17. FORBEARANCE. (a) Mortgagee may agree with Mortgagor, from time to time, at Mortgagee's option and without giving notice to, or obtaining the consent of, or having any effect upon the obligations of any guarantor or other third party obligor, extend the time for payment of all or any part of the Indebtedness, reduce the payments due under this Instrument, the Note, or any other Loan Document, release anyone liable for the payment of any amounts under this Instrument, the Note, or any other Loan Document, accept a renewal of the Note, modify the terms and time of payment of the Indebtedness, join in any extension or subordination agreement, release any Mortgaged Property, take or release other or additional security, modify the rate of interest or period of amortization of the Note or change the amount of the monthly installments payable under the Note, or otherwise modify this Instrument, the Note, or any other Loan Document. (b) Any forbearance by Mortgagee in exercising any right or remedy under the Note, this Instrument, the Guaranty Agreement, or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. The acceptance by Mortgagee of payment of all or any part of the Indebtedness after the due date of such payment, or in an amount which is less than the required payment, shall not be a waiver of Mortgagee's right to require prompt payment when due of all other payments on account of the Indebtedness or to exercise any remedies for any failure to make prompt payment. Enforcement by Mortgagee of any security for the Indebtedness shall not constitute an election by Mortgagee of remedies so as to preclude the exercise of any other right available to Mortgagee. Mortgagee's receipt of any insurance and/or condemnation proceeds shall not operate to cure or waive any Event of Default. 18. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from Mortgagor is interpreted so that any charge provided for in any Loan Document, whether considered separately or together with other charges levied in connection with any other Loan Document, violates that law, and Mortgagor is entitled to the benefit of that law, that charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Mortgagee in excess of the permitted amounts shall be applied by Mortgagee to reduce the principal of the Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Mortgagor has been violated, all Indebtedness which constitutes interest, as well as all other charges levied in connection with the Indebtedness which constitute interest, shall be deemed to be allocated and spread over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note. 25 26 19. WAIVER OF STATUTE OF LIMITATIONS. To the extent permitted by applicable law Mortgagor hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien of this Instrument or to any action brought to enforce any Loan Document. 20. WAIVER OF MARSHALLING. Notwithstanding the existence of any other security interests in the Mortgaged Property held by Mortgagee or by any other party, Mortgagee shall have the right to determine the order in which any or all of the Mortgaged Property shall be subjected to the remedies provided in this Instrument, the Note, the Loan Agreement, any other Loan Document or under applicable law. Mortgagee shall have the right to determine the order in which any or all portions of the Indebtedness are satisfied from the proceeds realized upon the exercise of such remedies. Mortgagor and any party who now or in the future acquires a security interest in the Mortgaged Property and who has actual or constructive notice of this Instrument waives any and all right to require the marshalling of assets or to require that any of the Mortgaged Property be sold in the inverse order of alienation or that any of the Mortgaged Property be sold in parcels or as an entirety in connection with the exercise of any of the remedies permitted by applicable law or provided in this Instrument. 21. FURTHER ASSURANCES. Mortgagor shall execute, acknowledge, and deliver, at its sole cost and expense, all further acts, deeds, conveyances, assignments, estoppel certificates, financing statements, transfers and assurances as Mortgagee may require from time to time in order to better assure, grant, and convey to Mortgagee the rights intended to be granted, now or in the future, to Mortgagee under this Instrument and the Loan Documents. 22. ESTOPPEL CERTIFICATE. Within ten (10) days after a request from Mortgagee, Mortgagor shall deliver to Mortgagee a written statement, signed and acknowledged by Mortgagor, certifying to Mortgagee or any person designated by Mortgagee, as of the date of such statement, (a) that the Loan Documents are unmodified and in full force and effect (or, if there have been modifications, that the Loan Documents are in full force and effect as modified and setting forth such modifications); (b) the unpaid principal balance of the Note; (c) the date to which interest under the Note has been paid; (d) that Mortgagor is not in default in paying the Indebtedness or in performing or observing any of the covenants or agreements contained in this Instrument or any of the other Loan Documents (or, if Mortgagor is in default, describing such default in reasonable detail); (e) whether or not there are then existing any setoffs or defenses known to Mortgagor against the enforcement of any right or remedy of Mortgagee under the Loan Documents; and (f) any additional facts reasonably requested by Mortgagee. 23. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. (a) This Instrument and the rights and obligations of the parties hereunder shall in all respects be governed by, and construed and enforced in accordance with the laws of the State of Tennessee, except to the extent (a) of procedural and substantive matters relating only to the creation, perfection, foreclosure and enforcement of rights and remedies against the Mortgaged Property, which matters shall be governed by the laws of the State of Arkansas, and (b) that the laws of the United States of America and any rules, regulations, or orders issued or promulgated thereunder, applicable to the affairs and transactions entered into by Assignee, otherwise preempt Arkansas or Tennessee law; in which event such Federal Law shall control. 26 27 (b) Grantor consents to the nonexclusive jurisdiction of any and all state and federal courts with jurisdiction in the States of Arkansas and Tennessee over Grantor and Grantor's assets. Grantor agrees that its assets shall be used first to satisfy all claims of creditors organized or domiciled in the United States and that no assets of Grantor in the United States shall be considered part of any foreign bankruptcy estate. (c) Grantor agrees that any controversy arising under or in relation to the Guaranty Agreement, the Note, this Instrument, or any other Loan Document may be litigated in the States of Tennessee or Arkansas, and the state and federal courts and authorities with jurisdiction in the States of Tennessee and Arkansas shall have jurisdiction over all controversies which shall arise under or in relation to the Guaranty Agreement, the Note, or any other Loan Document. Grantor irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise. 24. NOTICE. (a) All notices, demands and other communications ("Notice") under or concerning this Instrument shall be in writing. Each Notice shall be addressed to the intended recipient at its address set forth in this Instrument, and shall be deemed given on the earliest to occur of (i) the date when the Notice is received by the addressee; (ii) the first Business Day after the Notice is delivered to a recognized overnight courier service, with arrangements made for payment of charges for next Business Day delivery; or (iii) the third Business Day after the Notice is deposited in the United States mail with postage prepaid, certified mail, return receipt requested. (b) Any party to this Instrument may change the address to which Notices intended for it are to be directed by means of Notice given to the other party in accordance with this Section 24. Each party agrees that it will not refuse or reject delivery of any Notice given in accordance with this Section 24, that it will acknowledge, in writing, the receipt of any Notice upon request by the other party and that any Notice rejected or refused by it shall be deemed for purposes of this Section 24 to have been received by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service or the courier service. (c) Any Notice under the Note and any other Loan Document which does not specify how Notices are to be given shall be given in accordance with this Section 24. (d) A copy of any Notice sent to Mortgagee pursuant to this Section 24 shall be sent to: Kay K. Bains, Esq. Walston, Wells, Anderson & Bains, LLP 505 20th Street North, Suite 500 Birmingham, Alabama 35203 27 28 A copy of any Notice sent to Mortgagor pursuant to this Section 24 shall be sent to: Diversicare Pinedale, LLC c/o Advocat Inc. 277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067 Attn: CFO 25. SINGLE-PURPOSE ENTITY. Until the Indebtedness is paid in full, Mortgagor shall maintain its status as a Single-Purpose Entity and comply with all those covenants with respect to its status as a Single-Purpose Entity as set forth in Section 5.5 of the Loan Agreement. 26. SUBROGATION. If, and to the extent that, the proceeds of the Loan are used to pay, satisfy or discharge any obligation of Mortgagor for the payment of money that is secured by a pre-existing mortgage, deed of trust or other lien encumbering the Mortgaged Property (a "Prior Lien"), such loan proceeds shall be deemed to have been advanced by Mortgagee at Mortgagor's request, and Mortgagee shall automatically, and without further action on its part, be subrogated to the rights, including lien priority, of the owner or holder of the obligation secured by the Prior Lien, whether or not the Prior Lien is released. 27. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from Mortgagor is interpreted so that any charge provided for in any Loan Document, whether considered separately or together with other charges levied in connection with any other Loan Document, violates that law, and Mortgagor is entitled to the benefit of that law, that charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Mortgagee in excess of the permitted amounts shall be applied by Mortgagee to reduce the principal of the Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Mortgagor has been violated, all Indebtedness which constitutes interest, as well as all other charges levied in connection with the Indebtedness which constitute interest, shall be deemed to be allocated and spread over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note. 28. DISCLOSURE OF INFORMATION. Mortgagee may furnish financial information regarding Mortgagor or the Mortgaged Property to third parties with an existing or prospective interest in the enforcement, evaluation, performance, purchase or securitization of the Indebtedness, including but not limited to credit rating agencies, but not further or otherwise without the prior written consent of Mortgagor. Mortgagor irrevocably waives any and all rights it may have under applicable law to prohibit such disclosure, including but not limited to any right of privacy; but such disclosure shall be subject to prohibitions or limitations on disclosure of any such data 28 29 under applicable laws or regulations, including without limitation any duly enacted "Patient's Bill of Rights" or similar legislation, and such limitations, as may be necessary to preserve the confidentiality of the Facility-patient relationship and any physician-patient privilege. 29. RELEASE. Upon Mortgagee's written request stating that (i) all Indebtedness secured by this Instrument has been paid or performed in full (other than contingent Indebtedness which by their terms survive the release hereof and as to which no event giving rise to the incurrence of any such Indebtedness shall have occurred), and (ii) all fees due Mortgagee in connection with release of this Instrument have been paid, Mortgagor shall release the Mortgaged Property from the lien of this Instrument. Upon the payment and performance in full of all Indebtedness (other than contingent obligations which survive the release hereof and as to which no event giving rise to the incurrence of any such obligation shall have occurred), and upon request of Mortgagor, Mortgagee shall release the lien of this Instrument upon the Mortgaged Property and shall surrender to Mortgagor the Note and all other documents evidencing the Indebtedness secured by this Instrument. The recitals in the release of any matters or facts shall be conclusive proof of their truthfulness. Such release shall operate as a reassignment of the Rents and profits assigned to Mortgagee under the Assignment of Leases and Rents. Mortgagee shall deliver this Instrument and the Note after release to the Person or Persons legally entitled thereto. 30. EXECUTION OF DOCUMENTS BY MORTGAGEE. Without notice to or affecting the liability of Mortgagor or any other Person for the payment or performance of the Indebtedness, without affecting the lien or priority of this Instrument or Mortgagee's rights and remedies under the Loan Documents, and without liability to Mortgagor or any other Person, Mortgagee shall have the right, at any time and from time to time, to do any one or more of the following: (a) release any part of the Mortgaged Property and (b) execute any extension agreement relating to any or all of the Indebtedness, any document subordinating the lien of this Instrument to any other lien or document, or any other document relating to the Mortgaged Property, Indebtedness, or Loan Documents. 31. JOINT AND SEVERAL LIABILITY. If more than one Person or entity signs this Instrument as Mortgagor, the obligations of such Persons shall be joint and several. 32. RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY. The relationship between Mortgagee and Mortgagor shall be solely that of creditor and debtor, respectively, and nothing contained in this Instrument shall create any other relationship between Mortgagee and Mortgagor. No creditor of any party to this Instrument and no other person shall be a third party beneficiary of this Instrument or any other Loan Document. 33. SEVERABILITY; AMENDMENTS. The invalidity or unenforceability of any provision of this Instrument shall not affect the validity or enforceability of any other provision, and all other provisions shall remain in full force and effect. This Instrument contains the entire agreement among the parties as to the rights granted and the obligations assumed in this Instrument. 29 30 This Instrument may not be amended or modified except by a writing signed by the party against whom enforcement is sought. 34. MISCELLANEOUS PROVISIONS. The captions and headings of the sections of this Instrument are for convenience only and shall be disregarded in construing this Instrument. Any reference in this Instrument to an "Exhibit" or a "Section" shall, unless otherwise explicitly provided, be construed as referring, respectively, to an Exhibit attached to this Instrument or to a section of this Instrument. All Exhibits attached to or referred to in this Instrument are incorporated by reference into this Instrument. Any reference in this Instrument to a statute or regulation shall be construed as referring to that statute or regulation as amended from time to time. Use of the singular in this Agreement includes the plural and use of the plural includes the singular. As used in this Instrument, the term "including" means "including, but not limited to." 35. WAIVER OF TRIAL BY JURY. EACH OF MORTGAGOR AND MORTGAGEE (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE EXIST. MORTGAGOR AND MORTGAGEE ARE AUTHORIZED TO SUBMIT THIS INSTRUMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES TO ANY LOAN DOCUMENT, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF MORTGAGOR'S AND MORTGAGEE'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, EACH OF MORTGAGOR AND MORTGAGEE CERTIFIES THAT NEITHER MORTGAGOR'S NOR MORTGAGEE'S REPRESENTATIVES OR AGENTS HAVE REPRESENTED, EXPRESSLY OR OTHERWISE, THAT ENFORCEMENT OF THIS WAIVER WILL NOT BE SOUGHT. 36. WAIVER OF AUTOMATIC STAY. TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, MORTGAGOR HEREBY AGREES THAT, IN CONSIDERATION OF MORTGAGEE'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR MORTGAGEE TO MAKE THE LOAN, IN THE EVENT THAT MORTGAGOR SHALL (A) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED STATES CODE, AS AMENDED ("BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUTE; (B) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE; (C) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, 30 31 OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (D) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR; OR (E) BE THE SUBJECT OF AN ORDER, JUDGEMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED AGAINST MORTGAGOR FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, SUBJECT TO COURT APPROVAL, MORTGAGEE SHALL THEREUPON BE ENTITLED AND MORTGAGOR HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE (INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR AGAINST THE EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO MORTGAGEE AS PROVIDED IN THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND MORTGAGOR HEREBY IRREVOCABLY WAIVES ITS RIGHTS TO OBJECT TO SUCH RELIEF. 37. SUCCESSORS AND ASSIGNS BOUND. This Instrument shall bind, and the rights granted by this Instrument shall inure to, the respective successors and assigns of Mortgagee and Mortgagor. 38. COUNTERPARTS. This Instrument may be executed in any number of counterparts, all of which when taken together shall constitute one and the same Instrument. 31 32 IN WITNESS WHEREOF, Mortgagor and Mortgagee have caused this Instrument to be properly executed as of the date first above written. MORTGAGOR: WITNESS: DIVERSICARE PINEDALE, LLC, a Delaware limited liability company - ------------------------------ By: Diversicare Leasing Corp., a Tennessee corporation, its sole member - ------------------------------ [Print Name] By: ------------------------------------ James F. Mills, Jr., Senior Vice President WITNESS: MORTGAGEE: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation - ------------------------------ - ------------------------------ -------------------------------------------- [Print Name] James C. Thompson, Senior Vice President STATE OF ____________ ) )SS. ACKNOWLEDGMENT COUNTY OF __________ ) On this day before me, a Notary Public, duly commissioned, qualified and acting within and for said County and State, appeared in person the within named James F. Mills, Jr., being the Senior Vice President of Diversicare Leasing Corp., a Tennessee corporation and the sole member of Diversicare Pinedale, LLC, a Delaware limited liability company, who had been designated by said institution to execute the foregoing instrument, to me personally well known, who stated he was the Senior Vice President of Diversicare Leasing Corp., a Tennessee corporation and the sole member of Diversicare Windsor House, LLC, a Delaware limited liability company and was duly authorized in his/her respective capacity to execute the foregoing instrument for and in the name and behalf of said institution, and further stated and acknowledged that he had so signed, executed, and delivered said foregoing instrument for the consideration, uses and purposes therein mentioned and set forth. IN TESTIMONY WHEREOF, I have hereunto set my hand and seal this ________ day of March, 2001. ------------------------------------ NOTARY PUBLIC My Commission expires: 32 33 STATE OF ____________ ) )SS. ACKNOWLEDGMENT COUNTY OF __________ ) On this day before me, a Notary Public, duly commissioned, qualified and acting within and for said County and State, appeared in person the within named James C. Thompson, being the Senior Vice President, of GMAC Commercial Mortgage Corporation, a California corporation, who had been designated by said institution to execute the foregoing instrument, to me personally well known, who stated he was the Senior Vice President of GMAC Commercial Mortgage Corporation and was duly authorized in his respective capacity to execute the foregoing instrument for and in the name and behalf of said institution, and further stated and acknowledged that he had so signed, executed, and delivered said foregoing instrument for the consideration, uses and purposes therein mentioned and set forth. IN TESTIMONY WHEREOF, I have hereunto set my hand and seal this ________ day of _____________, ________. ------------------------------------ NOTARY PUBLIC My Commission expires: 33 34 EXHIBIT "A" LEGAL DESCRIPTION A-1 EX-10.6 8 g71016ex10-6.txt PROMISSORY NOTE 1 EXHIBIT 10.6 PROMISSORY NOTE $2,913,000.00 Nashville, Tennessee March 29, 2001 FOR VALUE RECEIVED, the undersigned DIVERSICARE PINEDALE, LLC, a Delaware limited liability company, having an address at 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067 (the "Borrower"), hereby promises to pay to the order of GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation, having an address at 200 Witmer Road, Horsham, Pennsylvania 19044 (the "Lender"), its successors and assigns as holder of this Note or, if this Note has then been endorsed "to bearer," to the bearer of this Note (the Lender, its said successors and assigns, and any such bearer, being hereinafter sometimes referred to collectively as the "Holder"), at the Lender's said address or at such other place or to such other person as may be designated in writing to the Borrower by the Lender, the principal sum of Two Million Nine Hundred Thirteen Thousand and No/100 Dollars ($2,913,000.00) (the "Loan"), together with interest on the unpaid balance thereof at the rate hereinafter set forth. ON THE TERMS AND SUBJECT TO THE CONDITIONS which are hereinafter set forth: Section 1. Interest Rate and Payment Dates. 1.1 Initial Rate and Initial Payment. Interest shall accrue on the outstanding balance of the principal amount outstanding hereunder from time to time from and after the date hereof at the rate of 8.5838 percent per annum until the first Rate Adjustment Date (as defined below). On each successive Rate Adjustment Date, the rate of interest at which interest accrues shall be adjusted to the then applicable Note Rate (as defined below). Interest for the period beginning on the date of this Note and ending on and including the last day of the month in which this Note is dated shall be payable on the date hereof. Interest shall be paid in arrears and shall be computed on the basis of a 360-day year and actual number of days elapsed for any whole or partial month in which interest on the loan is being calculated and shall be charged on the principal balance outstanding from time to time. 1.2 Rate Adjustment Date and Payment Adjustment Dates. The interest rate shall be adjusted on the dates (each being a "Rate Adjustment Date") described in this paragraph. The first Rate Adjustment Date shall be April 1, 2001, and subsequent Rate Adjustment Dates shall fall on the first day of each subsequent one month anniversary thereafter. The first payment adjustment date shall be May 1, 2001, and subsequent payment adjustment dates shall fall on the first day of each calendar month thereafter during the term of the Loan. 1.3 Default Interest Rate. If the Borrower fails to make any payment of principal, interest or fees on the date on which such payment becomes due and payable (including applicable grace periods) whether at maturity or by acceleration or on any other date, such payment shall accrue interest from the date on which such payment was due (and not the date of the payment 2 default) until paid at the fluctuating rate ("Default Rate") which is the lesser of (a) five (5) percentage points above the then applicable LIBOR Rate (as defined below) and (b) the maximum rate permitted by applicable law. 1.4 LIBOR Rate. The LIBOR Rate shall mean the average of London Interbank Offered Rates ("LIBOR") for a term of one month determined solely by Holder as of each Rate Adjustment Date plus three hundred fifty (350) basis points per annum, determined in the manner herein set forth below. On each Rate Adjustment Date, Holder will obtain the one month LIBOR (in U.S. Dollar deposits) from the appropriate Bloomberg display page available as of the close of business announced on the last business day of the month immediately preceding the Rate Adjustment Date. In the event Bloomberg ceases publication or ceases to publish the one month LIBOR, Holder shall select a comparable publication to determine the one month LIBOR and provide notice thereof to Borrower. LIBOR may or may not be the lowest rate based upon the market for U.S. Dollar deposits in the London Interbank Eurodollar Market at which the Holder prices loans on the date on which the LIBOR Rate is determined by Holder as set forth above. 1.5 LIBOR Rate Adjustments. This Note shall bear interest at the rate set forth above or at the applicable LIBOR Rate until a new LIBOR Rate is determined on each Rate Adjustment Date in accordance with the provisions hereof; provided, however, that, if Holder at any time determines, in the sole but reasonable exercise of its discretion, that it has miscalculated the amount of the monthly payment of principal and/or interest (whether because of a miscalculation of the LIBOR Rate or otherwise), then Holder shall give notice to Borrower of the corrected amount of such monthly payment (and the corrected amount of the LIBOR Rate, if applicable) and (a) if the corrected amount of such monthly payment represents an increase thereof, then Borrower shall, within ten (10) calendar days thereafter, pay to Holder any sums that Borrower would have otherwise been obligated under this Note to pay to Holder had the amount of such monthly payment not been miscalculated, or (b) if the corrected amount of such monthly payment represents a decrease thereof and Borrower is not otherwise in breach or default under any of the terms and provisions of the Note or the Loan Agreement, then Borrower shall, within (10) calendar days thereafter be paid the sums that Borrower would not have otherwise been obligated to pay to Holder had the amount of such monthly payment not been miscalculated. 1.6 LIBOR Unascertainable. If (a) on any date on which the LIBOR Rate would otherwise be set, Holder shall have determined in good faith (which determination shall be conclusive) that (i) adequate and reasonable means do not exist for ascertaining the one month LIBOR, or (ii) a contingency has occurred which materially and adversely affects the London Interbank Eurodollar Market at which Holder prices loans on the date on which the LIBOR Rate is determined by Holder as set forth above, or (b) at any time Holder shall have determined in good faith (which determination shall be conclusive) that the making, maintenance or funding of any part of the Loan has been made impracticable or unlawful by compliance by Holder in good faith with any Law or guideline or interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof or with any request or directive of any such Governmental Authority (whether or not having the force of law) then, and in any such event, Holder may notify Borrower of such determination. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) the obligation of Holder to 2 3 charge interest to Borrower at the LIBOR Rate shall be suspended until Holder shall have later notified Borrower of Holder's determination in good faith (which determination shall be conclusive) that the circumstances giving rise to such previous determination no longer exist. 1.7 U.S. Treasury Securities. If Holder notifies Borrower of a determination under subsection 1.6 hereof for purposes of calculating the LIBOR Rate, the one month LIBOR shall automatically be converted to the "Index" of the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board 45 days prior to the Rate Adjustment Date. 1.8 Reimbursement for Increased Costs. If any law or guideline or interpretation or application thereof by any Governmental Authority charged with the interpretation or administration thereof or compliance with any request or directive of any Governmental Authority (whether or not having the force of law) now existing or hereafter adopted (a) subjects Holder to any tax or changes the basis of taxation with respect to this Note, the Loan or payments by Borrower of principal, interest or other amounts due from Borrower hereunder or thereunder (except for taxes on the overall net income or overall gross receipts of Holder imposed as a result of a present or former connection between the jurisdiction of the Governmental Authority imposing such tax on Holder, provided, that this exclusion shall not apply to a connection arising solely from Holder having executed, delivered, performed its obligations under or received a payment under, or enforced any of the Loan Documents (as defined in Section 8.1.1 below)), or (b) imposes upon Holder any other condition or expense with respect to this Note, the Loan or its making, maintenance or funding of any part of the Loan or any security therefor, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including, without limitation, loss of margin) upon Holder with respect to the Note, or the making, maintenance or funding of any part of the Loan, by an amount which Holder deems to be material, Holder may from time to time notify Borrower of the amount determined in good faith (using any averaging and attribution methods) by Holder (which determination shall be conclusive) to be necessary to compensate Holder for such increase, reduction or imposition and, if Borrower is by law prohibited from paying any such amount, Holder may elect to declare the unpaid principal balance hereof and all interest accrued thereon immediately due and payable. Such amount shall be due and payable by Borrower to Holder ten (10) days after such notice is given. Section 2. Payments. 2.1 Intentionally Deleted. 2.2 Principal and Interest Payments. Commencing on May 1, 2001 and continuing on the first day of each calendar month thereafter through and including the Maturity Date (defined below) monthly payments of principal and interest in installments in such amount as is necessary, taking into account the then effective LIBOR Rate to fully amortize the unpaid principal balance of the Note over an assumed period of 25 years; provided, however, the entire unpaid principal balance together with interest thereon shall be due and payable in full on April 1, 2006. 3 4 Section 3. Application of Payments. Payments made by Borrower on account hereof shall be applied, first, toward any Late Fees (hereinafter defined) or other fees and charges due hereunder, second, toward payment of any interest due at the Default Rate, third, toward payment of any interest due at the then applicable LIBOR Rate set forth in Section 1.4 above, and fourth, toward payment of principal. Notwithstanding the foregoing, if any advances made by Holder under the terms of any instruments securing this Note have not been repaid, any payments made may, at the option of Holder, be applied, first, to repay such advances, and interest thereon, with the balance, if any, applied as set forth in the preceding sentence. Section 4. Maturity. Anything in this Note to the contrary notwithstanding, the entire unpaid balance of the principal amount hereof and all interest accrued thereon, to and including the Maturity Date (as defined below), (including interest accruing at the Default Rate) and all Late Fees (as defined below) shall, unless sooner paid, and except to the extent that payment thereof is sooner accelerated, be and become due and payable on April 1, 2006 (the "Maturity Date"). Notwithstanding anything contained herein, if repayment of the Loan is funded from the proceeds of any refinancing of the Loan pursuant to which Holder does not receive a contractually agreed upon sum for the arrangement thereof, then Borrower shall pay to Holder a premium equal to one- half of one percent (.05%) of the outstanding principal balance of the Note on the date of such prepayment. Section 5. Prepayment. Prepayment of the Loan in full or in part shall be permitted at any time during the term of the Loan without penalty, upon not less than thirty (30) and not greater than forty (40) days prior written notice to Lender specifying the date on which prepayment is to be made. Any such prepayment shall be credited, first, toward any Late Fees due hereunder, second, toward payment of any interest due at the Default Rate, third, toward payment of any interest due hereunder at the LIBOR Rate, and, fourth, toward payment of principal; provided, however, that if any advances made by Holder under the terms of any instruments securing this Note have not been repaid, any payments made may, at the option of Holder, be applied, first, to repay such advances, and interest thereon, with the balance, if any, applied as set forth in the preceding sentence. Notwithstanding anything contained herein, if such prepayment set forth herein is funded from the proceeds of any refinancing of the Loan pursuant to which the Holder does not receive a contractually agreed upon sum for the arrangement thereof, then Borrower shall pay to Holder a repayment in full as premium equal to one half of one percent (.05%) of the outstanding principal balance of the Note on the date of such prepayment (which balance shall be calculated exclusive of any voluntary partial prepayment). Section 6. Method of Payment. Each payment of the Loan Obligations (as defined in the Loan Agreement) shall be paid directly to the Holder in lawful tender of the United States of America. Each such payment shall be paid by 1:00 p.m. Horsham, Pennsylvania, time on the date such payment is due, except if such date is not a Business Day (as defined in the Loan Agreement) such payment shall then be due on the first Business Day after such date. Any payment received after 1:00 p.m. Horsham, 4 5 Pennsylvania, time shall be deemed to have been received on the immediately following Business Day. Section 7. Security. The debt evidenced by this Note is to be secured by, among other things, (a) a Mortgage and Security Agreement (the "Mortgage") of even date herewith by and between Borrower and Holder, and intended to be recorded in the office of the Judge of Probate of Jackson County, Arkansas and covering all of that real property in the said Jackson County, Arkansas, which is described in Exhibit "A" thereto (the "Property"), and (b) a Guaranty Agreement of even date herewith ("Guaranty Agreement"), given by Advocat Inc., a Delaware corporation (the "Guarantor"), for the benefit of Holder. Section 8. Default. 8.1 Events of Default. Anything in this Note to the contrary notwithstanding, on the occurrence of any of the following events (each of which is hereinafter referred to as an "Event of Default"), the Holder may, in the exercise of its sole and absolute discretion, accelerate the debt evidenced by this Note, in which event the entire outstanding principal balance and all interest and fees accrued thereon shall immediately be and become due and payable without further notice: 8.1.1 Failure to Pay or Perform. If (a) the Borrower fails in making any payment to the Holder of any or all sums due hereunder within ten (10) days after such payment becomes due or on the Maturity Date or (b) there exists an uncured default under any other document or instrument evidencing or securing the Loan (collectively, the "Loan Documents") which has been executed by Borrower and/or Guarantor, and such default is not cured within the grace or cure period, if any, provided in any of such Loan Documents. 8.1.2 Bankruptcy. (a) If the Borrower or Guarantor (i) applies for or consents to the appointment of a receiver, trustee or liquidator of the Borrower or Guarantor, as the case may be, or of all or a substantial part of its assets, (ii) files a voluntary petition in bankruptcy, or admits in writing its inability to pay its debts as they come due, (iii) makes an assignment for the benefit of creditors, (iv) files a petition or an answer seeking a reorganization or an arrangement with creditors or seeking to take advantage of any insolvency law, (v) performs any other act of bankruptcy, or (vi) files an answer admitting the material allegations of a petition filed against the Borrower or Guarantor in any bankruptcy, reorganization or insolvency proceeding; or (b) if (i) an order, judgment or decree is entered by any court of competent jurisdiction adjudicating the Borrower or Guarantor a bankrupt or an insolvent, or approving a receiver, trustee or liquidator of the Borrower or Guarantor or of all or a substantial part of its assets, or (ii) there otherwise commences with respect to the Borrower or Guarantor or any of its assets any proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment, receivership or like law or statute, and if such order, judgment, decree or proceeding 5 6 continues unstayed for any period of sixty (60) consecutive days after the expiration of any stay thereof. 8.1.3 Judgments. If any judgment for the payment of money in excess of $100,000.00 hereafter awarded against the Borrower or Guarantor by any court of competent jurisdiction remains unsatisfied or otherwise in force and effect for a period of thirty (30) days after the date of such award. 8.1.4 Cross-Defaults. Pursuant to that certain Cross-Collateralization and Cross-Default Agreement of even date herewith by and among the Borrower, Diversicare Windsor House, LLC, a Delaware limited liability company ("Windsor House") and the Lender, the Loan shall be cross-defaulted with a loan made by the Lender to Windsor House. 8.2 No Impairment of Rights. Nothing in this Section shall be deemed in any way to alter or impair any right which the Holder has under this Note or the Mortgage, or any of the other Loan Documents or at law or in equity, to accelerate such debt on the occurrence of any other Event of Default provided herein or therein, whether or not relating to this Note. 8.3 Late Fees. Without limiting the generality of the foregoing provisions of this Section, if any payment of interest or principal is not made prior to ten (10) days after the date on which it becomes due, the Borrower shall thereupon automatically become obligated immediately to pay to the Holder a late charge equal to the lesser of five percent (5%) of the amount of such payment or the maximum amount permitted by applicable law ("Late Fees") to defray the expenses incurred by Holder in handling and processing such delinquent payment and to compensate Holder for the loss of use of such delinquent payment, which sum shall be due and payable immediately thereupon. Section 9. Costs of Enforcement. The Borrower shall pay to the Holder on demand by the latter the amount of any and all expenses incurred by the Holder (a) in enforcing its rights hereunder or under the Mortgage and/or the Loan Documents, (b) as the result of a default by the Borrower in performing its obligations under this Note, including but not limited to the expense of collecting any amount owed hereunder, and of any and all reasonable attorneys' fees incurred by Holder in connection with such default, whether suit be brought or not, or (c) in protecting the security hereof. Such expenses shall be added to the principal amount hereof, shall be secured by the Mortgage and shall accrue interest at the Default Rate. Section 10. Borrower's Waiver of Certain Rights. The Borrower and any endorser, guarantor or surety hereby waives the exercise of any and all exemption rights which it holds at law or in equity with respect to the debt evidenced by this Note, and of any and all rights which it holds at law or in equity to require any valuation, appraisal or marshalling, or to have or receive any presentment, protest, demand and notice of dishonor, 6 7 protest, demand and nonpayment as a condition to the Holder's exercise of any of its rights under this Note or the Loan Documents. Section 11. Extensions. The Maturity Date and/or any other date by which any payment is required to be made hereunder may be extended by the Holder from time to time in the exercise of its sole discretion, without in any way altering or impairing the Borrower's or Guarantor's liability hereunder. Section 12. General. 12.1 Applicable Law. This Note shall be given effect and construed by application of the laws of the State of Tennessee (without regard to the principles thereof governing conflicts of laws), and any action or proceeding arising hereunder, and each of Holder and Borrower submits (and waives all rights to object) to non-exclusive personal jurisdiction in the State of Tennessee, for the enforcement of any and all obligations under the Loan Documents except that if any such action or proceeding arises under the Constitution, laws or treaties of the United States of America, or if there is a diversity of citizenship between the parties thereto, so that it is to be brought in a United States District Court, it shall be brought in the United States District Court for the Middle District of Tennessee or any successor federal court having original jurisdiction. 12.2 Headings. The headings of the Sections, subsections, paragraphs and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents. 12.3 Construction. As used herein, (a) the term "person" means a natural person, a trustee, a corporation, a limited liability company, a partnership and any other form of legal entity, and (b) all references made (i) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well, and (iii) to any Section, subsection, paragraph or subparagraph shall, unless therein expressly indicated to the contrary, be deemed to have been made to such Section, subsection, paragraph or subparagraph of this Note. 12.4 Severability. No determination by any court, governmental body or otherwise that any provision of this Note or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (a) any other such provision or (b) such provision in any circumstance not controlled by such determination. Each such provision shall be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with, applicable law. 12.5 No Waiver. The Holder shall not be deemed to have waived the exercise of any right which it holds hereunder unless such waiver is made expressly and in writing. No delay or omission by the Holder in exercising any such right (and no allowance by the Holder to the Borrower of an opportunity to cure a default in performing its obligations hereunder) shall be deemed a waiver of its future exercise. No such waiver made as to any instance involving the exercise of any such right 7 8 shall be deemed a waiver as to any other such instance, or any other such right. Further, acceptance by Holder of all or any portion of any sum payable under, or partial performance of any covenant of, this Note, the Mortgage or any of the other Loan Documents, whether before, on, or after the due date of such payment or performance, shall not be a waiver of Holder's right either to require prompt and full payment and performance when due of all other sums payable or obligations due thereunder or hereunder or to exercise any of Holder's rights and remedies hereunder or thereunder. 12.6 Waiver of Jury Trial; Service of Process; Court Costs. BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE HOLDER MAY BE PARTIES ARISING OUT OF, IN CONNECTION WITH, OR IN ANY WAY PERTAINING TO, THIS NOTE AND/OR ANY OF THE OTHER LOAN DOCUMENTS. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS NOTE. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY THE BORROWER, UPON CONSULTATION WITH COUNSEL OF BORROWER'S CHOICE, AND THE BORROWER HEREBY REPRESENTS THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. THE BORROWER FURTHER REPRESENTS AND WARRANTS THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. BORROWER HEREBY IRREVOCABLY DESIGNATES NATIONAL REGISTERED AGENTS, INC. (THE "AGENT"), 9 EAST LOOCKERMAN STREET, DOVER, DELAWARE 19901 AS ITS REGISTERED AGENT FOR THE PURPOSE OF RECEIVING SERVICE OF ALL LEGAL NOTICES AND PROCESS ISSUED BY ANY COURT IN THE STATE OF ALABAMA AS WELL AS SERVICE OF ALL PLEADINGS AND OTHER DOCUMENTS RELATED TO ANY LEGAL PROCEEDING OR ACTION ARISING OUT OF THIS NOTE. BORROWER AGREES THAT SERVICE UPON THE AGENT SHALL BE VALID REGARDLESS OF BORROWER'S WHEREABOUTS AT THE TIME OF SUCH SERVICE AND REGARDLESS OF WHETHER BORROWER RECEIVES A COPY OF SUCH SERVICE, PROVIDED THAT THE HOLDER SHALL HAVE MAILED A COPY TO BORROWER IN ACCORDANCE WITH THE NOTICE PROVISIONS HEREIN. BORROWER AGREES TO PAY ALL COURT COSTS AND REASONABLE ATTORNEY'S FEES INCURRED BY HOLDER IN CONNECTION WITH ENFORCING ANY PROVISION OF THIS NOTE. NOTWITHSTANDING THE FOREGOING, HOLDER AGREES TO USE REASONABLE EFFORTS TO PROVIDE BORROWER WITH NOTICE OF THE FILING OF ANY LAWSUIT BY HOLDER AGAINST BORROWER. 12.7 Offset. Upon the occurrence of an Event of Default, the Holder may set-off against any principal and interest owing hereunder, any and all credits, money, stocks, bonds or other 8 9 security or property of any nature whatsoever on deposit with, or held by, or in the possession of, the Holder, to the credit of or for the account of the Borrower, without notice to or consent of the Borrower or Guarantor. 12.8 Non-Exclusivity of Rights and Remedies. None of the rights and remedies herein conferred upon or reserved to Holder is intended to be exclusive of any other right or remedy contained herein or in any of the other Loan Documents and each and every such right and remedy shall be cumulative and concurrent, and may be enforced separately, successively or together, and may be exercised from time to time as often as may be deemed necessary or desirable by Holder. 12.9 Incorporation by Reference. All of the agreements, conditions, covenants and provisions contained in each of the Loan Documents are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully set forth herein. Borrower covenants and agrees to keep and perform, or cause to be kept and performed, all such agreements, conditions, covenants and provisions strictly in accordance with their terms. 12.10 Joint and Several Liability. If Borrower consists of more than one person and/or entity, each such person and/or entity agrees that its liability hereunder is joint and several. 12.11 Business Purpose. Borrower represents and warrants that the Loan evidenced by this Note is being obtained solely for the purpose of acquiring or carrying on a business, professional or commercial activity and is not for personal, agricultural, family or household purposes. 12.12 Interest Limitation. Notwithstanding anything to the contrary contained herein or in the Mortgage or in any other of the Loan Documents, the effective rate of interest on the obligation evidenced by this Note shall not exceed the lawful maximum rate of interest permitted to be paid. Without limiting the generality of the foregoing, in the event that the interest charged hereunder results in an effective rate of interest higher than that lawfully permitted to be paid, then such charges shall be reduced by the sum sufficient to result in an effective rate of interest permitted and any amount which would exceed the highest lawful rate already received and held by the Holder shall be applied to a reduction of principal and not to the payment of interest. Borrower agrees that for the purpose of determining highest rate permitted by law, any non-principal payment (including, without limitation, Late Fees and other fees) shall be deemed, to the extent permitted by law, to be an expense, fee or premium rather than interest. This provision shall control every other provision of this Note and the other Loan Documents with respect to the changing, collecting and payment of interest on the indebtedness evidenced hereby. 12.13 Modification. This Note may be modified, amended, discharged or waived only by an agreement in writing signed by the party against whom enforcement of such modification, amendment, discharge or waiver is sought. 12.14 Time of the Essence. Time is strictly of the essence of this Note. 9 10 12.15 Negotiable Instrument. The Borrower agrees that this Note shall be deemed a negotiable instrument, even though this Note may not otherwise qualify, under applicable law, absent this paragraph, as a negotiable instrument. 12.16 Interest Rate After Judgment. If judgment is entered against the Borrower on this Note, the amount of the judgment entered (which may include principal, interest, fees, Late Fees and costs) shall bear interest at the Default Rate, to be determined on the date of the entry of the judgment. 12.17 Relationship. Borrower and Holder intend that the relationship between them shall be solely that of creditor and debtor. Nothing contained in this Note or in any of the other Loan Documents shall be deemed or construed to create a partnership, tenancy-in-common, joint tenancy, joint venture or co-ownership by or between Borrower and Holder. 12.18 WAIVER OF AUTOMATIC STAY. BORROWER HEREBY AGREES THAT, IN CONSIDERATION OF LENDER'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN, IN THE EVENT THAT BORROWER SHALL (A) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED STATES CODE, AS AMENDED ("BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUTE; (B) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE; (C) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (D) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR; OR (E) BE THE SUBJECT OF AN ORDER, JUDGMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED AGAINST ANY BORROWER FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, SUBJECT TO COURT APPROVAL, HOLDER SHALL THEREUPON BE ENTITLED AND BORROWER HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE (INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR AGAINST THE EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO HOLDER AS PROVIDED IN THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND BORROWER HEREBY IRREVOCABLY WAIVES ITS RIGHTS TO OBJECT TO SUCH RELIEF. 10 11 12.19 Acknowledgment By Guarantor. Guarantor has acknowledged this Note below for purposes of confirming its obligations all as more specifically set forth in the Guaranty Agreement. [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 11 12 IN WITNESS WHEREOF, the Borrower has executed and sealed this Note or caused it to be executed and sealed on its behalf by its duly authorized representatives, the day and year first above written, and the obligations under this Note shall be binding upon Borrower's successors and assigns. WITNESS: BORROWER: DIVERSICARE PINEDALE, LLC, a Delaware limited liability company - ------------------------------ By: Diversicare Leasing Corp., a Tennessee corporation, its sole member [Print Name] By: ---------------------------------- James F. Mills, Jr., Senior Vice President ACKNOWLEDGED BY GUARANTOR: GUARANTOR: ADVOCAT INC. - ---------------------------------- By:___________________________ (SEAL) Its:___________________________ STATE OF ____________ ) ___________ COUNTY ) Before me, a Notary Public of said County and State, personally appeared ____________________, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence) and who, upon oath, acknowledged her/himself to be the _________________________ of, Diversicare Leasing Corp., a Tennessee corporation and the sole member of Diversicare Pinedale, LLC, a Delaware limited liability company, the within named Borrower, and that s/he, as such _________________________ of said corporation, executed the foregoing instrument for the purposes therein contained, by signing the name of said limited liability company by her/himself as _______________________ the sole member of the Borrower. Witness my hand and notarial stamp or seal this __ day of _______, 2001 ---------------------------------- Notary Public My Commission Expires: ------------ [stamp or seal] 12 EX-10.7 9 g71016ex10-7.txt GUARANTY AGREEMENT 1 EXHIBIT 10.7 GUARANTY AGREEMENT THIS GUARANTY AGREEMENT (this "Guaranty") is made as of the 29th day of March, 2001, by ADVOCAT INC., a Delaware corporation ("Guarantor"), for the benefit of GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (including its successors, transferees and assigns, "Lender"). RECITALS A. DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company ("Borrower"), has borrowed the sum of FOUR MILLION SEVEN HUNDRED NINE THOUSAND NO/100 DOLLARS ($4,709,000.00) (the "Loan") from Lender, evidenced by Borrower's Promissory Note of even date herewith (the "Note") and that certain Loan Agreement by and between Lender and Borrower of even date herewith (the "Loan Agreement"), and secured by, among other things, a Mortgage and Security Agreement, of even date herewith (the "Mortgage") granting a first lien on a skilled nursing facility known as Windsor House of Huntsville, which is located in the City of Huntsville, County of Madison, State of Alabama (the "Facility"). B. The Note, the Loan Agreement, the Mortgage and the other documents, certificates, instruments and agreements executed by Borrower in connection with the Loan or to otherwise evidence or secure the Loan, and all renewals, supplements, or amendments thereto or a part thereof, are collectively referred to as the "Loan Documents". C. As a condition of making the Loan, Guarantor has agreed to guaranty, absolutely and unconditionally, payment of the Guaranty Obligations (as defined below), subject to the terms and conditions set forth in this Guaranty. AGREEMENT NOW THEREFORE, in consideration of the above and as an inducement to Lender to make the Loan evidenced by the Note and the Loan Agreement, and as security for the payment of the Loan and all interest from time to time accrued and unpaid thereon, and all expenses, fees, charges and other amounts from time to time due and owing to Lender under the Note, and the other Loan Documents, and for the performance of all covenants, agreements and other obligations from time to time owing to, or for the benefit of, Lender pursuant to the Loan Documents (collectively referred to herein as the "Guaranty Obligations"), Guarantor, intending to be legally bound, hereby covenants, agrees, represents and warrants as follows: 1. Guaranty. Guarantor hereby absolutely and unconditionally guarantees to the Lender the full, regular and punctual payment and performance of the Guaranty Obligations within ten (10) days of the Lender's demand therefor. Without limiting the generality of the foregoing, "Guaranty Obligations" is used herein in its most comprehensive sense to include all debts, obligations and 2 indebtedness described in the Loan Documents, whether now or hereafter made, incurred, or created, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and regardless of whether there is any recourse with respect to any portion of such Guaranty Obligations as against Borrower or any member of Borrower. In addition, Guarantor guarantees the full payment of, and agrees to reimburse Lender for, all costs of collection incurred by Lender in enforcing the Guaranty Obligations and pursuing any remedies set forth in the Loan Documents and/or the Guaranty, including, without limitation, court costs and actual attorneys' fees (including, but not limited to, fees in any bankruptcy or appellate proceeding). 2. Payments. All payments to be made by Guarantor to Lender hereunder shall be made in lawful money of the United States of America, in immediately available funds, at 200 Witmer Road, Horsham, Pennsylvania 19044, or such other location designated by Lender in writing, and shall be accompanied by a notice from Guarantor stating that such payments are made under this Guaranty. All payments available to Lender for application in payment or reduction of the Guaranty Obligations may be applied by Lender in such manner and in such amount, and at such time or times and in such order and priority as Lender may see fit and to the payment or reduction of such portion of the Guaranty Obligations as Lender may elect. 3. Subsequent Acts by Lender. Lender may, in its sole discretion and without notice to Guarantor, take any action which might otherwise be deemed a legal or equitable release or discharge of Guarantor's obligations hereunder without either impairing or affecting the liability of Guarantor for payment of the Guaranty Obligations (but in no event shall Lender collect more than the aggregate amount of the Guaranty Obligations), which actions might include, by way of illustration and not limitation: (a) at any time or from time to time, the time for Borrower's performance of or compliance with any provision of the Loan Documents may be extended or such performance or compliance may be waived by Lender; (b) the acceptance of partial payment of the Guaranty Obligations; (c) any of the acts permitted in the Loan Documents may be performed; (d) the Loan Documents may from time to time be amended and/or renewed by Borrower and Lender for the purpose of adding any provisions thereto or changing in any manner the rights of Lender or of Borrower thereunder; (e) the maturity date of the Note may be changed or renewed in whole or in part; (f) the maturity of the Note may be accelerated in accordance with the terms of the Loan Documents or any future agreement between Borrower and Lender or the holder of such Note; 2 3 (g) any collateral security for all or any part of the Guaranty Obligations may be exchanged, released, compromised, consolidated, surrendered or otherwise dealt with, and Lender's interest therein may be released and may or may not be perfected; (h) the settlement, release, compounding, compromise, cancellation, rearrangement or consolidation of any of the Guaranty Obligations; (i) the collection of or other liquidation of any claims Lender may have in respect to the Guaranty Obligations; (j) the granting of indulgences, forbearance, compromises, extensions or adjustments in respect to any covenant or agreement under the Loan Documents; and/or (k) the release from liability of any Guarantor and/or any additional parties who may guarantee payment of the Guaranty Obligations or any portion thereof. 4. Certain Rights, Subordination, Etc. (a) Lender may pursue its rights and remedies under this Guaranty and shall be entitled to payment hereunder notwithstanding any other guaranty of all or any part of the Guaranty Obligations, and notwithstanding any action taken by Lender to enforce any of its rights or remedies under such other guaranty, or any payment received thereunder (but in no event shall Lender collect more than the aggregate amount of the Guaranty Obligations). (b) Any obligation or debt of Borrower now or hereafter held by Guarantor is hereby subordinated to the Guaranty Obligations and, except for the obligations due under the Management Agreement (as defined in the Loan Agreement), which obligations are governed by the Subordination Agreement (as defined in the Loan Agreement), Guarantor shall not enforce or collect any such indebtedness from Borrower. Nevertheless, upon request by Lender, Guarantor shall collect, enforce and receive such indebtedness of Borrower to Guarantor. Any sums collected at Lender's request or collected in contravention of the prohibition set forth herein shall be held by Guarantor as trustee for Lender and shall be paid over to Lender on account of the Guaranty Obligations; provided, however, that such payments shall not impair, reduce or affect in any manner the liability of Guarantor under the other provisions of this Guaranty (but in no event shall Lender collect more than the aggregate amount of Guaranty Obligations). (c) Guarantor agrees that if any Event of Default exists under the Loan Documents ("Event of Default") and is continuing, (i) such Guarantor shall not accept payment from any other guarantor of any Guaranty Obligations by way of contribution or similar rights on account of any payment made hereunder by Guarantor to Lender, all of which rights are hereby subordinated to Guarantor's obligations hereunder to Lender, (ii) Guarantor will not take any action to exercise or enforce any rights to such contribution, and (iii) if Guarantor should receive payment, satisfaction or security for any indebtedness of Borrower to Lender, the same shall be delivered to Lender in the form received, endorsed or signed as may be appropriate for application on account of or as security 3 4 for the indebtedness of Borrower to Lender and, until so delivered, shall be held in trust for Lender as security for the indebtedness of Borrower to Lender. (d) In the event of any default by Borrower with respect to the Guaranty Obligations, Guarantor agrees to pay or perform on demand the Guaranty Obligations in the time and manner as provided in Paragraph 1 hereof. Lender shall not be under a duty to protect, secure or insure or be required to liquidate any security or lien provided by the Mortgage or other such collateral held by Lender prior to making such demand. (e) Notwithstanding any payment or payments made by Guarantor under this Guaranty, Guarantor expressly, irrevocably and unconditionally waives and releases any and all "claims" (as that term is defined in the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. Sections 101 et seq., and the regulations adopted and promulgated pursuant thereto (collectively, the "Bankruptcy Code")) it may now or hereafter have against Borrower, and shall not be entitled to, and hereby expressly waives, any and all rights of subrogation, reimbursement, indemnity, exoneration and contribution against Borrower, which Guarantor may now or hereafter have against Borrower without regard to whether any such right or claim arises expressly; provided, that such waiver and release shall not be effective as to any such claim or entitlement or such subrogation and other rights that accrue after the indefeasible (as determined under the Bankruptcy Code) payment, performance or other satisfaction in full of the Guaranty Obligations. 5. Representations and Warranties. Each Guarantor represents and warrants to Lender that: (a) Existence, Power and Qualification. Guarantor is a duly organized and validly existing corporation, has the power to own its properties and to carry on its business as is now being conducted, and is duly qualified to do business and is in good standing in every jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes its qualification necessary. (b) Power and Authority. Guarantor has full power and authority to incur the Guaranty Obligations provided for herein, all of which have been authorized by all proper and necessary action. (c) Financial Condition. The financial statements of the Guarantor heretofore furnished to Lender are complete and correct and fairly present the financial condition of the Guarantor as of the date thereof. Since the date of said financial statements there has been no material adverse change in the financial condition or operations, or the business taken as a whole, of Guarantor from that set forth therein. (d) Litigation. There are no legal or arbitral proceedings or any proceedings by or before any governmental or regulatory authority or agency now pending or, to the best of Guarantor's knowledge, threatened against Guarantor, in which an adverse decision could materially and adversely affect the financial condition of Guarantor. 4 5 (e) No Breach. The execution and delivery of this Guaranty, the consummation of the transactions herein contemplated and compliance with the terms and provisions hereof will not (i) conflict with or result in a breach of, or require any consent (not heretofore obtained at the time this representation is made) under, any applicable law, administrative proceeding or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which Guarantor is a party or by which Guarantor is bound or to which Guarantor is subject, (ii) constitute a default under any such agreement or instrument or under Guarantor's articles of incorporation or any other agreement or instrument binding upon Guarantor, or (iii) result in the creation or imposition of any lien upon any of the revenues or assets of Guarantor pursuant to the terms of any such agreement or instrument. (f) Approvals. To the best of Guarantor's knowledge, no authorizations, approvals, or consents of (other than those heretofore obtained and in full force and effect), and no filings or registrations with (other than those heretofore obtained and in full force and effect), any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by Guarantor of this Guaranty or for the validity or enforceability thereof. (g) Taxes, etc. Guarantor has filed all United States federal and state tax returns and all other tax returns that are required to be filed by Guarantor and has paid all taxes due pursuant to such returns or pursuant to any assessment received by Guarantor, except such taxes, the payment of which is not yet due, or which if due, is not yet delinquent or is being contested in good faith or which has not been finally determined. (h) Benefit. The making of the Loan by Lender to Borrower will directly benefit Guarantor. 6. Financial Covenants and Other Information. Guarantor shall provide Lender the following financial statements and information on a continuing basis during the term of the Loan: (a) Within one hundred twenty (120) days after the end of each fiscal year of the Guarantor, audited financial statements of Guarantor prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP and shall include a balance sheet and a statement of income and expenses for the year then ended. (b) Within forty-five (45) days of the end of each fiscal quarter of Guarantor, unaudited interim financial statements of Guarantor, prepared in accordance with GAAP, which statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by the chief financial officer of Guarantor as true and correct in all material respects. (c) As soon as available, but in no event more than thirty (30) days after the filing deadline, as may be extended from time to time, copies of all federal, state and local tax returns of Guarantor, together with all supporting documentation and required schedules. 5 6 The Lender further reserves the right to require such other financial information of Guarantor in such form and at such other times (including monthly or more frequently, but not more frequently than reasonable) as Lender shall deem reasonably necessary, and Guarantor agrees promptly to provide or to cause to be provided, such information to Lender. All financial statements must be in form and detail as Lender may from time to time reasonably request. 7. Guaranty is a Continuing Obligation. The obligations of the Guarantor under this Guaranty shall be continuing, absolute, irrevocable and unconditional under all circumstances, and shall remain in full force and effect or be reinstated, until all of the Guaranty Obligations shall have been paid and performed in full, irrespective of the bankruptcy, insolvency, merger, reorganization, termination, discontinuation or dissolution of the Borrower or any assignment for the benefit of creditors by the Borrower. The Guarantor acknowledges and agrees that Guarantor's obligations hereunder shall apply to and continue with respect to any of the obligations of the Borrower under the Loan Documents which are subsequently recovered from the Lender for the reasons set forth below. In the event that any payment by or on the behalf of the Borrower to Lender is held to constitute a preference, fraudulent transfer or other voidable payment under any bankruptcy, insolvency or similar law, or if for any other reason the Lender is required to refund such payment or pay the amount thereof to any other party, including, without limitation, as a result of the appointment of a receiver, intervenor, or conservator of, or trustee or similar officer for, the Borrower or of any substantial part of its property or otherwise, such payment by the Borrower or any other party to the Lender shall not constitute a release of the Guarantor from any liability hereunder, and this Guaranty shall continue to be effective or shall be reinstated (notwithstanding any prior release, surrender or discharge by the Lender of this Guaranty or of the Guarantor), as the case may be, with respect to, and this Guaranty shall apply to, any and all amounts so refunded by the Lender or paid by the Lender to another party (which amounts shall constitute part of the Guaranty Obligations), and any interest paid by the Lender and any attorneys' fees, costs and expenses paid or incurred by the Lender in connection with any such event. It is the intent of the Guarantor and the Lender that the obligations and liabilities of the Guarantor hereunder are absolute and unconditional under any and all circumstances and that until the Guaranty Obligations are fully and finally paid and performed, and not subject to refund or disgorgement, the obligations and liabilities of the Guarantor hereunder shall not be discharged or released, in whole or in part, by any act or occurrence that might, but for the provisions of this Guaranty, be deemed a legal or equitable discharge or release of a guarantor. In the event Lender has reasonable cause to believe that it may have to pay back or return any sums as a result of any ruling under the Bankruptcy Code, the Lender shall be entitled to continue to hold this Guaranty in its possession for a period of one year from the later of (a) the date the Guaranty Obligations are paid and performed in full, or (b) if not paid in accordance with the Guaranty Obligations, the expiration or termination of the Loan, and for so long thereafter as may be necessary to enforce any obligation of the Guarantor hereunder and/or to exercise any right or remedy of the Lender hereunder. 8. This Section Intentionally Deleted. 9. Waiver and Release of Subrogation and Participation. Guarantor shall have no right of subrogation in or under the Guaranty Obligations, and no rights of reimbursement, indemnity or contribution from the Borrower or any other rights by law, equity, statute or contract that would 6 7 give rise to a creditor-debtor relationship between Guarantor and the Borrower. Guarantor shall have no right to participate in any way in any of the collateral which is conveyed under the Loan Documents as security for the Guaranty Obligations. Guarantor hereby explicitly waives and releases any of the above-described rights of subrogation, reimbursement, indemnity, contribution, participation, and any right to require the marshaling of Borrower's assets under any circumstances. 10. Continuing Validity. Guarantor further agrees that the validity of this Guaranty and the obligations of Guarantor hereunder shall in no way be terminated, affected or impaired (a) by reason of the assertion by Lender of any rights or remedies which it may have under or with respect to either the Note, the Mortgage, or the other Loan Documents, against any person obligated thereunder or against the owner of the premises covered by the Mortgage, (b) by reason of any failure to file or record any of such instruments or to take or perfect any security intended to be provided thereby, (c) by reason of the commencement of a case under the Bankruptcy Code by or against any person obligated under the Note, the Mortgage or the other Loan Documents, or the death of any Guarantor, or (d) by reason of any payment made on the Guaranty Obligations or any other indebtedness arising under the Note, the Mortgage or the other Loan Documents, whether made by Borrower or Guarantor or any other person, which is required to be refunded pursuant to any bankruptcy or insolvency law; it being understood that no payment so refunded shall be considered as a payment of any portion of the Guaranty Obligations, nor shall it have the effect of reducing the liability of Guarantor hereunder. It is further understood, that if Borrower shall have taken advantage of, or be subject to the protection of, any provision in the Bankruptcy Code, the effect of which is to prevent or delay Lender from taking any remedial action against Borrower, including the exercise of any option Lender has to declare the Guaranty Obligations due and payable on the happening of any default or event by which under the terms of the Note, the Mortgage or the other Loan Documents, the Guaranty Obligations shall become due and payable, Lender may, as against Guarantor, nevertheless, declare the Guaranty Obligations due and payable and enforce any or all of its rights and remedies against Guarantor provided for herein. 11. Notice. All notices given under this Guaranty shall be in writing and shall be either hand delivered or mailed, by certified U.S. mail, return receipt requested, first class postage prepaid, to the other party, at its address set forth below or at such other address as such party may designate by notice to the other party: (a) If to Guarantor: Advocat Inc. 277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067 Attn: CFO with a copy to: John N. Popham, IV, Esq. Harwell, Howard, Hyne, Gabbert & Manner, PC 1800 First American Center 7 8 315 Deaderick Street Nashville, Tennessee 37238-1800 (b) If to Lender: GMAC Commercial Mortgage Corporation 200 Witmer Road Horsham, Pennsylvania 19044 Attention: Servicing Department with a copy to: Kay K. Bains, Esq. Walston, Wells, Anderson & Bains, LLP 505 20th Street North, Suite 500 Birmingham, AL 35203 12. No Waiver by Lender; Remedies. No failure on the part of Lender or the holder of the Note to exercise, and no delay in exercising, any right hereunder or thereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right. Guarantor hereby agrees that all rights and remedies that Lender is afforded by reason of this Guaranty are separate and cumulative and may be pursued separately, successively, or concurrently, as Lender deems advisable. In addition, all such rights and remedies are non-exclusive and shall in no way limit or prejudice Lender's ability to pursue any other legal or equitable rights or remedies that may be available. Failure of Lender to insist upon strict performance or observance of any of the terms, provisions and covenants hereof or to exercise any right herein contained shall not be construed as a waiver or relinquishment of the right to demand strict performance at another time. Receipt by Lender of any payment or performance on the Guaranty Obligations shall not be deemed a waiver of the breach of any provision hereof or of any of the Loan Documents. Without limiting the generality of the foregoing, Guarantor agrees that in any action by Lender by reason of the Guaranty Obligations, Lender, at its election, may proceed (a) against Guarantor together with Borrower, (b) against Guarantor and Borrower, individually, or (c) against Guarantor only without having commenced any action against, or having obtained any judgment against, Borrower. 13. Certain Waivers by Guarantor. AS A FURTHER INDUCEMENT TO LENDER TO MAKE THE LOAN AND IN CONSIDERATION THEREOF, GUARANTOR FURTHER COVENANTS AND AGREES THAT SERVICE OF ANY SUMMONS AND COMPLAINT OR OTHER PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE MADE BY REGISTERED OR CERTIFIED MAIL DIRECTED TO GUARANTOR AT GUARANTOR'S ADDRESS HEREINABOVE SET FORTH, GUARANTOR HEREBY WAIVING PERSONAL SERVICE THEREOF. GUARANTOR HEREBY WAIVES THE PLEADING OF ANY STATUTE OF LIMITATIONS AS A DEFENSE TO THE OBLIGATIONS HEREUNDER. GUARANTOR HEREBY WAIVES NOTICE OF THE ACCEPTANCE HEREOF, PRESENTMENT, DEMAND FOR PAYMENT, PROTEST, NOTICE OF PROTEST, OR 8 9 ANY AND ALL NOTICE OF NON-PAYMENT, NON-PERFORMANCE OR NON-OBSERVANCE, OR OTHER PROOF, OR NOTICE OR DEMAND. THE GUARANTOR FURTHER WAIVES AND AGREES NOT TO ASSERT: (A) ANY RIGHT TO REQUIRE LENDER TO PROCEED AGAINST BORROWER OR TO PROCEED AGAINST ANY OTHER GUARANTOR, OR TO PROCEED AGAINST OR EXHAUST ANY SECURITY FOR THE GUARANTY OBLIGATIONS, OR TO PURSUE ANY OTHER REMEDY AVAILABLE TO LENDER, OR TO PURSUE ANY REMEDY IN ANY PARTICULAR ORDER OR MANNER, (B) THE BENEFIT OF ANY STATUTE OF LIMITATIONS AFFECTING GUARANTOR'S LIABILITY HEREUNDER OR THE ENFORCEMENT HEREOF, (C) NOTICE OF THE EXISTENCE, CREATION OR INCURRING OF NEW OR ADDITIONAL INDEBTEDNESS OF BORROWER TO LENDER, (D) THE BENEFITS OF ANY STATUTORY PROVISION LIMITING THE LIABILITY OF A SURETY, (E) ANY DEFENSE ARISING BY REASON OF ANY DISABILITY OR OTHER DEFENSE OF BORROWER OR BY REASON OF THE CESSATION FROM ANY CAUSE WHATSOEVER (OTHER THAN PAYMENT IN FULL) OF THE LIABILITY OF BORROWER FOR THE GUARANTY OBLIGATIONS, (F) THE BENEFITS OF ANY STATUTORY PROVISION LIMITING THE RIGHT OF LENDER TO RECOVER A DEFICIENCY JUDGMENT, OR TO OTHERWISE PROCEED AGAINST ANY PERSON OR ENTITY OBLIGATED FOR PAYMENT OF THE GUARANTY OBLIGATIONS, AFTER ANY FORECLOSURE OR TRUSTEE'S SALE OF ANY SECURITY FOR THE GUARANTY OBLIGATIONS, AND (G) ANY OTHER DEFENSE OR CIRCUMSTANCE WHICH MIGHT OTHERWISE CONSTITUTE A LEGAL OR EQUITABLE DISCHARGE OF GUARANTOR'S LIABILITY HEREUNDER, ARISING FROM OR OUT OF THE LOAN, THE LOAN DOCUMENTS AND/OR THE FACILITY. 14. Waiver of Automatic Stay. GUARANTOR HEREBY AGREES THAT, IN CONSIDERATION OF LENDER'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN, IN THE EVENT THAT GUARANTOR SHALL (A) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED STATES CODE, AS AMENDED ("BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUTE, (B) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE, (C) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS, (D) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR, OR (E) BE THE SUBJECT OF AN ORDER, JUDGEMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED AGAINST GUARANTOR FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR 9 10 RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, SUBJECT TO COURT APPROVAL, LENDER SHALL THEREUPON BE ENTITLED AND GUARANTOR HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE (INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR AGAINST THE EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO LENDER AS PROVIDED IN THIS AGREEMENT AND/OR THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND GUARANTOR HEREBY IRREVOCABLY WAIVES GUARANTOR'S RIGHTS TO OBJECT TO SUCH RELIEF. 15. Guaranty of Payment. This is a guaranty of payment and not of collection and upon any default of Borrower under the Note, the Mortgage, the Loan Agreement or the other Loan Documents, Lender may, at its option, proceed directly and at once, without notice, against Guarantor to collect and recover the full amount of the liability hereunder or any portion thereof, without proceeding against Borrower or any other person, or foreclosing upon, selling, or otherwise disposing of or collecting or applying against any of the Facility or other collateral for the Loan. (a) Joint and Several Liability. The term "Guarantor" as used in this Guaranty shall refer individually and collectively to all signers of this Guaranty. Each undertaking herein contained shall be the joint and several undertaking of each signer hereof if more than one, and it is specifically agreed that Lender may enforce the provisions hereof with respect to one or more of such signers without seeking to enforce the same as to all or any such signers. Guarantor hereby waives any requirement of joinder of all or any other of the parties hereto in any suit or proceeding to enforce the provisions hereof. (b) Assignment. Lender may assign this Guaranty or any rights or powers hereunder, in whole or in part, in connection with the sale of the Note and assignment of the Mortgage. The duties and obligations of Guarantor may not be delegated or transferred by Guarantor without the prior written consent of Lender which may be withheld in its absolute discretion. Each reference herein to Lender shall be deemed to include its successors and assigns, to whose favor the provisions of this Guaranty shall also inure. Each reference herein to Guarantor shall be deemed to include the heirs, executors, administrators, legal representatives, successors and assigns of Guarantor, all of whom shall be bound by the provisions of this Guaranty. If any party hereto shall be a partnership or a limited liability company, the agreements and obligations on the part of Guarantor herein contained shall remain in force and application notwithstanding any changes in the individuals or entities composing the partnership or the limited liability company, and the term "Guarantor" shall include any altered or successive partnerships and any altered or successive limited liability companies but the predecessor partnerships and their partners, and the predecessor limited liability companies and their members, shall not thereby be released from any obligations or liability hereunder. 10 11 16. Intentionally Deleted. 17. Waiver of Trial by Jury; Service of Process. GUARANTOR HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE GUARANTOR AND THE LENDER MAY BE PARTIES ARISING OUT OF, IN CONNECTION WITH, OR IN ANY WAY PERTAINING TO, THIS AGREEMENT AND/OR ANY OF THE OTHER LOAN DOCUMENTS. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY THE GUARANTOR, AND THE GUARANTOR HEREBY REPRESENTS THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. THE GUARANTOR FURTHER REPRESENTS AND WARRANTS THAT GUARANTOR HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED BY INDEPENDENT LEGAL COUNSEL SELECTED BY GUARANTOR OF GUARANTOR'S OWN FREE WILL, AND THAT GUARANTOR HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. GUARANTOR AGREES TO PAY ALL COURT COSTS AND REASONABLE ATTORNEY'S FEES INCURRED BY LENDER IN CONNECTION WITH ENFORCING ANY PROVISION OF THIS AGREEMENT. NOTWITHSTANDING THE FOREGOING, LENDER AGREES TO USE REASONABLE EFFORTS TO PROVIDE GUARANTOR WITH NOTICE OF THE FILING OF ANY LAWSUIT BY LENDER AGAINST GUARANTOR. 18. Power and Authority. Guarantor (and its representative, executing below, if any) has full power, authority and legal right to execute this Guaranty and to perform all its obligations under this Guaranty. 19. Complete Agreement; Modification; Waiver. All understandings, representations and agreements heretofore had with respect to this Guaranty are merged into this Guaranty which are incorporated herein which alone fully and completely expresses the agreement of Guarantor and Lender. In no event shall any modification or waiver of the provisions of this Guaranty be effective unless in writing executed by Lender. Any waiver granted by Lender shall be applicable only in the specific instance for which it is given. 20. Governing Law. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE FACILITY IS LOCATED AND APPLICABLE FEDERAL LAW. 21. Counterparts; Construction. This Guaranty may be executed in any number of counterparts, all of which when taken together shall constitute one and the same instrument. Words of any gender used in this Guaranty shall be held and construed to include the other gender, and 11 12 words in the singular shall be held and construed to include the plural, and words in the plural shall be held and construed to include the singular, unless this Guaranty or the context otherwise requires. 22. Review by Guarantor. GUARANTOR HAS RECEIVED COPIES OF, AND HAS HAD THE OPPORTUNITY TO REVIEW, ALL OF THE LOAN DOCUMENTS REFERRED TO IN THIS GUARANTY. GUARANTOR HAS DISCUSSED THIS GUARANTY WITH GUARANTOR'S LEGAL COUNSEL, AND GUARANTOR UNDERSTANDS THE NATURE AND EXTENT AND THE LEGAL AND PRACTICAL CONSEQUENCES OF GUARANTOR'S LIABILITY UNDER THIS GUARANTY. 23. No Oral Agreement. To the extent allowed by law, Guarantor agrees to be bound by the terms of the following notice: NOTICE: THIS GUARANTY AND THE OTHER LOAN DOCUMENTS CONSTITUTE A WRITTEN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE LOAN. [SIGNATURES BEGIN ON NEXT PAGE] IN WITNESS WHEREOF, this Guaranty has been duly executed by the undersigned as of the day and year first written above. GUARANTOR: WITNESS: ADVOCAT INC., a Delaware corporation - ----------------------------- ----------------------------------------- By: -------------------------------------- Its: ------------------------------------ STATE OF _____________ ) 12 13 ______________ COUNTY ) I, the undersigned, a Notary Public in and for said County in said State, hereby certify that _________________, whose name as _________________ of Advocat Inc., a Delaware corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he, as such officer and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and official seal this the ____ day of March, 2001. ------------------------------ Notary Public AFFIX SEAL My commission expires: ---------- 13 EX-10.8 10 g71016ex10-8.txt LOAN AGREEMENT 1 EXHIBIT 10.8 LOAN AGREEMENT THIS LOAN AGREEMENT (this "Agreement") is made as of the 29th day of March, 2001, by and between DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company (together with its successors and assigns, the "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (together with its successors and assigns, the "Lender"). R E C I T A L S: 1. Borrower has requested that the Lender make a loan to Borrower in the principal sum of $4,709,000.00 (the "Loan"). 2. Lender has agreed to make the Loan on the terms and conditions hereinafter set forth. A G R E E M E N T: NOW, THEREFORE, it is hereby agreed as follows: ARTICLE I DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS. 1.1 As used in this Agreement, the following terms shall have the following meanings unless the context hereof shall otherwise indicate: "Accounts" means any rights of Borrower arising from the operation of the Facility to payment for goods sold or leased or for services rendered, not evidenced by an Instrument, including, without limitation, (i) all accounts arising from the operation of the Facility , (ii) all moneys and accounts held by Lender pursuant to Section 4.12 of this Agreement, and (iii) all rights to payment from Medicare or Medicaid programs, or similar state or federal programs, boards, bureaus or agencies and rights to payment from patients, residents, private insurers, and others arising from the operation of the Facility, including rights to payment pursuant to Reimbursement Contracts. Accounts shall include the proceeds thereof (whether cash or noncash, moveable or immoveable, tangible or intangible) received from the sale, exchange, transfer, collection or other disposition or substitution thereof. "Actual Management Fees" means actual management fees paid or incurred in connection with operation of the Facility. 1 2 "Affiliate" means, with respect to any Person, (i) each Person that controls, is controlled by or is under common control with such Person, (ii) each Person that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, any of the Stock of such Person, and (iii) each of such Person's officers, directors, members, joint venturers and partners. "Assignment of Leases and Rents" means that certain Assignment of Leases and Rents of even date herewith executed by Borrower in favor of Lender. "Assumed Management Fees" means assumed management fees of five percent (5%) of net patient revenues of the Facility (after Medicare and Medicaid contractual adjustments). "Business Day" means a day on which commercial banks are not authorized or required by law to close in New York, New York. "Closing Date" means the date on which all or any part of the Loan is disbursed by the Lender to or for the benefit of Borrower. "Collateral" means, collectively, the Property, Improvements, Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money, Permits (to the full extent assignable), Reimbursement Contracts, and all Proceeds, all whether now owned or hereafter acquired, and including replacements, additions, accessions, substitutions, and products thereof and thereto, and all other property which is or hereafter may become subject to a Lien in favor of Lender as security for any of the Loan Obligations. "Combined Debt Service Coverage" shall mean the combined Debt Service Coverage of Borrower and the Related Borrower. "Commitment Letter" means the commitment letter issued by Lender to Borrower dated December 15, 2000. "Cross-Collateralization and Cross-Default Agreement" means that certain Cross-Collateralization and Cross-Default Agreement of even date herewith executed by and among Borrower, Related Borrower and Lender. "Debt Service Coverage" means a ratio in which the first number is the sum of net pre-tax income of the Borrower from the operations of the Facility as set forth in the quarterly statements provided to Lender (without deduction for Actual Management Fees paid or incurred), calculated based upon the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan), plus interest expense, to the extent deducted in determining net income, plus non-cash expenses or allowances for depreciation and amortization of the Facility for said period, less either Assumed Management Fees or Actual Management Fees, as applicable, and the second number is the sum of the scheduled principal amounts due (even if not paid) on the Loan (excluding the amount of any prepayment made during such period) for the applicable period plus 2 3 the interest expense on such Loan for the applicable period. In calculating "pre-tax income", Extraordinary Income and Extraordinary Expenses shall be excluded. "Debt Service Reserve Fund Agreement" means that certain Debt Service Reserve Fund Escrow and Security Agreement of even date herewith between Lender and Borrower. "Default" means the occurrence or existence of any event which, but for the giving of notice or expiration of time or both, would constitute an Event of Default. "Default Rate" shall have the meaning given to that term in the Note. "Environmental Permit" means any permit, license, or other authorization issued under any Hazardous Materials Law with respect to any activities or businesses conducted on or in relation to the Property and/or the Improvements. "Equipment" means all beds, linen, televisions, carpeting, telephones, cash registers, computers, lamps, glassware, rehabilitation equipment, restaurant and kitchen equipment, and other fixtures and equipment of Borrower located on, attached to or used or useful in connection with any of the Property or the Facility and all renewals and replacements thereof and substitutions therefor; provided, however, that with respect to any items which are leased for the benefit of the Facility and not owned by Borrower, the Equipment shall include the leasehold interest only of Borrower together with any options to purchase any of said items and any additional or greater rights with respect to such items which Borrower may hereafter acquire, but the foregoing shall not be construed to mean that such leasing shall be permitted hereunder and under the other Loan Documents. "Event of Default" means any "Event of Default" as defined in Article VII hereof. "Extraordinary Income and Extraordinary Expenses" means material items of a character significantly different from the typical or customary business activities of Borrower which would not be expected to recur frequently and which would not be considered as recurring factors in any evaluation of the ordinary operating processes of Borrower's business, and which would be treated as extraordinary income or extraordinary expenses under GAAP. "Exhibit" means an Exhibit to this Agreement, unless the context refers to another document, and each such Exhibit shall be deemed a part of this Agreement to the same extent as if it were set forth in its entirety wherever reference is made thereto. "Facility" means the facility known as "Windsor House," presently a 134-bed licensed facility (117-bed licensed skilled nursing, 17-bed licensed assisted living) located on the Property, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any facility), now or hereafter operated on the Property. 3 4 "GAAP" means, as in effect from time to time, generally accepted accounting principles consistently applied as promulgated by the American Institute of Certified Public Accountants. "General Intangibles" means all intangible personal property of Borrower arising out of or connected with the Property or the Facility and all renewals and replacements thereof and substitutions therefor (other than Accounts, Rents, Instruments, Inventory, Money, Permits, and Reimbursement Contracts), including, without limitation, things in action, contract rights and other rights to payment of money. "Governmental Authority" means any board, commission, department or body of any municipal, county, state or federal governmental unit, or any subdivision of any of them, that has or acquires jurisdiction over the Property and/or the Improvements or the use, operation or improvement of the Property. "Guarantor" means Advocat Inc., a Delaware corporation. "Guaranty Agreement" means that certain Guaranty Agreement of even date herewith from Guarantor to Lender. "Hazardous Materials" means petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials; radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or-could become friable; underground storage tanks, whether empty or containing any substance; any substance the presence of which on the Property is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material or substance now or in the future defined as a "hazardous substance," "hazardous material," "hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "pollutant" within the meaning of any Hazardous Materials Law. "Hazardous Materials Laws" means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Borrower or to the Property and/or the Improvements. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, and their state analogs. "Improvements" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Property, including, but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and 4 5 storm sashes, and cleaning apparatus which are or shall be attached to the Property or said buildings, structures or improvements. "Indebtedness" means any (i) obligations for borrowed money, (ii) obligations, payment for which is being deferred by more than thirty (30) days, representing the deferred purchase price of property other than accounts payable arising in connection with the purchase of inventory customary in the trade and in the ordinary course of Borrower's business, (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from the Accounts and/or property now or hereafter owned or acquired, and (iv) the amount of any other obligation (including obligations under financing leases) which would be shown as a liability on a balance sheet prepared in accordance with GAAP. "Instruments" means all instruments, chattel paper, documents or other writings obtained from or in connection with the operation of the Property or the Facility (including, without limitation, all ledger sheets, computer records and printouts, data bases, programs, books of account and files relating thereto). "Intercreditor Agreement" shall mean that certain Amended and Restated Intercreditor Agreement of even date herewith by and among Lender, Borrower and AmSouth Bank. "Inventory" means all inventories of food, beverages and other comestibles held by Borrower for sale or use at or from the Property or the Facility, and soap, paper supplies, medical supplies, drugs and all other such goods, wares and merchandise held by Borrower for sale to or for consumption by guests, patients or residents of the Property or the Facility and all such other goods returned to or repossessed by Borrower. "Lien" means any voluntary or involuntary mortgage, security deed, deed of trust, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, including those contemplated by or permitted in this Agreement and the other Loan Documents. "Loan" means the Loan in the principal sum of $4,709,000.00 made by Lender to Borrower as of the date hereof. "Loan Documents" means, collectively, this Agreement, the Assignment of Leases and Rents, the Note, the Debt Service Reserve Fund Agreement, the Guaranty Agreement, the Mortgage, the Subordination Agreement, the Cross-Collateralization and Cross-Default Agreement and the Intercreditor Agreement, together with any and all other documents executed by Borrower or others, evidencing, securing or otherwise relating to the Loan. "Loan Obligations" means the aggregate of all principal and interest owing from time to time under the Note and all expenses, charges and other amounts from time to time owing under the Note, this Agreement, or the other Loan Documents and all covenants, agreements and other obligations from time to time owing to, or for the benefit of, Lender pursuant to the Loan Documents. 5 6 "Management Agreement" means that certain Management Agreement dated December 1, 2000 by and between Manager and Borrower, obligating the Manager to operate and manage the Facility. "Manager" means Diversicare Management Services, a Tennessee corporation, and any successor manager of the Facility approved by Lender in writing. "Maturity Date" means April 1, 2006. "Medicaid" means that certain program of medical assistance, funded jointly by the federal government and the States, for impoverished individuals who are aged, blind and/or disabled, and/or members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. ss.ss. 1396 et seq.) and the regulations promulgated thereunder. "Medicare" means that certain federal program providing health insurance for eligible elderly and other individuals, under which physicians, hospitals, skilled nursing homes, home health care and other providers are reimbursed for certain covered services they provide to the beneficiaries of such program, which program is more fully described in Title XVIII of the Social Security Act (42 U.S.C. ss.ss. 1395 et seq.) and the regulations promulgated thereunder. "Money" means all monies, cash, rights to deposit or savings accounts or other items of legal tender obtained from or for use in connection with the operation of the Facility. "Mortgage" means that certain Mortgage and Security Agreement, of even date herewith from the Borrower in favor of or for the benefit of Lender and covering the Property. "Note" means the Promissory Note of even date herewith in the principal amount of the Loan payable by Borrower to the order of Lender. "O&M Program" means a written program of operations and maintenance established or approved in writing by Lender relating to any Hazardous Materials in, on or under the Property or Improvements. "Permits" means all licenses, permits and certificates used or necessary in connection with the ownership, operation, use or occupancy of the Property and/or the Facility, including, without limitation, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need and all such other permits, licenses and rights, obtained from any governmental, quasi-governmental or private person or entity whatsoever concerning ownership, operation, use or occupancy. "Permitted Encumbrances" has the meaning given to that term in Section 5.2 hereof. "Person" means any natural person, firm, trust, corporation, partnership, limited liability company, trust and any other form of legal entity. 6 7 "Proceeds" means all proceeds (including proceeds of insurance and condemnation) from the sale, exchange, transfer, collection, loss, damage, disposition, substitution or replacement of any of the Collateral. "Property" means the real estate located in Huntsville, Madison County, Alabama, which is more particularly described in Exhibit "A" hereto, upon which the Facility is located, and which, concurrent with the Closing Date, will be owned by the Borrower. "Reimbursement Contracts" means all third party reimbursement contracts for the Facility which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare, Medicaid and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements. "Related Borrower" means Diversicare Pinedale, LLC, a Delaware limited liability company. "Related Facility" means Pinedale Nursing Home located in Newport, Arkansas. "Rents" means all rent and other payments of whatever nature from time to time payable pursuant to leases of the Property or the Facility, or for retail space or other space at the Property (including, without limitation, rights to payment earned under leases for space in the Improvements for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians' offices, pharmacies and specialty shops). "Single-Purpose Entity" means a Person which owns no interest or property other than the Collateral. "Stock" means all shares, options, warrants, general or limited partnership interests, membership interests, participating or other equivalents (regardless of how designated) in a corporation, limited liability company, partnership or any equivalent entity, whether voting or nonvoting, including, without limitation, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended). "Subordination Agreement" means that certain Subordination of Management Agreement of even date herewith by and among Borrower, Manager, and Lender. 1.2 Singular terms shall include the plural forms and vice versa, as applicable, of the terms defined. 1.3 Terms contained in this Agreement shall, unless otherwise defined herein or unless the context otherwise indicates, have the meanings, if any, assigned to them by the Uniform Commercial Code in effect in the State of Alabama. 7 8 1.4 All accounting terms used in this Agreement shall be construed in accordance with GAAP, except as otherwise specified. 1.5 All references to other documents or instruments shall be deemed to refer to such documents or instruments as they may hereafter be extended, renewed, modified, or amended and all replacements and substitutions therefor. 1.6 All references herein to "Medicaid" and "Medicare" shall be deemed to include any successor program thereto. ARTICLE II TERMS OF THE LOAN 2.1 THE LOAN. Borrower has agreed to borrow the Loan from Lender, and Lender has agreed to make the Loan to Borrower, subject to Borrower's compliance with and observance of the terms, conditions, covenants, and provisions of this Agreement and the other Loan Documents, and Borrower has made the covenants, representations, and warranties herein and therein as a material inducement to Lender to make the Loan. 2.2 SECURITY FOR THE LOAN. The Loan will be evidenced, secured and guaranteed by the Loan Documents. ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, and to make the Loan to Borrower, Borrower represents and warrants to Lender as follows: 3.1 EXISTENCE, POWER AND QUALIFICATION. Borrower is a duly organized and validly existing Delaware limited liability company, has the power to own its properties and to carry on its business as is now being conducted, and is duly qualified to do business and is in good standing in every jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes its qualification necessary. 3.2 POWER AND AUTHORITY. Borrower has full power and authority to borrow the indebtedness evidenced by the Note and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and limited liability company action on the part of Borrower. All consents, approvals, authorizations, orders or filings of or with any court or governmental agency or body, if any, required for the execution, delivery and performance of the Loan Documents by the Borrower have been obtained or made. 3.3 DUE EXECUTION AND ENFORCEMENT. Each of the Loan Documents to which Borrower is a party constitutes a valid and legally binding obligation of Borrower, enforceable in accordance with its respective terms (except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity) and does not violate, conflict with, or constitute any default under any law, government regulation, decree, judgment, Borrower's articles of 8 9 organization/incorporation, partnership agreement or operating agreement, as applicable, or any other agreement or instrument binding upon Borrower. 3.4 SINGLE PURPOSE ENTITY. Borrower is a Single Purpose Entity. 3.5 PENDING MATTERS. a. Operations; Financial Condition. No action or investigation is pending or, to the best of Borrower's knowledge, threatened before or by any court or administrative agency which might result in any material adverse change in the financial condition, operations or prospects of Borrower or any lower reimbursement rate under the Reimbursement Contracts. The Borrower is not in violation of any agreement, the violation of which might reasonably be expected to have a material adverse effect on its business or assets, and the Borrower is not in violation of any order, judgment, or decree of any court, or any material violation of any statute or governmental regulation, to which it is subject. b. Condemnation or Casualty. There are no proceedings pending, or, to the best of Borrower's knowledge, threatened, to acquire through the exercise of any power of condemnation, eminent domain or similar proceeding any part of the Property, the Improvements or any interest therein, or to enjoin or similarly prevent or restrict the use of the Property or the operation of the Facility in any manner. None of the Improvements is subject to any unrepaired casualty or other damage. 3.6 FINANCIAL STATEMENTS ACCURATE. All financial statements heretofore or hereafter provided by Borrower are and will be true and complete in all material respects as of their respective dates and fairly present the respective financial condition of Borrower, and there are no material liabilities, direct or indirect, fixed or contingent, as of the respective dates of such statements which are not reflected therein or in the notes thereto or in a written certificate delivered with such statements. The financial statements of the Borrower have been prepared in accordance with GAAP. There has been no material adverse change in the financial condition, operations, or prospects of Borrower since the dates of such statements except as fully disclosed in writing with the delivery of such statements. All financial statements of the operations of the Facility heretofore or hereafter provided to Lender are and will be true and complete in all material respects as of their respective dates. 3.7 COMPLIANCE WITH FACILITY LAWS. The Facility is duly licensed and is currently operated as a 117-bed licensed skilled care nursing home and a 17-bed licensed congregate assisted living facility under the applicable laws of the state where the Property is located. Borrower is the lawful owner of all Permits for the Facility, including, without limitation, the Certificate of Need issued by the Alabama State Health Planning and Development Agency or the Nursing Home License issued by the Alabama State Board of Health, if applicable, which (a) are in full force and effect, (b) constitute all of the permits, licenses and certificates required for the use, operation and occupancy thereof, (c) have not been pledged as collateral for any other loan or Indebtedness, (d) are held free from restrictions or any encumbrance which would materially adversely affect the use 9 10 or operation of the Facility, and (e) are not provisional, probationary or restricted in any way. The Borrower and Manager as well as the operation of the Facility are in compliance in all material respects with the applicable provisions of nursing home and/or assisted living facility laws, rules, regulations and published interpretations to which the Facility is subject. No waivers of any laws, rules, regulations, or requirements (including, but not limited to, minimum foot requirements per bed) are required for the Facility to operate at the current licensed bed capacity. All Reimbursement Contracts are in full force and effect with respect to the Facility, and Borrower and Manager are in good standing with all the respective agencies governing such applicable nursing home licenses, program certification, and Reimbursement Contracts. Borrower and Manager are current in the payment of all so-called provider specific taxes or other assessments with respect to such Reimbursement Contracts. Borrower will maintain or cause Manager to maintain (without allowing to lapse) the Certificate of Need, if applicable, and any required Permits. In the event Lender acquires the Facility through foreclosure or otherwise, neither Lender nor a subsequent manager, a subsequent lessee or any subsequent purchaser (through foreclosure or otherwise) must obtain a Certificate of Need prior to applying for and receiving a license to operate the Facility and certification to receive Medicare and Medicaid payments (and its successor programs) for patients having coverage thereunder provided that no service or bed complement is changed. 3.8 MAINTAIN BED CAPACITY. Neither Borrower nor the Manager has granted to any third party the right to reduce the number of licensed beds in the Facility or to apply for approval to transfer the right to any and all of the licensed Facility beds to any other location. 3.9 MEDICARE AND MEDICAID COMPLIANCE. The Facility is in compliance with all requirements for participation in Medicare and Medicaid, including without limitation, the Medicare and Medicaid Patient Protection Act of 1987. The Facility is in conformance in all material respects with all insurance, reimbursement and cost reporting requirements and has a current provider agreement which is in full force and effect under Medicare and Medicaid. 3.10 THIRD-PARTY PAYORS. There is no threatened or pending revocation, suspension, termination, probation, restriction, limitation, or nonrenewal affecting Borrower, Manager or the Facility or any participation or provider agreement with any third-party payor, including Medicare, Medicaid, Blue Cross and/or Blue Shield, and any other private commercial insurance managed care and employee assistance program (such programs, the "Third-Party Payors' Programs") to which Borrower or Manager presently is subject. All Medicare, Medicaid and private insurance cost reports and financial reports submitted by Borrower or Manager are and will be materially accurate and complete and have not been and will not be misleading in any material respects. No cost reports for the Facility remain "open" or unsettled, except as otherwise disclosed. 3.11 GOVERNMENTAL PROCEEDINGS AND NOTICES. Neither Borrower nor Manager nor the Facility is currently the subject of any proceeding by any governmental agency, and no notice of any violation has been received from a governmental agency that would, directly or indirectly, or with the passage of time: 10 11 a. Have a material adverse impact on Borrower's ability to accept and/or retain patients or result in the imposition of a fine, a sanction, a lower rate certification or a lower reimbursement rate for services rendered to eligible patients; b. Modify, limit or annul or result in the transfer, suspension, revocation or imposition of probationary use of any of the Permits; or c. Affect Borrower's continued participation in the Medicare or Medicaid programs or any other Third-Party Payors' Programs, or any successor programs thereto, at current rate certifications. 3.12 PHYSICAL PLANT STANDARDS. To the best of Borrower's knowledge, except as disclosed in the Condition of Property Survey prepared for Lender in connection with the Loan the Facility and the use thereof complies in all material respects with all applicable local, state and federal building codes, fire codes, zoning codes, use restrictions, health care, health care facility and other similar regulatory requirements (the "Physical Plant Standards"), and no waivers of Physical Plant Standards exist at the Facility. 3.13 PLEDGES OF RECEIVABLES. With the exception of the pledge of certain Accounts more specifically described in the Intercreditor Agreement, the Borrower has not pledged its Accounts as collateral security for any loan or indebtedness other than the Loan. 3.14 PAYMENT OF TAXES AND PROPERTY IMPOSITIONS. Borrower has filed all federal, state, and local tax returns which it is required to file and has paid, or made adequate provision for the payment of, all taxes which are shown pursuant to such returns or are required to be shown thereon or to assessments received by Borrower, including, without limitation, provider taxes. All such returns are complete and accurate in all respects. Borrower has paid or made adequate provision for the payment of all applicable water and sewer charges, government assessments, ground rents (if applicable) and Taxes (as defined in the Mortgage) with respect to the Property. 3.15 TITLE TO COLLATERAL. Borrower has good and marketable title to all of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning violation, or encumbrance, except Permitted Encumbrances, which Permitted Encumbrances do not and will not materially interfere with the security intended to be provided by the Mortgage or the current use or operation of the Property and or the current ability of the Facility to generate net operating income sufficient to service the Loan. Except as shown on the current as-built survey for the Facility provided by the Borrower to Lender in connection with the Loan (the "Survey"), all Improvements situated on the Property are situated wholly within the boundaries of the Property. 3.16 PRIORITY OF MORTGAGE. The Mortgage constitutes a valid first lien against the real and personal property described therein, prior to all other liens or encumbrances, including those which may hereafter accrue, excepting only "Permitted Encumbrances", which Permitted Encumbrances do not and will not materially and adversely affect (a) the ability of the Borrower to pay in full the principal of and interest on the Note when due, (b) the security (and its value) 11 12 intended to be provided by the Mortgage or (c) the current use of the Property and the Improvements. 3.17 LOCATION OF CHIEF EXECUTIVE OFFICES. The location of Borrower's principal place of business and chief executive office is set forth on Exhibit "B" hereto. 3.18 DISCLOSURE. All information furnished or to be furnished by Borrower to Lender in connection with the Loan or any of the Loan Documents, is, or will be at the time the same is furnished, accurate and correct in all material respects and complete insofar as completeness may be necessary to provide Lender with true and accurate knowledge of the subject matter. 3.19 TRADE NAMES. The Facility, which operates under the trade name Windsor House, has not changed its name, been known by any other name (except Windsor House Assisted Living Facility), or been a party to a merger, reorganization or similar transaction within the last two (2) years. Borrower and Diversicare Leasing Corp., its sole member, have owned the Facility for the last four (4) years. 3.20 ERISA. Borrower is in compliance with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 3.21 OWNERSHIP. The ownership interests of the Persons comprising the Borrower and each of the respective interests in the Borrower are correctly and accurately set forth on Exhibit "C" hereto. 3.22 COMPLIANCE WITH APPLICABLE LAWS. The Facility and its operations and the Property comply in all material respects with all covenants and restrictions of record and applicable laws, ordinances, rules and regulations, including, without limitation, the Americans with Disabilities Act (to the extent required) and the regulations thereunder, and all laws, ordinances, rules and regulations relating to zoning, setback requirements and building codes and there are no waivers of any building codes currently in existence for the Facility. 3.23 SOLVENCY. Borrower is solvent for purposes of 11 U.S.C. ss. 548, and the borrowing of the Loan will not render Borrower insolvent for purposes of 11 U.S.C. ss. 548. 3.24 OTHER INDEBTEDNESS. Borrower has no outstanding Indebtedness, secured or unsecured, direct or contingent (including any guaranties), other than (a) the Loan, and (b) indebtedness which represents trade payables or accrued expenses incurred in the ordinary course of business of owning and operating the Property; and (c) indebtedness more particularly described as the Intercreditor Agreement; no other debt will be secured (senior, subordinate or pari passu) by the Property. 3.25 OTHER OBLIGATIONS. Borrower has no material financial obligation under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which 12 13 Borrower is a party or by which Borrower or the Property is otherwise bound, other than obligations incurred in the ordinary course of the operation of the Property and other than obligations under the Mortgage, the Intercreditor Agreement and the other Loan Documents. 3.26 FRAUDULENT CONVEYANCES. Borrower (1) has not entered into this Agreement or any of the other Loan Documents with the actual intent to hinder, delay, or defraud any creditor and (2) has received reasonably equivalent value in exchange for its obligations under the Loan Documents. Giving effect to the transactions contemplated by the Loan Documents, to the best of Borrower's knowledge the fair saleable value of Borrower's assets exceeds and will, immediately following the execution and delivery of the Loan Documents, be greater than Borrower's probable liabilities, including the maximum amount of its contingent liabilities or its debts as such debts become absolute and mature. Borrower's assets do not and, immediately following the execution and delivery of the Loan Documents will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Borrower does not intend to, and does not believe that it will, incur debts and liabilities (including, without limitation, contingent liabilities and other commitments) beyond its ability to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of Borrower). 3.27 MANAGEMENT AGREEMENT. The Management Agreement is in full force and effect and there are no defaults (either monetary or nonmonetary) by the Manager or the Borrower thereunder. 3.28 REPRESENTATIONS AND WARRANTIES. Borrower agrees that its representations and warranties and covenants contained herein are true and correct as of the date hereof and shall survive closing of the Loan. ARTICLE IV AFFIRMATIVE COVENANTS OF BORROWER Borrower agrees with and covenants unto the Lender that until the Loan Obligations have been paid in full, Borrower shall: 4.1 PAYMENT OF LOAN/PERFORMANCE OF LOAN OBLIGATIONS. Duly and punctually pay or cause to be paid the principal and interest of the Note in accordance with its terms and duly and punctually pay and perform or cause to be paid or performed all Loan Obligations hereunder and under the other Loan Documents. 4.2 MAINTENANCE OF EXISTENCE. Maintain its existence as a limited liability company, and, in each jurisdiction in which the character of the property owned by it or in which the transaction of its business makes qualification necessary, maintain good standing. 4.3 ACCRUAL AND PAYMENT OF TAXES. During each fiscal year, make accurate provision for the payment of all current tax liabilities of all kinds (including, without limitation, federal and 13 14 state income taxes, franchise taxes, payroll taxes, provider taxes (to the extent necessary to participate in and receive maximum funding pursuant to Reimbursement Contracts) and Taxes (as defined in the Mortgage)), all required withholding of income taxes of employees, all required old age and unemployment contributions, and all required payments to employee benefit plans, and pay the same when they become due. 4.4 INSURANCE. Maintain the following insurance coverages with respect to the Property and the Facility: a. Insurance against loss or damage by fire, casualty and other hazards as now are or subsequently may be covered by an "all risk" policy or a policy covering "special" causes of loss, with such endorsements as Lender may from time to time reasonably require and which are customarily required by institutional lenders of similar properties similarly situated, including, without limitation, building ordinance law, lightning, windstorm, civil commotion, hail, riot, strike, water damage, sprinkler leakage, collapse, malicious mischief, explosion, smoke, aircraft, vehicles, vandalism, falling objects and weight of snow, ice or sleet, and covering the Facility in an amount equal to 100% of the full insurable replacement value of the Facility (exclusive of footings and foundations below the lowest basement floor) without deduction for depreciation. The determination of the replacement cost amount shall be adjusted annually to comply with the requirements of the insurer issuing the coverage or, at Lender's election, by reference to such indexes, appraisals or information as Lender determines in its reasonable discretion, and, unless the insurance required by this paragraph shall be effected by blanket and/or umbrella policies in accordance with the requirements of this Agreement, the policy shall include inflation guard coverage that ensures that the policy limits will be increased over time to reflect the effect of inflation. Each policy shall, subject to Lender's approval, contain (i) a replacement cost endorsement, without deduction for depreciation, (ii) either an agreed amount endorsement or a waiver of any co-insurance provisions, and (iii) an ordinance or law coverage or enforcement endorsement if the Improvements or the use of the Property constitutes any legal nonconforming structures or uses, and shall provide for deductibles in such amounts as Lender may permit in its sole discretion. b. Commercial general liability insurance under a policy containing "Comprehensive General Liability Form" of coverage (or a comparably worded form of coverage) and the "Broad Form CGL" endorsement (or a policy which otherwise incorporates the language of such endorsement), providing coverage on an occurrence (not "claims made") basis, which policy shall include, without limitation, coverage against claims for personal injury, bodily injury, death and property damage liability with respect to the Facility and the operations related thereto, whether on or off the Property, and the following coverages: Employee as Additional Insured, Product Liability/Completed Operations; Broad Form Contractual Liability, Independent Contractor, Personal Injury and Advertising Injury Protection, Medical Payment (with a minimum limit of $5,000 per person), Broad Form Cross Suits Liability Endorsement, where applicable, hired and non- owned automobile coverage (including rented and leased vehicles), and, if any alcoholic beverages shall be sold, manufactured or distributed in the Facility, liquor liability coverage, all of 14 15 which shall be in such amounts as Lender may from time to time reasonably require, but not less than One Million Dollars ($1,000,000) per occurrence, Two Million Dollars ($2,000,000) in the aggregate and with umbrella coverage not less than Three Million Dollars ($3,000,000). If such policy shall cover more than one property, such limits shall apply on a "per location" basis. If any elevators, health club facilities or swimming pools are located at the Facility, the foregoing amounts shall be increased to Three Million Dollars ($3,000,000), Six Million Dollars ($6,000,000) and Ten Million Dollars ($10,000,000), respectively. Such liability policy shall delete the contractual exclusion under the personal injury coverage, if possible, and if available, shall include the following endorsements: Notice of Accident, Knowledge of Occurrence, and Unintentional Error and Omission. c. Professional liability insurance coverage in an amount equal to not less than One Million Dollars ($1,000,000) per occurrence and Three Million Dollars ($3,000,000) in the aggregate and insuring Borrower for acts occurring prior to the date of the Loan. d. Business interruption insurance, which may be in the form of Blanket Earnings and Extra Expense Coverage, (i) covering the same perils of loss as are required to be covered by the property insurance required under Section 4.4(a) above, (ii) in an amount equal to the projected annual net income from the Facility plus carrying costs and extraordinary expenses of the Property for a period of twelve (12) months, based upon Borrower's reasonable estimate thereof as approved by Lender, (iii) including either an agreed amount endorsement or a waiver of any co- insurance provisions, so as to prevent Borrower, Lender and any other insured thereunder from being a co-insurer, and (iv) providing that any covered loss thereunder shall be payable to Lender. e. During any period of new construction on the Premises, a so-called "Builder's All-Risk Completed Value" or "Course of Construction" insurance policy in non-reporting form for any improvements under construction, including, without limitation, for demolition and increased cost of construction or renovation, in an amount equal to 100% of the estimated replacement cost value on the date of completion, including "soft cost" coverage, and Workers' Compensation Insurance covering all persons engaged in such construction, in an amount at least equal to the minimum required by law. In addition, each contractor and subcontractor shall be required to provide Lender with a certificate of insurance for (i) workers' compensation insurance covering all persons engaged by such contractor or subcontractor in such construction in an amount at least equal to the minimum required by law, and (ii) general liability insurance showing minimum limits of at least $5,000,000, including coverage for products and completed operations. Each contractor and subcontractor also shall cover Borrower and Lender as an additional insured under such liability policy and shall indemnify and hold Borrower and Lender harmless from and against any and all claims, damages, liabilities, costs and expenses arising out of, relating to or otherwise in connection with its performance of such construction. f. If the Facility contains steam boilers, steam pipes, steam engines, steam turbines or other high pressure vessels, insurance covering the major components of the central 15 16 heating, air conditioning and ventilating systems, boilers, other pressure vessels, high pressure piping and machinery, elevators and escalators, if any, and other similar equipment installed in the Improvements, in an amount equal to one hundred percent (100%) of the full replacement cost of the Facility, which policies shall insure against physical damage to and loss of occupancy and use of the Improvements arising out of an accident or breakdown covered thereunder. g. Flood insurance with a deductible not to exceed Three Thousand Dollars ($3,000), or such greater amount as may be satisfactory to Lender in its sole discretion, and in an amount equal to the full insurable value of the Facility or the maximum amount available, whichever is less, from the "flood pool", if the Facility is located in an area designated by the Secretary of Housing and Urban Development or the Federal Emergency Management Agency as having special flood hazards. h. Workers' compensation insurance or other similar insurance which may be required by governmental authorities or applicable legal requirements in an amount at least equal to the minimum required by law, and employer's liability insurance with a limit of Five Hundred Thousand Dollars ($500,000) per accident and per disease per employee, and Five Hundred Thousand Dollars ($500,000) in the aggregate for disease arising in connection with the operation of the Property. i. Such other insurance coverages, in such amounts, and such other forms and endorsements, as may from time to time be required by Lender and which are customarily required by institutional lenders to similar properties, similarly situated, including, without limitation, coverages against other insurable hazards (including, by way of example only, earthquake, sinkhole and mine subsidence), which at the time are commonly insured against and generally available. All insurance required under this Section 4.4 shall have a term of not less than one year and shall be in the form and amount and with deductibles as, from time to time, shall be reasonably acceptable to Lender, under valid and enforceable policies issued by financially responsible insurers either licensed to transact business in the State where the Facility is located, or obtained through a duly authorized surplus lines insurance agent or otherwise in conformity with the laws of such State, with (a) a rating of not less than the third (3rd) highest rating category by either Standard & Poor's Ratings Group, Duff & Phelps Credit Rating Co., Moody's Investors Service, Inc., Fitch Investors Service, Inc. or any successors thereto, or (b) an A:V rating in Best's Key Rating Guide; provided, however, that if the initial principal balance of the Loan is greater than Seven Million Five Hundred Thousand Dollars ($7,500,000.00), such insurer must, in lieu of such Best's rating, have a long term senior debt rating of at least "A" by Standard & Poor's Ratings Group. Originals or certified copies of all insurance policies shall be delivered to and held by Lender. All such policies shall name Lender as an additional insured, shall provide for loss payable solely to Lender and shall contain: (i) standard "non-contributory mortgagee" endorsement or its equivalent relating, inter alia, to recovery by Lender notwithstanding the negligent or willful acts or omissions of Borrower and notwithstanding (a) occupancy or use of the Facility for purposes more hazardous than those permitted by the terms of such policy, (b) any foreclosure or other action 16 17 taken by Lender pursuant to the Mortgage upon the occurrence of an Event of Default, or (c) any change in title or ownership of the Facility; and (ii) a provision that such policies shall not be canceled or amended, including, without limitation, any amendment reducing the scope or limits of coverage, or failed to be renewed, without at least thirty (30) days prior written notice to Lender in each instance. With respect to insurance policies which require payment of premiums annually, not less than thirty (30) days prior to the expiration dates of the insurance policies obtained pursuant to this Agreement, Borrower shall pay such amount, except to the extent Lender is escrowing sums therefor pursuant to the Loan Documents. Not less than thirty (30) days prior to the expiration dates of the insurance policies obtained pursuant to this Agreement, originals or certified copies of renewals of such policies (or certificates evidencing such renewals) bearing notations evidencing the payment of premiums or accompanied by other evidence satisfactory to Lender of such payment, which premiums shall not be paid by Borrower through or by any financing arrangement, shall be delivered by Borrower to Lender. Borrower shall not carry separate insurance, concurrent in kind or form or contributing in the event of loss, with any insurance required under this Section 4.4. If the limits of any policy required hereunder are reduced or eliminated due to a covered loss, Borrower shall pay the additional premium, if any, in order to have the original limits of insurance reinstated, or Borrower shall purchase new insurance in the same type and amount that existed immediately prior to the loss. If Borrower fails to maintain and deliver to Lender the original policies or certificates of insurance required by this Agreement, Lender may, at its option, procure such insurance and Borrower shall pay or, as the case may be, reimburse Lender for, all premiums thereon promptly, upon demand by Lender, with interest thereon at the Default Rate from the date paid by Lender to the date of repayment and such sum shall constitute a part of the Loan Obligations. The insurance required by this Agreement may, at the option of Borrower, be effected by blanket and/or umbrella policies issued to Borrower or to an Affiliate of Borrower covering the Facility and the properties of such Affiliate; provided that, in each case, the policies otherwise comply with the provisions of this Agreement and allocate to the Facility, from time to time, the coverage specified by this Agreement, without possibility of reduction or coinsurance by reason of, or damage to, any other property (real or personal) named therein. If the insurance required by this Agreement shall be effected by any such blanket or umbrella policies, Borrower shall furnish to Lender original policies or certified copies thereof, with schedules attached thereto showing the amount of the insurance provided under such policies which is applicable to the Facility. Neither Lender nor its agents or employees shall be liable for any loss or damage insured by the insurance policies required to be maintained under this Agreement; it being understood that (i) Borrower shall look solely to its insurance company for the recovery of such loss or damage, (ii) such insurance company shall have no rights of subrogation against Lender, its agents or employees, and (iii) Borrower shall use its best efforts to procure from such insurance company a waiver of subrogation rights against Lender. If, however, such insurance policies do not provide for a waiver of subrogation rights against Lender (whether because such a waiver is 17 18 unavailable or otherwise), then Borrower hereby agrees, to the extent permitted by law and to the extent not prohibited by such insurance policies, to waive its rights of recovery, if any, against Lender, its agents and employees, whether resulting from any damage to the Facility, any liability claim in connection with the Facility or otherwise. If any such insurance policy shall prohibit Borrower from waiving such claims, then Borrower must obtain from such insurance company a waiver of subrogation rights against Lender. If loss or damage to the Facility is equal to or less than $25,000 and there shall exist no Default or Event of Default at the time, the insurance proceeds shall be made available to the Borrower for the sole purpose of the repair and restoration of the Facility, to the same quality and condition as existed prior to such loss or damage. If the loss or damage insured by the casualty insurance required to be maintained under this Agreement exceeds $25,000, Lender may make the net proceeds of insurance or condemnation (after payment of Lender's reasonable costs and expenses) available to Borrower for Borrower's repair, restoration and replacement of the Improvements, Equipment and Inventory damaged or taken on the following terms and subject to Borrower's satisfaction of the following conditions: a. The aggregate amount of all such proceeds shall not exceed the aggregate amount of all such Loan Obligations. b. At the time of such loss or damage and at all times thereafter while Lender is holding any portion of such proceeds, there shall exist no Default or Event of Default; c. The Improvements, Equipment, and Inventory for which loss or damage has resulted shall be capable of being restored to its preexisting condition and utility in all material respects with a value equal to or greater than that which existed prior to such loss or damage and such restoration shall be capable of being completed prior to the earlier to occur of (i) the expiration of business interruption insurance as determined by an independent inspector or (ii) the Maturity Date; d. Within thirty (30) days from the date of such loss or damage Borrower shall have given Lender a written notice electing to have the proceeds applied for such purpose; e. Within sixty (60) days following the date of notice under the preceding subparagraph (c) and prior to any proceeds being disbursed to Borrower, Borrower shall have provided to Lender all of the following: (i) complete plans and specifications for restoration, repair and replacement of the Improvements, Equipment and Inventory damaged to the condition, utility and value required by (b) above, 18 19 (ii) if loss or damage exceeds $100,000, fixed-price or guaranteed maximum cost bonded construction contracts for completion of the repair and restoration work in accordance with such plans and specifications, (iii) builder's risk insurance for the full cost of construction with Lender named under a standard mortgagee loss-payable clause, (iv) such additional funds as in Lender's reasonable opinion are necessary to complete such repair, restoration and replacement, and (v) copies of all permits and licenses necessary to complete the work in accordance with the plans and specifications; f. Lender may, at Borrower's expense, retain an independent inspector to review and approve plans and specifications and completed construction and to approve all requests for disbursement, which approvals shall be conditions precedent to release of proceeds as work progresses; g. No portion of such proceeds shall be made available by Lender for architectural reviews or for any other purposes which are not directly attributable to the cost of repairing, restoring or replacing the Improvements, Equipment and Inventory for which a loss or damage has occurred unless the same are covered by such insurance; h. Borrower shall diligently pursue such work and shall complete such work prior to the earlier to occur of the expiration of business interruption insurance or the Maturity Date; i. The Facility continues to achieve the Debt Service Coverage requirements set forth in Section 4.12 below; j. Each disbursement by Lender of such proceeds and deposits shall be funded subject to conditions and in accordance with disbursement procedures which a commercial construction lender would typically establish in the exercise of sound banking practices and shall be made only upon receipt of disbursement requests on an AIA G702/703 form (or similar form approved by Lender) signed and certified by Borrower and, if required by the Lender, its architect and general contractor with appropriate invoices and lien waivers as required by Lender; k. Lender shall have a first lien security interest in all building materials and completed repair and restoration work and in all fixtures and equipment acquired with such proceeds, and Borrower shall execute and deliver such mortgages, deeds of trust, security agreements, financing statements and other instruments as Lender shall request to create, evidence, or perfect such lien and security interest; and 19 20 l. In the event and to the extent such proceeds are not required or used for the repair, restoration and replacement of the Improvements, Equipment and Inventory for which a loss or damage has occurred, or in the event Borrower fails to timely make the election to have insurance proceeds applied to the restoration of the Improvements, Equipment, or Inventory, or, having made such election, fails to timely comply with the terms and conditions set forth herein, or, if the conditions set forth herein for such application are otherwise not satisfied, then Lender shall be entitled without notice to or consent from Borrower to apply such proceeds, or the balance thereof, at Lender's option either (i) to the full or partial payment or prepayment of the Loan Obligations (without premium) in the manner aforesaid, or (ii) to the repair, restoration and/or replacement of all or any part of such Improvements, Equipment and Inventory for which a loss or damage has occurred. Borrower appoints Lender as Borrower's attorney-in-fact to cause the issuance of or an endorsement of any insurance policy to bring Borrower into compliance herewith and, as limited above, at Lender's sole option, to make any claim for, receive payment for, and execute and endorse any documents, checks or other instruments in payment for loss, theft, or damage covered under any such insurance policy; however, in no event will Lender be liable for failure to collect any amounts payable under any insurance policy. 4.5 FINANCIAL AND OTHER INFORMATION. Provide Lender, or cause the Manager to provide to Lender, at its address set forth in Section 8.7 and at GMAC Commercial Mortgage Corporation, 2200 Woodcrest Place, Suite 305, Birmingham, Alabama 35209, the following financial statements and information on a continuing basis during the term of the Loan: a. Within one hundred twenty (120) days after the end of each fiscal year of the Facility and the Borrower (if different from the Facility) and the Guarantor, respectively, unaudited financial statements of the operations of the Facility, unaudited and consolidating financial statements of the Borrower and audited financial statements of the Guarantor, respectively, prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, certified by a financial officer of Borrower and the Guarantor, to be true and correct. b. Within one hundred twenty (120) days after the end of each fiscal year of the Manager, unaudited and consolidating financial statements of the Manager prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, and, shall be certified as true and correct in all material respects by a financial officer of the Manager. c. Within forty-five (45) days after the end of each fiscal quarter of the Facility and Borrower (if different from the Facility), unaudited financial statements of the operations of the Facility and Borrower prepared in accordance with GAAP, which statements shall include a balance 20 21 sheet and statement of income and expenses for the quarter then ended, and shall be certified as true and correct in all material respects by a financial officer of Borrower to be true and correct. d. Within forty-five (45) days after the end of each fiscal quarter of the Manager, unaudited interim financial statements of the Manager, prepared in accordance with GAAP, which shall include a balance sheet and statement of income and expenses for the quarter then ended, and shall be certified as true and correct in all material respects by a financial officer of the Manager to be true and correct. e. Within forty-five (45) days of the end of each calendar quarter, a statement of the number of bed days available and the actual patient days incurred for the quarter, together with quarterly census information of the Facility as of the end of such quarter in sufficient detail to show patient-mix (i.e., private, Medicare, Medicaid, and V.A.) on a daily average basis for such year through the end of such quarter, certified by the chief financial officer of Borrower or Manager to be true and correct. Such statements of the Facility shall be accompanied by the Summary of Financial Statements and Census Data attached hereto as Exhibit "D". f. Within forty-five (45) days after the end of each fiscal quarter of the Facility, unaudited monthly financial statements of the operations of the Facility, prepared in accordance with GAAP, which statements shall include a balance sheet and statement of income and expenses for the month then ended, certified by a financial officer of the Borrower or Manager to be true and correct. g. Upon request by Lender, as soon as available, but in no event more than thirty (30) days after the filing deadline, as may be extended from time to time, copies of all federal, state and local tax returns of Borrower and Guarantor, together with all supporting documentation and required schedules. h. Within twenty (20) days of filing or receipt, all Medicare and/or Medicaid cost reports and any amendments thereto filed with respect to the Facility, and all responses, audit reports, or other inquiries with respect to such cost reports. i. Within ten (10) days of receipt, a copy of the Medicaid Rate Calculation Worksheet (or the equivalent thereof) issued by the appropriate Medicaid Agency for the Facility. j. Within ten (10) business days of receipt, any and all notices (regardless of form) from any and all licensing and/or certifying agencies that the Facility license and/or the Medicare and/or Medicaid certification of the Facility is being downgraded to a substandard category, revoked, or suspended or that any such action is pending or being considered. k. Upon Lender's request, evidence of payment by Borrower or Manager of any applicable provider bed taxes or similar taxes, which taxes Borrower agrees to pay. 21 22 l. Within one hundred twenty (120) days of the Borrower's fiscal year end, and more frequently if reasonably requested by Lender, an aged accounts receivable report of the Facility in sufficient detail to show amounts due from each class of patient-mix (i.e., private, Medicare, Medicaid and V.A.) by the account age classifications of 30 days, 60 days, 90 days, 120 days, and over 120 days. m. Within forty-five (45) days after the end of each calendar quarter, a statement of the number of patient days, if any, for which the Facility has received the Medicare default rate for any applicable period. For purposes herein, "default rate" shall have the meaning ascribed to it in that certain applicable Medicare rate notification letter prepared in connection with any review or survey of the Facility. The Lender reserves the right to require that the annual financial statements of the Borrower and the Manager be audited and prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender if (i) an Event of Default exists, (ii) if required by internal policy or by any investor in any securities backed in whole or in part by the Loan or any rating agency rating such securities, or (iii) if Lender has reasonable grounds to believe that the unaudited financial statements do not accurately represent the financial condition of the Borrower, Guarantor or the Manager, as the case may be. The Lender further reserves the right to require such other financial information of Borrower, Guarantor, Manager and/or the Facility, in such form and at such other times (including monthly or more frequently but not more frequently than reasonable) as Lender shall deem reasonably necessary, and Borrower agrees promptly to provide or to cause to be provided, such information to Lender. All financial statements must be in the form and detail as Lender may from time to time reasonably request. n. Within forty-five (45) days of the end of each calendar quarter, a certificate of a financial officer of the Borrower confirming compliance with the covenants and requirements set forth above. 4.6 COMPLIANCE CERTIFICATE. (a) At the time of furnishing the quarterly operating statements required under the foregoing Section, furnish to Lender a compliance certificate in the form attached hereto as Exhibit "E" executed by the chief financial officer, of the Borrower; (b) Upon Lender's written request, furnish Lender with a certificate stating that Borrower has complied with and is in compliance with all terms, covenants and conditions of the Loan Documents to which Borrower is a party and that there exists no Default or Event of Default or, if such is not the case, that one or more specified events have occurred, and that the representations and warranties contained herein are true and correct with the same effect as though made on the date of such certificate. 22 23 4.7 BOOKS AND RECORDS. Keep and maintain at all times at the Facility or the management agent's offices, and upon Lender's request shall make available at the Facility, complete and accurate books of account and records (including copies of supporting bills and invoices) adequate to reflect correctly the results of the operation of the Facility, and copies of all written contracts, leases (if any), and other instruments which affect the Property, which books, records, contracts, leases (if any) and other instruments shall be subject to examination and inspection at any reasonable time by Lender (upon reasonable advance notice, which for such purposes only may be given orally, except in the case of an emergency or following an Event of Default, in which case no advance notice shall be required) provided, however, that if an Event of Default has occurred and is continuing, Borrower shall deliver to Lender upon written demand all books, records, contracts, leases (if any) and other instruments relating to the Facility or its operation and Borrower authorizes Lender to obtain a credit report on Borrower at any time. 4.8 PAYMENT OF INDEBTEDNESS. Duly and punctually pay or cause to be paid all other Indebtedness now owing or hereafter incurred by Borrower in accordance with the terms of such Indebtedness, except such Indebtedness owing to those other than Lender which is being contested in good faith and with respect to which any execution against properties of Borrower has been effectively stayed and for which reserves and collateral for the payment and security thereof have been established as determined by Lender in its sole discretion. 4.9 RECORDS OF ACCOUNTS. Maintain all records, including records pertaining to the Accounts of Borrower, at the chief executive office of Borrower as set forth in this Agreement. 4.10 CONDUCT OF BUSINESS. Conduct, or cause the Manager to conduct the operation of the Facility at all times in a manner consistent with the level of operation of the Facility as of the date hereof, including without limitation, the following: (i) to maintain the standard of care for the patients of the Facility at all times at a level necessary to ensure quality care for the patients of the Facility in accordance with customary and prudent industry standards; (ii) to operate the Facility in a prudent manner and in compliance with applicable laws and regulations relating thereto and cause all Permits, Reimbursement Contracts, and any other agreements necessary for the use and operation of the Facility or as may be necessary for participation in the Medicaid, Medicare, or other applicable reimbursement programs to remain in effect without reduction in the number of licensed beds or beds authorized for use in the Medicaid, Medicare, or other applicable reimbursement programs; 23 24 (iii) to maintain sufficient Inventory and Equipment of types and quantities at the Facility to enable Borrower adequately to perform operations of the Facility; (iv) to keep all Improvements and Equipment located on or used or useful in connection with the Facility in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needed and proper repairs, renewals, replacements, additions, and improvements thereto to keep the same in good operating condition; (v) to maintain sufficient cash in the operating accounts of the Facility in order to satisfy the working capital needs of the Facility; and (vi) to keep all required Permits current and in full force and effect. 4.11 PERIODIC SURVEYS. Furnish or cause Manager to furnish to Lender within twenty (20) days of receipt a copy of any Medicare, Medicaid, or other licensing agency survey or report and any statement of deficiencies and/or any other report indicating that any action is pending or being considered to downgrade the Facility to a substandard category, and within the time period required by the particular agency for furnishing a plan of correction also furnish or cause to be furnished to Lender a copy of the plan of correction generated from such survey or report for the Facility, and correct or cause to be corrected any deficiency, the curing of which is a condition of continued licensure or for full participation in Medicaid, Medicare or other reimbursement program pursuant to any Reimbursement Contract for existing patients or for new patients to be admitted with Medicaid or Medicare coverage, by the date required for cure by such agency (plus extensions granted by such agency). 4.12 DEBT SERVICE COVERAGE REQUIREMENTS. a. Achieve (commencing with the closing of the Loan), and, within forty-five (45) days after the end of each fiscal quarter of Borrower, provide evidence satisfactory to the Lender of the achievement of, the following Debt Service Coverage and Combined Debt Service Coverage ratios: (i) a Debt Service Coverage, after deduction of Actual Management Fees, of not less than 1.0 to 1.0, based on a rolling twelve (12) month period, tested quarterly; (ii) a Debt Service Coverage, after deduction of Assumed Management Fees, of not less than 1.0 to 1.0, based on a rolling twelve (12) month period, tested quarterly; 24 25 (iii) a Combined Debt Service Coverage after deduction of Assumed Management Fees, of not less than 1.3 to 1.0, based on a rolling twelve (12) month period, tested quarterly. b. If Borrower fails to achieve or provide evidence of achievement of the Debt Service Coverage for the Facility or the Combined Debt Service Coverage, upon fifteen (15) days written notice to Borrower, Borrower will deposit with Lender additional cash or other liquid collateral in an amount which, when added to the first number of the Debt Service Coverage calculation, would have resulted in the noncomplying Debt Service Coverage requirement having been satisfied. If such failure continues for two (2) consecutive quarters, on the third consecutive quarter, if Borrower again fails to achieve or provide evidence of the achievement of the Debt Service Coverages required above, upon fifteen (15) days written notice to Borrower, Borrower will deposit with Lender additional cash or other liquid collateral (with credit for amounts currently being held by Lender pursuant to the foregoing sentence), in an amount which, if the same had been applied on the first day of the first quarter for which such noncompliance of the Debt Service Coverage requirement occurred to reduce the outstanding principal indebtedness of the Loan Obligations, would have resulted in the noncomplying Debt Service Coverage requirement having been satisfied, and Borrower agrees promptly to provide such additional cash or other liquid collateral, which increased amount will be held by Lender for an additional two (2) consecutive calendar quarters. Such additional Collateral will be held by the Lender in a standard custodial account, and shall constitute additional collateral for the Loan Obligations and an "Account" as defined in this Agreement, and, upon the occurrence of an Event of Default, may be applied by the Lender, in such order and manner as the Lender may elect, to the reduction of the Loan Obligations. Borrower shall not be entitled to any interest earned on such additional Collateral. Provided that there is no outstanding Default or Event of Default, such additional Collateral which has not been applied to the Loan Obligations will be released by the Lender at such time as Borrower provides the Lender with evidence that the required Debt Service Coverage requirements outlined above have been achieved and maintained (without regard to any cash deposited pursuant to this Section 4.12) as of the end of each of two (2) consecutive quarters. 4.13 OCCUPANCY. Maintain or cause to be maintained at all times a daily average annual occupancy for the Facility of seventy-five percent (75%) or higher (based on the number of beds available at the Facility, with the minimum number of beds available at the Facility remaining at or in excess of the number of beds set forth in the Facility description at page 3, herein). 4.14 CAPITAL EXPENDITURES. Maintain the Facility in good condition and make minimum capital expenditures for the Facility in each fiscal year in the amount of $300 per bed (which capital expenditures may include those necessary for ordinary repairs and routine maintenance), and, within forty-five (45) days of the end of such fiscal year, provide evidence thereof satisfactory to Lender. In the event that Borrower shall fail to do so, Borrower shall, upon Lender's written request, immediately establish and maintain a capital expenditures reserve fund with Lender equal to the difference between the required amount per bed and the amount per bed actually spent by the Borrower. Borrower grants to Lender a right of setoff against all moneys in the capital expenditures 25 26 reserve fund, and Borrower shall not permit any other Lien to exist upon such fund. The proceeds of such capital expenditures reserve fund will be disbursed monthly upon Lender's receipt of satisfactory evidence that Borrower has made the required capital expenditures. Upon Borrower's failure to adequately maintain the Facility in good condition, Lender may, but shall not be obligated to, make such capital expenditures and may apply the moneys in the capital expenditures reserve fund for such purpose. To the extent there are insufficient moneys in the capital expenditures reserve fund for such purposes, all funds advanced by Lender to make such capital expenditures shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue interest at the Default Rate until paid. Upon an Event of Default, Lender may apply any moneys in the capital expenditures reserve fund to the Loan Obligations, in such order and manner as Lender may elect. For any partial fiscal year during which the Loan is outstanding, the required expenditure amount shall be prorated by multiplying the total of the required amount per bed [unit] by a fraction, the numerator of which is the number of days during such year for which all or part of the Loan is outstanding and the denominator of which is the number of days in such year. 4.15 MANAGEMENT AGREEMENT. Maintain the Management Agreement in full force and effect and timely perform all of Borrower's obligations thereunder and enforce performance of all obligations of the Manager thereunder and not permit the termination, amendment or assignment of the Management Agreement unless the prior written consent of Lender is first obtained, which consent shall not be unreasonably withheld. Borrower will enter and cause the Manager to enter into the Subordination Agreement. Borrower will not enter into any other management agreement without Lender's prior written consent, which consent shall not be unreasonably withheld, which consent may be in the sole and absolute discretion of Lender. 4.16 UPDATED APPRAISALS. For so long as the Loan remains outstanding, if any Event of Default shall occur hereunder, or if, in Lender's judgment, a material depreciation in the value of the Property shall have occurred, then in any such event, Lender may cause the Property to be appraised by an appraiser selected by Lender, and in accordance with Lender's appraisal guidelines and procedures then in effect, and Borrower agrees to cooperate in all respects with such appraisals and furnish to the appraisers all requested information regarding the Property and the Facility. Borrower agrees to pay all reasonable costs incurred by Lender in connection with such appraisal which costs shall be secured by the Mortgage and shall accrue interest at the Default Rate until paid. 4.17 COMPLY WITH COVENANTS AND LAWS. Comply, in all material respects, with all applicable covenants and restrictions of record and all laws, ordinances, rules and regulations and keep the Facility and the Property in compliance with all applicable laws, ordinances, rules and regulations, including, without limitation, the Americans with Disabilities Act and regulations promulgated thereunder, and laws, ordinances, rules and regulations relating to zoning, health, building codes, setback requirements, Medicaid and Medicare laws and keep the Permits for the Facility in full force and effect. 26 27 4.18 TAXES AND OTHER CHARGES. Subject to Borrower's right to contest the same as set forth in Section 9(c) of the Mortgage, pay all taxes, assessments, charges, claims for labor, supplies, rent, and other obligations which, if unpaid, might give rise to a Lien against property of Borrower, except Liens to the extent permitted by this Agreement. 4.19 COMMITMENT LETTER. Provide all items and pay all amounts required by the Commitment Letter. If any term of the Commitment Letter shall conflict with the terms of this Agreement, this Agreement shall govern and control. As to any matter contained in the Commitment Letter, and as to which no mention is made in this Agreement or the other Loan Documents, the Commitment Letter shall continue to be in effect and shall survive the execution of this Agreement and all other Loan Documents. 4.20 NOTICE OF FEES OR PENALTIES. Immediately notify Lender, upon Borrower's knowledge thereof, of the assessment by any state or any Medicare, Medicaid, health or licensing agency of any fines or penalties against Borrower, Manager or the Facility. 4.21 DEBT SERVICE RESERVE FUND. Pursuant to the Debt Service Reserve Fund Agreement, establish and maintain a debt service reserve fund with Lender equal to approximately three (3) months of debt service payments with respect to the Note as reasonably estimated by Lender, rounded upward to the nearest $1,000.00. 4.22 RADON TESTING. Pursuant to that certain Phase I Environmental Site Assessment dated March 9, 2001, prepared by ESA1, the Facility is located in an area of high radon risk. The Lender shall conduct annual radon testing of the Property and the Facility. Pursuant to Section 6.7 herein, the Borrower shall promptly pay to the Lender all costs related to the radon testing. Additionally, should the result of the annual testing necessitate remediation of radon present at the Property, the Borrower shall complete all necessary Remedial Work, as defined in Section 6.8 herein. 4.23 INTENTIONALLY DELETED. 4.24 LOAN CLOSING CERTIFICATION. Immediately notify Lender, in writing, in the event any representation, warranty or covenant contained herein or in that certain Loan Closing Certification, executed by Borrower for the benefit of Lender of even date herewith, becomes untrue or there shall have been any material adverse change in any such representation, warranty or covenant. ARTICLE V NEGATIVE COVENANTS OF BORROWER Until the Loan Obligations have been paid in full, Borrower shall not: 5.1 ASSIGNMENT OF LICENSES AND PERMITS. Assign or transfer any of its interest in the Permits, or Reimbursement Contracts (including rights to payment thereunder) pertaining to the 27 28 Facility, or assign, transfer, or remove or permit any other person to assign, transfer, or remove any records pertaining to the Facility including, without limitation, patient records, medical and clinical records (except for removal of such patient records as directed by the patients owning such records or by governmental or judicial order or direction), without Lender's prior written consent, which consent may be granted or refused in Lender's sole discretion. 5.2 NO LIENS; EXCEPTIONS. Create, incur, assume or suffer to exist any Lien upon or with respect to the Facility or any of its properties, rights, income or other assets relating thereto, including, without limitation, the Collateral, whether now owned or hereafter acquired, other than the following permitted Liens ("Permitted Encumbrances"): a. Liens at any time existing in favor of the Lender; b. Liens which are listed in Exhibit "F" attached hereto; c. Inchoate Liens arising by operation of law for the purchase of labor, services, materials, equipment or supplies, provided payment shall not be delinquent and, if such Lien is a lien upon any of the Property or Improvements, such Lien must be fully disclosed to Lender and bonded off and removed from the Property and Improvements within thirty (30) days of its creation in a manner satisfactory to Lender; d. Liens incurred in the ordinary course of business in connection with workers' compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for money borrowed or for credit received with respect to property acquired) entered into in the ordinary course of business as presently conducted or to secure obligations for surety or appeal bonds; e. Liens for current year's taxes, assessments or governmental charges or levies not yet due and payable; f. Liens in favor of AmSouth Bank as described and set forth in the Intercreditor Agreement, as amended; g. Liens securing purchase money loans not to exceed $300,000 in the aggregate at any one time outstanding; and h. Intra-Borrower Loans more particularly described in the Cross- Collateralization and Cross-Default Agreement. 5.3 MERGER, CONSOLIDATION, ETC. Except as otherwise provided in the Mortgage, consummate any merger, consolidation or similar transaction, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions), all or substantially all of its 28 29 assets (whether now or hereafter acquired), without the prior written consent of the Lender, which consent may be granted or refused in Lender's sole discretion. 5.4 MAINTAIN SINGLE-PURPOSE ENTITY STATUS; INDEBTEDNESS. a. Dissolve or terminate or materially amend the terms of its certificate of incorporation, articles of organization, operating agreement or partnership agreement, as applicable, the terms of which require Borrower to be a Single-Purpose Entity; b. enter into any transaction of merger or consolidation, or liquidate or dissolve itself (or suffer any liquidation or dissolution), or acquire by purchase or otherwise all or substantially all the business or assets of, or any Stock or other evidence of beneficial ownership of, any Person; c. guarantee or otherwise become liable on or in connection with any obligation of any other Person, except for indebtedness to AmSouth Bank described in the Intercreditor Agreement, as amended; d. at any time own any encumbered asset other than (i) the Collateral, and (ii) incidental personal property necessary for the operation of the Property; e. at any time be engaged directly or indirectly, in any business other than the ownership, management and operation of the Collateral; f. enter into any contract or agreement with any general partner, principal, member or Affiliate of Borrower or any Affiliate of any general partner, principal or member of Borrower (other than the Management Agreement) except upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arm's-length basis with third parties other than an Affiliate; g. incur, create or assume any indebtedness, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than (i) the Loan, (ii) indebtedness which represents trade payables or accrued expenses incurred in the ordinary course of business of owning and operating the Property and (iii) the indebtedness to AmSouth Bank described and set forth in the Intercreditor Agreement, as amended; no other debt will be secured (senior, subordinate or pari passu) by the Property; h. make any loans or advances to any third party (including any Affiliate); i. become insolvent or fail to pay its debts from its assets as the same shall become due; j. fail to do all things necessary to preserve its existence as a Single-Purpose Entity, and will not, nor will any partner, limited or general, member or shareholder thereof, amend, 29 30 modify or otherwise change its partnership certificate, partnership agreement, articles of organization, operating agreement, articles of incorporation or by-laws in a manner which adversely affects Borrower's existence as a Single-Purpose Entity; k. fail to conduct and operate its business as presently conducted and operated; l. fail to maintain books and records and bank accounts separate from those of its Affiliates, including its members, general partners or shareholders, as applicable; m. fail to at all times hold itself out to the public as a legal entity separate and distinct from any other entity (including any Affiliate thereof, including the general partner or any member or shareholder of Borrower or any Affiliate of the general partner or any member or shareholder of Borrower, as applicable); n. Intentionally Deleted; o. fail to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations; p. seek the dissolution or winding up, in whole or in part, of Borrower; q. commingle the funds and other assets of Borrower with those of any general partner, any member, any shareholder, any Affiliate or any other Person, except for daily sweeps to a master account for Borrower and its Affiliates from which necessary operating funds will be disbursed to a control account in the name of Borrower; r. fail to maintain its assets in such a manner that it is not costly or difficult to segregate, ascertain or identify its individual assets from those of any Affiliate or any other Person; and s. hold itself out to be responsible for the debts or obligations of any other Person, other than with respect to the indebtedness to AmSouth described and set forth in the Intercreditor Agreement, as amended. 5.5 CHANGE OF BUSINESS. Make any material change in the nature of its business as it is being conducted as of the date hereof. 5.6 CHANGES IN ACCOUNTING. Change its methods of accounting, unless such change is permitted by GAAP, and provided such change does not have the effect of curing or preventing what would otherwise be an Event of Default or Default had such change not taken place. 30 31 5.7 ERISA FUNDING AND TERMINATION. Permit (a) the funding requirements of ERISA with respect to any employee plan to be less than the minimum required by ERISA at any time, or (b) any employee plan to be subject to involuntary termination proceedings at any time. 5.8 TRANSACTIONS WITH AFFILIATES. Enter into any transaction (other than the Management Agreement) with any Affiliate of Borrower other than in the ordinary course of its business and on fair and reasonable terms no less favorable to Borrower than those it could obtain in a comparable arms-length transaction with a Person not an Affiliate. 5.9 TRANSFER OF OWNERSHIP INTERESTS. Except for the pledge of membership interests to secure the indebtedness to AmSouth Bank as otherwise provided in the Mortgage, permit a change in the ownership interests of the Persons comprising the Borrower unless the written consent of the Lender is first obtained, which consent may be granted or refused in Lender's sole discretion. 5.10 CHANGE OF USE. Alter or change the use of the Facility or permit any management agreement, other than the Management Agreement, or lease for the Facility or enter into any operating lease for the Facility, unless Borrower first notifies Lender and provides Lender a copy of the proposed lease agreement or management agreement, obtains Lender's written consent thereto, which consent may be withheld in Lender's sole discretion, and obtains and provides Lender with a subordination agreement in form satisfactory to Lender, as determined by Lender in its sole discretion, from such manager or lessee subordinating to all rights of Lender. 5.11 PLACE OF BUSINESS. Change its chief executive office or its principal place of business without first giving Lender at least thirty (30) days prior written notice thereof and promptly providing Lender such information and amendatory financing statements as Lender may request in connection therewith. 5.12 ACQUISITIONS. Directly or indirectly, purchase, lease, manage, own, operate, or otherwise acquire any property or other assets (or any interest therein) which are not used in connection with the operation of the Facility. 5.13 INTENTIONALLY DELETED. ARTICLE VI ENVIRONMENTAL HAZARDS 6.1 PROHIBITED ACTIVITIES AND CONDITIONS. Except for matters covered by a written program of operations and maintenance approved in writing by Lender (an "O&M Program") or matters described in Section 6.2, Borrower shall not cause or permit any of the following: a. The presence, use, generation, release, treatment, processing, storage, handling, or disposal-of any Hazardous Materials in, on or under the Property or any Improvements; 31 32 b. The transportation of any Hazardous Materials to, from, or across the Property; c. Any occurrence or condition on the Property or in the Improvements or any other property of Borrower that is adjacent to the Property, which occurrence or condition is or may be in violation of Hazardous Materials Laws; or d. Any violation of or noncompliance with the terms of any Environmental Permit with respect to the Property, the Improvements or any property of Borrower that is adjacent to the Property. The matters described in clauses (a) through (d) above are referred to collectively in this Article VI as "Prohibited Activities and Conditions" and individually as a "Prohibited Activity and Condition." 6.2 EXCLUSIONS. Notwithstanding any other provision of Article VI to the contrary, "Prohibited Activities and Conditions" shall not include the safe and lawful use and storage of quantities of (i) pre-packaged supplies, medical waste, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable Facilities, (ii) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by occupants of the Facility; and (iii) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the Property's parking areas or stored underground or above ground storage tanks used in the operation of the Facility, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Hazardous Materials Laws. 6.3 PREVENTIVE ACTION. Borrower shall take all appropriate steps (including the inclusion of appropriate provisions in any Leases approved by Lender which are executed after the date of this Agreement) to prevent its employees, agents, contractors, tenants and occupants of the Facility from causing or permitting any Prohibited Activities and Conditions. 6.4 O & M PROGRAM COMPLIANCE. If an O&M Program has been established with respect to Hazardous Materials, Borrower shall comply in a timely manner with, and cause all employees, agents, and contractors of Borrower and any other persons present on the Property to comply with the O&M Program. All costs of performance of Borrower's obligations under any O&M Program shall be paid by Borrower, and Lender's out-of-pocket costs incurred in connection with the monitoring and review of the O&M Program and Borrower's performance shall be paid by Borrower upon demand by Lender. Any such out-of-pocket costs of Lender which Borrower fails to pay promptly shall become an additional part of the Loan Obligations. 6.5 BORROWER'S ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender that, except as previously disclosed by Borrower to Lender in writing or in the Phase I Environmental Report prepared for Lender by ESA1 in connection with the Loan (the "Environmental Report"): 32 33 a. Borrower has not at any time caused or permitted any Prohibited Activities and Conditions. b. No Prohibited Activities and Conditions exist or, to best knowledge of Borrower, have existed. c. The Property and the Improvements do not now contain any underground storage tanks, and, to the best of Borrower's knowledge after reasonable and diligent inquiry, the Property and the Improvements have not contained any underground storage tanks in the past. If there is an underground storage tank located on the Property or the Improvements which has been previously disclosed by Borrower to Lender in writing, that tank complies with all requirements of Hazardous Materials Laws, except as disclosed in the Environmental Report. d. Borrower has complied with all Hazardous Materials Laws, including all requirements for notification regarding releases of Hazardous Materials. Without limiting the generality of the foregoing, Borrower has obtained all Environmental Permits required for the operation of the Property and the Improvements in accordance with Hazardous Materials Laws now in effect and all such Environmental Permits are in full force and effect. No event has occurred with respect to the Property and/or Improvements that constitutes, or with the passing of time or the giving of notice would constitute, noncompliance with the terms of any Environmental Permit. e. There are no actions, suits, claims or proceedings pending or, to the best of Borrower's knowledge after reasonable and diligent inquiry, threatened that involve the Property and/or the Improvements and allege, arise out of, or relate to any Prohibited Activity and Condition. f. Borrower has not received any complaint, order, notice of violation or other communication from any Governmental Authority with regard to air emissions, water discharges, noise emissions or Hazardous Materials, or any other environmental, health or safety matters affecting the Property, the Improvements or any other property of Borrower that is adjacent to the Property. The representations and warranties in this Article VI shall be continuing representations and warranties that shall be deemed to be made by Borrower throughout the term of the Loan evidenced by the Note, until the Loan Obligations have been paid in full. 6.6 NOTICE OF CERTAIN EVENTS. Borrower shall promptly notify Lender in writing of any and all of the following that may occur: a. Borrower's discovery of any Prohibited Activity and Condition. b. Borrower's receipt of or knowledge of any complaint, order, notice of violation or other communication from any Governmental Authority or other person with regard to present, or future alleged Prohibited Activities and Conditions or any other environmental, health or safety matters affecting the Property, the Improvements or any other property of Borrower that is adjacent to the Property. 33 34 c. Any representation or warranty in this Article VI which becomes untrue at any time after the date of this Agreement. Any such notice given by Borrower shall not relieve Borrower of, or result in a waiver of, any obligation under this Agreement, the Note, or any of the other Loan Documents. 6.7 COSTS OF INSPECTION. Borrower shall pay promptly the costs of any environmental inspections, tests or audits required by Lender in connection with any foreclosure or deed in lieu of foreclosure, or, if required by Lender, as a condition of Lender's consent to any "Transfer" (as defined in the Mortgage), or required by Lender following a reasonable determination by Lender that Prohibited Activities and Conditions may exist. Any such costs incurred by Lender (including the fees and out-of-pocket costs of attorneys and technical consultants whether incurred in connection with any judicial or administrative process or otherwise) which Borrower fails to pay promptly shall become an additional part of the Loan Obligations. 6.8 REMEDIAL WORK. If any investigation, site monitoring, containment, clean-up, restoration or other remedial work ("Remedial Work") is necessary to comply with any Hazardous Materials Laws or order of any Governmental Authority that has or acquires jurisdiction over the Property, the Improvements or the use, operation or improvement of the Property under any Hazardous Materials Laws, Borrower shall, by the earlier of (1) the applicable deadline required by Hazardous Materials Laws or (2) 30 days after notice from Lender demanding such action, begin performing the Remedial Work, and thereafter diligently prosecute it to completion, and shall in any event complete such work by the time required by applicable Hazardous Materials Laws. If Borrower fails to begin on a timely basis or diligently prosecute any required Remedial Work, Lender may, at its option, cause the Remedial Work to be completed, in which case Borrower shall reimburse Lender on demand for the cost of doing so. Any reimbursement due from Borrower to Lender shall become part of the Loan Obligations. 6.9 COOPERATION WITH GOVERNMENTAL AUTHORITIES. Borrower shall cooperate with any inquiry by any Governmental Authority and shall comply with any governmental or judicial order which arises from any alleged Prohibited Activity and Condition. 6.10 INDEMNITY. a. Borrower shall hold harmless, defend and indemnify (i) Lender, (ii) any successor owner or holder of the Note, (iii) the officers, directors, partners, agents, shareholders, employees and trustees of any of the foregoing, and (iv) the heirs, legal representatives, successors and assigns of each of the foregoing (together, the "Indemnitees") against all proceedings, claims, damages, losses, expenses, penalties and costs (whether initiated or sought by any Governmental Authority or private parties), including fees and out of pocket expenses of attorneys and expert witnesses, investigatory fees, and remediation costs, whether incurred in connection with any judicial or administrative process or otherwise, arising directly or indirectly from any of the following, except to the extent the same relate solely to Hazardous Materials first introduced to the Property or any part thereof by anyone other than Borrower following foreclosure of the Mortgage 34 35 (or the delivery and acceptance of a deed in lieu of such foreclosure) of the sale or transfer of the Property or any part thereof by Borrower (with Lender's consent subject to the Mortgage): 1. Any breach of any representation or warranty of Borrower in this Article VI. 2. Any failure by Borrower to perform any of its obligations under this Article VI. 3. The existence or alleged existence of any Prohibited Activity and Condition. 4. The presence or alleged presence of Hazardous Materials in, on, or around under the Property, the Improvements or any property of Borrower that is adjacent to the Property, or 5. Actual or alleged violation of any Hazardous Materials Laws. b. Counsel selected by Borrower to defend Indemnitees shall be subject to the approval of those Indemnitees. Notwithstanding anything contained herein, any Indemnitee may elect to defend any claim or legal or administrative proceeding at the Borrower's expense if such Indemnitee has reason to believe that its interests are not being adequately represented or diverge from other interests being represented by such counsel (but Borrower shall be obligated to bear the expense of at most only one such separate counsel). Nothing contained herein shall prevent an Indemnitee from employing separate counsel in any such action at any time and participating in the defense thereof at its own expense. c. Borrower shall not, without the prior written consent of those Indemnitees who are named as parties to a claim or legal or administrative proceeding (a "Claim") settle or compromise the Claim if the settlement (1) results in the entry of any judgment that does not include as an unconditional term the delivery by the claimant or plaintiff to Lender of a written release of those Indemnitees, satisfactory in form and substance to Lender or (2) may materially and adversely affect any Indemnitee, as determined by such Indemnitee in its sole discretion. d. The liability of Borrower to indemnify the Indemnitees shall not be limited or impaired by any of the following, or by any failure of Borrower or any guarantor to receive notice of or consideration for any of the following: 1. Any amendment or modification of any Loan Document. 2. Any extensions of time for performance required by any of the Loan Documents. 35 36 3. The accuracy or inaccuracy of any representations and warranties made by Borrower under this Agreement or any other Loan Document. 4. The release of Borrower or any other person, by Lender or by operation of law, from performance of any obligation under any of the Loan Documents. 5. The release or substitution in whole or in part of any security for the Loan Obligations. 6. Lender's failure to properly perfect any lien or security interest given as security for the Loan Obligations. e. Borrower shall, at its own cost and expense, do all of the following: 1. Pay or satisfy any judgment or decree that may be entered against any Indemnitee or Indemnitees in any legal or administrative proceeding incident to any matters against which Indemnitees are entitled to be indemnified under this Article VI. 2. Reimburse Indemnitees for any expenses paid or incurred in connection with any matters against which Indemnitees are entitled to be indemnified under this Article VI. 3. Reimburse Indemnitees for any and all expenses, including fees and costs of attorneys and expert witnesses, paid or incurred in connection with the enforcement by Indemnitees of their rights under this Article VI, or in monitoring and participating in any legal or administrative proceeding. f. In any circumstances in which the indemnity under this Article VI applies, Lender may employ its own legal counsel and consultants to prosecute, defend or negotiate any claim or legal or administrative proceeding and Lender, with the prior written consent of Borrower (which shall not be unreasonably withheld, delayed or conditioned) may settle or compromise any action or legal or administrative proceeding. Borrower shall reimburse Lender upon demand for all costs and expenses incurred by Lender, including all costs of settlements entered into in good faith, and the fees and out of pocket expenses of such attorneys and consultants. g. The provisions of this Article VI shall be in addition to any and all other obligations and liabilities that Borrower may have under the applicable law or under the other Loan Documents, and each Indemnitee shall be entitled to indemnification under this Article VI without regard to whether Lender or that Indemnitee has exercised any rights against the Property and/or the Improvements or any other security, pursued any rights against any guarantor, or pursued any other rights available under the Loan Documents or applicable law. If Borrower consists of more than one person or entity, the obligation of those persons or entities to indemnify the Indemnitees under this Article VI shall be joint and several. The obligations of Borrower to indemnify the Indemnitees under this Article VI shall survive any repayment or discharge of the Loan Obligations, any 36 37 foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, and any release of record of the lien of the Mortgage. ARTICLE VII EVENTS OF DEFAULT AND REMEDIES 7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an "Event of Default" hereunder: a. The failure by Borrower to pay any installment of principal, interest, or other payments required under the Note, within ten (10) days after the same becomes due; or b. Borrower's violation of any covenant set forth in Article V hereof; or c. Borrower's failure to deliver or cause to be delivered the financial statements and information set forth in Section 4.5 above within the times required and such failure is not cured within thirty (30) days following Lender's written notice to Borrower thereof; or d. The failure of Borrower properly and timely to perform or observe any covenant or condition set forth in this Agreement (other than those specified in (a), (b) and (c) of this Section) or any other Loan Documents which is not cured within any applicable cure period as set forth herein or, if no cure period is specified therefor, is not cured within thirty (30) days of Lender's notice to Borrower of such Default; provided, however, that if such default cannot be cured within such thirty (30) day period, such cure period shall be extended for an additional sixty (60) days, as long as Borrower is diligently and in good faith prosecuting said cure to completion. e. The filing by Borrower or Guarantor or Manager of a voluntary petition, or the adjudication of any of the aforesaid Persons, or the filing by any of the aforesaid Persons of any petition or answer seeking or acquiescing, in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief for itself under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, or if any of the aforesaid Persons should seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator for itself or of all or any substantial part of its property or of any or all of the rents, revenues, issues, earnings, profits or income thereof, or the mailing of any general assignment for the benefit of creditors or the admission in writing by any of the aforesaid Persons of its inability to pay its debts generally as they become due; or f. The entry by a court of competent jurisdiction of an order, judgment, or decree approving a petition filed against Borrower or Guarantor or Manager which petition seeks any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency, or other relief for debtors, which order, judgment or decree remains unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive) from the date of entry thereof, or the appointment of any trustee, receiver or liquidator of any of the aforesaid Persons or 37 38 of all or any substantial part of its properties or of any or all of the rents, revenues, issues, earnings, profits or income thereof, which appointment shall remain unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive); or g. Unless otherwise permitted hereunder or under any other Loan Documents, the sale, transfer, lease, assignment, or other disposition, voluntarily or involuntarily, of the Collateral, or any part thereof, or, except for Permitted Encumbrances as described in Section 5.2 above, any further encumbrance of the Collateral, unless the prior written consent of Lender is obtained; or h. The failure of Borrower to take the corrective measures required in this Agreement within the time periods specified following Lender's demand because the Debt Service Coverage for the Facility has not been met; or i. Any certificate, statement, representation, warranty or audit heretofore or hereafter furnished by or on behalf of Borrower or Guarantor or Manager pursuant to or in connection with this Agreement (including, without limitation, representations and warranties contained herein or in any Loan Documents) or as an inducement to Lender to make the Loan to Borrower, (i) proves to have been false in any material respect at the time when the facts therein set forth were stated or certified, or (ii) proves to have omitted any substantial contingent or unliquidated liability or claim against Borrower, or (iii) on the date of execution of this Agreement there shall have been any material adverse change in any of the facts previously disclosed by any such certificate, statement, representation, warranty or audit, which change shall not have been disclosed to Lender in writing at or prior to the time of such execution; or j. The failure of Borrower to correct or cause the Manager to correct, within the time deadlines set by any applicable Medicare, Medicaid or licensing agency, any deficiency which would result in the following actions by such agency with respect to the Facility: 1. a termination of any Reimbursement Contract or any Permit; or 2. a ban on new admissions generally or on admission of patients otherwise qualifying for Medicare or Medicaid coverage; or k. The Borrower, Manager or the Facility should be assessed fines or penalties by any state or any Medicare, Medicaid, health or licensing agency having jurisdiction over such Persons or the Facility in excess of $50,000; or l. A final judgment shall be rendered by a court of law or equity against Borrower or Manager or Guarantor in excess of $100,000, and the same shall remain undischarged for a period of thirty (30) days, unless such judgment is either (i) fully covered by collectible insurance and such insurer has within such period acknowledged such coverage in writing, or (ii) although not fully covered by insurance, enforcement of such judgment has been effectively stayed, such judgment is being contested or appealed by appropriate proceedings and Borrower or 38 39 Guarantor or Manager, as the case may be, has established reserves adequate for payment in the event such Person is ultimately unsuccessful in such contest or appeal and evidence thereof is provided to Lender; or m. The occurrence of any material adverse change in the financial condition or prospects of Borrower or Guarantor or Manager, or the existence of any other condition which, in Lender's reasonable determination, constitutes a material impairment of any such Person's ability to operate the Facility or of such Person's ability to perform their respective obligations under the Loan Documents, and is not remedied within thirty (30) days after written notice. Notwithstanding anything in this Section, all requirements of notice shall be deemed eliminated if Lender is prevented from declaring an Event of Default by bankruptcy or other applicable law. The cure period, if any, shall then run from the occurrence of the event or condition of Default rather than from the date of notice. 7.2 REMEDIES. Upon the occurrence of any one or more of the foregoing Events of Default, the Lender may, at its option: a. Intentionally Deleted. b. Declare the entire unpaid principal of the Loan Obligations to be, and the same shall thereupon become, immediately due and payable, without presentment, protest or further demand or notice of any kind, all of which are hereby expressly waived. c. Proceed to protect and enforce its rights by action at law (including, without limitation, bringing suit to reduce any claim to judgment), suit in equity and other appropriate proceedings including, without limitation, for specific performance of any covenant or condition contained in this Agreement. d. Exercise any and all rights and remedies afforded by the laws of the United States, the states in which any of the Property or other Collateral is located or any other appropriate jurisdiction as may be available for the collection of debts and enforcement of covenants and conditions such as those contained in this Agreement and the Loan Documents. e. Exercise the rights and remedies of setoff and/or banker's lien against the interest of Borrower in and to every account and other property of Borrower which is in the possession of the Lender or any person who then owns a participating interest in the Loan, to the extent of the full amount of the Loan. f. Exercise its rights and remedies pursuant to any other Loan Documents. 39 40 ARTICLE VIII MISCELLANEOUS 8.1 WAIVER. No remedy conferred upon, or reserved to, the Lender in this Agreement or any of the other Loan Documents is intended to be exclusive of any other remedy or remedies, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity. Exercise of or omission to exercise any right of the Lender shall not affect any subsequent right of Lender to exercise the same. No course of dealing between Borrower and Lender or any delay on the Lender's part in exercising any rights shall operate as a waiver of any of the Lender's rights. No waiver of any Default under this Agreement or any of the other Loan Documents shall extend to or shall affect any subsequent or other then existing Default or shall impair any rights, remedies or powers of Lender. 8.2 COSTS AND EXPENSES. Borrower will bear all taxes, fees and expenses (including actual attorneys' fees and expenses of counsel for Lender) in connection with the Loan, the Note, the preparation of this Agreement and the other Loan Documents (including any amendments hereafter made), and in connection with any modifications thereto and the recording of any of the Loan Documents. If, at any time, a Default occurs or Lender becomes a party to any suit or proceeding in order to protect its interests or priority in any Collateral for any of the Loan Obligations or its rights under this Agreement or any of the Loan Documents, or if Lender is made a party to any suit or proceeding by virtue of the Loan, this Agreement or any Collateral and as a result of any of the foregoing, the Lender employs counsel to advise or provide other representation with respect to this Agreement, or to collect the balance of the Loan Obligations, or to take any action in or with respect to any suit or proceeding relating to this Agreement, any of the other Loan Documents, any Collateral, Borrower, Manager, or any guarantor or to protect, collect, or liquidate any of the security for the Loan Obligations, or attempt to enforce any security interest or lien granted to the Lender by any of the Loan Documents, then in any such events, all of the actual attorney's fees arising from such services, including attorneys' fees for preparation of litigation and in any appellate or bankruptcy proceedings, and any expenses, costs and charges relating thereto shall constitute additional obligations of Borrower to the Lender payable on demand of the Lender. Without limiting the foregoing, Borrower has undertaken the obligation for payment of, and shall pay, all recording and filing fees, revenue or documentary stamps or taxes, intangibles taxes, and other taxes, expenses and charges payable in connection with this Agreement, any of the Loan Documents, the Loan Obligations, or the filing of any financing statements or other instruments required to effectuate the purposes of this Agreement, and should Borrower fail to do so, Borrower agrees to reimburse Lender for the amounts paid by Lender, together with penalties or interest, if any, incurred by Lender as a result of underpayment or nonpayment. Such amounts shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall bear interest at the Default Rate from the date advanced until repaid. 8.3 PERFORMANCE OF LENDER. At its option, upon Borrower's failure to do so, the Lender may make any payment or do any act on Borrower's behalf that Borrower or others are inquired to do to remain in compliance with this Agreement or any of the other Loan Documents, and Borrower agrees to reimburse the Lender, on demand, for any payment made or expense incurred by Lender pursuant to the foregoing authorization, including, without limitation, attorneys' fees, and until so repaid any sums advanced by Lender shall constitute a portion of the Loan Obligations, shall be 40 41 secured by the Mortgage and shall bear interest at the Default Rate from the date advanced until repaid. 8.4 INDEMNIFICATION. Except to the extent caused solely by the gross negligence or willful misconduct or illegal activity of the Indemnified Parties, Borrower shall, at its sole cost and expense, protect, defend, indemnify and hold harmless the Indemnified Parties from and against any and all claims, suits, liabilities (including, without limitation, strict liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses, diminutions in value, fines, penalties, charges, fees, judgments, awards, amounts paid in settlement, punitive damages, foreseeable and unforeseeable consequential damages, of whatever kind or nature (including but not limited to reasonable attorneys' fees and other costs of defense) imposed upon or incurred by or asserted against Lender by reason of (a) ownership of the Note, the Mortgage, the Property or any interest therein or receipt of any Rents; (b) any amendment to, or restructuring of, the Loan Obligations and/or any of the Loan Documents; (c) any and all lawful action that may be taken by Lender in connection with the enforcement of the provisions of the Mortgage or the Note or any of the other Loan Documents, whether or not suit is filed in connection with same, or in connection with Borrower, any guarantor and/or any partner, joint venturer, member or shareholder thereof becoming a party to a voluntary or involuntary federal or state bankruptcy, insolvency or similar proceeding; (d) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (e) any use, nonuse or condition in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (f) any failure on the part of Borrower, or any guarantor to perform or comply with any of the terms of this Agreement or any of the other Loan Documents; (g) any claims by any broker, person or entity claiming to have participated in arranging the making of the Loan evidenced by the Note; (h) any failure of the Property to be in compliance with any applicable laws; (i) performance of any labor or services or the furnishing of any materials or other property with respect to the Property, the Improvements or any part thereof; (j) the failure of any person to file timely with the Internal Revenue Service an accurate Form 1099-b, statement for recipients of proceeds from real estate, broker and barter exchange transactions, which may be required in connection with the Mortgage, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the transaction in connection with which the Loan is made; (k) any misrepresentation made to Lender in this Agreement or in any of the other Loan Documents; (l) any tax on the making and/or recording of the Mortgage, the Note or any of the other Loan Documents; (m) the violation of any requirements of the Employee Retirement Income Security Act of 1974, as amended; (n) any fines or penalties assessed or any corrective costs incurred by Lender if the Facility or any part of the Property is determined to be in violation of any covenants, restrictions of record, or any applicable laws, ordinances, rules or regulations; or (o) the enforcement by any of the Indemnified Parties of the provisions of this Section 8.4. Any amounts payable to Lender by reason of the application of this Section 8.4 shall become immediately due and payable and shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue interest at the Default Rate. The obligations and liabilities of Borrower under this Section 8.4 shall survive any termination, satisfaction, assignment, entry of a judgment of foreclosure or exercise of a power of sale or delivery of a deed in lieu of 41 42 foreclosure of the Mortgage except to the extent such obligations and liabilities arise solely out of events or circumstances first occurring after any termination, satisfaction, foreclosure or delivery of a deed in lieu of foreclosure of the Mortgage or the transfer or sale of the Property by the Borrower with Lender's consent subject to the Mortgage. For purposes of this Section 8.4, the term "Indemnified Parties" means Lender and any Person who is or will have been involved in the origination of the Loan, any Person who is or will have been involved in the servicing of the Loan, any Person in whose name the encumbrance created by the Mortgage is or will have been recorded, any Person who may hold or acquire or will have held a full or partial interest in the Loan (including, without limitation, any investor in any securities backed in whole or in part by the Loan) as well as the respective directors, officers, shareholder, partners, members, employees, agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries, participants, successors and assigns of any and all of the foregoing (including, without limitation, any other Person who holds or acquires or will have held a participation or other full or partial interest in the Loan or the Property, whether during the term of the Mortgage or as a part of or following a foreclosure of the Loan and including, without limitation, any successors by merger, consolidation or acquisition of all or a substantial portion of Lender's assets and business). 8.5 HEADINGS. The headings of the Sections of this Agreement are for convenience of reference only, are not to be considered a part hereof, and shall not limit or otherwise affect any of the terms hereof. 8.6 SURVIVAL OF COVENANTS. All covenants, agreements, representations and warranties made herein and in certificates or reports delivered pursuant hereto shall be deemed to have been material and relied on by Lender, notwithstanding any investigation made by or on behalf of Lender, and shall survive the execution and delivery to Lender of the Note and this Agreement. 8.7 NOTICES, ETC. Any notice or other communication required or permitted to be given by this Agreement or the other Loan Documents or by applicable law shall be in writing and shall be deemed received (a) on the date delivered, if sent by hand delivery (to the person or department if one is specified below) with receipt acknowledged by the recipient thereof, (b) three (3) Business Days following the date deposited in the U.S. mail, certified or registered, with return receipt requested, or (c) one (1) Business Day following the date deposited with Federal Express or other national overnight carrier, and in each case addressed as follows: If to Borrower: Diversicare Windsor House, LLC c/o Advocat Inc. 277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067 Attn: CFO 42 43 If to Lender: GMAC Commercial Mortgage Corporation 200 Witmer Road Horsham, Pennsylvania 19044 Attn: Servicing Department with a copy to: Kay K. Bains, Esq. Walston, Wells, Anderson & Bains, LLP 505 20th Street North, Suite 500 Birmingham, Alabama 35203 Either party may change its address to another single address by notice given as herein provided, except any change of address notice must be actually received in order to be effective. 8.8 BENEFITS. All of the terms and provisions of this Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. No Person other than Borrower or Lender shall be entitled to rely upon this Agreement or be entitled to the benefits of this Agreement. 8.9 PARTICIPATION. Borrower acknowledges that Lender may, at its option, sell participation interests in the Loan or to other participating banks or Lender may (but shall not be obligated to) assign its interest in the Loan to its affiliates or to other assignees (the "Assignee") to be included as a pool of properties to be financed in a proposed Real Estate Mortgage Investment Conduit (REMIC). Borrower agrees with each present and future participant in the Loan or Assignee of the Loan that if an Event of Default should occur, each present and future participant or Assignee shall have all of the rights and remedies of Lender with respect to any deposit due from the Borrower. The execution by a participant of a participation agreement with Lender, and the execution by the Borrower of this Agreement, regardless of the order of execution, shall evidence an agreement between Borrower and said participant in accordance with the terms of this Section. If the Loan is assigned to the Assignee, the Assignee will engage an underwriter (the "Underwriter"), who will be responsible for the due diligence, documentation, preparation and execution of certain documents required in connection with the offering of interests in the REMIC. Borrower agrees that Lender may, at its sole option and without notice to or consent of the Borrower, assign its interest in the Loan to the Assignee for inclusion in the REMIC and, in such event, Borrower agrees to provide the Assignee with such information as may be reasonably required by the Underwriter in connection therewith or by an investor in any securities backed in whole or in part by the Loan or any rating agency rating such securities. Borrower irrevocably waives any and all right it may have under applicable law to prohibit such disclosure, including, but not limited to, any right of privacy, and consents to the disclosure of such information to the Underwriter, to potential investors in the REMIC, and to such rating agencies. 8.10 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and the instruments referred to herein supersede and incorporate all representations, promises, and statements, oral or 43 44 written, made by Lender in connection with the Loan. This Agreement may not be varied, altered, or amended except by a written instrument executed by an authorized officer of the Lender. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, but such counterparts shall together constitute one and the same instrument. 8.11 LOAN AGREEMENT GOVERNS. The Loan is governed by terms and provisions set forth in this Loan Agreement and the other Loan Documents and in the event of any irreconcilable conflict between the terms of the other Loan Documents and the terms of this Loan Agreement, the terms of this Loan Agreement shall control; provided, however, that in the event there is any apparent conflict between any particular term or provision which appears in both this Loan Agreement and the other Loan Documents, and it is possible and reasonable for the terms of both this Loan Agreement and the Loan Documents to be performed or complied with, then, notwithstanding the foregoing, both the terms of this Loan Agreement and the other Loan Documents shall be performed and complied with. 8.12 CONTROLLING LAW. THE PARTIES HERETO AGREE THAT THE VALIDITY, INTERPRETATION, ENFORCEMENT AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ALABAMA AND THE PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE PERSONAL JURISDICTION IN THE STATE OF ALABAMA, FOR THE ENFORCEMENT OF ANY AND ALL OBLIGATIONS UNDER THE LOAN DOCUMENTS, EXCEPT THAT IF ANY SUCH ACTION OR PROCEEDING ARISES UNDER THE CONSTITUTION, LAWS OR TREATIES OF THE UNITED STATES OF AMERICA, OR IF THERE IS A DIVERSITY OF CITIZENSHIP BETWEEN THE PARTIES THERETO, SO THAT IT IS TO BE BROUGHT IN A UNITED STATES DISTRICT COURT, IT SHALL BE BROUGHT IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ALABAMA OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION. 8.13 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE ANY RIGHT THAT THEY MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE LOAN OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF EITHER PARTY'S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. BORROWER AND LENDER AGREE THAT EITHER PARTY MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF EITHER PARTY 44 45 HERETO TO IRREVOCABLY WAIVE THEIR RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF LENDER TO MAKE THE LOAN AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. 8.14 ASSUMPTIONS. The Loan will be assumable one time only during the term of the Loan subject to Lender's prior written approval and the payment of an assumption fee of one percent (1%) of the outstanding principal balance of the Loan. Lender's approval shall be based, among other things, upon the transferee's financial strength and experience in owning and operating properties similar to the Facility (but in no event may a transferee be a non-United States entity). Lender may condition the consent required to the transfer and assumption upon (i) the modification of the Loan Documents, (ii) the assumption of the Loan Documents as modified, by the proposed transferee, (iii) the payment of the transfer fee referred to above, (iv) the payment by Borrower of all of Lender's out-of-pocket expenses, including, without limitation, all of Lender's attorneys' fees, (v) the approval by a Rating Agency of the proposed transferee, (vi) the proposed transferee's continued compliance with the Single-Purpose Entity requirements set forth above, and (vii) such other conditions as Lender may reasonably require at the time of such consent is sought. 8.15 INTEREST LIMITATION. Notwithstanding anything to the contrary contained herein or in the Mortgage or in any other of the Loan Documents, the effective rate of interest on the obligation evidenced by the Note shall not exceed the lawful maximum rate of interest permitted to be paid. Without limiting the generality of the foregoing, in the event that the interest charged under the Note results in an effective rate of interest higher than that lawfully permitted to be paid, then such charges shall be reduced by the sum sufficient to result in an effective rate of interest permitted and any amount which would exceed the highest lawful rate already received and held by the Lender shall be applied to a reduction of principal and not to the payment of interest. Borrower agrees that for the purpose of determining highest rate permitted by law, any non principal payment (including, without limitation, late fees and other fees) shall be deemed, to the extent permitted by law, to be an expense, fee or premium rather than interest. This provision shall control every other provision of the Note and the other Loan Documents with respect to the charging, collecting and payment of interest on the indebtedness evidenced by the Note. [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 45 46 IN WITNESS WHEREOF, the Borrower and the Lender have caused this Agreement to be properly executed, by their respective duly authorized representatives, as of the date first above written. WITNESS: BORROWER: DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company - ------------------------------ By: Diversicare Leasing Corp., a Tennessee corporation, its sole member - ------------------------------ [Print Name] By: ------------------------------------ James F. Mills, Jr., Senior Vice President WITNESS: LENDER: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation - ------------------------------ - ------------------------------ -------------------------------------------- [Print Name] James C. Thompson, Senior Vice President 47 EXHIBIT "A" [LEGAL DESCRIPTION] 48 EXHIBIT "B" BORROWER'S CHIEF EXECUTIVE OFFICE Diversicare Windsor House, LLC c/o Advocat Inc. 277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067 Attn: CFO BORROWER'S PRINCIPAL PLACES OF BUSINESS Diversicare Windsor House, LLC c/o Advocat Inc. 4411 McAllister Drive Huntsville, Alabama Attn: CFO 49 EXHIBIT "C" OWNERSHIP INTERESTS Diversicare Leasing Corp.-- 100% membership interest 50 EXHIBIT "D" SUMMARY OF FINANCIAL STATEMENTS AND CENSUS DATA Facility Name: Windsor House of Huntsville Report Date: ___________________________________________________
QUARTER QUARTER QUARTER 12 MONTH ENDING ENDING ENDING ENDING (DATE) (DATE) (DATE) (DATE) CENSUS DATA Total Number of Beds [UNITS]: _______ _______ _______ _______ Number of Days in Period: _______ _______ _______ _______ Total Patient Days Available: _______ _______ _______ _______ Patient Utilization Days: Medicaid _______ _______ _______ _______ Private _______ _______ _______ _______ Medicare _______ _______ _______ _______ Other _______ _______ _______ _______ Total Utilization Days: _______ _______ _______ _______ CASH FLOW ANALYSIS Total Routine Patient Revenue: _______ _______ _______ _______ Total Net Revenues: _______ _______ _______ _______ Total Expenses: _______ _______ _______ _______ Pre-Tax Income: _______ _______ _______ _______ ADD BACK
51 Depreciation and Amortization: _______ _______ _______ _______ Interest on Mortgage: _______ _______ _______ _______ Facility Lease Expense (if applicable): _______ _______ _______ _______ Management Fees: _______ _______ _______ _______ Extraordinary Items: _______ _______ _______ _______ Net Operating Income: _______ _______ _______ _______
I hereby certify the above to be true and correct. Dated this ____ day of ________________, 200_. By: _______________________________ Its: ______________________________ 52 EXHIBIT "E" COMPLIANCE CERTIFICATE GMAC Commercial Mortgage Corporation 2200 Woodcrest Place, Suite 305 Birmingham, Alabama 35209 RE: Loan Agreement dated __________, 2001 (together with amendments, if any, the "Loan Agreement") by and between GMAC Commercial Mortgage Corporation, as Lender, and Diversicare Windsor House, LLC, as Borrower The undersigned officer of the above named Borrower, does hereby certify that for the quarterly financial period ending ____________________: 1. 1. No Default or Event of Default has occurred or exists except __________ __________________. 2. The Debt Service Coverage after deduction of Actual Management Fees for the preceding twelve (12) months (or such lesser period as shown have elapsed following the closing of the Loan) through the end of such period was: Required: _____ to 1.0 Actual: _____ to 1.0 The manner of calculation is attached. 3. The Debt Service Coverage after deduction of Assumed Management Fees for the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan) through the end of such period was: Required: _____ to 1.0 Actual: _____ to 1.0 The manner of calculation is attached. 4. The Combined Debt Service Coverage for the Facility and Related Facility after deduction of Assumed Management Fees for the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan) through the end of such period was: Required: 1.30 to 1.0 Actual: ____ to 1.0 53 The manner of this calculation is attached. 5. The fiscal year to date average daily occupant for the Facility: Required: Not less than ___0% Actual: __________ 6. The capital expenditures per bed was: Required: $___ per bed. Actual: $___ per bed. Evidence of such capital expenditures is attached. 7. All representations and warranties contained in the Loan Agreement and other Loan Documents are true and correct in all material respects as though given on the date hereof, except _________________________________________________. 8. All information provided herein is true and correct. 9. Capitalized terms not defined herein shall have the meanings given to such terms in the Loan Agreement. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Dated this the _____ day of _____________________________. 54 EXHIBIT "F" PERMITTED ENCUMBRANCES [Insert Schedule B exceptions in Title Insurance Policy] EX-10.9 11 g71016ex10-9.txt MORTGAGE AND SECURITY AGREEMENT 1 EXHIBIT 10.9 THIS INSTRUMENT WAS PREPARED BY, AND UPON RECORDING SHOULD BE RETURNED TO: Kay K. Bains, Esq. Walston, Wells, Anderson & Bains, LLP 505 20th Street North, Suite 500 Birmingham, AL 35203 205-251-9600 STATE OF ALABAMA ) COUNTY OF MADISON ) MORTGAGE AND SECURITY AGREEMENT THIS MORTGAGE AND SECURITY AGREEMENT (this "Instrument"), is made as of the 29th day of March, 2001, by and between DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company ("Mortgagor"), whose address is 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067, and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (together with its successors and assigns, "Mortgagee"), whose address is 200 Witmer Road, Horsham, Pennsylvania 19044. RECITALS A. Mortgagor is indebted to Mortgagee for money loaned in the principal sum of Four Million Seven Hundred Nine Thousand and No/100 Dollars ($4,709,000.00) (the "Loan"), as is evidenced by that certain Promissory Note of even date herewith from Mortgagor, payable to the order of Mortgagee in installments of principal and/or interest thereon, such final installment being due on March 1, 2006. B. As a condition precedent to making the Loan, Mortgagee has required that Mortgagor execute this Instrument as security for the Loan and the other Indebtedness (as hereinafter defined). GRANTING CLAUSES NOW, THEREFORE, for and in consideration of the Indebtedness, and to secure the prompt payment thereof, Mortgagor does hereby irrevocably grant, bargain, sell, convey, assign, transfer, mortgage, pledge and set over unto Mortgagee, its successors and assigns forever, and grants to Mortgagee a security interest in and to, the Mortgaged Property (as hereinafter defined). 2 TO HAVE AND TO HOLD the Mortgaged Property and all parts thereof unto Mortgagee, its successors and assigns forever, subject however to the terms and conditions herein: PROVIDED, HOWEVER, that if Mortgagor shall pay to Mortgagee the entire Indebtedness, at the times and in the manner stipulated herein, in the Note (as hereinafter defined) and in the other Loan Documents (as hereinafter defined), all without any deduction or credit for taxes or other similar charges paid by Mortgagor, and shall cause all other obligated parties to, keep, perform, and observe all and singular the covenants and promises herein, in the Note and in each of the other Loan Documents to be kept, performed, and observed, all without fraud or delay, then this Instrument, and all the properties, interests, and rights hereby granted, bargained, and sold shall cease, terminate, and be void, but shall otherwise remain in full force and effect. AGREEMENT AND Mortgagor and Mortgagee covenant and agree as follows: 1. DEFINITIONS. The following terms, when used in this Instrument (including when used in the above recitals), shall have the following meanings: (a) "1933 ACT" has the meaning given to that term in Section 13. (b) "ACCOUNTS" means any rights of Mortgagor arising from the operation of the Facility to payment for goods sold or leased or for services rendered, not evidenced by an Instrument, including, without limitation, (i) all accounts arising from the operation of the Facility, (ii) all moneys and accounts, if any, held by Mortgagee pursuant to this Instrument or any other Loan Document, and (iii) all rights to payment from Medicare or Medicaid programs or similar state or federal programs, boards, bureaus or agencies, and rights to payment from patients, residents, private insurers, and others arising from the operation of the Facility, including rights to payment pursuant to Reimbursement Contracts. Accounts shall include the Proceeds thereof. (c) "AFFILIATE" means, with respect to any Person, (i) each Person that controls, is controlled by or is under common control with such Person, (ii) each Person that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, any of the Stock of such Person, and (iii) each of such Person's officers, directors, members, joint venturers and partners. (d) "APPURTENANT RIGHTS" means all air rights, development rights, zoning rights, easements, rights-of-way, strips and gores of land, vaults, streets, roads, alleys, tenements, passages, sewer rights, waters, water courses, water rights and powers, minerals, flowers, shrubs, crops, trees, timber and other emblements now or hereafter appurtenant to, or used or useful in connection with, or located on, under or above the Land, or any part or parcel thereof, and all ground leases, estates, rights, titles, interests, privileges, liberties, tenements, hereditaments and appurtenances, reversions, and remainders whatsoever, in any way belonging, relating or appertaining to the Land, or any part thereof, now or hereafter. 2 3 (e) "ASSIGNMENT OF LEASES AND RENTS" means that certain Assignment of Leases and Rents of even date herewith executed by Mortgagor for the benefit of Mortgagee. (f) "ASSIGNMENT OF LICENSES" means that certain Assignment of Licenses, Permits and Contracts of even date herewith executed by Mortgagor for the benefit of Mortgagee. (g) "BUSINESS DAY" means a day, other than Saturday, Sunday or legal holidays, when Mortgagee is open for business. (h) "COLLATERAL AGREEMENTS" means collectively, as applicable, the Debt Service Reserve Escrow and Security Agreement of even date herewith by and between Mortgagor and Mortgagee. (i) "CONDEMNATION" has the meaning given to that term in Section 12. (j) "CONTRACTS" means all license agreements, operating contracts, and all management, service, employment, supply and maintenance contracts and agreements, and any other agreements, licenses or contracts of any nature whatsoever now or hereafter obtained or entered into by Mortgagor with respect to the acquisition, construction, renovation, expansion, ownership, occupancy, use, operation, maintenance and administration of the Facility and/or the Mortgaged Property, including, without limitation, (i) any and all contracts, authorizations, agreements and/or consents executed by, or on behalf of any patient or other Person seeking services from Mortgagor pursuant to which Mortgagor provides or furnishes skilled nursing care and related services at the facility, including the consent to treatment and assignment of payment of benefits by third party and (ii) any and all contracts between Mortgagor and any resident of the Facility giving the resident certain rights of occupancy in the Facility and providing for certain services to such resident. (k) "CROSS COLLATERALIZATION AND CROSS-DEFAULT AGREEMENT" means that certain Cross Collateralization and Cross-Default Agreement of even date herewith executed by Mortgagor, Mortgagee and Diversicare of Pinedale, LLC. (l) "DEFAULT RATE" has the meaning given to that term in the Note. (m) "EQUIPMENT" means all beds, linen, televisions, carpeting, telephones, cash registers, computers, lamps, glassware, rehabilitation equipment, restaurant and kitchen equipment, and other fixtures and equipment of Mortgagor located on, attached to or used or useful in connection with any of the Mortgaged Property or the Facility and all renewals and replacements thereof and substitutions therefor; provided, however, that with respect to any items which are leased for the benefit of the Facility and not owned by Mortgagor, the Equipment shall include the leasehold interest only of Mortgagor together with any options to purchase any of said items and any additional or greater rights with respect to such items which Mortgagor may hereafter acquire, but the foregoing shall not be construed to mean that such leasing shall be permitted hereunder and under the other Loan Documents. (n) "EVENT OF DEFAULT" means the occurrence of any event listed in Section 14. 3 4 (o) "FACILITY" means the facility known as "Windsor House," presently a 134-bed licensed facility (117-bed licensed skilled nursing and 17-bed licensed congregate assisted living)located on the Land, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any skilled nursing facility), now or hereafter operated on the Land. (p) "FIXTURES" means all property which is now or hereafter so attached to the Land or the Improvements as to constitute a fixture under applicable law and all renewals and replacements thereof and substitutions therefor, including, without limitation: machinery, equipment, engines, boilers, incinerators, installed building materials; systems and equipment for the purpose of supplying or distributing heating, cooling, electricity, gas, water, air, or light; antennas, cable, wiring and conduits used in connection with radio, television, security, fire prevention, or fire detection or otherwise used to carry electronic signals; telephone systems and equipment; elevators and related machinery and equipment; fire detection, prevention and extinguishing systems and apparatus; security and access control systems and apparatus; plumbing systems; water heaters, ranges, stoves, microwave ovens, refrigerators, dishwashers, garbage disposers, washers, dryers and other appliances; light fixtures, awnings, storm windows and storm doors; pictures, screens, blinds, shades, curtains and curtain rods; mirrors; cabinets, paneling, rugs and floor and wall coverings; fences, trees and plants; and exercise equipment. (q) "GENERAL INTANGIBLES" means all intangible personal property of Mortgagor arising out of or connected with the Mortgaged Property or the Facility and all renewals and replacements thereof and substitutions therefor (other than Accounts, Rents, Instruments, Inventory, Money, Permits and Reimbursement Contracts), including, without limitation, things in action, contract rights and other rights to payments of Money. (r) "GOVERNMENTAL AUTHORITY" means any board, commission, department or body of any municipal, county, state or federal governmental unit, or any subdivision of any of them, that has or acquires jurisdiction over the Mortgaged Property and/or the Improvements or the use, operation or improvement of the Mortgaged Property. (s) "GUARANTOR" means Advocat Inc., a Delaware corporation. (t) "GUARANTY AGREEMENT" means that certain Guaranty Agreement of even date herewith executed by Guarantor for the benefit of Mortgagee. (u) "IMPOSITIONS" and "IMPOSITION DEPOSITS" have the meanings given to those terms in Section 4. (v) "IMPROVEMENTS" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Land, including but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and storm sashes, and cleaning apparatuses which are or shall be attached to the Land or said buildings, structures or improvements. 4 5 (w) "INDEBTEDNESS" means the aggregate of the principal of and interest on the Note due and owing from time to time and all expenses, charges and other amounts due and owing from time to time under the Note, the Loan Agreement, this Instrument or any other Loan Document, including, without limitation, prepayment premiums, late charges, default interest and advances to protect the security of this Instrument under Section 7, if any. (x) "INSTRUMENTS" means all instruments, chattel paper, documents or other writings obtained by Mortgagor from or in connection with the operation of the Mortgaged Property or the construction and operation of the Facility (including without limitation, all ledger sheets, computer records and printouts, data bases, programs, books of account, trademarks or trade names, utility contracts, maintenance and service contracts and files of Mortgagor relating thereto). (y) "INVENTORY" means all inventories of food, beverages and other comestibles owned and held by Mortgagor for sale or use at or from the Mortgaged Property or the Facility, and soap, paper supplies, medical supplies, drugs and all other such goods, wares and merchandise held by Mortgagor for sale to or for consumption by residents, guests or patients of the Land or the Facility and all such other goods returned to or repossessed by Mortgagor. (z) "LAND" means the land described in Exhibit "A" attached hereto and incorporated herein. (aa) "LEASES" means all present and future leases, subleases, licenses, concessions or grants or other possessory interests now or hereafter in force, whether oral or written, covering or affecting the Mortgaged Property and/or the Facility, or any portion of the Mortgaged Property and/or the Facility and all modifications, extensions or renewals thereof. (ab) "LIEN" means any voluntary or involuntary mortgage, security deed, deed of trust, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, including those contemplated by or permitted in this Instrument, the Loan Agreement and the other Loan Documents. (ac) "LOAN" has the meaning given to that term in the recitals. (ad) "LOAN AGREEMENT" means that certain Loan Agreement of even date herewith by and between Mortgagor and Mortgagee. (ae) "LOAN DOCUMENTS" means the Note, the Loan Agreement, this Instrument, the Assignment of Leases and Rents, the Assignment of Licenses, the Guaranty Agreement, all Collateral Agreements, O&M Programs, the Subordination Agreement, the Cross-Collateralization and Cross-Default Agreement, and any other documents now or in the future executed by Mortgagor, any guarantor or any other Person in connection with the Loan evidenced by the Note, as such documents may be amended from time to time. 5 6 (af) "MANAGED CARE PLANS" means any health maintenance organization, preferred provider organization, individual practice association, competitive medical plan, or similar arrangement, entity, organization, or Person. (ag) "MEDICAID" means that certain program of medical assistance, funded jointly by the federal government and the States, for impoverished individuals who are aged, blind and/or disabled, and/or members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. ss.ss. 1396 et seq.) and the regulations promulgated thereunder. (ah) "MEDICARE" means that certain federal program providing health insurance for eligible elderly and other individuals, under which physicians, hospitals, skilled nursing homes, home health care, and other providers are reimbursed for certain covered services they provide to the beneficiaries of such program, which program is more fully described in Title XVIII of the Social Security Act (42 U.S.C. ss.ss. 1395 et seq.) and the regulations promulgated thereunder. (ai) "MONEY" means all monies, cash, rights to deposit or savings accounts, or other items of legal tender obtained from or for use in connection with the operation of the Facility. (aj) "MORTGAGED PROPERTY" means all of Mortgagor's present and future right, title and interest in and to all of the following: (i) the Land; (ii) all Appurtenant Rights; (iii) all Equipment; (iv) all Improvements; (v) all Fixtures; (vi) all Accounts; (vii) all Contracts; (viii) all General Intangibles; (ix) all Permits (to the extent assignment is permitted by law); (x) all Money; (xi) all Instruments; (xii) all Inventory; (xiii) all Reimbursement Contracts (to the extent assignment is permitted by law); (xiv) all Rents; (xv) all Personalty; (xvi) all Leases; (xvii) all Proceeds; (xviii) all contracts, options and other agreements for the sale of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property entered into by Mortgagor now or in the future, including cash or securities deposited to secure performance by parties of their obligations; 6 7 (xix) all Imposition Deposits; (xx) all refunds or rebates of Impositions by any municipal, state or federal authority or insurance company (other than refunds applicable to periods before the real property tax year in which this Instrument is dated); (xxi) all names under or by which any of the above Mortgaged Property may be operated or known (other than the right to the use of the name "Diverscare"), and all trademarks, trade names, and goodwill relating to any of the Mortgaged Property; and (xxii) all renewals, replacements and Proceeds of any of the foregoing and any substitutions therefor. (ak) "MORTGAGEE" means the entity identified as "Mortgagee" in the first paragraph of this Instrument, or any subsequent holder of the Note. (al) "MORTGAGOR" means all persons or entities identified as "Mortgagor" in the first paragraph of this Instrument, together with their successors and assigns. (am) "NOTE" means the note evidencing the Loan, including all schedules, riders, allonges, endorsements, addenda or amendments together with any renewals, replacements, substitutions, or extensions thereof. (an) "NOTICE" has the meaning given to that term in Section 24. (ao) "O&M PROGRAMS" has the meaning given to such term in the Loan Agreement. (ap) "OPINION OF COUNSEL" means an opinion or opinions in writing signed by independent legal counsel to Mortgagor, designated by Mortgagor, and reasonably satisfactory to Mortgagee. (aq) "PARENT" means, with respect to a corporation, any other corporation owning or controlling, directly or indirectly, fifty percent (50%) or more of the voting stock of the corporation. (ar) "PERMITS" means all licenses, permits and certificates used or necessary in connection with the construction, ownership, operation, use or occupancy of the Mortgaged Property and/or the Facility, including, without limitation, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need and all such other permits, licenses and rights, obtained from any governmental, quasi-governmental or private person or entity whatsoever concerning ownership, operation, use or occupancy. (as) "PERMITTED ENCUMBRANCES" has the meaning given to that term in Section 5.2 of the Loan Agreement. 7 8 (at) "PERSON" means any natural person, firm, trust, corporation, partnership, limited liability company and any other form of legal entity. (au) "PERSONALTY" means all furniture, furnishings, Equipment, machinery, building materials, appliances, goods, supplies, tools, books, records (whether in written or electronic form), computer equipment (hardware and software) and other tangible personal property (other than Fixtures) which are used now or in the future in connection with the ownership, management or operation of the Land or the Improvements or are located on the Land or in the Improvements, and any operating agreements relating to the Land or the Improvements, and any surveys, plans and specifications and contracts for architectural, engineering and construction services relating to the Land or the Improvements. (av) "PRIOR LIEN" has the meaning given to that term in Section 26. (aw) "PROCEEDS" means all awards, payments, earnings, royalties, issues, profits, liquidated claims and proceeds (including proceeds of insurance and condemnation and any conveyance in lieu thereof), whether cash or noncash, moveable or immoveable, tangible or intangible, from the sale, conversion (whether voluntary or involuntary), exchange, transfer, collection, loss, damage, condemnation, disposition, substitution or replacement of any of the Mortgaged Property. (ax) "PROPERTY JURISDICTION" means the jurisdiction in which the Mortgaged Property is located. (ay) "REIMBURSEMENT CONTRACTS" means all third-party reimbursement contracts for the Facility which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare and Medicaid, Managed Care Plans and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements, now or hereafter existing. (az) "RENTS" means all rent and other payments of whatever nature from time to time payable pursuant to the Leases (including, without limitation, rights to payment earned under leases for space in the Improvements for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians' offices, pharmacies and specialty shops). (ba) "SINGLE-PURPOSE ENTITY" means a Person which owns no interest or property other than the Mortgaged Property. (bb) "STOCK" means all shares, options, warrants, general or limited partnership interests, membership interests, participations or other equivalents (regardless of how designated) in a corporation, limited liability company, partnership or any equivalent entity, whether voting or nonvoting, including, without limitation, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended). 8 9 (bc) "SUBORDINATION AGREEMENT" means that certain Subordination of Management Agreement of even date herewith by and among Borrower, Diversicare Management Services, a Tennessee corporation, and Lender. (bd) "TAXES" means all taxes, assessments, vault rentals and other charges, if any, general, special or otherwise, including all assessments for schools, public betterments and general or local improvements, which are levied, assessed or imposed by any public authority or quasi-public authority, and which, if not paid, will become a lien, on the Land or the Improvements. (be) "TRANSFER" shall mean the conveyance, assignment, sale, transfer, mortgaging, collateral assignment, encumbrance, pledging, alienation, hypothecation, granting of a security interest in, granting of options with respect to, or other disposition of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record) all or any portion of any legal or beneficial interest (i) in all or any portion of the Mortgaged Property; (ii) in the Stock of any corporation which is Mortgagor, a member of Mortgagor (if Mortgagor is a limited liability company), a partner of Mortgagor or, if applicable, a partner of a general partner of Mortgagor; and (iii) in Mortgagor (or any trust of which Mortgagor is a trustee), or, if Mortgagor is a limited or general partnership, limited liability company, joint venture, trust, nominee trust, tenancy in common or other unincorporated form of business association or form of ownership interest, in any Person having a direct legal or beneficial ownership in Mortgagor, excluding any legal or beneficial interest in any constituent limited partner or member of Mortgagor but including the interest of such limited partner or member itself and further including any legal or beneficial interest in any constituent general partner of Mortgagor, if applicable, in any general partner of any constituent general partner of Mortgagor, or, if Mortgagor is a limited liability company, in any constituent corporate member of Mortgagor. The term "Transfer" shall also include, without limitation, the following: an installment sales agreement wherein Mortgagor agrees to sell the Mortgaged Property or any part thereof or any interest therein for a price to be paid in installments; an agreement by Mortgagor leasing all or a substantial part of the Mortgaged Property to one or more Persons pursuant to a single transaction or related transactions, or a sale, assignment or other transfer of, or the grant of a security interest in, Mortgagor's right, title and interest in and to any Leases or any Rent; any instrument subjecting the Mortgaged Property to a condominium regime or transferring ownership to a cooperative corporation or other form of multiple ownership or governance; the dissolution or termination of Mortgagor, any general partner of Mortgagor, any general partner of any general partner of Mortgagor, if applicable, or, if Mortgagor is a limited liability company, any corporate member of Mortgagor; the issuance of new Stock in any corporation which is Mortgagor, a member of Mortgagor (if Mortgagor is a limited liability company), a partner of Mortgagor or, if applicable, a partner of a general partner of Mortgagor; and the merger or consolidation with any other Person of Mortgagor, any general partner of Mortgagor, any general partner of any general partner of Mortgagor, if applicable, or, if Mortgagor is a limited liability company, any corporate member of Mortgagor. (bf) "UCC COLLATERAL" has the meaning given to that term in Section 2. 9 10 2. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument is also a security agreement under the Uniform Commercial Code as adopted in the State of Alabama for any of the Mortgaged Property which, under applicable law, may be subject to a security interest under the Uniform Commercial Code as adopted in the State of Alabama, whether acquired now or in the future, and all products and cash and non-cash Proceeds thereof (collectively, "UCC Collateral"), and Mortgagor hereby grants to Mortgagee a security interest in the UCC Collateral. Mortgagor shall execute and deliver to Mortgagee promptly for the filing of such financing statements and any extensions, renewals and amendments thereof, of any termination statements and, upon Mortgagee's request, financing statements, continuation statements and amendments, in such form as Mortgagee may require to perfect or continue the perfection of this security interest. Mortgagor shall pay all filing costs and all costs and expenses of any record searches for financing statements that Mortgagee may require. Without the prior written consent of Mortgagee, Mortgagor shall not create or permit to exist any other lien or security interest in any of the UCC Collateral. If an Event of Default has occurred and is continuing, Mortgagee shall have the remedies of a secured party under the Uniform Commercial Code as adopted in the State of Alabama, in addition to all remedies provided by this Instrument or existing under applicable law. In exercising any remedies, Mortgagee may exercise its remedies against the UCC Collateral separately or together and in any order, without in any way affecting the availability of Mortgagee's other remedies hereunder and/or under applicable law. 3. LEASES. Mortgagor shall not, without the prior written consent and approval of Mortgagee which consent will not be unreasonably withheld, enter into any Lease (except for admission of Facility patients or residents), or enter into or permit any management agreement of or affecting any part of the Mortgaged Property, except for the Management Agreement (as defined in the Loan Agreement). 4. DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES. If (i) any reduction occurs in the Debt Reserve Fund below three (3) months of debt service payments or upon evidence that Mortgagor has failed to pay Taxes, insurance premiums or other similar charges affecting the Mortgaged Property on a timely basis, (ii) Mortgagor does not establish a Debt Reserve Fund on the Closing Date, or (iii) an Event of Default occurs under the Loan Documents, then: (a) Mortgagor shall deposit with Mortgagee on the day monthly installments of principal and/or interest, or both, are due under the Note (or on another day designated in writing by Mortgagee), until the Indebtedness is paid in full, an additional amount sufficient to accumulate with Mortgagee the entire sum required to pay, when due (i) to the extent applicable, the yearly water and sewer charges which may be levied on all or any part of the Mortgaged Property, (ii) the premiums for fire and other hazard insurance, business interruption insurance and such other insurance as Mortgagee may require under the Loan Agreement, (iii) the yearly Taxes, and (iv) amounts for other charges and expenses which Mortgagee at any time reasonably deems necessary to protect the Mortgaged Property, to prevent the imposition of liens on the Mortgaged Property, or otherwise to protect Mortgagee's interests, all as reasonably estimated from time to time by Mortgagee, plus one-sixth of such estimate. The amounts deposited under the preceding sentence 10 11 are collectively referred to in this Instrument as the "Imposition Deposits". The obligations of Mortgagor for which the Imposition Deposits are required are collectively referred to in this Instrument as "Impositions". The amount of the Imposition Deposits shall be sufficient to enable Mortgagee to pay each Imposition before the last date upon which such payment may be made without any penalty or interest charge being added plus one-sixth of such estimate. Mortgagee shall maintain records indicating how much of the monthly Imposition Deposits and how much of the aggregate Imposition Deposits held by Mortgagee are held for the purpose of paying property taxes, insurance premiums and each other obligation of Mortgagor for which Imposition Deposits are required. Any waiver by Mortgagee of the requirement that Mortgagor remit Imposition Deposits to Mortgagee may be revoked by Mortgagee, in Mortgagee's discretion, at any time upon notice to Mortgagor. (b) Imposition Deposits shall be held in an institution (which may be Mortgagee, if Mortgagee is such an institution) whose deposits or accounts are insured or guaranteed by a federal agency. Mortgagee shall not be obligated to open additional accounts or deposit Imposition Deposits in additional institutions when the amount of the Imposition Deposits exceeds the maximum amount of the federal deposit insurance or guaranty. Mortgagee shall apply the Imposition Deposits to pay Impositions so long as no Event of Default has occurred and is continuing. Unless applicable law requires, Mortgagee shall not be required to pay Mortgagor any interest, earnings or profits on the Imposition Deposits, but any interest, earnings or profits earned on the Imposition Deposits shall belong to Grantor and shall be credited against future installments of Imposition Deposits due. Mortgagor hereby pledges and grants to Mortgagee a security interest in the Imposition Deposits as additional security for all of Mortgagor's obligations under this Instrument and the other Loan Documents. Any amounts deposited with Mortgagee under this Section 4 shall not be trust funds, nor shall they operate to reduce the Indebtedness, unless applied by Mortgagee for that purpose under Section 4(e). (c) Mortgagor shall direct the applicable Governmental Authority to deliver the invoices and bills for all Impositions to Mortgagee. If Mortgagee receives a bill or invoice for an Imposition, Mortgagee shall pay the Imposition from the Imposition Deposits held by Mortgagee. Mortgagee shall have no obligation to pay any Imposition to the extent it exceeds Imposition Deposits then held by Mortgagee, unless Mortgagor challenges such Impositions in accordance with Section 9(d), below. Mortgagee may pay an Imposition according to any bill, statement or estimate from the appropriate public office or insurance company without inquiring into the accuracy of the bill, statement or estimate or into the validity of the Imposition. (d) If at any time the amount of the Imposition Deposits held by Mortgagee for payment of a specific Imposition exceeds the amount reasonably deemed necessary by Mortgagee plus one-sixth of such estimate, the excess shall be credited against future installments of Imposition Deposits. If at any time the amount of the Imposition Deposits held by Mortgagee for payment of a specific Imposition is less than the amount reasonably estimated by Mortgagee to be necessary plus one-sixth of such estimate, Mortgagor shall pay to Mortgagee the amount of the deficiency within fifteen (15) days after notice from Mortgagee. 11 12 (e) If an Event of Default has occurred and is continuing, Mortgagee may apply any Imposition Deposits, in any amounts and in any order as Mortgagee determines, in Mortgagee's discretion, to pay any Impositions or as a credit against the Indebtedness. Upon payment in full of the Indebtedness, Mortgagee shall refund to Mortgagor any Imposition Deposits (together with any interest, earnings or profits thereon) held by Mortgagee. 5. APPLICATION OF PAYMENTS. If at any time Mortgagee receives, from Mortgagor or otherwise, any amount applicable to the Indebtedness which is less than all amounts due and payable at such time, then Mortgagee may apply that payment to amounts then due and payable in the manner set forth in the Note. Neither Mortgagee's acceptance of an amount which is less than all amounts then due and payable nor Mortgagee's application of such payment in the manner authorized in the immediately preceding sentence shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. Notwithstanding the application of any such amount to the Indebtedness, Mortgagor's obligations under this Instrument and the Note shall remain unchanged. 6. USE OF PROPERTY. Unless required by applicable law, Mortgagor shall not (a) except for any change in use approved by Mortgagee, allow changes in the use for which all or any part of the Mortgaged Property is being used at the time this Instrument was executed, (b) convert any part of the Facility to commercial use, or (c) initiate or acquiesce in a change in the zoning classification of the Mortgaged Property which would prohibit the continued use of the Mortgaged Property as the same is being used at the time of this Instrument. 7. PROTECTION OF MORTGAGEE'S SECURITY. (a) If Mortgagor fails to perform any of its obligations under this Instrument or any other Loan Document, or if any action or proceeding is commenced which purports to affect the Mortgaged Property, Mortgagee's security or Mortgagee's rights under this Instrument, including eminent domain, insolvency, code enforcement, civil or criminal forfeiture, enforcement of Hazardous Materials Laws, fraudulent conveyance or reorganizations or proceedings involving a bankrupt or decedent, then Mortgagee at Mortgagee's option and upon notice to Mortgagor may make such appearances, disburse such sums and take such actions as Mortgagee reasonably deems necessary to perform such obligations of Mortgagor and to protect Mortgagee's interest, including (i) disbursement of fees and out of pocket expenses of attorneys, accountants, inspectors and consultants, (ii) entry upon the Mortgaged Property to make repairs or secure the Mortgaged Property, (iii) procurement of the insurance coverages required under the Loan Agreement, and (iv) payment of amounts which Mortgagor has failed to pay under Section 9. (b) Any amounts disbursed by Mortgagee under this Section 7, or under any other provision of this Instrument, or under any of the other Loan Documents, that treats such disbursement as being made under this Section 7, shall be added to, and become part of the Indebtedness, shall be immediately due and payable and shall bear interest from the date of disbursement until paid at the Default Rate. 12 13 (c) Nothing in this Section 7 shall require Mortgagee to incur any expense or take any action. 8. INSPECTION. Mortgagee, its agents, representatives, and designees may make or cause to be made entries upon and inspections of the Mortgaged Property (including environmental inspections and tests) during normal business hours, or at any other reasonable time, upon reasonable advance notice to Mortgagor (which may be oral) except in an emergency or during the continuance of an Event of Default. Grantor may have a representative present during such entry and inspection and any such entry and inspection shall be subject to the right of any patients/residents of the Mortgaged Property. 9. TAXES; OPERATING EXPENSES. (a) Subject to the provisions of Section 9(c) and Section 9(d), Mortgagor shall pay, or cause to be paid, all Taxes when due and before the addition of any interest, fine, penalty or cost for nonpayment. (b) Subject to the provisions of Section 9(c), Mortgagor shall pay or cause to be paid the expenses of operating, managing, maintaining and repairing the Mortgaged Property (including insurance premiums, utilities, repairs and replacements) before the last date upon which each such payment may be made without any penalty or interest charge being added or lien imposed. (c) As long as no Event of Default has occurred and is continuing, Mortgagor shall not be obligated to pay Taxes, insurance premiums or any other individual Imposition to the extent that Imposition Deposits are held by Mortgagee for the purpose of paying that specific Imposition. If an Event of Default exists, Mortgagee may exercise any rights Mortgagee may have with respect to Imposition Deposits without regard to whether Impositions are then due and payable. (d) Mortgagor, at its own expense, may contest by appropriate legal proceedings, conducted diligently and in good faith, the amount or validity of any Imposition other than insurance premiums, if (i) Mortgagor notifies Mortgagee of the commencement or expected commencement of such proceedings, (ii) the Mortgaged Property is not in danger of being sold or forfeited, as determined by Mortgagee, (iii) if requested by Mortgagee, Mortgagor deposits with Mortgagee cash reserves or other collateral sufficient to pay the contested Imposition, (iv) Mortgagor furnishes whatever security is required in the proceedings or is reasonably requested by Mortgagee, which may include the delivery to Mortgagee of the reserves established by Mortgagor to pay the contested Imposition, as additional security, and (v) such contest operates to suspend enforcement of such Imposition. (e) Upon request by Mortgagee for a specific Imposition Mortgagor shall promptly deliver to Mortgagee a copy of all notices of, and invoices for, Impositions, and if Mortgagor pays any Imposition directly, Mortgagor shall promptly furnish to Mortgagee receipts evidencing such payments. 13 14 (f) In the event of the passage of any law subsequent to the date of this Instrument in any manner changing or modifying the laws now in force governing the taxation of deeds of trust or mortgages or debts secured by deeds of trust or mortgages or the manner of collecting any such taxes so as to adversely affect Mortgagee (including, without limitation, a requirement that internal revenue stamps be affixed to this Instrument or any of the other Loan Documents), Mortgagor will promptly pay any such tax. If Mortgagor fails to make such prompt payment, or if any law prohibits Mortgagor from making such payment or would penalize Mortgagee if Mortgagor makes such payment, then the entire unpaid balance of the Indebtedness shall, without notice, immediately become due and payable at the sole option of Mortgagee. In no event, however, shall any income taxes of Mortgagee or franchise taxes of Mortgagee measured by income, or taxes in lieu of such income taxes or franchise taxes, be required to be paid by Mortgagor. 10. LIENS; ENCUMBRANCES. Mortgagor acknowledges that the existence of any Lien on the Mortgaged Property, other than Permitted Encumbrances, whether voluntary, involuntary or by operation of law, not discharged and released or bonded off and removed from the Mortgaged Property within thirty (30) days of its creation is a "Transfer" which constitutes an Event of Default as provided under Section 14, and will subject Mortgagor to personal liability under the Note. 11. PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY. Mortgagor (a) shall not commit waste or permit impairment or deterioration of the Mortgaged Property, (b) shall not abandon the Facility, (c) shall restore or repair promptly, in a good and workmanlike manner, any damaged part of the Mortgaged Property to the equivalent of its original condition, or such other condition as Mortgagee may approve in writing, whether or not insurance proceeds or condemnation awards are available to cover any costs of such restoration or repair, except to the extent Mortgagee applies such insurance proceeds or condemnation awards to reduce the Indebtedness, (d) shall keep the Mortgaged Property in good repair, including the replacement of Personalty and Fixtures with items of equal or better function and quality, (e) shall provide for professional management of the Mortgaged Property by a manager satisfactory to Mortgagee, in its sole discretion, under a contract approved by Mortgagee in writing, and (f) shall give notice to Mortgagee of and, unless otherwise directed in writing by Mortgagee, shall appear in and defend any action or proceeding purporting to affect the Mortgaged Property, Mortgagee's security or Mortgagee's rights under this Instrument. Mortgagor shall not (and shall not permit any other person to) remove, demolish or alter the Mortgaged Property or any part of the Mortgaged Property except in connection with the replacement of tangible Personalty. 12. CONDEMNATION. (a) Mortgagor shall promptly notify Mortgagee of any action or proceeding relating to any condemnation or other taking, or conveyance in lieu thereof, of all or any part of the Mortgaged Property, whether direct or indirect (a "Condemnation"). Mortgagor shall appear in and prosecute or defend any proceeding relating to any Condemnation unless otherwise directed by Mortgagee in writing. Mortgagor authorizes and appoints Mortgagee as attorney-in-fact for Mortgagor to commence, appear in and prosecute, in Mortgagee's or Mortgagor's name, any action 14 15 or proceeding relating to any Condemnation and to settle or compromise any claim in connection with any Condemnation. This power of attorney is coupled with an interest and therefore is irrevocable. However, nothing contained in this Section 12 shall require Mortgagee to incur any expense or take any action. Mortgagor hereby transfers and assigns to Mortgagee all right, title and interest of Mortgagor in and to any award or payment with respect to (i) any Condemnation, or any conveyance in lieu of Condemnation, and (ii) any damage to the Mortgaged Property caused by governmental action that does not result in a Condemnation. (b) Subject to the provisions of Section 4.5 of the Loan Agreement, Mortgagee, in its sole discretion, may apply such awards or proceeds, after the deduction of Mortgagee's expenses incurred in the collection of such amounts, at Mortgagee's option, to the restoration or repair of the Mortgaged Property or to the payment of the Indebtedness, with the balance, if any, to Mortgagor. Unless Mortgagee otherwise agrees in writing, any application of any awards or proceeds to the Indebtedness shall not extend or postpone the due date of any monthly installments referred to in the Note, Section 4 of this Instrument or any Collateral Agreement, or change the amount of such installments. Mortgagor agrees to execute such further evidence of assignment of any awards or proceeds as Mortgagee may require. 13. TRANSFERS OF THE MORTGAGED PROPERTY OR BENEFICIAL INTERESTS IN MORTGAGOR. Except as otherwise permitted under this Section 13, no Transfer of any part of the Mortgaged Property or any beneficial interest of Mortgagor shall be permitted without Mortgagee's prior written consent which may be withheld in Mortgagee's sole and absolute discretion. Any transfer made in violation of this Section shall constitute an Event of Default. Notwithstanding any provision of this Section to the contrary, in no event shall a Transfer resulting in a change of control of Mortgagor or the Mortgaged Property are permitted without Mortgagee's prior written consent which may be withheld in Mortgagee's sole and absolute discretion. The following Transfers shall be permitted, subject to Beneficiary's prior written consent, which consent shall not be unreasonably withheld or delayed, provided that (1) no such Transfer (in a series of one or more transactions) shall result in a change in control of Grantor, (2) in no event shall Grantor or, if Grantor is a limited partnership, the general partner of Grantor (or the general partner of the general partner of Grantor) or, if Grantor is a limited liability company, any corporate member of Grantor which is a Single-Purpose Entity, cease to be a Single-Purpose Entity, and (3) in no event shall any such Transfer result in the dissolution or termination of Grantor, any general partner of Grantor or any general partner of any general partner of Grantor, if applicable, or, if Grantor is a limited liability company, any corporate member of Grantor: (1) Transfers of Stock in any corporation which is Grantor, any general or limited partner or member of Grantor or any Person holding an interest therein; (2) Transfers of limited partnership interests in any limited partnership which is Grantor, any general or limited partner or member of Grantor or any Person holding an interest therein; and 15 16 (3) Transfers of membership interests in any limited liability company which is Grantor, any general or limited partner or member of Grantor or any Person holding an interest therein. (4) Notwithstanding any provision herein to the contrary, no Transfer otherwise permitted under this Section 13 shall occur unless Grantor shall have given Beneficiary not less than ten (10) Business Days prior notice of the intended Transfer together with a certificate of the financial officer of Grantor stating (i) the nature and size of the interest to be the subject of the Transfer, (ii) the name and address of the Person to which such interest shall be conveyed, sold or transferred unless such interest is to be conveyed, sold or transferred pursuant to a registered public sale pursuant to applicable securities laws, and (iii) that the proposed transaction is a bona fide sale, transfer or conveyance solely for cash or equivalent consideration, if applicable. Beneficiary reserves the right to condition any consent required pursuant to this Section 13 with respect to a Transfer upon (A) the payment of all expenses incurred by Beneficiary as set forth below and, in connection with the Transfer of any fee interest in the Security Property, an assumption fee equal to one percent (1.0%) of the outstanding balance of the Loan, (B) Beneficiary's approval of the financial condition, managerial capabilities and ownership structure of the proposed transferee, including requiring that the transferee of any fee interest in the Security Property be a Single-Purpose Entity, (C) if the Transfer shall result in a change in control of Grantor or the Security Property, execution of an assumption agreement by the proposed transferee, in form and content acceptable to Beneficiary, (D) the Loan being in good standing and free from any Event of Default, and (E) if required by Beneficiary, receipt of an Opinion of Counsel reasonably satisfactory to Beneficiary stating that, if effected, the proposed Transfer would have no effect on the enforceability of the Mortgage or the other Loan Documents, and would not result in the dissolution or termination of Grantor, the managing member of Grantor, if applicable, any general partner of Grantor or any general partner of any general partner of Grantor, if applicable. Grantor agrees to pay on demand all expenses (including, without limitation, reasonable attorney's fees and disbursements, title search costs and title insurance endorsement premiums) incurred by Beneficiary in connection with the review, approval and documentation of any Transfer. In no event shall any Transfer otherwise permitted under this Section occur if such Transfer is required to be registered under the Securities Act of 1933, as amended (the "1933 Act"), or any state securities or Blue Sky laws, or offered pursuant to Rule 144A under the 1933 Act. (5) Notwithstanding any other provision of this Section 13 to the contrary, Transfers of partnership interests, membership interests or corporate shares in Grantor or any Person holding an interest in Grantor between or among partners, members or shareholders existing as such on the date hereof, or Transfers of such interests to immediate family members of existing partners, members or shareholders or to trusts for estate planning purposes for the benefit of existing partners, members or shareholders or members of the transferor's immediate family shall be permitted without Beneficiary's consent, provided that in no event shall Grantor and any Person holding an interest in Grantor who is a Single-Purpose Entity cease to be a Single-Purpose Entity and provided no such Transfer results in a change of control of Grantor. 14. EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an Event of Default under this Instrument: 16 17 (a) any failure by Mortgagor to pay or deposit within ten (10) days after the same becomes due any amount required by the Note, this Instrument or any other Loan Document; (b) any failure by Mortgagor to maintain the insurance coverage required under the Loan Agreement which continues beyond the applicable cure period; if any, provided therein; (c) any failure by Mortgagor to comply with the provisions of Section 25; (d) fraud or material misrepresentation or material omission by Mortgagor, any of its officers, directors, trustees, general partners or managers or any guarantor in connection with (i) the application for or creation of the Indebtedness, (ii) any financial statement, financial report, certification, or other report or information required under the Loan Agreement required to be provided to Mortgagee during the term of the Indebtedness, or (iii) any request for Mortgagee's consent to any proposed action, including a request for disbursement of funds under any Collateral Agreement; (e) a failure of Mortgagor to comply with the provisions of Section 13; (f) the commencement of a forfeiture action or proceeding, whether civil or criminal, which, in Mortgagee's reasonable judgment, could result in a forfeiture of the Mortgaged Property or otherwise materially impair the lien created by this Instrument or Mortgagee's interest in the Mortgaged Property; (g) any failure by Mortgagor to perform any of its obligations under this Instrument (other than those specified in Sections 14 (a) through (f)) hereof and other than those specified in Sections 7.1(a), (b) and (c) of the Loan Agreement), as and when required, which continues for a period of thirty (30) days after notice of such failure by Mortgagee to Mortgagor; provided, however, that if such default cannot be cured within such thirty (30) day period, then such cure period shall be extended for an additional sixty (60) days as long as Mortgagor is diligently and in good faith prosecuting such cure to completion. However, no such notice or grace period shall apply in the case of any such failure which could, in Mortgagee's judgment, absent immediate exercise by Mortgagee of a right or remedy under this Instrument, result in harm to Mortgagee, impairment of the Note or this Instrument or any other security given under any other Loan Document; (h) any failure by Mortgagor to perform any of its obligations as and when required under any Loan Document other than this Instrument which continues beyond the applicable cure period, if any, specified in that Loan Document; (i) any exercise by the holder of any debt instrument secured by a mortgage, deed of trust or deed to secure debt on the Mortgaged Property of a right to declare all amounts due under that debt instrument immediately due and payable; (j) the Mortgaged Property becomes part of a bankrupt debtor's estate pursuant to any chapter of the Federal Bankruptcy Code or the Mortgaged Property otherwise becomes 17 18 subject to any reorganization, receivership (other than a receivership proceeding instituted by Mortgagee) or insolvency proceeding or any similar proceeding pursuant to any federal, state or foreign law affecting debtor and creditor rights; or (k) if any representation or warranty made by Mortgagor in that certain Loan Closing Certification executed in connection with the Loan is not true and correct in any material respect at the time when the facts therein set forth were stated or certified, or upon Mortgagor's breach of any covenant made in that Loan Closing Certification and, if susceptible of cure, such breach remains uncured of thirty (30) days after Mortgagee gives written notice of such breach to Mortgagor. 15. REMEDIES. (a) Acceleration of Maturity. If an Event of Default shall have occurred, then the entire Indebtedness shall, at the option of Mortgagee, immediately become due and payable without notice or demand, time being of the essence of this Instrument, and no omission on the part of Mortgagee to exercise such option when entitled to do so shall be construed as a waiver of such right. (b) Intentionally Deleted. (c) Performance by Mortgagee. Upon the occurrence of an Event of Default, Mortgagee may, at its sole option, pay, perform or observe the same, and all payments made or costs or expenses incurred by Mortgagee in connection therewith, with interest thereon at the Default Rate (as defined in the Note) or at the maximum rate from time to time allowed by applicable law, whichever is less, shall be secured hereby and shall be, without demand, immediately repaid by Mortgagor to Mortgagee. Notwithstanding anything to the contrary herein, Mortgagee shall have no obligation, explicit or implied to pay, perform, or observe any term, covenant, or condition. (d) Receiver. If any Event of Default shall have occurred and be continuing, Mortgagee, upon application to a court of competent jurisdiction, shall be entitled as a matter of strict right, without notice and without regard to the sufficiency or value of any security for the Indebtedness or the solvency of any party bound for its payment, to the appointment of a receiver to take possession of and to operate the Facility and to collect and apply the Rents. The receiver shall have all the rights and powers permitted under the laws of the Property Jurisdiction. Mortgagor will pay unto Mortgagee upon demand all expenses, including receiver's fees, actual attorney's fees, costs and agent's compensation, incurred pursuant to the provisions of this Section, and upon any Mortgagor's failure to pay the same, any such amounts shall be added to the Indebtedness and shall be secured by this Instrument. (e) Mortgagee's Power of Enforcement. If an Event of Default shall have occurred and be continuing, Mortgagee may, either with or without entry or taking possession as hereinabove provided or otherwise, proceed by suit or suits at law in equity or any other appropriate proceeding or remedy (i) to enforce payment of the Note or the performance of any term thereof or any other right, (ii) to foreclose this Instrument and to sell, as an entirety or in separate lots or 18 19 parcels, the Mortgaged Property, as provided by applicable Alabama law, and (iii) to pursue any other remedy available to it, all as Mortgagee shall deem most effectual for such purposes. Mortgagee shall take action either by such proceedings or by the exercise of its powers with respect to entry or taking possession, as Mortgagee may determine. (f) Right to Enter and Take Possession. (1) If an Event of Default shall have occurred and is continuing, Mortgagor, upon demand of Mortgagee, shall forthwith surrender to Mortgagee the actual possession of the Mortgaged Property and, if and to the extent permitted by law, Mortgagee itself, or by such officers or agents as it may appoint, may enter and take possession of all or any part of the Mortgaged Property without the appointment of a receiver or an application therefor, and may exclude Mortgagor and its agents and employees wholly therefrom, and take possession of the books, papers and accounts of Mortgagor relating thereto; (2) If Mortgagor shall for any reason fail to surrender or deliver the Mortgaged Property or any part thereof after such demand by Mortgagee, Mortgagee may obtain a judgment or decree conferring upon Mortgagee the right to immediate possession or requiring Mortgagor to deliver immediate possession of the Mortgaged Property to Mortgagee. Mortgagor will pay to Mortgagee, upon demand, all expenses of obtaining such judgment or decree, including reasonable costs and expense incurred by Mortgagee, its attorneys and agents, and all such expenses and costs shall, until paid, become part of the Indebtedness and shall be secured by this Instrument; (3) Upon every such entering or taking of possession, Mortgagee may hold, store, use, operate, manage and control the Mortgaged Property and conduct the business thereof, and, from time to time (i) make all necessary and proper maintenance, repairs, renewals, replacements, additions, betterments and improvements thereto and thereon and purchase or otherwise acquire additional Fixtures, Personalty and Equipment; (ii) insure or keep the Mortgaged Property insured; (iii) manage and operate the Mortgaged Property and exercise all of the rights and powers of Mortgagor to the same extent as Mortgagor could in its own name; or and (iv) enter into any and all agreements with respect to the exercise by others of any of the powers herein granted to Mortgagee, all as Mortgagee from time to time may determine to be in its best interest. Mortgagee may collect and receive all the Rents, including those past due as well as those accruing thereafter, and, after deducting (A) all reasonable expenses of taking, holding, managing and operating the Mortgaged Property (including compensation for the services of all persons employed for such purposes); (B) the reasonable cost of all such maintenance, repairs, renewals, replacements, additions, betterments, improvements, purchases and acquisitions; (C) the cost of such insurance deemed necessary by Mortgagor; (D) such taxes, assessments and other similar charges as Mortgagee may at its option pay; (E) other proper and reasonable charges upon the Mortgaged Property or any 19 20 part thereof; and (F) the reasonable fees, expenses and disbursements of the attorneys and agents of Mortgagee, Mortgagee shall apply the remainder of the monies and proceeds so received by Mortgagee, first, to the payment of accrued interest; second, to the payment of Imposition Deposits and to other sums required to be paid hereunder; and third, to the payment of overdue installments of principal and any other unpaid Indebtedness then due. Anything in this Section to the contrary notwithstanding, Mortgagee shall not incur any liability as a result of any exercise by Mortgagee of its rights under this Instrument, and Mortgagee shall be liable to account only for the Rents actually received by Mortgagee; (4) Mortgagor agrees to use commercially reasonably efforts to cause the licensed operator of the Facility to promptly notify all of its account debtors, including the Medicaid and Medicare agencies and other account debtors pursuant to all Reimbursement Contracts, to the extent permitted under applicable law, to make payments to one or more such deposit accounts upon Mortgagee's request and as designated by Mortgagee, and, to the extent permitted under any law applicable to Medicare and Medicaid, Mortgagor agrees to provide any necessary endorsements to checks, drafts and other forms of payment so that such payments will be properly deposited in such accounts. Mortgagee may require that the deposit accounts be established so as to comply with any applicable Medicaid, Medicare and other requirements applicable to payments of any accounts receivable. Mortgagee may cause moneys to be withdrawn from such deposit accounts and applied to the Indebtedness in such order as Mortgagee may elect. Mortgagor appoints Mortgagee as Mortgagor's attorney-in-fact, which appointment is coupled with an interest and is irrevocable, to provide, after the occurrence of an Event of Default and so long as such default is continuing, any notice, endorse any check, draft or other payment for deposit, or take any other action which Mortgagor agrees to undertake in accordance with this Section 15(f)(4), to the extent permitted under any law applicable to Medicare and Medicaid; and (5) Whenever all the Indebtedness shall have been paid and all Events of Default shall have been cured, Mortgagee shall surrender possession of the Mortgaged Property to Mortgagor, its successors and/or assigns. The same right of taking possession, however, shall exist if any subsequent Event of Default shall occur and be continuing. (g) Purchase by Mortgagee. Upon any foreclosure sale, Mortgagee may bid for and purchase the Mortgaged Property and shall be entitled to apply all or any part of the Indebtedness as a credit to the purchase price. (h) Application of Proceeds of Sale. In the event of a foreclosure or other sale of all or any portion of the Mortgaged Property, the proceeds of said sale shall be applied, first, to the expenses of such sale and of all proceedings in connection therewith, including actual attorney's fees and expenses (and attorney's fees and expenses shall become absolutely due and payable whenever foreclosure is commenced); then to insurance premiums, liens, assessments, Impositions 20 21 and charges, including utility charges and any other amounts advanced by Mortgagee hereunder, and interest thereon; then to payment of the Indebtedness in such order of priority as Mortgagee shall determine, in its sole discretion; and finally the remainder, if any, shall be paid to Mortgagor, or to the person or entity lawfully entitled thereto. (i) Mortgagor as Tenant Holding Over. In the event of any such foreclosure sale, Mortgagor (if Mortgagor shall remain in possession) shall be deemed a tenant holding over and shall forthwith deliver possession to the purchaser or purchasers at such sale or be summarily dispossessed according to provisions of law applicable thereto. (j) Waiver of Appraisement, Valuation, Etc. Mortgagor agrees, to the full extent permitted by law, that in case of an Event of Default on the part of Mortgagor hereunder, neither Mortgagor nor anyone claiming through or under Mortgagor will assert, claim or seek to take advantage of any appraisement, redemption, valuation, stay, homestead, extension, exemption or laws now or hereafter in force, in order to prevent or hinder the enforcement of foreclosure of this Instrument, or the absolute sale of the Mortgaged Property, or the delivery of possession thereof immediately after such sale to the purchaser at such sale. (k) Discontinuance of Proceedings. In case Mortgagee shall have proceeded to enforce any right, power or remedy under this Instrument by foreclosure, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to Mortgagee, then in every such case, Mortgagor and Mortgagee shall be restored to their former positions and rights hereunder, and all rights, powers and remedies of Mortgagee shall continue as if no such proceedings had occurred. (l) Waiver. (i) No delay or omission by Mortgagee or by any holder of the Note to exercise any right, power or remedy accruing upon any default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of any such default, or acquiescence therein, and every right, power and remedy given by this Instrument to Mortgagee may be exercised from time to time and as often as may be deemed expedient by Mortgagee. No consent or waiver expressed or implied by Mortgagee to or of any breach or default by Mortgagor in the performance of the obligations of Mortgagor hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of the same or any other obligations of Mortgagor hereunder. Failure on the part of Mortgagee to complain of any act or failure to act or failure to declare an Event of Default, irrespective of how long such failure continues, shall not constitute a waiver by Mortgagee of its rights hereunder or impair any rights, powers or remedies of Mortgagee hereunder. 21 22 (ii) No act or omission by Mortgagee shall release, discharge, modify, change or otherwise affect the original liability under the Note, this Instrument, other Loan Documents or any other obligation of Mortgagor or any subsequent purchaser of the Mortgaged Property or any part thereof, or any maker, co-signer, endorser, surety or guarantor, nor preclude Mortgagee from exercising any right, power or privilege herein granted or intended to be granted in any Event of Default then existing or of any subsequent default, nor alter the lien of this Instrument, except as expressly provided in an instrument or instruments executed by Mortgagee. Without limiting the generality of the foregoing, Mortgagee may (A) grant forbearance or an extension of time for the payment of all or any portion of the Indebtedness; (B) take other or additional security for the payment of any of the Indebtedness; (C) waive or fail to exercise any right granted herein, in the Note or in other Loan Documents; (D) release any part of the Mortgaged Property from the security interest or lien of this Instrument or otherwise change any of the terms, covenants, conditions or agreements of the Note, this Instrument or other Loan Documents; (E) consent to the filing of any map, plat or replat affecting the Land; (F) consent to the granting of any easement or other right affecting the Mortgaged Property; (G) make or consent to any agreement subordinating the security title or lien hereof, or (H) take or omit to take any action whatsoever with respect to the Note, this Instrument, the other Loan Documents, the Mortgaged Property or any document or instrument evidencing, securing or in any way related to the Instrument, all without releasing, discharging, modifying, changing or affecting any such liability, or precluding Mortgagee from exercising any such right, power or privilege with respect to the lien of this Instrument. In the event of the sale or transfer by operation of law or otherwise of all or any part of the Mortgaged Property, Mortgagee, without notice, is hereby authorized and empowered to deal with any such vendee or transferee with respect to the Mortgaged Property or the Indebtedness, or with reference to any of the terms, covenants, conditions or agreements hereof, as fully and to the same extent as it might deal with the original parties hereto and without in any way releasing or discharging any liabilities, obligations or undertakings of Mortgagor, any guarantor of the Indebtedness or others. (iii) Mortgagor waives and relinquishes any and all rights it may have, whether at law or equity, to require Mortgagee to proceed to enforce or exercise any rights, powers and remedies it may have under the Loan Documents in any particular manner, in any particular order, or in any particular state or other jurisdiction. Mortgagor expressly waives and relinquishes any and all rights and remedies that 22 23 Mortgagor may have or be able to assert by reason of the laws of the state of jurisdiction pertaining to the rights and remedies of sureties. Mortgagor makes these arrangements, waivers and relinquishments knowingly and as a material inducement to Mortgagee in making the Loan, after consulting with and considering the advice of independent legal counsel selected by Mortgagor. (m) Suits to Protect the Mortgaged Property. Mortgagee shall have power to institute and maintain such suits and proceedings as it may deem expedient (i) to prevent any impairment of the Mortgaged Property by any acts which may be unlawful or constitute an Event of Default under this Instrument; (ii) to preserve or protect its interest in the Mortgaged Property and in the Rents arising therefrom; and (iii) to restrain the enforcement of or compliance with any legislation or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid, if the enforcement of or compliance with such enactment, rule or order would materially impair the security hereunder or be prejudicial to the interest of Mortgagee. (n) Proofs of Claim. In the case of any receivership, insolvency, bankruptcy, reorganization, arrangement, adjustment, composition or other proceedings affecting Mortgagor, its creditors or its properties, Mortgagee, to the extent permitted by law, shall be entitled to file such proofs of claim and other documents as may be necessary or advisable in order to have the claims of Mortgagee allowed in such proceedings for the entire amount due and payable by Mortgagor under this Instrument at the date of the institution of such proceedings and for any additional amount which may become due and payable by Mortgagor hereunder after such date. (o) Actions Without Mortgagor's Consent. Mortgagor agrees that Mortgagee may do any one or all of the following without notice to or the consent of Mortgagor and without affecting Mortgagee's rights or remedies against Mortgagor: (i) accept partial payment of, compromise, settle, renew, extend the time for payment or performance of, or refuse to enforce any of Mortgagor's Indebtedness to Mortgagee under or in connection with this Instrument or any of the other Loan Documents; (ii) grant any indulgence or forbearance to Guarantor or any other Person under or in connection with any or all of the Loan Documents; (iii) release, waive, substitute or add any or all collateral securing payment of any or all of the Indebtedness; (iv) release, substitute or add any one or more endorsers or guarantors of any or all of the Indebtedness; and (v) exercise any right or remedy with respect to the Indebtedness or any collateral securing the Indebtedness, notwithstanding any effect on or impairment of Mortgagor's subrogation, reimbursement or other rights against Guarantor or any other Person under or in connection with any or all of the Loan Documents. 16. REMEDIES CUMULATIVE. Each right and remedy provided in this Instrument is distinct from all other rights or remedies under this Instrument or any other Loan Document or afforded by applicable law, and each shall be cumulative and may be exercised concurrently, independently, or successively, in any order. 17. FORBEARANCE. 23 24 (a) Mortgagee may agree with Mortgagor, from time to time, at Mortgagee's option and without giving notice to, or obtaining the consent of, or having any effect upon the obligations of any guarantor or other third party obligor, extend the time for payment of all or any part of the Indebtedness, reduce the payments due under this Instrument, the Note, or any other Loan Document, release anyone liable for the payment of any amounts under this Instrument, the Note, or any other Loan Document, accept a renewal of the Note, modify the terms and time of payment of the Indebtedness, join in any extension or subordination agreement, release any Mortgaged Property, take or release other or additional security, modify the rate of interest or period of amortization of the Note or change the amount of the monthly installments payable under the Note, or otherwise modify this Instrument, the Note, or any other Loan Document. (b) Any forbearance by Mortgagee in exercising any right or remedy under the Note, this Instrument, the Guaranty Agreement, or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. The acceptance by Mortgagee of payment of all or any part of the Indebtedness after the due date of such payment, or in an amount which is less than the required payment, shall not be a waiver of Mortgagee's right to require prompt payment when due of all other payments on account of the Indebtedness or to exercise any remedies for any failure to make prompt payment. Enforcement by Mortgagee of any security for the Indebtedness shall not constitute an election by Mortgagee of remedies so as to preclude the exercise of any other right available to Mortgagee. Mortgagee's receipt of any insurance and/or condemnation proceeds shall not operate to cure or waive any Event of Default. 18. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from Mortgagor is interpreted so that any charge provided for in any Loan Document, whether considered separately or together with other charges levied in connection with any other Loan Document, violates that law, and Mortgagor is entitled to the benefit of that law, that charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Mortgagee in excess of the permitted amounts shall be applied by Mortgagee to reduce the principal of the Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Mortgagor has been violated, all Indebtedness which constitutes interest, as well as all other charges levied in connection with the Indebtedness which constitute interest, shall be deemed to be allocated and spread over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note. 19. WAIVER OF STATUTE OF LIMITATIONS. To the extent permitted by applicable law Mortgagor hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien of this Instrument or to any action brought to enforce any Loan Document. 20. WAIVER OF MARSHALLING. Notwithstanding the existence of any other security interests in the Mortgaged Property held by Mortgagee or by any other party, Mortgagee shall have the right to determine the order in which any or all of the Mortgaged Property shall be subjected to the remedies provided in this Instrument, the Note, the Loan Agreement, any other 24 25 Loan Document or under applicable law. Mortgagee shall have the right to determine the order in which any or all portions of the Indebtedness are satisfied from the proceeds realized upon the exercise of such remedies. Mortgagor and any party who now or in the future acquires a security interest in the Mortgaged Property and who has actual or constructive notice of this Instrument waives any and all right to require the marshalling of assets or to require that any of the Mortgaged Property be sold in the inverse order of alienation or that any of the Mortgaged Property be sold in parcels or as an entirety in connection with the exercise of any of the remedies permitted by applicable law or provided in this Instrument. 21. FURTHER ASSURANCES. Mortgagor shall execute, acknowledge, and deliver, at its sole cost and expense, all further acts, deeds, conveyances, assignments, estoppel certificates, financing statements, transfers and assurances as Mortgagee may require from time to time in order to better assure, grant, and convey to Mortgagee the rights intended to be granted, now or in the future, to Mortgagee under this Instrument and the Loan Documents. 22. ESTOPPEL CERTIFICATE. Within ten (10) days after a request from Mortgagee, Mortgagor shall deliver to Mortgagee a written statement, signed and acknowledged by Mortgagor, certifying to Mortgagee or any person designated by Mortgagee, as of the date of such statement, (a) that the Loan Documents are unmodified and in full force and effect (or, if there have been modifications, that the Loan Documents are in full force and effect as modified and setting forth such modifications); (b) the unpaid principal balance of the Note; (c) the date to which interest under the Note has been paid; (d) that Mortgagor is not in default in paying the Indebtedness or in performing or observing any of the covenants or agreements contained in this Instrument or any of the other Loan Documents (or, if Mortgagor is in default, describing such default in reasonable detail); (e) whether or not there are then existing any setoffs or defenses known to Mortgagor against the enforcement of any right or remedy of Mortgagee under the Loan Documents; and (f) any additional facts reasonably requested by Mortgagee. 23. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. (a) This Instrument, and any Loan Document which does not itself expressly identify the law that is to apply to it, shall be governed by the laws of Property Jurisdiction. (b) Each of Mortgagor and Mortgagee consents to the exclusive jurisdiction of any and all state and federal courts with jurisdiction in the Property Jurisdiction over Mortgagor and Mortgagor's assets. Mortgagor agrees that its assets shall be used first to satisfy all claims of creditors organized or domiciled in the United States and that no assets of Mortgagor in the United States shall be considered part of any foreign bankruptcy estate. (c) Each of Mortgagor and Mortgagee agrees that any controversy arising under or in relation to the Note, this Instrument, or any other Loan Document shall be litigated exclusively in the Property Jurisdiction. The state and federal courts and authorities with jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to the Note, any security for the Indebtedness, or any other Loan Document. Mortgagor irrevocably consents to service, jurisdiction, and venue of such courts for any such 25 26 litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise. 24. NOTICE. (a) All notices, demands and other communications ("Notice") under or concerning this Instrument shall be in writing. Each Notice shall be addressed to the intended recipient at its address set forth in this Instrument, and shall be deemed given on the earliest to occur of (i) the date when the Notice is received by the addressee; (ii) the first Business Day after the Notice is delivered to a recognized overnight courier service, with arrangements made for payment of charges for next Business Day delivery; or (iii) the third Business Day after the Notice is deposited in the United States mail with postage prepaid, certified mail, return receipt requested. (b) Any party to this Instrument may change the address to which Notices intended for it are to be directed by means of Notice given to the other party in accordance with this Section 24. Each party agrees that it will not refuse or reject delivery of any Notice given in accordance with this Section 24, that it will acknowledge, in writing, the receipt of any Notice upon request by the other party and that any Notice rejected or refused by it shall be deemed for purposes of this Section 24 to have been received by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service or the courier service. (c) Any Notice under the Note and any other Loan Document which does not specify how Notices are to be given shall be given in accordance with this Section 24. (d) A copy of any Notice sent to Mortgagee pursuant to this Section 24 shall be sent to: Kay K. Bains, Esq. Walston, Wells, Anderson & Bains, LLP 505 20th Street North, Suite 500 Birmingham, Alabama 35203 A copy of any Notice sent to Mortgagor pursuant to this Section 24 shall be sent to: Diversicare Windsor House, LLC c/o Advocat Inc. 277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067 Attn: CFO 25. SINGLE-PURPOSE ENTITY. Until the Indebtedness is paid in full, Mortgagor shall maintain its status as a Single-Purpose Entity and comply with all those covenants with respect to its status as a Single-Purpose Entity as set forth in Section 5.5 of the Loan Agreement. 26 27 26. SUBROGATION. If, and to the extent that, the proceeds of the Loan are used to pay, satisfy or discharge any obligation of Mortgagor for the payment of money that is secured by a pre-existing mortgage, deed of trust or other lien encumbering the Mortgaged Property (a "Prior Lien"), such loan proceeds shall be deemed to have been advanced by Mortgagee at Mortgagor's request, and Mortgagee shall automatically, and without further action on its part, be subrogated to the rights, including lien priority, of the owner or holder of the obligation secured by the Prior Lien, whether or not the Prior Lien is released. 27. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from Mortgagor is interpreted so that any charge provided for in any Loan Document, whether considered separately or together with other charges levied in connection with any other Loan Document, violates that law, and Mortgagor is entitled to the benefit of that law, that charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Mortgagee in excess of the permitted amounts shall be applied by Mortgagee to reduce the principal of the Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Mortgagor has been violated, all Indebtedness which constitutes interest, as well as all other charges levied in connection with the Indebtedness which constitute interest, shall be deemed to be allocated and spread over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note. 28. DISCLOSURE OF INFORMATION. Mortgagee may furnish financial information regarding Mortgagor or the Mortgaged Property to third parties with an existing or prospective interest in the enforcement, evaluation, performance, purchase or securitization of the Indebtedness, including but not limited to credit rating agencies, but not further or otherwise without the prior written consent of Mortgagor. Mortgagor irrevocably waives any and all rights it may have under applicable law to prohibit such disclosure, including but not limited to any right of privacy; but such disclosure shall be subject to prohibitions or limitations on disclosure of any such data under applicable laws or regulations, including without limitation any duly enacted "Patient's Bill of Rights" or similar legislation, and such limitations, as may be necessary to preserve the confidentiality of the Facility-patient relationship and any physician-patient privilege. 29. RELEASE. Upon Mortgagee's written request stating that (i) all Indebtedness secured by this Instrument has been paid or performed in full (other than contingent Indebtedness which by their terms survive the release hereof and as to which no event giving rise to the incurrence of any such Indebtedness shall have occurred), and (ii) all fees due Mortgagee in connection with release of this Instrument have been paid, Mortgagor shall release the Mortgaged Property from the lien of this Instrument. Upon the payment and performance in full of all Indebtedness (other than contingent obligations which survive the release hereof and as to which no event giving rise to the incurrence of any such obligation shall have occurred), and upon request of Mortgagor, Mortgagee shall release the lien of this Instrument upon the Mortgaged Property and shall surrender to Mortgagor the Note and all other documents evidencing the Indebtedness secured by this Instrument. 27 28 The recitals in the release of any matters or facts shall be conclusive proof of their truthfulness. Such release shall operate as a reassignment of the Rents and profits assigned to Mortgagee under the Assignment of Leases and Rents. Mortgagee shall deliver this Instrument and the Note after release to the Person or Persons legally entitled thereto. 30. EXECUTION OF DOCUMENTS BY MORTGAGEE. Without notice to or affecting the liability of Mortgagor or any other Person for the payment or performance of the Indebtedness, without affecting the lien or priority of this Instrument or Mortgagee's rights and remedies under the Loan Documents, and without liability to Mortgagor or any other Person, Mortgagee shall have the right, at any time and from time to time, to do any one or more of the following: (a) release any part of the Mortgaged Property and (b) execute any extension agreement relating to any or all of the Indebtedness, any document subordinating the lien of this Instrument to any other lien or document, or any other document relating to the Mortgaged Property, Indebtedness, or Loan Documents. 31. JOINT AND SEVERAL LIABILITY. If more than one Person or entity signs this Instrument as Mortgagor, the obligations of such Persons shall be joint and several. 32. RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY. The relationship between Mortgagee and Mortgagor shall be solely that of creditor and debtor, respectively, and nothing contained in this Instrument shall create any other relationship between Mortgagee and Mortgagor. No creditor of any party to this Instrument and no other person shall be a third party beneficiary of this Instrument or any other Loan Document. 33. SEVERABILITY; AMENDMENTS. The invalidity or unenforceability of any provision of this Instrument shall not affect the validity or enforceability of any other provision, and all other provisions shall remain in full force and effect. This Instrument contains the entire agreement among the parties as to the rights granted and the obligations assumed in this Instrument. This Instrument may not be amended or modified except by a writing signed by the party against whom enforcement is sought. 34. MISCELLANEOUS PROVISIONS. The captions and headings of the sections of this Instrument are for convenience only and shall be disregarded in construing this Instrument. Any reference in this Instrument to an "Exhibit" or a "Section" shall, unless otherwise explicitly provided, be construed as referring, respectively, to an Exhibit attached to this Instrument or to a section of this Instrument. All Exhibits attached to or referred to in this Instrument are incorporated by reference into this Instrument. Any reference in this Instrument to a statute or regulation shall be construed as referring to that statute or regulation as amended from time to time. Use of the singular in this Agreement includes the plural and use of the plural includes the singular. As used in this Instrument, the term "including" means "including, but not limited to." 35. WAIVER OF TRIAL BY JURY. EACH OF MORTGAGOR AND MORTGAGEE (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY TO THE EXTENT THAT ANY SUCH 28 29 RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE EXIST. MORTGAGOR AND MORTGAGEE ARE AUTHORIZED TO SUBMIT THIS INSTRUMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES TO ANY LOAN DOCUMENT, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF MORTGAGOR'S AND MORTGAGEE'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, EACH OF MORTGAGOR AND MORTGAGEE CERTIFIES THAT NEITHER MORTGAGOR'S NOR MORTGAGEE'S REPRESENTATIVES OR AGENTS HAVE REPRESENTED, EXPRESSLY OR OTHERWISE, THAT ENFORCEMENT OF THIS WAIVER WILL NOT BE SOUGHT. 36. WAIVER OF AUTOMATIC STAY. TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, MORTGAGOR HEREBY AGREES THAT, IN CONSIDERATION OF MORTGAGEE'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR MORTGAGEE TO MAKE THE LOAN, IN THE EVENT THAT MORTGAGOR SHALL (A) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED STATES CODE, AS AMENDED ("BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUTE; (B) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE; (C) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (D) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR; OR (E) BE THE SUBJECT OF AN ORDER, JUDGEMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED AGAINST MORTGAGOR FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, SUBJECT TO COURT APPROVAL, MORTGAGEE SHALL THEREUPON BE ENTITLED AND MORTGAGOR HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE (INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR AGAINST THE EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO MORTGAGEE AS PROVIDED IN THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND 29 30 MORTGAGOR HEREBY IRREVOCABLY WAIVES ITS RIGHTS TO OBJECT TO SUCH RELIEF. 37. SUCCESSORS AND ASSIGNS BOUND. This Instrument shall bind, and the rights granted by this Instrument shall inure to, the respective successors and assigns of Mortgagee and Mortgagor. 38. COUNTERPARTS. This Instrument may be executed in any number of counterparts, all of which when taken together shall constitute one and the same Instrument. 30 31 IN WITNESS WHEREOF, Mortgagor and Mortgagee have caused this Instrument to be properly executed as of the date first above written. MORTGAGOR: WITNESS: DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company - ------------------------------ By: Diversicare Leasing Corp., a Tennessee corporation, its sole member - ------------------------------ [Print Name] By: ------------------------------------ James F. Mills, Jr., Senior Vice President WITNESS: MORTGAGEE: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation - ------------------------------ - ------------------------------ -------------------------------------------- [Print Name] James C. Thompson, Senior Vice President STATE OF TENNESSEE ) ____________ COUNTY ) I, the undersigned, a Notary Public in and for said County in said State, hereby certify that James F. Mills, Jr., whose name as Senior Vice President of Diversicare Leasing Corp., a Tennessee corporation and the sole member of Diversicare Windsor House, LLC, a Delaware limited liability company, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he, as such officer and with full authority, executed the same voluntarily for and as the act of said limited liability company. Given under my hand and official seal this the ____ day of March, 2001. ------------------------- Notary Public 31 32 AFFIX SEAL My commission expires: _________ STATE OF ALABAMA ) JEFFERSON COUNTY ) I, the undersigned, a Notary Public in and for said County in said State, hereby certify that James C. Thompson, whose name as Vice President of GMAC Commercial Mortgage corporation, a California corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he, as such officer and with full authority, executed the same voluntarily for and as the act of said corporation. Given under my hand and official seal this the ____ day of March, 2001. ------------------------- Notary Public AFFIX SEAL My commission expires: _________ 32 33 EXHIBIT "A" LEGAL DESCRIPTION A-1 EX-10.10 12 g71016ex10-10.txt PROMISSORY NOTE 1 EXHIBIT 10.10 PROMISSORY NOTE $4,709,000.00 Nashville, Tennessee March 29, 2001 FOR VALUE RECEIVED, the undersigned DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company, having an address at 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067 (the "Borrower"), hereby promises to pay to the order of GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation, having an address at 200 Witmer Road, Horsham, Pennsylvania 19044 (the "Lender"), its successors and assigns as holder of this Note or, if this Note has then been endorsed "to bearer," to the bearer of this Note (the Lender, its said successors and assigns, and any such bearer, being hereinafter sometimes referred to collectively as the "Holder"), at the Lender's said address or at such other place or to such other person as may be designated in writing to the Borrower by the Lender, the principal sum of Four Million Seven Hundred Nine Thousand and No/100 Dollars ($4,709,000.00) (the "Loan"), together with interest on the unpaid balance thereof at the rate hereinafter set forth. ON THE TERMS AND SUBJECT TO THE CONDITIONS which are hereinafter set forth: Section 1. Interest Rate and Payment Dates. 1.1 Initial Rate and Initial Payment. Interest shall accrue on the outstanding balance of the principal amount outstanding hereunder from time to time from and after the date hereof at the rate of 8.5838 percent per annum until the first Rate Adjustment Date (as defined below). On each successive Rate Adjustment Date, the rate of interest at which interest accrues shall be adjusted to the then applicable Note Rate (as defined below). Interest for the period beginning on the date of this Note and ending on and including the last day of the month in which this Note is dated shall be payable on the date hereof. Interest shall be paid in arrears and shall be computed on the basis of a 360-day year and actual number of days elapsed for any whole or partial month in which interest on the loan is being calculated and shall be charged on the principal balance outstanding from time to time. 1.2 Rate Adjustment Date and Payment Adjustment Dates. The interest rate shall be adjusted on the dates (each being a "Rate Adjustment Date") described in this paragraph. The first Rate Adjustment Date shall be April 1, 2001, and subsequent Rate Adjustment Dates shall fall on the first day of each subsequent one month anniversary thereafter. The first payment adjustment date shall be May 1, 2001, and subsequent payment adjustment dates shall fall on the first day of each calendar month thereafter during the term of the Loan. 1.3 Default Interest Rate. If the Borrower fails to make any payment of principal, interest or fees on the date on which such payment becomes due and payable (including applicable grace periods) whether at maturity or by acceleration or on any other date, such payment shall accrue interest from the date on which such payment was due (and not the date of the payment 2 default) until paid at the fluctuating rate ("Default Rate") which is the lesser of (a) five (5) percentage points above the then applicable LIBOR Rate (as defined below) and (b) the maximum rate permitted by applicable law. 1.4 LIBOR Rate. The LIBOR Rate shall mean the average of London Interbank Offered Rates ("LIBOR") for a term of one month determined solely by Holder as of each Rate Adjustment Date plus three hundred fifty (350) basis points per annum, determined in the manner herein set forth below. On each Rate Adjustment Date, Holder will obtain the one month LIBOR (in U.S. Dollar deposits) from the appropriate Bloomberg display page available as of the close of business announced on the last business day of the month immediately preceding the Rate Adjustment Date. In the event Bloomberg ceases publication or ceases to publish the one month LIBOR, Holder shall select a comparable publication to determine the one month LIBOR and provide notice thereof to Borrower. LIBOR may or may not be the lowest rate based upon the market for U.S. Dollar deposits in the London Interbank Eurodollar Market at which the Holder prices loans on the date on which the LIBOR Rate is determined by Holder as set forth above. 1.5 LIBOR Rate Adjustments. This Note shall bear interest at the rate set forth above or at the applicable LIBOR Rate until a new LIBOR Rate is determined on each Rate Adjustment Date in accordance with the provisions hereof; provided, however, that, if Holder at any time determines, in the sole but reasonable exercise of its discretion, that it has miscalculated the amount of the monthly payment of principal and/or interest (whether because of a miscalculation of the LIBOR Rate or otherwise), then Holder shall give notice to Borrower of the corrected amount of such monthly payment (and the corrected amount of the LIBOR Rate, if applicable) and (a) if the corrected amount of such monthly payment represents an increase thereof, then Borrower shall, within ten (10) calendar days thereafter, pay to Holder any sums that Borrower would have otherwise been obligated under this Note to pay to Holder had the amount of such monthly payment not been miscalculated, or (b) if the corrected amount of such monthly payment represents a decrease thereof and Borrower is not otherwise in breach or default under any of the terms and provisions of the Note or the Loan Agreement, then Borrower shall, within (10) calendar days thereafter be paid the sums that Borrower would not have otherwise been obligated to pay to Holder had the amount of such monthly payment not been miscalculated. 1.6 LIBOR Unascertainable. If (a) on any date on which the LIBOR Rate would otherwise be set, Holder shall have determined in good faith (which determination shall be conclusive) that (i) adequate and reasonable means do not exist for ascertaining the one month LIBOR, or (ii) a contingency has occurred which materially and adversely affects the London Interbank Eurodollar Market at which Holder prices loans on the date on which the LIBOR Rate is determined by Holder as set forth above, or (b) at any time Holder shall have determined in good faith (which determination shall be conclusive) that the making, maintenance or funding of any part of the Loan has been made impracticable or unlawful by compliance by Holder in good faith with any Law or guideline or interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof or with any request or directive of any such Governmental Authority (whether or not having the force of law) then, and in any such event, Holder may notify Borrower of such determination. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) the obligation of Holder to 2 3 charge interest to Borrower at the LIBOR Rate shall be suspended until Holder shall have later notified Borrower of Holder's determination in good faith (which determination shall be conclusive) that the circumstances giving rise to such previous determination no longer exist. 1.7 U.S. Treasury Securities. If Holder notifies Borrower of a determination under subsection 1.6 hereof for purposes of calculating the LIBOR Rate, the one month LIBOR shall automatically be converted to the "Index" of the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board 45 days prior to the Rate Adjustment Date. 1.8 Reimbursement for Increased Costs. If any law or guideline or interpretation or application thereof by any Governmental Authority charged with the interpretation or administration thereof or compliance with any request or directive of any Governmental Authority (whether or not having the force of law) now existing or hereafter adopted (a) subjects Holder to any tax or changes the basis of taxation with respect to this Note, the Loan or payments by Borrower of principal, interest or other amounts due from Borrower hereunder or thereunder (except for taxes on the overall net income or overall gross receipts of Holder imposed as a result of a present or former connection between the jurisdiction of the Governmental Authority imposing such tax on Holder, provided, that this exclusion shall not apply to a connection arising solely from Holder having executed, delivered, performed its obligations under or received a payment under, or enforced any of the Loan Documents (as defined in Section 8.1.1 below)), or (b) imposes upon Holder any other condition or expense with respect to this Note, the Loan or its making, maintenance or funding of any part of the Loan or any security therefor, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including, without limitation, loss of margin) upon Holder with respect to the Note, or the making, maintenance or funding of any part of the Loan, by an amount which Holder deems to be material, Holder may from time to time notify Borrower of the amount determined in good faith (using any averaging and attribution methods) by Holder (which determination shall be conclusive) to be necessary to compensate Holder for such increase, reduction or imposition and, if Borrower is by law prohibited from paying any such amount, Holder may elect to declare the unpaid principal balance hereof and all interest accrued thereon immediately due and payable. Such amount shall be due and payable by Borrower to Holder ten (10) days after such notice is given. Section 2. Payments. 2.1 Intentionally Deleted. 2.2 Principal and Interest Payments. Commencing on May 1, 2001 and continuing on the first day of each calendar month thereafter through and including the Maturity Date (defined below) monthly payments of principal and interest in installments in such amount as is necessary, taking into account the then effective LIBOR Rate to fully amortize the unpaid principal balance of the Note over an assumed period of 25 years; provided, however, the entire unpaid principal balance together with interest thereon shall be due and payable in full on April 1, 2006. 3 4 Section 3. Application of Payments. Payments made by Borrower on account hereof shall be applied, first, toward any Late Fees (hereinafter defined) or other fees and charges due hereunder, second, toward payment of any interest due at the Default Rate, third, toward payment of any interest due at the then applicable LIBOR Rate set forth in Section 1.4 above, and fourth, toward payment of principal. Notwithstanding the foregoing, if any advances made by Holder under the terms of any instruments securing this Note have not been repaid, any payments made may, at the option of Holder, be applied, first, to repay such advances, and interest thereon, with the balance, if any, applied as set forth in the preceding sentence. Section 4. Maturity. Anything in this Note to the contrary notwithstanding, the entire unpaid balance of the principal amount hereof and all interest accrued thereon, to and including the Maturity Date (as defined below), (including interest accruing at the Default Rate) and all Late Fees (as defined below) shall, unless sooner paid, and except to the extent that payment thereof is sooner accelerated, be and become due and payable on April 1, 2006 (the "Maturity Date"). Notwithstanding anything contained herein, if repayment of the Loan is funded from the proceeds of any refinancing of the Loan pursuant to which Holder does not receive a contractually agreed upon sum for the arrangement thereof, then Borrower shall pay to Holder a premium equal to one- half of one percent (.05%) of the outstanding principal balance of the Note on the date of such prepayment. Section 5. Prepayment. Prepayment of the Loan in full or in part shall be permitted at any time during the term of the Loan without penalty, upon not less than thirty (30) and not greater than forty (40) days prior written notice to Lender specifying the date on which prepayment is to be made. Any such prepayment shall be credited, first, toward any Late Fees due hereunder, second, toward payment of any interest due at the Default Rate, third, toward payment of any interest due hereunder at the LIBOR Rate, and, fourth, toward payment of principal; provided, however, that if any advances made by Holder under the terms of any instruments securing this Note have not been repaid, any payments made may, at the option of Holder, be applied, first, to repay such advances, and interest thereon, with the balance, if any, applied as set forth in the preceding sentence. Notwithstanding anything contained herein, if such prepayment set forth herein is funded from the proceeds of any refinancing of the Loan pursuant to which the Holder does not receive a contractually agreed upon sum for the arrangement thereof, then Borrower shall pay to Holder a repayment in full as premium equal to one half of one percent (.05%) of the outstanding principal balance of the Note on the date of such prepayment (which balance shall be calculated exclusive of any voluntary partial prepayment). Section 6. Method of Payment. Each payment of the Loan Obligations (as defined in the Loan Agreement) shall be paid directly to the Holder in lawful tender of the United States of America. Each such payment shall be paid by 1:00 p.m. Horsham, Pennsylvania, time on the date such payment is due, except if such date is not a Business Day (as defined in the Loan Agreement) such payment shall then be due on the first Business Day after such date. Any payment received after 1:00 p.m. Horsham, 4 5 Pennsylvania, time shall be deemed to have been received on the immediately following Business Day. Section 7. Security. The debt evidenced by this Note is to be secured by, among other things, (a) a Mortgage and Security Agreement (the "Mortgage") of even date herewith by and between Borrower and Holder, and intended to be recorded in the office of the Judge of Probate of Madison County, Alabama and covering all of that real property in the said Madison County, Alabama, which is described in Exhibit "A" thereto (the "Property"), and (b) a Guaranty Agreement of even date herewith ("Guaranty Agreement"), given by Advocat Inc., a Delaware corporation (the "Guarantor"), for the benefit of Holder. Section 8. Default. 8.1 Events of Default. Anything in this Note to the contrary notwithstanding, on the occurrence of any of the following events (each of which is hereinafter referred to as an "Event of Default"), the Holder may, in the exercise of its sole and absolute discretion, accelerate the debt evidenced by this Note, in which event the entire outstanding principal balance and all interest and fees accrued thereon shall immediately be and become due and payable without further notice: 8.1.1 Failure to Pay or Perform. If (a) the Borrower fails in making any payment to the Holder of any or all sums due hereunder within ten (10) days after such payment becomes due or on the Maturity Date or (b) there exists an uncured default under any other document or instrument evidencing or securing the Loan (collectively, the "Loan Documents") which has been executed by Borrower and/or Guarantor, and such default is not cured within the grace or cure period, if any, provided in any of such Loan Documents. 8.1.2 Bankruptcy. (a) If the Borrower or Guarantor (i) applies for or consents to the appointment of a receiver, trustee or liquidator of the Borrower or Guarantor, as the case may be, or of all or a substantial part of its assets, (ii) files a voluntary petition in bankruptcy, or admits in writing its inability to pay its debts as they come due, (iii) makes an assignment for the benefit of creditors, (iv) files a petition or an answer seeking a reorganization or an arrangement with creditors or seeking to take advantage of any insolvency law, (v) performs any other act of bankruptcy, or (vi) files an answer admitting the material allegations of a petition filed against the Borrower or Guarantor in any bankruptcy, reorganization or insolvency proceeding; or (b) if (i) an order, judgment or decree is entered by any court of competent jurisdiction adjudicating the Borrower or Guarantor a bankrupt or an insolvent, or approving a receiver, trustee or liquidator of the Borrower or Guarantor or of all or a substantial part of its assets, or (ii) there otherwise commences with respect to the Borrower or Guarantor or any of its assets any proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment, receivership or like law or statute, and if such order, judgment, decree or proceeding 5 6 continues unstayed for any period of sixty (60) consecutive days after the expiration of any stay thereof. 8.1.3 Judgments. If any judgment for the payment of money in excess of $100,000.00 hereafter awarded against the Borrower or Guarantor by any court of competent jurisdiction remains unsatisfied or otherwise in force and effect for a period of thirty (30) days after the date of such award. 8.1.4 Cross-Defaults. Pursuant to that certain Cross-Collateralization and Cross-Default Agreement of even date herewith by and among the Borrower, Diversicare Pinedale, LLC, a Delaware limited liability company ("Pinedale") and the Lender, the Loan shall be cross-defaulted with a loan made by the Lender to Pinedale. 8.2 No Impairment of Rights. Nothing in this Section shall be deemed in any way to alter or impair any right which the Holder has under this Note or the Mortgage, or any of the other Loan Documents or at law or in equity, to accelerate such debt on the occurrence of any other Event of Default provided herein or therein, whether or not relating to this Note. 8.3 Late Fees. Without limiting the generality of the foregoing provisions of this Section, if any payment of interest or principal is not made prior to ten (10) days after the date on which it becomes due, the Borrower shall thereupon automatically become obligated immediately to pay to the Holder a late charge equal to the lesser of five percent (5%) of the amount of such payment or the maximum amount permitted by applicable law ("Late Fees") to defray the expenses incurred by Holder in handling and processing such delinquent payment and to compensate Holder for the loss of use of such delinquent payment, which sum shall be due and payable immediately thereupon. Section 9. Costs of Enforcement. The Borrower shall pay to the Holder on demand by the latter the amount of any and all expenses incurred by the Holder (a) in enforcing its rights hereunder or under the Mortgage and/or the Loan Documents, (b) as the result of a default by the Borrower in performing its obligations under this Note, including but not limited to the expense of collecting any amount owed hereunder, and of any and all reasonable attorneys' fees incurred by Holder in connection with such default, whether suit be brought or not, or (c) in protecting the security hereof. Such expenses shall be added to the principal amount hereof, shall be secured by the Mortgage and shall accrue interest at the Default Rate. Section 10. Borrower's Waiver of Certain Rights. The Borrower and any endorser, guarantor or surety hereby waives the exercise of any and all exemption rights which it holds at law or in equity with respect to the debt evidenced by this Note, and of any and all rights which it holds at law or in equity to require any valuation, appraisal or marshalling, or to have or receive any presentment, protest, demand and notice of dishonor, 6 7 protest, demand and nonpayment as a condition to the Holder's exercise of any of its rights under this Note or the Loan Documents. Section 11. Extensions. The Maturity Date and/or any other date by which any payment is required to be made hereunder may be extended by the Holder from time to time in the exercise of its sole discretion, without in any way altering or impairing the Borrower's or Guarantor's liability hereunder. Section 12. General. 12.1 Applicable Law. This Note shall be given effect and construed by application of the laws of the State of Alabama (without regard to the principles thereof governing conflicts of laws), and any action or proceeding arising hereunder, and each of Holder and Borrower submits (and waives all rights to object) to non-exclusive personal jurisdiction in the State of Alabama, for the enforcement of any and all obligations under the Loan Documents except that if any such action or proceeding arises under the Constitution, laws or treaties of the United States of America, or if there is a diversity of citizenship between the parties thereto, so that it is to be brought in a United States District Court, it shall be brought in the United States District Court for the Northern District of Alabama or any successor federal court having original jurisdiction. 12.2 Headings. The headings of the Sections, subsections, paragraphs and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents. 12.3 Construction. As used herein, (a) the term "person" means a natural person, a trustee, a corporation, a limited liability company, a partnership and any other form of legal entity, and (b) all references made (i) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well, and (iii) to any Section, subsection, paragraph or subparagraph shall, unless therein expressly indicated to the contrary, be deemed to have been made to such Section, subsection, paragraph or subparagraph of this Note. 12.4 Severability. No determination by any court, governmental body or otherwise that any provision of this Note or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (a) any other such provision or (b) such provision in any circumstance not controlled by such determination. Each such provision shall be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with, applicable law. 12.5 No Waiver. The Holder shall not be deemed to have waived the exercise of any right which it holds hereunder unless such waiver is made expressly and in writing. No delay or omission by the Holder in exercising any such right (and no allowance by the Holder to the Borrower of an opportunity to cure a default in performing its obligations hereunder) shall be deemed a waiver of its future exercise. No such waiver made as to any instance involving the exercise of any such right 7 8 shall be deemed a waiver as to any other such instance, or any other such right. Further, acceptance by Holder of all or any portion of any sum payable under, or partial performance of any covenant of, this Note, the Mortgage or any of the other Loan Documents, whether before, on, or after the due date of such payment or performance, shall not be a waiver of Holder's right either to require prompt and full payment and performance when due of all other sums payable or obligations due thereunder or hereunder or to exercise any of Holder's rights and remedies hereunder or thereunder. 12.6 Waiver of Jury Trial; Service of Process; Court Costs. BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE HOLDER MAY BE PARTIES ARISING OUT OF, IN CONNECTION WITH, OR IN ANY WAY PERTAINING TO, THIS NOTE AND/OR ANY OF THE OTHER LOAN DOCUMENTS. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS NOTE. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY THE BORROWER, UPON CONSULTATION WITH COUNSEL OF BORROWER'S CHOICE, AND THE BORROWER HEREBY REPRESENTS THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. THE BORROWER FURTHER REPRESENTS AND WARRANTS THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. BORROWER HEREBY IRREVOCABLY DESIGNATES NATIONAL REGISTERED AGENTS, I NC. (THE "AGENT"), 9 EAST LOOCKERMAN STREET, DOVER, DELAWARE 19901 AS ITS REGISTERED AGENT FOR THE PURPOSE OF RECEIVING SERVICE OF ALL LEGAL NOTICES AND PROCESS ISSUED BY ANY COURT IN THE STATE OF ALABAMA AS WELL AS SERVICE OF ALL PLEADINGS AND OTHER DOCUMENTS RELATED TO ANY LEGAL PROCEEDING OR ACTION ARISING OUT OF THIS NOTE. BORROWER AGREES THAT SERVICE UPON THE AGENT SHALL BE VALID REGARDLESS OF BORROWER'S WHEREABOUTS AT THE TIME OF SUCH SERVICE AND REGARDLESS OF WHETHER BORROWER RECEIVES A COPY OF SUCH SERVICE, PROVIDED THAT THE HOLDER SHALL HAVE MAILED A COPY TO BORROWER IN ACCORDANCE WITH THE NOTICE PROVISIONS HEREIN. BORROWER AGREES TO PAY ALL COURT COSTS AND REASONABLE ATTORNEY'S FEES INCURRED BY HOLDER IN CONNECTION WITH ENFORCING ANY PROVISION OF THIS NOTE. NOTWITHSTANDING THE FOREGOING, HOLDER AGREES TO USE REASONABLE EFFORTS TO PROVIDE BORROWER WITH NOTICE OF THE FILING OF ANY LAWSUIT BY HOLDER AGAINST BORROWER. 12.7 Offset. Upon the occurrence of an Event of Default, the Holder may set-off against any principal and interest owing hereunder, any and all credits, money, stocks, bonds or other 8 9 security or property of any nature whatsoever on deposit with, or held by, or in the possession of, the Holder, to the credit of or for the account of the Borrower, without notice to or consent of the Borrower or Guarantor. 12.8 Non-Exclusivity of Rights and Remedies. None of the rights and remedies herein conferred upon or reserved to Holder is intended to be exclusive of any other right or remedy contained herein or in any of the other Loan Documents and each and every such right and remedy shall be cumulative and concurrent, and may be enforced separately, successively or together, and may be exercised from time to time as often as may be deemed necessary or desirable by Holder. 12.9 Incorporation by Reference. All of the agreements, conditions, covenants and provisions contained in each of the Loan Documents are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully set forth herein. Borrower covenants and agrees to keep and perform, or cause to be kept and performed, all such agreements, conditions, covenants and provisions strictly in accordance with their terms. 12.10 Joint and Several Liability. If Borrower consists of more than one person and/or entity, each such person and/or entity agrees that its liability hereunder is joint and several. 12.11 Business Purpose. Borrower represents and warrants that the Loan evidenced by this Note is being obtained solely for the purpose of acquiring or carrying on a business, professional or commercial activity and is not for personal, agricultural, family or household purposes. 12.12 Interest Limitation. Notwithstanding anything to the contrary contained herein or in the Mortgage or in any other of the Loan Documents, the effective rate of interest on the obligation evidenced by this Note shall not exceed the lawful maximum rate of interest permitted to be paid. Without limiting the generality of the foregoing, in the event that the interest charged hereunder results in an effective rate of interest higher than that lawfully permitted to be paid, then such charges shall be reduced by the sum sufficient to result in an effective rate of interest permitted and any amount which would exceed the highest lawful rate already received and held by the Holder shall be applied to a reduction of principal and not to the payment of interest. Borrower agrees that for the purpose of determining highest rate permitted by law, any non-principal payment (including, without limitation, Late Fees and other fees) shall be deemed, to the extent permitted by law, to be an expense, fee or premium rather than interest. This provision shall control every other provision of this Note and the other Loan Documents with respect to the changing, collecting and payment of interest on the indebtedness evidenced hereby. 12.13 Modification. This Note may be modified, amended, discharged or waived only by an agreement in writing signed by the party against whom enforcement of such modification, amendment, discharge or waiver is sought. 12.14 Time of the Essence. Time is strictly of the essence of this Note. 9 10 12.15 Negotiable Instrument. The Borrower agrees that this Note shall be deemed a negotiable instrument, even though this Note may not otherwise qualify, under applicable law, absent this paragraph, as a negotiable instrument. 12.16 Interest Rate After Judgment. If judgment is entered against the Borrower on this Note, the amount of the judgment entered (which may include principal, interest, fees, Late Fees and costs) shall bear interest at the Default Rate, to be determined on the date of the entry of the judgment. 12.17 Relationship. Borrower and Holder intend that the relationship between them shall be solely that of creditor and debtor. Nothing contained in this Note or in any of the other Loan Documents shall be deemed or construed to create a partnership, tenancy-in-common, joint tenancy, joint venture or co-ownership by or between Borrower and Holder. 12.18 WAIVER OF AUTOMATIC STAY. BORROWER HEREBY AGREES THAT, IN CONSIDERATION OF LENDER'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN, IN THE EVENT THAT BORROWER SHALL (A) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED STATES CODE, AS AMENDED ("BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUTE; (B) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE; (C) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (D) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR; OR (E) BE THE SUBJECT OF AN ORDER, JUDGMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED AGAINST ANY BORROWER FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, SUBJECT TO COURT APPROVAL, HOLDER SHALL THEREUPON BE ENTITLED AND BORROWER HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE (INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR AGAINST THE EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO HOLDER AS PROVIDED IN THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND BORROWER HEREBY IRREVOCABLY WAIVES ITS RIGHTS TO OBJECT TO SUCH RELIEF. 10 11 12.19 Acknowledgment By Guarantor. Guarantor has acknowledged this Note below for purposes of confirming its obligations all as more specifically set forth in the Guaranty Agreement. [REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 11 12 IN WITNESS WHEREOF, the Borrower has executed and sealed this Note or caused it to be executed and sealed on its behalf by its duly authorized representatives, the day and year first above written, and the obligations under this Note shall be binding upon Borrower's successors and assigns. WITNESS: BORROWER: DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company - ------------------------------ By: Diversicare Leasing Corp., a Tennessee corporation, its sole m member [Print Name] By: ---------------------------------- James F. Mills, Jr., Senior Vice President ACKNOWLEDGED BY GUARANTOR: GUARANTOR: ADVOCAT INC. - ------------------------------ By:___________________________ (SEAL) Its:__________________________ STATE OF TENNESSEE ) _________ COUNTY ) I, the undersigned, a Notary Public in and for said County in said State, hereby certify that James F. Mills, Jr., whose name as Senior Vice President of Diversicare Leasing Corp., a Tennessee corporation and the sole member of Diversicare Windsor House, LLC, a Delaware limited liability company, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, he, as such officer and with full authority, executed the same voluntarily for and as the act of said limited liability company. Given under my hand and official seal this the ____ day of March, 2001. ------------------------- Notary Public AFFIX SEAL My commission expires: ----------- 12 EX-10.11 13 g71016ex10-11.txt EMPLOYMENT AGREEMENT 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT This Agreement made effective as of March 5, 2001 by and between ADVOCAT INC., a Delaware corporation (the "Company"), and William R. Council III (the "Executive"). In consideration of the mutual covenants contained in this Agreement, the parties hereby agree as follows: SECTION I EMPLOYMENT The Company agrees to employ the Executive and the Executive agrees to be employed by the Company for the Period of Employment as provided in Section III.A. below and upon the terms and conditions provided in the Agreement. SECTION II POSITION AND RESPONSIBILITIES During the Period of Employment, the Executive agrees to serve as Chief Financial Officer of the Company and to be responsible for the typical management responsibilities expected of an officer holding such positions and such other responsibilities as may be assigned to Executive from time to time by the Chief Executive Officer or Board of Directors of the Company. SECTION III TERMS AND DUTIES A. Period of Employment The period of Executive's employment under this Agreement will commence as of the date hereof and shall continue through February 28, 2002, subject to extension or termination as provided in this Agreement ("Period of Employment"). On each anniversary of the commencement of the Period of Employment, the period of Executive's employment shall be extended for additional one (1) year periods, unless either party gives notice thirty (30) days in advance of the expiration of the then current period of employment of such party's intent not to extend the Period of Employment. 2 B. Duties During the Period of Employment, the Executive shall devote all of his business time, attention and skill to the business and affairs of the Company and its subsidiaries. The Executive will perform faithfully the duties which may be assigned to him from time to time by the Chief Executive Officer or the Board of Directors. SECTION IV COMPENSATION AND BENEFITS A. Compensation For all services rendered by the Executive in any capacity during the Period of Employment, the Executive shall be compensated as follows: 1. Base Salary The Company shall pay the Executive a base salary ("Base Salary") as follows: One Hundred Fifty Thousand Dollars ($150,000) per annum. Base Salary shall be payable according to the customary payroll practices of the Company but in no event less frequently than once each month. The base salary shall be reviewed annually and shall be subject to increase according to the policies and practices adopted by the Company from time to time. B. Annual Incentive Awards The Company will pay the Executive annual incentive compensation awards as may be granted by the Board or a Compensation Committee to the Executive up to 30% of Base Salary, conditional upon achievement of pre-agreed goals. C. Additional Benefits The Executive will be entitled to participate in all compensation or employee benefit plans or programs and receive all benefits and perquisites for which any salaried employees are eligible under any existing or future plan or program established by the Company for salaried employees. The Executive will participate to the extent permissible under the terms and provisions of such plans or programs in accordance with program provisions. These may include group hospitalization, health, dental care, life or other insurance, tax qualified pension, car allowance, savings, thrift and profit sharing plans, termination pay programs, sick leave plans, travel or accident insurance, disability insurance, and contingent compensation plans including capital accumulation programs, Restricted Stock programs, stock purchase programs 3 and stock option plans. Nothing in this Agreement will preclude the Company from amending or terminating any of the plans or programs applicable to salaried or senior executives as long as such amendment or termination is applicable to all salaried employees or senior executives. The Executive will be entitled to an annual four-week paid vacation. D. Stock Option Plan The Company will grant to the Executive options for the purchase of 50,000 shares of the Company's common stock under the Company's 1994 Incentive and Nonqualified Stock Option Plan for Key Personnel. The exercise price for these options will be the price on the market close on April 9, 2001. SECTION V BUSINESS EXPENSES The Company will reimburse the Executive for all reasonable travel and other expenses incurred by the Executive in connection with the performance of his duties and obligations under this Agreement. SECTION VI DISABILITY A. In the event of disability of the Executive during the Period of Employment, the Company will continue to pay the Executive according to the compensation provisions of this Agreement during the period of his disability, until such time as Executive's long term disability insurance benefits are available. However, in the event the Executive is disabled for a continuous period of six (6) months after the Executive first becomes disabled, the Company may terminate the employment of the Executive. In this case, normal compensation will cease except for earned but unpaid Base Salary and Incentive Compensation Awards which would be payable on a pro-rated basis for the year in which the disability occurred. In the event of such termination, all unvested stock options held by Executive shall be deemed fully vested on the date of such termination. B. During the period the Executive is receiving payments of either regular compensation or disability insurance described in this Agreement and as long as he is physically and mentally able to do so, the Executive will furnish information and assistance to the Company and from time to time will make herself available to the Company to undertake assignments consistent with his prior position with the Company and his physical and mental health. If the Company fails to make a payment or provide a benefit required as part of the Agreement, the Executive's obligation to fulfill information and assistance will end. 4 C. The term "disability" will have the same meaning as under any disability insurance provided pursuant to this Agreement or otherwise. SECTION VII DEATH In the event of the death of the Executive during the Period of Employment, the Company's obligation to make payments under this Agreement shall cease as of the date of death, except for earned but unpaid Base Salary and Incentive Compensation Awards which will be paid on a pro-rated basis for that year. The Executive's designated beneficiary will be entitled to receive the proceeds of any life or other insurance or other death benefit programs provided in this Agreement. SECTION VIII EFFECT OF TERMINATION OF EMPLOYMENT A. If the Executive's employment terminates due to either a Without Cause Termination or a Constructive Discharge, as defined later in this Agreement, the Company will pay the Executive in a lump sum upon such Termination or Constructive Discharge an amount equal to 200% of his Base Salary as in effect at the time of the termination. Earned but unpaid Base Salary and Incentive Compensation Awards will be paid in a lump sum at such time. The benefits and perquisites described in this Agreement as in effect at the date of termination of employment will be continued for eighteen (18) months. If the Executive's employment terminates due to either a Without Cause Termination or a Constructive Discharge, or pursuant to Section XI, all stock options ("Options") granted to the Executive under the Company's 1991 Non-Qualified Stock Option Plan or other stock option program or plan (the "Plan") shall be deemed vested, and the Company shall cause the Options to remain exercisable for eighteen (18) months from the date of termination. B. If the Executive's employment terminates due to a Termination for Cause, earned but unpaid Base Salary will be paid on a pro-rated basis for the year in which the termination occurs. No other payments will be made or benefits provided by the Company. C. Upon termination of the Executive's employment other than for reasons due to death, disability, or pursuant to Paragraph A of this Section or Section XI, the Period of Employment and the Company's obligation to make payments under this Agreement will cease as of the date of the termination except as expressly defined in this Agreement. D. For this Agreement, the following terms have the following meanings: 5 1. "Termination for Cause" means termination of the Executive's employment by the Company's Board of Directors acting in good faith by the Company by written notice to the Executive specifying the event relied upon for such termination, due to the Executive's serious, willful misconduct with respect to his duties under this Agreement, including but not limited to conviction for a felony or perpetration of a common law fraud, which has resulted or is likely to result in material economic damage to the Company. 2. "Constructive Discharge" means termination of the Executive's employment by the Executive due to a failure of the Company to fulfill its obligations under this Agreement in any material respect including any reduction of the Executive's Base Salary or other compensation other than reductions applicable to all employees of the Company or failure to appoint or reappoint the Executive to the position specified in Section II hereof, or other material change by the Company in the functions, duties or responsibilities of the position which would reduce the ranking or level, responsibility, importance or scope of the position. The Executive will provide the Company a written notice which describes the circumstances being relied on for the termination with respect to the Agreement within ninety (90) days after the event giving rise to the notice. The Company will have thirty (30) days to remedy the situation prior to the Termination for Constructive Dismissal. 3. "Without Cause Termination" means termination of the Executive's employment by the Company (a) other than due to death, disability, Termination for Cause or pursuant to Section XI; or (b) upon expiration of the Period of Employment as a result of the giving of notice by the Company of its intent not to extend the Period of Employment as provided in Section III.A. E. Stock Option Repurchase. If the Executive's employment terminates due to either a Without Cause Termination or a Constructive Discharge or pursuant to Section XI, Executive may require the Company to repurchase any Options for an amount equal to the difference between the fair market value of a share of the Company's common stock on the date of termination and the per share exercise price set forth in the Options, times the number of shares (whether vested or unvested) granted to the Executive under the Options. SECTION IX OTHER DUTIES OF THE EXECUTIVE DURING AND AFTER THE PERIOD OF EMPLOYMENT A. The Executive will, with reasonable notice during or after the Period of Employment, furnish information as may be in his possession and cooperate with the Company as may reasonably be requested in connection with any claims or legal actions in which the Company is or may become a party. 6 B. The Executive recognizes and acknowledges that all information pertaining to the affairs, business, clients, customers or other relationships of the Company, as hereinafter defined, is confidential and is a unique and valuable asset of the Company. Access to and knowledge of this information are essential to the performance of the Executive's duties under this Agreement. The Executive will not during the Period of Employment or after except to the extent reasonably necessary in performance of the duties under this Agreement, give to any person, firm, association, corporation or governmental agency any information concerning the affairs, business, clients, customers or other relationships of the Company except as required by law. The Executive will not make use of this type of information for his own purposes or for the benefit of any person or organization other than the Company. The Executive will also use his best efforts to prevent the disclosure of this information by others. All records, memoranda, etc. relating to the business of the Company whether made by the Executive or otherwise coming into his possession are confidential and will remain the property of the Company. C. During the Period of Employment and for a twelve (12) month period thereafter, the Executive will not use his status with the Company to obtain loans, goods or services from another organization on terms that would not be available to him in the absence of his relationship to the Company. During the Period of Employment and for a twelve (12) month period following termination of the Period of Employment, other than termination due to a Without Cause Termination, a Constructive Discharge or termination pursuant to Section XI: the Executive will not make any statements or perform any acts intended to advance the interest of any existing or prospective competitors of the Company in any way that will injure the interest of the Company; the Executive without prior express written approval by the Board of Directors of the Company will not directly or indirectly own or hold any proprietary interest in or be employed by or receive compensation from any party engaged in the same or any similar business in the same geographic areas the Company does business; and the Executive without express prior written approval from the Board of Directors, will not solicit any members of the then current clients of the Company or discuss with any employee of the Company information or operation of any business intended to compete with the Company. For the purposes of the Agreement, proprietary interest means legal or equitable ownership, whether through stock holdings or otherwise, of a debt or equity interest (including options, warrants, rights and convertible interests) in a business firm or entity, or ownership of more than 5% of any class of equity interest in a publicly-held company. The Executive acknowledges that the covenants contained herein are reasonable as to geographic and temporal scope. For a twelve (12) month period after termination of the Period of Employment for any reason, the Executive will not directly or indirectly hire any employee of the Company or solicit or encourage any such employee to leave the employ of the Company. D. The Executive acknowledges that his breach or threatened or attempted breach of any provision of Section IX would cause irreparable harm to the Company not compensable in monetary damages and that the Company shall be entitled, in addition to all other applicable remedies, to a temporary and permanent injunction and a decree for specific performance of the 7 terms of Section IX without being required to prove damages or furnish any bond or other security. E. The Executive shall not be bound by the provisions of Section IX in the event of the default by the Company in its obligations under this Agreement which are to be performed upon or after termination of this Agreement. SECTION X INDEMNIFICATION, LITIGATION The Company will indemnify the Executive to the fullest extent permitted by the laws of the state of incorporation in effect at that time, or certificate of incorporation and by-laws of the Company whichever affords the greater protection to the Executive. The Executive will be entitled to any insurance proceeds related to any award, or any fees or expenses incurred in connection with any action, suit or proceeding to which he may be made a party by reason of being a director or officer of the Company. SECTION XI CHANGE IN CONTROL In the event there is a Change in Control of the ownership of the Company, the Executive may at any time immediately resign upon written notice to the Company. In this event, the Company shall pay to the Executive in a lump sum upon such resignation an amount equal to 200% of his Base Salary as in effect at the time of such resignation. In addition, earned but unpaid Base Salary and Incentive Compensation Awards will be paid on a pro-rated basis for the year in which resignation occurs. Any stock options granted to the Executive prior to termination pursuant to the Plan, but subject to vesting restrictions, will be fully vested upon a Change in Control whether or not the Executive resigns. The benefits and perquisites described in this Agreement as in effect at the date of termination of employment will also be continued for eighteen (18) months from the effective date of termination pursuant to Change of Control. A "Change in Control" shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of more than 50% of the outstanding voting securities of the Company, (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, as the same shall have existed immediately prior to such merger or consolidation, (iii) the Company shall sell all or substantially all of its assets to another corporation which is not a wholly-owned subsidiary, or (iv) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date hereof) of the Securities and Exchange Act of 1934 ("Exchange "Act")), shall acquire more than 50% of the outstanding 8 voting securities of the Company (whether directly, indirectly, beneficially or of record). For purposes hereof, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange Act. SECTION XII WITHHOLDING TAXES The Company may directly or indirectly withhold from any payments under this Agreement all federal, state, city or other taxes that shall be required pursuant to any law or governmental regulation. SECTION XIII EFFECTIVE PRIOR AGREEMENTS This Agreement contains the entire understanding between the Company and the Executive with respect to the subject matter and supersedes any prior employment or severance agreements between the Company and its affiliates, and the Executive. SECTION XIV CONSOLIDATION, MERGER OR SALE OF ASSETS Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation which assumes this Agreement and all obligations and undertakings of the Company hereunder. Upon such a Consolidation, Merger or Sale of Assets, the term "the Company" as used will mean the other corporation and this Agreement shall continue in full force and effect. This Section XIV is not intended to modify or limit the rights of the Executive hereunder, including without limitation, the rights of Executive under Section XI. SECTION XV MODIFICATION This Agreement may not be modified or amended except in writing signed by the parties. No term or condition of this Agreement will be deemed to have been waived except in writing by the party charged with waiver. A waiver shall operate only as to the specific term or condition waived and will not constitute a waiver for the future or act on anything other than that which is specifically waived. 9 SECTION XVI GOVERNING LAW; ARBITRATION This Agreement has been executed and delivered in the State of Tennessee and its validity, interpretation, performance and enforcement shall be governed by the laws of that state. Any dispute among the parties hereto shall be settled by arbitration in Nashville, Tennessee, in accordance with the rules then obtaining of the American Arbitration Association and judgment upon the award rendered may be entered in any court having jurisdiction thereof. SECTION XVII NOTICES All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid by registered mail, return receipt requested, or if delivered by hand, overnight delivery service or confirmed facsimile transmission, to the following: (a) If to the Company, at 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067, Attention: President or Chief Executive Officer, or at such other address as may have been furnished to the Executive by the Company in writing; or (b) If to the Executive, at 5161 Ravens Glen, Nashville, Tennessee 37211, or such other address as may have been furnished to the Company by the Executive in writing. SECTION XVIII BINDING AGREEMENT This Agreement shall be binding on the parties' successors, heirs and assigns. 10 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. ADVOCAT INC. By: /s/ Charles H. Rinne ---------------------------------------- President and Chief Operating Officer EXECUTIVE: /s/ William R. Council III -------------------------------------------- William R. Council III -----END PRIVACY-ENHANCED MESSAGE-----