ADVOCAT - FORM 10-Q

-----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, DCBGZh+uE7cT7K4DDQOoz6Sh/BYClKznPb+gUmG01kRmdMv2WbhboU3O4Zppizki 8nlcAOs8ljxrq5fQl1a34w== 0000950144-03-009879.txt : 20030813 0000950144-03-009879.hdr.sgml : 20030813 20030813165432 ACCESSION NUMBER: 0000950144-03-009879 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 26 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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: 03842103 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 g84031e10vq.htm ADVOCAT - FORM 10-Q ADVOCAT - FORM 10-Q

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, 2003

		OR

o		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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

5,493,287

(Outstanding shares of the issuer’s common stock as of August 8, 2003)

TABLE OF CONTENTS


Part I. FINANCIAL INFORMATION
INTERIM CONSOLIDATED BALANCE SHEETS
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
PART II — OTHER INFORMATION
SIGNATURES
EX-10.1 LEASE TERMINATION AGREEMENT 05/29/03
EX-10.2 AMENDMENT TO BOND LEASE AGREEMENT 05/02/03
EX-10.3 FOURTH AMENDMENT LOAN AGREEMENT 06/18/03
EX-10.4 FIFTH AMENDMENT PROMISSORY NOTE 06/18/03
EX-10.5 FIFTH AMENDMENT PROMISSORY NOTE 06/18/03
EX-10.6 FOURTH AMENDMENT LOAN AGREEMENT 06/18/03
EX-10.7 CROSS-DEFAULT AGREEMENT 06/18/03
EX-10.8 SIXTH AMENDMENT PROMISSORY NOTE 07/01/03
EX-10.9 FIFTH AMENDMENT TO LOAN AGREEMENT 07/01/03
EX-10.10 SIXTH AMENDMENT PROMISSORY NOTE 07/01/03
EX-10.11 FIFTH AMENDMENT LOAN AGREEMENT 07/01/03
EX-10.12 CONTRACT TO PURCHASE REAL PROPERTY
EX-10.13 MASTER LEASE AGREEMENT 05/01/03
EX-10.14 WORKING CAPITAL LOAN AGREEMENT 04/01/03
EX-10.15 WORKING CAPITAL PROMISSORY NOTE
EX-10.16 SECURITY AGREEMENT 04/01/03
EX-10.17 FIRST AMENDMENT TO PROMISSORY NOTE
EX-10.18 FIRST AMENDMENT TO PROMISSORY NOTE
EX-10.19 THIRD AMENDMENT TO PROMISSORY NOTE
EX-10.20 THIRD AMENDMENT TO PROMISSORY NOTE
EX-10.21 SECOND AMENDMENT TO PROMISSORY NOTE
EX-10.22 THIRD AMENDMENT TO MASTER DOCUMENTS
EX-31.1 302 CERTIFICATION OF THE CEO
EX-31.2 302 CERTIFICATION OF THE CFO
EX-32 906 CERTIFICATION OF THE CEO AND THE CFO

Part I. FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

ADVOCAT INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands)


			June 30,			December 31,
			2003			2002

			(unaudited)
CURRENT ASSETS:
	Cash and cash equivalents		$	10,873		$	7,720
	Restricted cash			1,252			1,252
	Receivables, less allowance for doubtful accounts of $2,791 and $2,215, respectively			13,992			13,268
	Inventories			555			500
	Prepaid expenses and other current assets			1,405			1,505

		Total current assets		28,077			24,245

PROPERTY AND EQUIPMENT, at cost				96,286			92,499
	Less accumulated depreciation			(36,223	)		(33,428	)

	Property and equipment, net			60,063			59,071

OTHER ASSETS:
	Deferred financing and other costs, net			271			416
	Deferred lease costs, net			1,703			1,577
	Assets held for sale or redevelopment			—			200
	Investments in and receivables from joint ventures			1,943			2,179
	Other assets			1,165			1,183

		Total other assets		5,082			5,555

			$	93,222		$	88,871

(Continued)

ADVOCAT INC.

INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(continued)


				June 30,			December 31,
				2003			2002

				(unaudited)
CURRENT LIABILITIES:
	Current portion of long-term debt			$	9,183		$	12,677
	Short-term debt				43,641			41,367
	Trade accounts payable				7,942			7,600
	Accrued expenses:
		Payroll and employee benefits			8,005			6,962
		Interest			170			192
		Current portion of self-insurance reserves			11,866			9,017
		Other current liabilities			4,520			5,275

			Total current liabilities		85,327			83,090

NONCURRENT LIABILITIES:
	Long-term debt, less current portion				6,575			5,370
	Self-insurance reserves, less current portion				36,125			26,724
	Other noncurrent liabilities				4,127			3,657

			Total noncurrent liabilities		46,827			35,751

COMMITMENTS AND CONTINGENCIES
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
	Authorized 600,000 shares, $.10 par value, 393,658 shares issued and outstanding at redemption value				3,994			3,858

SHAREHOLDERS’ EQUITY (DEFICIT):
	Preferred stock, authorized 400,000 shares, $.10 par value, none issued and outstanding				—			—
	Common stock, authorized 20,000,000 shares, $.01 par value, 5,493,000 issued and outstanding				55			55
	Paid-in capital				15,908			15,908
	Accumulated deficit				(58,889	)		(49,791	)

			Total shareholders’ deficit		(42,926	)		(33,828	)

				$	93,222		$	88,871

The accompanying notes are an integral part of these interim consolidated balance sheets.

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts, unaudited)


			Three Months Ended June 30,

			2003			2002

REVENUES:
	Patient revenues, net		$	47,188		$	41,207
	Resident revenues			5,929			7,637
	Management fees			748			647
	Equity in joint venture income (loss)			44			(12	)
	Interest			76			34

		Net revenues		53,985			49,513

EXPENSES:
	Operating			51,701			39,552
	Lease			4,196			4,406
	General and administrative			3,228			3,193
	Interest			838			994
	Depreciation and amortization			1,364			1,369
	Asset impairment and non-recurring charges			344			1,065

		Total expenses		61,671			50,579

LOSS BEFORE INCOME TAXES				(7,686	)		(1,066	)
PROVISION FOR INCOME TAXES				145			103

NET LOSS				(7,831	)		(1,169	)
PREFERRED STOCK DIVIDENDS, ACCRUED BUT NOT PAID				69			58

NET LOSS FOR COMMON STOCK			$	(7,900	)	$	(1,227	)

BASIC AND DILUTED NET LOSS PER COMMON SHARE:
	Basic		$	(1.44	)	$	(0.22	)

	Diluted		$	(1.44	)	$	(0.22	)

WEIGHTED AVERAGE SHARES:
	Basic			5,493			5,493

	Diluted			5,493			5,493

The accompanying notes are an integral part of these interim consolidated financial statements.

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts, unaudited)


			Six Months Ended June 30,

			2003			2002

REVENUES:
	Patient revenues, net		$	88,162		$	81,828
	Resident revenues			11,823			17,816
	Management fees			1,523			1,326
	Equity in joint venture income			108			58
	Interest			134			59

		Net revenues		101,750			101,087

EXPENSES:
	Operating			93,115			83,280
	Lease			8,002			9,586
	General and administrative			6,436			6,352
	Interest			1,728			2,029
	Depreciation and amortization			2,740			2,752
	Asset impairment and non-recurring charges			364			1,065

		Total expenses		112,385			105,064

LOSS BEFORE INCOME TAXES				(10,635	)		(3,977	)
PROVISION FOR INCOME TAXES				275			196

NET LOSS				(10,910	)		(4,173	)
PREFERRED STOCK DIVIDENDS, ACCRUED BUT NOT PAID				136			115

NET LOSS FOR COMMON STOCK			$	(11,046	)	$	(4,288	)

BASIC AND DILUTED NET LOSS PER COMMON SHARE:
	Basic		$	(2.01	)	$	(0.78	)

	Diluted		$	(2.01	)	$	(0.78	)

WEIGHTED AVERAGE SHARES:
	Basic			5,493			5,493

	Diluted			5,493			5,493

The accompanying notes are an integral part of these interim consolidated financial statements.

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands and unaudited)


		Three Months Ended June 30,						Six Months Ended June 30,

		2003			2002			2003			2002

NET LOSS FOR COMMON STOCK		$	(7,900	)	$	(1,227	)	$	(11,046	)	$	(4,288	)
OTHER COMPREHENSIVE INCOME (LOSS):
	Foreign currency translation adjustments		1,811			782			3,039			689
	Income tax provision		(650	)		(281	)		(1,090	)		(248	)

			1,161			501			1,949			441

COMPREHENSIVE LOSS		$	(6,739	)	$	(726	)	$	(9,097	)	$	(3,847	)

The accompanying notes are an integral part of these interim consolidated financial statements.

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)


				Six Months Ended June 30,

				2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(10,910	)	$	(4,173	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation			2,740			2,752
		Provision for doubtful accounts			949			685
		Provision for self-insured professional liability			12,285			7,285
		Equity earnings in joint ventures			(108	)		(58	)
		Amortization of deferred balances			211			241
		Amortization of discount on non-interest bearing promissory note			—			11
		Provision for leases in excess of cash payments			451			763
		Asset impairment and non-recurring charges			20			870
	Changes in other assets and liabilities affecting operating activities:
		Receivables, net			(1,673	)		2,452
		Inventories			(55	)		(2	)
		Prepaid expenses and other assets			121			259
		Trade accounts payable and accrued expenses			595			(4,505	)

			Net cash provided by operating activities		4,626			6,580

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property and equipment, net				(2,011	)		(2,482	)
	Proceeds from sale of property				179			—
	Mortgages receivable, net				50			42
	Deposits and other deferred balances				(151	)		—
	Investment in and advances to joint ventures, net				652			115

		Net cash used in investing activities			(1,281	)		(2,325	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Repayment of debt obligations				(1,503	)		(1,023	)
	Net proceeds from (repayment of) lines of credit				558			(2,866	)
	Proceeds from issuance of debt				—			865
	Financing costs				(28	)		(33	)

		Net cash used in financing activities			(973	)		(3,057	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH					781			—

(Continued)

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
(continued)


		Six Months Ended June 30,

		2003		2002

INCREASE IN CASH AND CASH EQUIVALENTS		$	3,153	$	1,198
CASH AND CASH EQUIVALENTS, beginning of period			7,720		3,426

CASH AND CASH EQUIVALENTS, end of period		$	10,873	$	4,624

SUPPLEMENTAL INFORMATION:
	Cash payments of interest	$	1,590	$	1,707

	Cash payments of income taxes, net	$	298	$	192

NON-CASH TRANSACTIONS:

During the three month periods ended June 30, 2003 and 2002, the Company accrued, but did not pay, Preferred Stock dividends of $69,000 and $58,000, respectively. During the six month periods ended June 30, 2003 and 2002, the Company accrued, but did not pay, Preferred Stock dividends of $136,000 and $115,000, respectively.

The accompanying notes are an integral part of these interim consolidated financial statements.

ADVOCAT INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003 AND 2002

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 nine states, primarily in the Southeast, and three 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, 2003, the Company operates 96 facilities, consisting of 62 nursing homes with 7,108 licensed beds and 34 assisted living facilities with 3,359 units. The Company owns 12 nursing homes, leases 38 others, and manages 12 nursing homes. The Company owns 15 assisted living facilities, leases seven others, and manages the remaining 12 assisted living facilities. The Company holds a minority interest in six of these managed assisted living facilities. The Company operates 48 nursing homes and 14 assisted living facilities in the United States and 14 nursing homes and 20 assisted living facilities in Canada. The Company operates facilities in Alabama, Arkansas, Florida, Kentucky, North Carolina, Ohio, Tennessee, Texas, West Virginia and the Canadian provinces of Alberta, British Columbia and Ontario.

Effective April 1, 2003, the Company entered into leases for four nursing home facilities in Florida that had previously been managed by the Company under management contracts. Accordingly, the results of operations of these facilities are included in the Company’s results of operations beginning April 1, 2003. The leases expire December 31, 2005. Lease payments of $1,498,000 are required each year. Additional rent may be imposed based on the profitability of the facilities. The Company evaluates such additional rentals each quarter and records additional expense as incurred. There was no additional rent incurred in the three month period ended June 30, 2003.

Under the terms of the previous management contracts, the Company was required to obtain professional liability insurance coverage for the four facilities and received reimbursement for the facilities pro rata share of premiums paid as well as any claims paid on behalf of the owner. Due to the recent deterioration of the financial condition of the owner and the terms of the owner’s mortgage on the facilities, the Company does not believe that the owner of the four facilities will in the future be able to reimburse the Company for costs incurred in connection with professional liability claims arising out of events occurring at the four facilities prior to the entry of the lease. As a result, the Company recorded a liability of approximately $4.3 million in the second quarter of 2003 to record obligations for possible professional liability costs relating to these facilities for which the Company does not anticipate receiving reimbursement from the owner of the facilities.

Effective April 30, 2002, the Company entered into a Lease Termination and Operations Transfer Agreement (the “Pierce Agreement”) with Pierce Management Group and related persons (collectively, “Pierce”), pursuant to which the 13 leases with the former principal owners or affiliates of Pierce were terminated. Effective May 31, 2002, the leases on two additional assisted living facilities were assumed by Pierce. As a result, the Company was relieved of its future obligations with respect to these 15 leases. Effective June 30, 2002, the Company terminated the lease on one additional assisted living facility. The

Company is in a dispute with the owner of this property which will be the subject of an arbitration hearing expected to be held in the fourth quarter of 2003 or the first quarter of 2004. The Company has accrued for the estimated costs associated with this arbitration hearing. The Company asserts that it was entitled to terminate the lease as a result of the landlord’s failure to correct construction defects at the facility. The Company seeks return of its $285,000 security deposit and cancellation of a $200,000 letter of credit. The landlord has asserted claims against the Company for unpaid rents, taxes and operating losses in the amount of $1.4 million.

Effective May 31, 2003, the Company terminated the lease of its only remaining leased assisted living facility in the United States. The lease termination agreement requires aggregate payments of approximately $355,000, with $75,000 paid in June 2003 and the balance over the following twelve months.

The Company incurred lease termination charges of approximately $344,000 and $750,000 in 2003 and 2002, respectively, consisting of the remaining net book value of these 17 facilities and costs of completing the transactions.

During the second quarter of 2003, the Company sold an assisted living facility in North Carolina that had been classified as held for sale. The net proceeds of approximately $179,000 were used to repay outstanding bank debt and there was no material gain or loss resulting from the sale.

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 PRESENTATION OF FINANCIAL STATEMENTS

The interim consolidated financial statements for the three and six month periods ended June 30, 2003 and 2002, 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 Company’s financial position at June 30, 2003 and the results of operations for the three and six month periods ended June 30, 2003 and 2002, and the cash flows for the three and six month periods ended June 30, 2003 and 2002.

The results of operations for the three and six month periods ended June 30, 2003 and 2002 are not necessarily indicative of the operating results that may be expected for a full year. 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, 2002.

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, 2003 and the years ended December 31, 2002, 2001 and 2000 and has limited resources available to meet its operating, capital expenditure and debt service requirements during 2003.

The Company has a net working capital deficit of $57.3 million as of June 30, 2003. The Company has $44.0 million of scheduled debt maturities (including short term debt and current portions of long term debt) during the next twelve months, and is in default of certain debt covenants contained in debt agreements. Beginning October 1, 2002, the Company’s Medicare reimbursements were reduced by approximately $368,000 per month as a result of the expiration of legislation that temporarily increased Medicare reimbursement. Effective March 9, 2001, the Company also obtained professional liability insurance coverage that, based on historical claims experience, could be substantially less than the claims that could be incurred during 2001, 2002 and 2003 and is less than the coverage required by certain of the Company’s debt and lease agreements. The ultimate payments on professional liability claims accrued as of June 30, 2003 and claims that could be incurred during the remainder of 2003 could require cash resources during 2003 or thereafter that would be in excess of the Company’s available cash or other resources. The Company is also not in compliance with certain lease and debt agreements, including financial covenants, insurance requirements and other obligations, that allow the Company’s primary lessor certain rights as discussed below and allows the holders of substantially all of the Company’s debt to demand immediate repayment. Although the Company does not anticipate that such demands 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, 2003. 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. Events of default under the Company’s debt agreements could lead to additional events of default under the Company’s lease agreements covering a majority of its United States nursing facilities. A default in the related lease agreements allows the lessor the right to terminate the lease agreements and assume operating rights with respect to the leased properties. The net book value of property and equipment, including leasehold improvements, related to these facilities total approximately $4.4 million as of June 30, 2003. A default in these lease agreements also allows the holder of the Series B Redeemable Convertible Preferred Stock the right to require the Company to redeem such stock. At a minimum, the Company’s cash requirements during 2003 and 2004 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 these requirements. The independent accountants’ report on the Company’s financial statements at December 31, 2002 included an explanatory paragraph concerning the Company’s ability to continue as a going concern.

The Company’s management is working to enhance revenues related to the operations of the Company’s nursing homes and assisted living facilities, but the results of these efforts are uncertain. Management is focused on increasing the occupancy in its nursing homes and assisted living facilities through an increased emphasis on attracting and retaining patients and residents. Management is also focused on minimizing 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 enhancing revenues, 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. Regardless of the effectiveness of management’s efforts, any demands for repayment by lenders, the inability to obtain waivers or refinance the related debt, the termination of lease agreements or entry of a final judgment in a material amount for a professional liability claim 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, the Company may have to 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 long-term care profession in the United States has experienced a dramatic increase in claims related to alleged negligence in providing care to its patients — the Company is no exception in this regard. As a result, the Company has numerous liability claims and disputes outstanding for professional liability and other related issues. As of June 30, 2003, the Company is engaged in 63 professional liability lawsuits, including 17, 22, and 6 in the states of Florida, Arkansas and Texas, respectively. On June 22, 2001, a jury in Mena, Arkansas issued a verdict in a professional liability lawsuit against the Company totaling $78.425 million. The Company appealed this verdict to the Arkansas Supreme Court in a hearing that took place March 13, 2003. On May 1, 2003, the Arkansas Supreme Court issued a decision on the Company’s appeal, reducing the damages to $26.425 million, plus interest from the date of the original verdict. The Company is presently seeking to obtain review of the appellate court’s judgment by the United States Supreme Court. If the reduced judgment is upheld, the Company believes the settlement amount will be within the Company’s insurance coverage.

The Company and its subsidiaries carry professional liability insurance up to certain limits for coverage of such claims. However, due to the increasing cost of claims against the Company and throughout the long-term care industry, the Company’s professional liability insurance premiums and deductible amounts increased substantially and coverage limits have decreased substantially during 1999 through 2002 and continuing for policy year 2003.

As a result of the substantial premium and deductible increases and insurance coverage decreases, effective March 9, 2002, the Company has obtained professional liability insurance coverage for its United States nursing homes and assisted living facilities that could be substantially less than the claims that could be incurred during the policy periods from March 9, 2002 through March 9, 2004 (policy years 2002 and 2003). For claims made after March 9, 2002, the Company maintains general and professional liability insurance with coverage limits of $250,000 per medical incident and total aggregate policy coverage limits of $1,000,000 for its long-term care services. As of June 30, 2003, payments already made by the insurance carrier for these policies have reduced the remaining aggregate coverage amount. The 2002 and 2003 policies are on a claims made basis and the Company is self-insured for the first $25,000 per occurrence with no aggregate limit. The Company provides reserves on an actuarial basis for known and expected claims incurred during the policy period.

For claims made during the period March 9, 2001 through March 9, 2002, the Company is self-insured for the first $50,000 per occurrence with no aggregate limit for the Company’s United States nursing homes. The policy has coverage limits of $2,000,000 per occurrence and $3,000,000 in the aggregate. As of June 30, 2003, payments already made by the insurance carrier for this policy have reduced the remaining aggregate coverage amount. The Company provides reserves on an actuarial basis for known and expected claims incurred during the policy period. This policy is on a claims made basis. Effective October 1, 2001, the Company’s United States assisted living properties were added to the Company’s insurance program for United States nursing home properties.

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. As of June 30, 2003, payments already made by the insurance carriers for this policy year have reduced the remaining aggregate coverage amount. The Company provides reserves on an actuarial basis for known and expected claims incurred during the policy period. This policy is 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. Effective February 1, 1999, all United States nursing homes became part of the $250,000/$2,500,000 deductible program.

For the policy years 1996 through March 9, 2000, the Company has fully incurred or expects to ultimately fully incur the aggregate deductible amount and has established reserves based on this expectation.

The Company’s United States assisted living facilities are self-insured, with respect to each location, for the first $50,000 per occurrence through September 30, 2001. Effective October 1, 2001, the Company’s United States assisted living properties were added to the Company’s insurance program for United States nursing home properties. The Company also maintains a $15,000,000 aggregate umbrella liability policy for claims in excess of the foregoing limits for these assisted living operations through September 30, 2001.

In Canada, the Company’s professional liability claims experience and associated costs have been dramatically less than that in the United States. The Canadian facilities owned or leased by the Company are self-insured for the first $3,000 ($5,000 Canadian) per occurrence. The Company’s aggregate primary coverage limit with respect to Canadian operations is $1,485,000 ($2,000,000 Canadian). The Company also maintains a $3,713,000 ($5,000,000 Canadian) aggregate umbrella policy for claims in excess of the foregoing limits for these facilities.

The Company has recorded total liabilities for reported professional liability claims and estimates for incurred but unreported claims of $45,514,000 as of June 30, 2003. Such liabilities include estimates of legal costs. The Company believes that the $26.425 million monetary judgment in the professional liability lawsuit in Mena, Arkansas, will be covered by insurance pursuant to the 1997 and 1998 insurance programs. Based on the expected insurance coverage, the judgment amount has not been accrued. However, to the extent the Company’s professional liability insurance pays large amounts with respect to this verdict, there may not be sufficient insurance coverage for other claims during the same time period. The ultimate results of all of the Company’s professional liability claims and disputes are unknown at the present time. There can be no assurance that verdicts against the Company will not exceed the policy limits of the Company’s insurance policies.

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 two of its insurance carriers providing coverage for prior years claims have either been declared insolvent or are currently under rehabilitation proceedings. Any future judgments or settlements above the Company’s per occurrence, per location or umbrella coverage or not covered by insurance due to the insolvency of the insurance carrier could have a material adverse impact on the Company’s financial position, cash flows and results of operations. In addition, the ultimate payment of professional liability claims accrued as of June 30, 2003 and claims that could be incurred during 2003 could require cash resources during 2003 or

thereafter that would be in excess of the Company’s available cash or other resources. These potential future payments could have a material adverse impact on the Company’s financial position and cash flows.

With respect to workers’ compensation insurance, substantially all of the Company’s employees became covered under either an indemnity insurance plan or state-sponsored programs in May 1997. Prior to that time, the Company was self-insured for the first $250,000, on a per claim basis, for workers’ compensation claims in a majority of its United States nursing facilities. However, the insurance carrier providing coverage above the Company’s self-insured retention has been declared insolvent by the applicable state insurance agency. As a result, the Company is completely self-insured for workers compensation exposures prior to May 1997. The Company has been and remains a non-subscriber to the Texas workers’ compensation system and is, therefore, completely self-insured for employee injuries with respect to its Texas operations. For the policy period July 1, 2002 through June 30, 2003, the Company entered into a “high deductible” workers compensation insurance program covering the majority of the Company’s United States employees. Under the high deductible policy, the Company is self-insured for the first $25,000 per claim, subject to an aggregate maximum of out of pocket cost of $1,600,000 for the 12 month policy period. The Company has a letter of credit of $1,252,000 securing its self insurance obligations under this program. The letter of credit is secured by a certificate of deposit of $1,252,000, which is reflected as “restricted cash” in the accompanying balance sheet. The reserve for the high deductible policy is based on known claims incurred and an estimate of incurred but not reported claims determined by an analysis of historical claims incurred. Effective June 30, 2003, the Company entered into a new workers compensation insurance program that provides traditional coverage for claims incurred with premium adjustments depending on incurred losses. The Company has provided reserves for the settlement of outstanding self-insured claims at amounts believed to be adequate. The liability recorded by the Company for its obligations under these plans is $1,639,000 as of June 30, 2003. The differences between actual settlements and reserves are included in expense in the year finalized.

The Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $150,000 per individual annually. The Company provides reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims is $838,000 at June 30, 2003. The differences between actual settlements and reserves are included in expense in the year finalized.

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. Information with respect to the accumulated other comprehensive income (loss) balance is presented below:


		Three Months Ended June 30,						Six Months Ended June 30,

(in thousands)		2003			2002			2003			2002

Foreign currency items:
	Beginning balance	$	(84	)	$	(995	)	$	(872	)	$	(935	)
	Current period change, net of income tax		1,161			501			1,949			441

	Ending balance	$	1,077		$	(494	)	$	1,077		$	(494	)

Positive amounts represent unrealized gains and negative amounts represent unrealized losses.

5. STOCK-BASED COMPENSATION

SFAS No. 123, “Accounting for Stock-Based Compensation” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock based compensation using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related Interpretations (all herein referred to as “APB No. 25”). Under APB No. 25, no compensation cost related to stock options has been recognized because all options are issued with exercise prices equal to the fair market value at the date of grant. Had compensation cost for the Company’s stock-based compensation plans been determined consistent with SFAS No. 123, the Company’s net loss for common stock and net loss per common share would have been increased to the following pro forma amounts:


	Three Months Ended June 30						Six Months Ended June 30

	2003			2002			2003			2002

	(in thousands, except per share amounts)
Net loss for common stock, as reported	$	(7,900	)	$	(1,227	)	$	(11,046	)	$	(4,288	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(7	)		(8	)		(14	)		(14	)

Pro forma net loss	$	(7,907	)	$	(1,235	)	$	(11,060	)	$	(4,302	)

Basic and diluted net loss per common share:
As reported	$	(1.44	)	$	(0.22	)	$	(2.01	)	$	(0.78	)

Pro forma	$	(1.44	)	$	(0.22	)	$	(2.01	)	$	(0.78	)

6. RECLASSIFICATIONS

Certain amounts in the 2002 interim financial statements have been reclassified to conform with the 2003 presentation.

7. 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 excluding 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 June 30,						Six Months Ended June 30,

(in thousands)			2003			2002			2003			2002

Net revenues:
	U.S. nursing homes		$	45,972		$	40,207		$	85,940		$	80,059
	U.S. assisted living facilities			3,071			5,162			6,304			12,992
	Canadian operation			4,935			4,139			9,493			8,028
	Corporate			7			5			13			8

		Total	$	53,985		$	49,513		$	101,750		$	101,087

Depreciation and amortization:
	U.S. nursing homes		$	834		$	827		$	1,657		$	1,654
	U.S. assisted living facilities			356			399			747			818
	Canadian operation			157			124			301			244
	Corporate			17			19			35			36

		Total	$	1,364		$	1,369		$	2,740		$	2,752

Operating income (loss):
	U.S. nursing homes		$	(6,768	)	$	1,128		$	(8,978	)	$	(976	)
	U.S. assisted living facilities			(560	)		(779	)		(1,177	)		(1,271	)
	Canadian operation			628			510			1,176			923
	Corporate			(642	)		(860	)		(1,292	)		(1,588	)

		Total	$	(7,342	)	$	(1	)	$	(10,271	)	$	(2,912	)


			June 30,			December 31,
			2003			2002

Long-lived assets:
	U.S. nursing homes		$	24,216		$	24,745
	U.S. assisted living facilities			26,429			26,760
	Canadian operation			13,914			12,525
	Corporate			586			596

		Total	$	65,145		$	64,626

Total assets:
	U.S. nursing homes		$	63,618		$	59,469
	U.S. assisted living facilities			26,519			27,132
	Canadian operation			23,818			20,011
	Corporate			2,474			3,061
	Eliminations			(23,207	)		(20,802	)

		Total	$	93,222		$	88,871

8. FINANCING TRANSACTIONS

In connection with the new leases for four facilities that had previously been managed by the Company, the Company entered into a Working Capital Loan Agreement with Omega Healthcare Investors, Inc. (“Omega”) to provide working capital for the facilities. Including these four Florida leases, the Company now leases 35 nursing homes from Omega. Loans under this agreement are secured by certain accounts receivable and substantially all other property of the facilities. Borrowings bear interest at 8.5%. The loan agreement provides for a maximum loan of $2 million, subject to certain borrowing base limitations

and other restrictions. The loan matures in December 2005. As of June 30, 2003, the Company has $405,000 outstanding under this loan agreement.

In July 2003, the Company entered into an agreement to extend the maturities of certain borrowings from a commercial finance company. The new agreement extends the maturities of outstanding indebtedness with an aggregate balance of $23.3 million at June 30, 2003 from July 1, 2003 to June 30, 2004.

In July 2003, the Company entered into an agreement to extend the maturities of certain mortgage notes payable to three banks. The new agreement extends the maturities of outstanding indebtedness with an aggregate balance of $2.3 million as of June 30, 2003 from May 2, 2003 to November 2, 2003.

In August 2003, the Company entered into an agreement to extend the maturities of certain borrowings from a bank lender, including the Company’s working capital line of credit. The new agreement extends the maturities of outstanding indebtedness with an aggregate balance of $14.7 million at June 30, 2003 from July 11, 2003 to January 9, 2004.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Effective June 30, 2002, the Company terminated the lease on one additional assisted living facility. The Company is in a dispute with the owner of this property which will be the subject of an arbitration hearing expected to be held in the fourth quarter of 2003 or the first quarter of 2004. The Company has accrued for the estimated costs associated with this arbitration hearing. The Company asserts that it was entitled to terminate the lease as a result of the landlord’s failure to correct construction defects at the facility. The Company seeks return of its $285,000 security deposit and cancellation of a $200,000 letter of credit. The landlord has asserted claims against the Company for unpaid rents, taxes and operating losses in the amount of $1.4 million.

Effective May 31, 2003, the Company terminated the lease of its only remaining leased assisted living facility in the United States. The lease termination agreement requires payments of approximately $355,000, paid $75,000 in June 2003 and the balance over the following twelve months.

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.

Critical Accounting Policies and Judgments

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

A “critical accounting policy” is one which is both important to the understanding of the financial condition and results of operations of the Company and requires management’s most difficult, subjective or complex judgments often of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s accounting policies that fit this definition include the following:

Revenues

Patient and Resident Revenues

The fees charged by the Company to patients in its nursing homes and residents in its assisted living facilities include fees with respect to individuals receiving benefits under federal and state-funded cost reimbursement programs. These revenues are based on approved rates for each facility that are either based on current costs with retroactive settlements or prospective rates with no cost settlement. Amounts earned under federal and state programs with respect to nursing home patients are subject to review by the third-party payors. In the opinion of management, adequate provision has been made for any adjustments that may result from such reviews. Final cost settlements, if any, are recorded when objectively determinable, generally within three years of the close of a reimbursement year depending upon the timing of appeals and third-party settlement reviews or audits.

Management Fees

Under its management agreements, the Company has responsibility for the day-to-day operation and management of each of its managed facilities. The Company typically receives a base management fee ranging generally from 3.5% to 6.0% of net revenues of each managed facility. The Company has the potential to earn incentive management fees over its base management fees in certain instances. The Company records revenues associates with management services on an accrual basis as the services are provided. Other than certain corporate and regional overhead costs, the services provided at the facility are at the facility owner’s expense. The facility owner is also obligated to pay for all required capital expenditures. The Company generally is not required to advance funds to the owner. Other than with respect to facilities managed during insolvency or receivership situations, the Company’s management fees are generally subordinated to the debt payments of the facilities it manages. In instances in which management fees are subordinated to debt payments, the Company recognizes revenues when services are performed based on the probability of collection.

Allowance for Doubtful Accounts

The Company’s allowance for doubtful accounts is estimated utilizing current agings of accounts receivable, historical collections data and other factors. Management monitors these factors and determines the estimated provision for doubtful accounts. Historical bad debts have resulted from uncollectible private balances, some uncollectible coinsurance and deductibles and other factors. Receivables that are deemed to be uncollectible are written off. The allowance for doubtful accounts is assessed on a quarterly basis with changes in estimated losses being recorded in the consolidated statements of operations in the period identified.

Self-Insurance Reserves

Self insurance reserves primarily represent the accrual for self-insured risks associated with general and professional liability claims, employee health insurance and workers compensation. The self insurance reserves include a liability for reported claims and estimates for incurred but unreported claims. The Company’s policy with respect to a significant portion of the general and professional liability claims is to use an actuary to support the estimates recorded for the development of known claims and incurred but unreported claims. The Company’s health insurance reserve is based on known claims incurred and an estimate of incurred but unreported claims determined by an analysis of historical claims paid. The Company’s workers compensation reserve related to periods of self insurance prior to May 1997 and a high deductible policy issued July 1, 2002 through June 30, 2003, covering most of the Company’s employees in the United States. The reserve for workers compensation self insurance prior to May 1997 consists only of known claims incurred and the reserve is based on an estimate of the future costs to be incurred for the known claims. The reserve for the high deductible policy issued July 1, 2002 is based on known claims incurred and an estimate of incurred but not reported claims determined by an analysis of historical claims incurred. Expected insurance coverages are reflected as a reduction of the reserves. The self insurance reserves are assessed on a quarterly basis, with changes in estimated losses being recorded in the consolidated statements of operations in the period identified. Professional liability claims are inherently uncertain and actual results could differ from estimates and cause the Company’s reported net income to vary significantly from period to period. The long-term care industry has seen a significant increase in claims based on alleged negligence by nursing homes and their employees in providing care to residents. As of June 30, 2003, the Company is the defendant in 63 such claims inclusive of years 1994 through 2003. This litigation will take many years to complete and additional claims which are as yet unasserted will likely arise. Based on historical claims experience, it is likely that payments required with respect to these claims plus unasserted claims will exceed the Company’s insurance coverage, and it is possible that these claims plus unasserted claims could exceed the Company’s reserves, which would have a material adverse effect on the Company’s financial position, results of operations and cash flows.

Asset Impairment

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company evaluates the recoverability of the carrying values of its properties on a property by property basis. On a quarterly basis, the Company reviews its properties for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize an impairment is based on estimated future cash flows from a property compared to the carrying value of that property. If recognition of an impairment is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.

Medicare Reimbursement

During 1997, the federal government enacted the Balanced Budget Act of 1997 (“BBA”), which contained numerous Medicare and Medicaid cost-saving measures. The BBA required 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 contained 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 care industry.

During 1999 and 2000, certain amendments to the BBA were 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 has continued to provide additional increases in certain Medicare payment rates during 2001. In July 2001 the Centers for Medicare & Medicaid Services (“CMS”) published a final rule updating payment rates for skilled nursing facilities under PPS. The new rules increased payments to skilled nursing facilities by an average of 10.3% beginning on October 1, 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, to the extent capital is available to do so, if at all.

Under the current law, Medicare reimbursements for nursing facilities were reduced following the October 1, 2002 expiration of two temporary payment increases enacted as part of earlier Medicare enhancement bills. As a result, beginning October 1, 2002, the Company’s Medicare reimbursement has been reduced by an estimated $368,000 per month, as a result of the expiration of temporary add-on legislation. Partially offsetting this decrease, CMS implemented a Medicare rate increase of approximately 2.6% effective October 1, 2002. There are two additional payment increases that were originally scheduled to expire October 1, 2002. CMS has announced that the expiration of these payment increases have been postponed to October 1, 2004.

CMS has recently announced Medicare rate increases of approximately 6% scheduled to take effect October 1, 2003. These rate increases, if implemented as announced, will increase the Company’s Medicare reimbursement by approximately $230,000 per month beginning October 1, 2003.

Self-Insurance Reserves

During the past five years, the long-term care profession in the United States has experienced a dramatic increase in claims related to alleged negligence in providing care to its patients — the Company is no exception in this regard. As a result, the Company has numerous liability claims and disputes outstanding for professional liability and other related issues. As of June 30, 2003, the Company is engaged in 63 professional liability lawsuits, including 17, 22, and 6 in the states of Florida, Arkansas and Texas, respectively. On June 22, 2001, a jury in Mena, Arkansas issued a verdict in a professional liability lawsuit against the Company totaling $78.425 million. The Company appealed the verdict to the Arkansas Supreme Court in a hearing that took place March 13, 2003. On May 1, 2003, the Arkansas Supreme Court issued a decision on the Company’s appeal, reducing the damages to $26.425 million, plus interest from the date of the original verdict. The Company is presently seeking to obtain review of the appellate court’s judgment by the United States Supreme Court. If the reduced judgment is upheld, the Company believes the settlement amount will be within the Company’s insurance coverage.

The Company and its subsidiaries carry professional liability insurance up to certain limits for coverage of such claims. However, the insurance coverage limits available to the Company has declined significantly beginning in 1999. Based on the insurance coverage in effect at the time of the Mena claim, the verdict amount has not been accrued. However, due to the increasing cost of claims against the Company and throughout the long-term care profession in general, the Company’s professional liability insurance premiums and deductible amounts increased substantially and insurance coverage limits decreased substantially during 1999 through 2002 and continuing for policy year 2003.

As a result of the substantial premium and deductible increases and insurance coverage limit decreases, effective March 9, 2002, the Company has obtained professional liability insurance coverage for its United States nursing homes and assisted living facilities that is likely to be substantially less than the claims that could be incurred during the policy periods from March 9, 2002 through March 9, 2004 (policy years 2002 and 2003). As a result, the Company is effectively self-insured. For claims made after March 9, 2002, the Company maintains general and professional liability insurance with coverage limits of $250,000 per medical incident and total aggregate policy coverage limits of $1,000,000 for its long-term care and assisted living services. As of June 30, 2003, payments already made by the insurance carrier for these policies have reduced the remaining aggregate coverage amount. The 2002 and 2003 policies are on a claims made basis and the Company is self-insured for the first $25,000 per occurrence with no aggregate limit. The Company provides reserves on an actuarial basis for known and expected claims incurred during the policy period.

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. As of June 30, 2003, payments already made by the insurance carriers for this policy year have reduced the remaining aggregate coverage amount. The Company provides reserves on an actuarial basis for known and expected claims incurred during the policy period. This policy is on a claims made basis.

Prior to March 9, 2000, all of the Company’s 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. Effective February 1, 1999, all of the Company’s United States nursing homes became part of the $250,000/$2,500,000 deductible program.

In Canada, the Company’s professional liability claims experience and associated costs has been dramatically less than that in the United States. The Canadian facilities owned or leased by the Company are self-insured for the first $3,000 ($5,000 Canadian) per occurrence. The Company’s aggregate primary coverage limit with respect to Canadian operations is $1,485,000 ($2,000,000 Canadian). The Company also maintains a $3,713,000 ($5,000,000 Canadian) aggregate umbrella policy for claims in excess of the foregoing limits for these facilities.

The Company has recorded total liabilities for reported professional liability claims and estimates for incurred but unreported claims of $45,514,000 as of June 30, 2003. Such liabilities include estimates of legal costs. The Company believes that the $26.425 million monetary judgment in the professional liability lawsuit in Mena, Arkansas, will be covered by insurance pursuant to the 1997 and 1998 insurance programs. Based on the insurance coverage in effect at the time of the Mena claim, the verdict amount has not been accrued. However, to the extent the Company’s professional liability insurance pays large amounts with respect to this verdict, there may not be sufficient insurance coverage for other claims during the same time period. The ultimate results of all of the Company’s professional liability claims and disputes are unknown at the present time. There can be no assurance that verdicts against the Company will not exceed the policy limits of the Company’s insurance policies.

month policy period. The Company has a letter of credit of $1,252,000 securing its self-insured obligations under this program. The letter of credit is secured by a certificate of deposit of $1,252,000, which is reflected as “restricted cash” in the accompanying balance sheet. The reserve for the high deductible policy is based on known claims incurred and an estimate of incurred but not reported claims determined by an analysis of historical claims incurred. Effective June 30, 2003, the Company entered into a new workers compensation insurance program that provides traditional coverage for claims incurred with premium adjustments depending on incurred losses. The liability recorded by the Company for its obligations under workers’ compensation claims is $1,639,000 as of June 30, 2003. The difference between actual settlements and reserves are included in expense in the year finalized.

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 state operating 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 and certifications for its facilities or that the Company will not be required to expend significant sums in order to maintain compliance with regulatory requirements.

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 such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time. The Company is currently subject to certain ongoing investigations, as described in Part 2., Other Information — Item 1. Legal Proceedings.

Contractual Obligations and Commercial Commitments

The Company has certain contractual obligations as of June 30, 2003, summarized by the period in which payment is due, as follows (dollar amounts in thousands):


			Less than		1 to 3		4 to 5		After
Contractual Obligations	Total		1 year		Years		Years		5 Years

Long-Term Debt	$	15,758	$	353	$	8,962	$	6,443	$	0
Short-Term Debt	$	43,641	$	43,641	$	0	$	0	$	0
Series B Preferred Stock	$	3,994	$	0	$	0	$	3,994	$	0
Operating Leases	$	254,220	$	15,595	$	28,665	$	26,776	$	183,184

The Company has employment agreements with certain members of management that provide for the payment to these members of amounts up to 2.5 times their annual salary in the event of a termination without cause, a constructive discharge (as defined), or upon a change of control of the Company (as defined). The maximum contingent liability under these agreements is approximately $1.7 million. In addition, upon the occurrence of any triggering event, certain executives may elect to require the Company to purchase options granted to them for a purchase price equal to the difference in the fair market value of the Company’s common stock at the date of termination versus the stated option exercise price. The terms of such agreements are from one to three years and automatically renew for one year if not terminated by the employee or the Company.

A subsidiary of the Company has provided guarantees of certain cash flow deficiencies and quarterly return obligations of Diversicare VI Limited Partnership (“Diversicare VI”), which may obligate the subsidiary to make interest-free loans to Diversicare VI. Such cash flow obligations have never been called upon. There is no assurance that such loans will not be made or that if made, all or any portion of such loans to Diversicare VI will be repaid. These guarantees are not included in the table above due to uncertainty about the amount and timing of obligations under the guarantees.

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, 2003 and 2002:


			Three Months Ended

(in thousands)			2003			2002			Change			%

REVENUES:
	Patient revenues		$	47,188		$	41,207		$	5,981			14.5	%
	Resident revenues			5,929			7,637			(1,708	)		(22.4	)
	Management fees			748			647			101			15.6
	Equity in joint venture income (loss)			44			(12	)		56			(466.7	)
	Interest			76			34			42			123.5

		Net revenues		53,985			49,513			4,472			9.0

EXPENSES:
	Operating			51,701			39,552			12,149			30.7
	Lease			4,196			4,406			(210	)		(4.8	)
	General and administrative			3,228			3,193			35			1.1
	Interest			838			994			(156	)		(15.7	)
	Depreciation and amortization			1,364			1,369			(5	)		(0.4	)
	Asset impairment and non-recurring charges			344			1,065			(721	)		(67.7	)

		Total expenses		61,671			50,579			11,092			21.9

LOSS BEFORE INCOME TAXES				(7,686	)		(1,066	)		(6,620	)		621.0
PROVISION FOR INCOME TAX				145			103			42			40.8

NET LOSS			$	(7,831	)	$	(1,169	)	$	(6,662	)		569.9	%


			Six Months Ended

(in thousands)			2003			2002			Change			%

REVENUES:
	Patient revenues		$	88,162		$	81,828		$	6,334			7.7	%
	Resident revenues			11,823			17,816			(5,993	)		(33.6	)
	Management fees			1,523			1,326			197			14.9
	Equity in joint venture income			108			58			50			86.2
	Interest			134			59			75			127.1

		Net revenues		101,750			101,087			663			0.7

EXPENSES:
	Operating			93,115			83,280			9,835			11.8
	Lease			8,002			9,586			(1,584	)		(16.5	)
	General and administrative			6,436			6,352			84			1.3
	Interest			1,728			2,029			(301	)		(14.8	)
	Depreciation and amortization			2,740			2,752			(12	)		(0.4	)
	Asset impairment and non-recurring charges			364			1,065			(701	)		(65.8	)

		Total expenses		112,385			105,064			7,321			7.0

LOSS BEFORE INCOME TAXES				(10,635	)		(3,977	)		(6,658	)		167.4
PROVISION FOR INCOME TAXES				275			196			79			40.3

NET LOSS			$	(10,910	)	$	(4,173	)	$	(6,737	)		161.4	%

Percentage of Net Revenues


			Three Months Ended June 30,						Six Months Ended June 30,

			2003			2002			2003			2002

REVENUES:
	Patient revenues			87.4	%		83.2	%		86.7	%		80.9	%
	Resident revenues			11.0			15.4			11.6			17.6
	Management fees			1.4			1.3			1.5			1.3
	Equity in joint venture income (loss)			0.1			0.0			0.1			0.1
	Interest			0.1			0.1			0.1			0.1

		Net revenues		100.0			100.0			100.0			100.0

EXPENSES:
	Operating			95.8			79.9			91.5			82.4
	Lease			7.8			8.9			7.8			9.5
	General and administrative			6.0			6.4			6.3			6.3
	Interest			1.5			2.0			1.7			2.0
	Depreciation and amortization			2.5			2.8			2.7			2.7
	Asset impairment and non-recurring charges			0.6			2.2			0.4			1.0

		Total expenses		114.2			102.2			110.4			103.9

LOSS BEFORE INCOME TAXES				(14.2	)		(2.2	)		(10.4	)		(3.9	)
PROVISION FOR INCOME TAXES				0.3			0.2			0.3			0.2

NET LOSS				(14.5	)%		(2.4	)%		(10.7	)%		(4.1	)%

Three Months Ended June 30, 2003 Compared With Three Months Ended June 30, 2002

The following discussion is significantly impacted by termination of leases on 16 assisted living properties during 2002, one assisted living facility during 2003 and the closure of another assisted living facility in 2003 (the “Assisted Living Eliminated Operations”), the sale of one Florida nursing home in the fourth quarter of 2002, and the initiation of leases for four Florida nursing homes in 2003, as discussed in the overview at the start of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Revenues. Net revenues increased to $54.0 million in 2003 from $49.5 million in 2002, an increase of $4.5 million, or 9.0%. Patient revenues increased to $47.2 million in 2003 from $41.2 million in 2002, an increase of $6.0 million, or 14.5%. The increase in patient revenues is due to the new lease for four Florida nursing homes and increased Medicaid rates in certain states, partially offset by a 2.1% decline in census in the United States in 2003 as compared to 2002, the Florida nursing home sold in the fourth quarter in 2002 and the expiration of Medicare temporary payment increases effective October 1, 2002. As a percent of total census in the United States, Medicare days decreased to 11.0% in 2003 from 11.1% in 2002. Medicare revenues were 25.9% of patient revenue in 2003 and 27.9% in 2002, while Medicaid and similar programs were 61.0% in 2003 compared to 59.5% in 2002.

Resident revenues decreased to $5.9 million in 2003 from $7.6 million in 2002, a decrease of $1.7 million, or 22.4%. This decline is primarily attributable to the Assisted Living Eliminated Operations, which resulted in reduced revenue of approximately $2.1 million.

Ancillary service revenues, prior to contractual allowances, increased to $8.7 million in 2003 from $7.3 million in 2002, an increase of $1.4 million, or 19.3%. The increase is primarily attributable to the new lease for four Florida nursing homes, partially offset by the Florida nursing home sold in the fourth quarter of 2002 and reductions in revenue availability under Medicare. Although the $1,590 per patient annual ceiling on physical, speech and occupational therapy services had been lifted for a two year period,

the limitation is currently scheduled to become effective in September 2003. 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 increased to $748,000 in 2003 from $647,000 in 2002, an increase of $101,000, or 15.6%. The increase is primarily due to changes in the rate of currency exchange between the Canadian and U.S. dollars.

Operating Expense. Operating expense increased to $51.7 million in 2003 from $39.6 million in 2002, an increase of $12.1 million, or 30.7%. As a percent of patient and resident revenues, operating expense increased to 97.3% in 2003 from 81.0% in 2002. The increase in operating expenses is primarily attributable to the operating costs of the four new leased Florida nursing homes, including costs of professional liability claims, and cost increases related to wages and benefits. Partially offsetting these increases are the Assisted Living Eliminated Operations and the sale of a Florida nursing home.

The largest component of operating expenses is wages, which increased to $25.1 million in 2003 from $21.7 million in 2002, an increase of $3.5 million, or 15.9%. This increase is primarily attributable to costs of the four new leased Florida nursing homes and an increase in wages as a result of competitive labor markets in most of the areas in which the Company operates. Partially offsetting this increase, the Company experienced a decrease in wages as a result of reduced costs associated with reduced census, the sale of a Florida nursing home and the Assisted Living Eliminated Operations.

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 $8.5 million in 2003 from $2.5 million in 2002, an increase of 6.0 million, or 245%. This increase is primarily attributed to $4.9 million in expenses related to the four new leased Florida nursing homes. Under the terms of the previous management contracts, the Company was required to obtain professional liability insurance coverage for the four facilities and received reimbursement for the facilities pro rata share of premiums paid as well as any claims paid on behalf of the owner. Due to the recent deterioration of the financial condition of the owner and the terms of the owner’s mortgage on the facilities, the Company does not believe that the owner of the four facilities will in the future be able to reimburse the Company for costs incurred in connection with professional liability claims arising out of events occurring at the four facilities prior to the entry of the lease. As a result, the Company recorded a liability of approximately $4.3 million in the second quarter of 2003 to record obligations for possible professional liability costs relating to these facilities for which the Company does not anticipate receiving reimbursement from the owner of the facilities. Professional liability costs include cash and non-cash charges recorded based on current actuarial reviews. The actuarial reviews include estimates of known claims and an estimate of claims that may have occurred, but have not yet been reported to the Company.

Lease Expense. Lease expense decreased to $4.2 million in 2003 from $4.4 million in 2002, a decrease of $210,000, or 4.8%. The decrease in lease expense is primarily attributable to the Assisted Living Eliminated Operations, partially offset by additional rent for the new Florida leased facilities

General and Administrative Expense. General and administrative expense was approximately $3.2 million in both 2003 and 2002. As a percent of total net revenues, general and administrative expense decreased to 6.0% in 2003 from 6.4% in 2002. This decrease is attributable to the increased revenues as a result of the new Florida nursing home leases.

Interest Expense. Interest expense decreased to $0.8 million in 2003 from $1.0 million in 2002, a decrease of $156,000, or 15.7%. The decrease is primarily attributable to interest rate reductions on the Company’s variable rate debt and reduced interest rates on bank debt refinanced in 2002.

Depreciation and Amortization. Depreciation and amortization expenses totaled approximately $1.4 million in both 2003 and 2002.

Asset Impairment and Non-recurring Charges. During the three months ended June 30, 2003, the Company recorded charges of $344,000 related to the termination of a lease for an assisted living facility. During the three months ended June 30, 2002, the Company recorded charges of $404,000 to write down assets held for sale to estimated net realizable value, and charges of $661,000 related to the termination of leases for assisted living facilities, for total charges of $1,065,000.

Loss Before Income Taxes; Net Loss for Common Stock; Net Loss Per Common Share. As a result of the above, the loss before income taxes was $7.7 million in 2003 compared to $1.1 million in 2002. The income tax provision in 2003 and 2002 relates to U.S. state and Canadian provincial taxes. After preferred stock dividends of $69,000 in 2003 and $58,000 in 2002, net loss for common stock was $7.9 million in 2003 and $1.2 million in 2002. The basic and diluted loss per share was $1.44 each in 2003 as compared to $0.22 each in 2002.

Six Months Ended June 30, 2003 Compared With Six Months Ended June 30, 2002

Revenues. Net revenues increased to $101.8 million in 2003 from $101.1 million in 2002, an increase of $663,000, or 0.7%. Patient revenues increased to $88.2 million in 2003 from $81.8 million in 2002, an increase of $6.3 million, or 7.7%. The increase in patient revenues is due to the new lease for four Florida nursing homes and increased Medicaid rates in certain states, partially offset by a 2.4% decline in census in the United States in 2003 as compared to 2002, the Florida nursing home sold in the fourth quarter in 2002 and the expiration of Medicare temporary payment increases effective October 1, 2002. As a percent of total census in the United States, Medicare days increased to 11.1% in 2003 from 10.4% in 2002. Medicare revenues were 25.6% of patient revenue in 2003 and 26.7% in 2002, while Medicaid and similar programs were 61.3% in 2003 compared to 60.7% in 2002.

Resident revenues decreased to $11.8 million in 2003 from $17.8 million in 2002, a decrease of $6.0 million, or 33.6%. This decline is primarily attributable to the Assisted Living Eliminated Operations, which resulted in reduced revenue of approximately $6.7 million.

Ancillary service revenues, prior to contractual allowances, increased to $15.9 million in 2003 from $13.9 million in 2002, an increase of $2.0 million, or 14.4%. The increase is primarily attributable to increased Medicare census and the new lease for four Florida nursing homes, partially offset by the Florida nursing home sold in the fourth quarter of 2002 and reductions in revenue availability under Medicare. Although the $1,590 per patient annual ceiling on physical, speech and occupational therapy services had been lifted for a two year period, the limitation is currently scheduled to become effective in September 2003.

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 increased to $1.5 million in 2003 from $1.3 million in 2002, an increase of $197,000, or 14.9%. The increase is primarily due to changes in the rate of currency exchange between the Canadian and U.S. dollars.

Operating Expense. Operating expense increased to $93.1 million in 2003 from $83.3 million in 2002, an increase of $9.8 million, or 11.8%. As a percent of patient and resident revenues, operating expense increased to 93.1% in 2003 from 83.6% in 2002. The increase in operating expenses is primarily attributable to the operating costs of the four new leased Florida nursing homes, including costs of professional liability claims, and cost increases related to wages and benefits. Partially offsetting these increases are the Assisted Living Eliminated Operations and the sale of a Florida nursing home.

The largest component of operating expenses is wages, which increased to $46.2 million in 2003 from $43.6 million in 2002, an increase of $2.6 million, or 6.0%. This increase is primarily attributable to costs of the four new leased Florida nursing homes and an increase in wages as a result of competitive labor markets in most of the areas in which the Company operates. Partially offsetting this increase, the Company experienced a decrease in wages as a result of reduced costs associated with reduced Medicaid census, the sale of a Florida nursing home and the Assisted Living Eliminated Operations.

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 $12.8 million in 2003 from $7.3 million in 2002, an increase of 5.5 million, or 75.8%. This increase is primarily attributed to $4.9 million in expenses related to the four new leased Florida nursing homes. Under the terms of the previous management contracts, the Company was required to obtain professional liability insurance coverage for the four facilities, and received reimbursement for the facilities pro rata share of premiums paid as well as any claims paid on behalf of the owner. Due to the recent deterioration of the financial condition of the owner and the terms of the owner’s mortgage on the facilities, the Company does not believe that the owner of the four facilities will in the future be able to reimburse the Company for costs incurred in connection with professional liability claims arising out of events occurring at the four facilities prior to the entry of the lease. As a result, the Company recorded a liability of approximately $4.3 million in the second quarter of 2003 to record obligations for possible professional liability costs relating to these four facilities for which the Company does not anticipate receiving reimbursement from the owner of the facilities. Professional liability costs include cash and non-cash charges recorded based on current actuarial reviews. The actuarial reviews include estimates of known claims and an estimate of claims that may have occurred, but have not yet been reported to the Company.

Lease Expense. Lease expense decreased to $8.0 million in 2003 from $9.6 million in 2002, a decrease of $1.6 million, or 16.5%. The decrease in lease expense is primarily attributable to the Assisted Living Eliminated Operations, partially offset by additional rent for the new Florida leased facilities.

General and Administrative Expense. General and administrative expense was approximately $6.4 million in both 2003 and 2002.

Interest Expense. Interest expense decreased to $1.7 million in 2003 from $2.0 million in 2002, a decrease of $301,000, or 14.8%. The decrease is primarily attributable to interest rate reductions on the Company’s variable rate debt and reduced interest rates on bank debt refinanced in 2002.

Asset Impairment and Non-Recurring Charges. During the six months ended June 30, 2003, the Company recorded charges of $344,000 related to the termination of a lease for an assisted living facility, and $20,000 to write down assets held for sale to estimated net realizable value. During the six months ended June 30, 2002, the Company recorded charges of $404,000 to write down assets held for sale to estimated net realizable value, and charges of $661,000 related to the termination of leases for assisted living facilities, for total charges of $1,065,000.

Depreciation and Amortization. Depreciation and amortization expenses totaled approximately $2.7 million in 2003 compared to $2.8 million in 2002.

Loss Before Income Taxes; Net Loss for Common Stock; Net Loss Per Common Share. As a result of the above, the loss before income taxes was $10.6 million in 2003 compared to $4.0 million in 2002. The income tax provision in 2003 and 2002 relates to U.S. state and Canadian provincial taxes. After preferred stock dividends of $136,000 in 2003 and $115,000 in 2002, net loss for common stock was $11.0 million in 2003 and $4.3 million in 2002. The basic and diluted loss per share were $2.01 each in 2003 as compared to $0.78 each in 2002.

Liquidity and Capital Resources

At June 30, 2003, the Company had negative working capital of $57.3 million and a current ratio of 0.33, compared with negative working capital of $58.8 million and a current ratio of 0.29 at December 31, 2002. The Company has incurred losses during 2003, 2002, and 2001 and has limited resources available to meet its operating, capital expenditure and debt service requirements during 2003.

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), required insurance coverages, and limits on the payment of dividends to shareholders. As of June 30, 2003, the Company was not in compliance with certain of the financial covenants contained in the Company’s debt and lease agreements. 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.

As of June 30, 2003, the Company has $44.0 million of scheduled debt maturities that must be repaid or refinanced during the next twelve months. As a result of these maturities, covenant non-compliance and other cross-default provisions, the Company has classified a total of $52.8 million of debt as current liabilities as of June 30, 2003.

In July 2003, the Company entered into an agreement to extend the maturity maturities of certain borrowings from a commercial finance company. The new agreement extends the maturities of outstanding indebtedness with an aggregate balance of $23.3 million at June 30, 2003 from July 1, 2003 to June 30, 2004.

An event of default under the Company’s debt agreements could lead to actions by the lenders that could 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 and assume operating rights with respect to the leased properties. The net book value of property and equipment, including leasehold improvements, related to these facilities total approximately $4.4 million as of June 30, 2003. A default in these lease agreements would also give the holder of the Series B Redeemable Convertible Preferred Stock the right to require the Company to redeem those shares.

Beginning October 1, 2002, the Company’s Medicare reimbursement was reduced by an estimated $368,000 per month, as a result of the expiration of temporary add-on legislation (See “Medicare Reimbursement”). Management continues to focus on efforts to increase revenues and to minimize future expense increases through the elimination of excess operating costs. Management will also attempt to minimize professional liability claims in the future periods by vigorously defending the Company 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, the inability to obtain waivers or refinance the related debt, the termination of the lease agreements or entry of a final judgment in a material amount for a professional liability claim 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, the Company may have to 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. The independent public accountant’s report on the Company’s financial statements at December 31, 2002 included a paragraph with regards to the uncertainties of the Company’s ability to continue as a going concern.

As of June 30, 2003, the Company had borrowings of $153,000 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 $2,500,000. There are certain restrictions based on certain borrowing base restrictions. As of June 30, 2003, the Company had $200,000 of letters of credit outstanding with the same bank lender, which further reduce the maximum available amount outstanding under the working capital line of credit. As of June 30, 2003, the Company had total additional borrowing availability of $2,147,000 under its working capital line of credit. The working capital line of credit matures January 2004 with interest at either LIBOR plus 2.50% or the bank’s prime rate plus .50% (up to a maximum of 9.50%). Given the Company’s default under its credit facility, no assurance can be given that the bank will allow the Company to draw under its working capital line of credit. At a minimum, the Company’s cash requirements during the next twelve months 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 these requirements.

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, 2002 and 2003 and is less than the coverage required by certain of the Company’s debt and lease agreements. The ultimate payments on professional liability claims accrued as of June 30, 2003 and claims that could be incurred during 2003 could require cash resources during 2003 or thereafter that would be in excess of the Company’s available cash or other resources.

Net cash provided by operating activities totaled $4.6 million and $6.6 million in 2003 and 2002, respectively. These amounts primarily represent the cash flows from net operations plus changes in non-cash components of operations and by working capital changes.

Net cash used in investing activities totaled $1.3 million and $2.3 million in 2003 and 2002, respectively. These amounts primarily represent purchases of property plant and equipment and investments in and advances to joint ventures. The Company has used between $2.4 million and $4.3 million for capital expenditures in the three calendar years ending December 31, 2002. Substantially all such expenditures were for facility improvements and equipment, which were financed principally through working capital. For the year ending December 31, 2003, the Company anticipates that capital expenditures for improvements and equipment for its existing facility operations will be approximately $4.0 million. During the six month periods ended June 30, 2003 and 2002, the Company received distributions from joint ventures in the amount of $652,000 and $115,000, respectively. In general, the Company has been appointed as manager of the joint venture properties.

Net cash used in financing activities totaled $1.0 million and $3.1 million in the six month periods ended June 30, 2003 and 2002, 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 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, 2003 and December 31, 2002, totaled $16.4 million and $14.2 million, respectively, representing approximately 28 and 26 days in accounts receivable, respectively. Accounts receivable from the provision of management services were $261,000 and $475,000 at June 30, 2003 and December 31, 2002, respectively, representing approximately 31 and 61 days in accounts receivable, respectively. The allowance for bad debt was $2.8 million and $2.2 million at June 30, 2003 and December 31, 2002, 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.

Foreign Currency Translation

The Company has obtained its financing primarily in U.S. dollars; however, it receives revenues and incurs 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 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.

Recent Accounting Pronouncements

In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” that amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. With certain exceptions, SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designed after June 30, 2003. Management is currently evaluating the effect the adoption of this statement will have on the Company’s financial condition and results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” that improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that these instruments be classified as liabilities in the statement of financial position. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise will be effective for the Company’s quarter beginning July 1, 2003. Management is currently evaluating the effect the adoption of this statement will have on the Company’s financial condition and results of operations.

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. This discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. 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, 2002 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The chief market risk factor affecting the financial condition and operating results of the Company is interest rate risk. As of June 30, 2003, the Company had outstanding borrowings of approximately $59.4 million, including $23.0 million in fixed-rate borrowings and $36.4 million in variable-rate borrowings. In the event that interest rates were to change 1%, the impact on future cash flows would be approximately $364,000 annually, representing the impact of increased interest expense on variable rate debt.

The Company receives revenues and incurs 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. The Company believes that its exposure to market risk related to changes in foreign currency exchange rates and trade accounts receivable and accounts payable is not material.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a rigorous set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company’s principal executive and financial officers have evaluated the Company’s disclosure controls and procedures within 90 days prior to filing this Quarterly Report on Form 10-Q and has determined that such disclosure controls and procedures are effective. Subsequent to this evaluation, there were no significant changes in internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The provision of health care services entails an inherent risk of liability. In recent years, participants in the health care industry have become subject to an increasing number of lawsuits alleging malpractice, product liability, or related legal theories, many of which involve large claims and significant defense costs. The entire long-term care profession in the United States has experienced a dramatic increase in claims related to alleged negligence in providing care to its patients — the Company is no exception in this regard. The Company, as with the rest of the industry, has numerous liability claims and disputes outstanding for professional liability and other related issues. It is expected that the Company will continue to be subject to such suits as a result of the nature of its business. Further, as with all health care providers, the Company is potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws.

As of June 30, 2003, the Company is engaged in 63 professional liability lawsuits, including 17, 22, and 6 in the states of Florida, Arkansas and Texas, respectively. On June 22, 2001, a jury in Mena, Arkansas, issued a verdict in a professional liability lawsuit against the Company totaling $78.425 million. The Company appealed the verdict to the Arkansas Supreme Court in a hearing that took place March 13, 2003. On May 1, 2003, the Arkansas Supreme Court issued a decision on the Company’s appeal, reducing the damages to $26.425 million, plus interest from the date of the original verdict. The Company is presently seeking to obtain review of the appellate court’s judgment by the United States Supreme Court. If the reduced judgment is upheld, the Company believes the settlement amount will be within the Company’s insurance coverage. Based on the insurance coverage in effect at the time of the claim, the verdict amount has not been accrued. However, to the extent the Company’s professional liability insurance pays large amounts with respect to this verdict, there may not be sufficient insurance coverage for other claims during the same time period. The ultimate results of all of the Company’s professional liability claims and disputes are unknown at the present time. There can be no assurance that verdicts against the Company will not exceed the policy limits of the Company’s insurance policies.

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 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”), was named in the complaint, as amended, which accused 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. During the first quarter of 2003, the State of Florida granted a voluntary dismissal with prejudice of all claims related to this incident against the Company and its subsidiaries. In addition, a settlement agreement was executed between the State of Florida, R. Brent Maggio and Emerald, pursuant to which the State of Florida has dropped its prosecution of this matter. The whistle blower in this action filed a written objection asking the court to reject the settlement agreement on the grounds that the settlement was not fair, adequate or reasonable under the circumstances. Under Florida’s False Claims Act, a whistle blower may object in court to a settlement but must demonstrate that the State’s settlement is manifestly unjust.

Following a hearing on the State of Florida’s motion, the Leon County Circuit Court approved the State of Florida’s settlement agreement. An appeal is currently pending before Florida’s First District Court of

Appeal. The Company believes that it is no longer a party to this lawsuit since it is not a party to the settlement agreement and the lawsuit has been dismissed, with prejudice, by the State of Florida. In the event that the Company is required to litigate any remaining matters involving this case, the Company believes that it has meritorious defenses in this matter and intends to vigorously pursue these defenses in litigation.

In addition to the false claims actions described above, the Company has also received notices from CMS 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 1996 through 1999. The government has recovered $355,000 as of June 30, 2003, and may 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 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 has appealed many of the denied claims. The Company’s intermediary has indicated it will no longer pursue the denial of claims related to the provision of infusion therapy although it is still denying other therapy services on the same claims. 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.

On August 5, 2002, the Company was served notice that the State of Arkansas was suing the Company and certain subsidiaries, including a nursing home operated in Eureka Springs, Arkansas. The State of Arkansas’ allegations against the Company and certain subsidiaries includes violation of the Arkansas Abuse of Adults Act and violation of the Arkansas Medicaid False Claims Act. These allegations are made with respect to a resident of the Eureka Springs facility. On May 1, 2003, during the course of the defense of this case, the Company learned that the State of Arkansas is investigating several other allegations of additional violations of the Arkansas Abuse of Adults Act and the Arkansas Medicaid False Claims Act with respect to patients of Eureka Springs and other facilities operated by the Company in Arkansas. The Company has investigated the allegations and has met with the Office of the Attorney General of the State of Arkansas regarding these matters. The Company has not been able to reach an agreement with the Attorney General regarding the disposition of the investigation. The Attorney General’s office is proceeding with its investigation.

The Company cannot currently predict with certainty the ultimate impact of the above cases on the Company’s financial condition, cash flows or results of operations. An unfavorable outcome in any of the lawsuits or 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.

As described in the Overview of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company is in a dispute with the owner of an assisted living facility in which the Company terminated the lease. This dispute will be the subject of an arbitration hearing expected to be held in the fourth quarter of 2003 or the first quarter of 2004. The Company has accrued for the estimated costs associated with this arbitration hearing. The Company asserts that it was entitled to

terminate the lease as a result of the landlord’s failure to correct construction defects at the facility. The Company seeks return of its $285,000 security deposit and cancellation of a $200,000 letter of credit. The landlord has asserted claims against the Company for unpaid rents, taxes and operating losses in the amount of $1.4 million.

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 4, 2003.

(b) Matters voted upon at the meeting:

1. Election of Directors


William R. Council, III
	FOR	4,855,729
	WITHHELD	314,653
	ELIGIBLE SHARES	5,493,287

Richard M. Brame
	FOR	4,856,229
	WITHHELD	314,153
	ELIGIBLE SHARES	5,493,287

(Continuing directors include Wallace E. Olson and William C. O’Neil, Jr.)

2. Stockholder Proposal to terminate the Shareholders Rights Plan originally dated as of March 13, 1995 and amended and restated as of December 7, 1998, by and between Advocat Inc., a Delaware corporation, and Third National Bank in Nashville, the Rights Agent.


FOR			451,095
AGAINST			1,495,263
ABSTAIN FROM VOTING			21,427
BROKER NON VOTE			3,202,597
ELIGIBLE SHARES			5,493,287

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.


(a)		The exhibits filed as part of this 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 on May 2, 2003 for a press release reporting the reduced judgment in the previously announced professional liability lawsuit.

		Form 8-K filed on May 14, 2003 for a press release reporting the Company’s results of operations for the quarter ending March 31, 2003.

		Form 8-K filed on June 3, 2003 to announce the termination of the lease of Palmetto Village a 99-bed assisted living facility in Chester, South Carolina.

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 13, 2003	By:	/s/ William R. Council, III William R. Council, III President and Chief Executive Officer, Principal Executive Officer and An Officer Duly Authorized to Sign on Behalf of the Registrant

	By:	/s/ L. Glynn Riddle, Jr. L. Glynn Riddle, Jr. Vice President and Chief Financial Officer, Secretary Principal Accounting Officer and An Officer Duly Authorized to Sign on Behalf of the Registrant


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		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		Lease Termination Agreement dated as of May 29, 2003, by and among (i) Diversicare Assisted Living Services, Inc., a Tennessee corporation, and Advocat Inc., a Delaware corporation, and (ii) 570 Center Street, LLC, a South Carolina limited liability company, and Albert M. Lynch, an individual.

10.2		Fourth Amendment to Revenue Bond Lease Agreement and Mortgage and Indenture of Trust dated as of May 2, 2003 by and between The Medical Clinic Board of the City of Hartford, Alabama; Diversicare Leasing Corp.; Colonial Bank; City Bank of Hartford and Slocomb National Bank.

10.3		Fourth Amendment to Loan Agreement dated as of June 18, 2003 by and between Diversicare Assisted Living Services NC I, LLC and GMAC Commercial Mortgage Corporation.

10.4		Fifth Amendment to Promissory Note dated as of June 18, 2003 by and between Diversicare Assisted Living Services NC I, LLC and GMAC Commercial Mortgage Corporation.

10.5		Fifth Amendment to Promissory Note dated as of June 18, 2003 by and between Diversicare Assisted Living Services NC II, LLC and GMAC Commercial Mortgage Corporation.

10.6		Fourth Amendment to Loan Agreement dated as of June 18, 2003 by and between Diversicare Assisted Living Services NC II, LLC and GMAC Commercial Mortgage Corporation.

10.7		Cross-Collateralization and Cross-Default Agreement dated as of June 18, 2003 by and among Diversicare Windsor House, LLC, a Delaware limited liability company; Diversicare Pinedale, LLC, a Delaware limited liability company; Diversicare Afton Oaks, LLC, a Delaware limited liability company; Diversicare Assisted Living Services NC I, LLC, a Delaware limited liability company and Diversicare Assisted Living Services NC II, LLC a Delaware limited liability company in favor of GMAC Commercial Mortgage Corporation, a California corporation.

10.8		Sixth Amendment to Promissory Note dated as of the 1st day of July, 2003, by and between Diversicare Assisted Living Services NC II, LLC and GMAC Commercial Mortgage Corporation


10.9		Fifth Amendment to Loan Agreement dated as of July 1, 2003, by and between Diversicare Assisted Living Services NC II, LLC and GMAC Commercial Mortgage Corporation

10.10		Sixth Amendment to Promissory Note dated as of the 1st day of July, 2003, by and between Diversicare Assisted Living Services NC I, LLC, and GMAC Commercial Mortgage Corporation

10.11		Fifth Amendment to Loan Agreement dated as of July 1, 2003, by and between Diversicare Assisted Living Services NC I, LLC and GMAC Commercial Mortgage Corporation.

10.12		Contract to Purchase Real Property in Morehead City, North Carolina between Ronald F. McManus and Diversicare Assisted Living Services NC, LLC for Carteret Care.

10.13		Master Lease Agreement dated as of May 1, 2003 by and between Emerald-Cedar Hills, Inc. Emerald-Golfview, Inc., Emerald-Southern Pines, Inc. and Emerald-Golfcrest, Inc. and Senior Care Florida Leasing, LLC.

10.14		Working Capital Loan Agreement dated as of April 1, 2003, between Omega Healthcare Investors, Inc., a Maryland corporation, and Senior Care Florida Leasing, LLC, a Delaware limited liability company, Senior Care Golfview, LLC, a Delaware limited liability company, Senior Care Golfcrest, LLC, a Delaware limited liability company, Senior Care Southern Pines, LLC, a Delaware limited liability company, and Senior Care Cedar Hills, LLC

10.15		Secured Working Capital Promissory Note dated April 1, 2003 from Senior Care Florida Leasing, LLC, a Delaware limited liability company, Senior Care Golfview, LLC, a Delaware limited liability company, Senior Care Golfcrest, LLC, a Delaware limited liability company, Senior Care Southern Pines, LLC, a Delaware limited liability company, Senior Care Cedar Hills, LLC, a Delaware limited liability company, to Omega Healthcare Investors, Inc., a Maryland corporation.

10.16		Security Agreement as of April 1, 2003 by and between Senior Care Florida Leasing, LLC, a Delaware limited liability company, Senior Care Golfview, LLC, a Delaware limited liability company, Senior Care Golfcrest, LLC, a Delaware limited liability company, Senior Care Southern Pines, LLC, a Delaware limited liability company, Senior Care Cedar Hills, LLC, a Delaware limited liability company and Omega Healthcare Investors, Inc., a Maryland corporation.

10.17		First Amendment to Reduced and Modified Renewal Revolving Promissory Note dated July 11, 2003 by and among AmSouth Bank and Diversicare Management Services Co.

10.18		First Amendment to Renewal Promissory Note dated as of July 11, 2003 by and among AmSouth Bank and Advocat Inc., a Delaware corporation.

10.19		Third Amendment To Renewal Promissory Note dated as of July 11, 2003 by and among AmSouth Bank and Diversicare Assisted Living Services, NC, LLC, a Tennessee limited liability company.

10.20		Third Amendment To Renewal Promissory Note (Overline Facility) dated July 11, 2003 by and among AmSouth Bank and Diversicare Management Services, Co., a Tennessee corporation

10.21		Second Amendment To Reduced And Modified Renewal Revolving Promissory Note dated as of July 11, 2003 by and among AmSouth Bank and Diversicare Management Services Co., a Tennessee corporation

10.22		Third Amendment To Master Amendment To Loan Documents And Agreement dated as of July 11, 2003 by and between AmSouth Bank, successor in interest by merger to First American National Bank, Advocat Inc., a Delaware corporation and various subsidiaries of Advocat Inc.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).


31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b).

44 EX-10.1 3 g84031exv10w1.txt EX-10.1 LEASE TERMINATION AGREEMENT 05/29/03 EXHIBIT 10.1 LEASE TERMINATION AGREEMENT (PALMETTO VILLAGE OF CHESTER, SC) THIS LEASE TERMINATION AGREEMENT (this "Agreement") is made and entered into as of the 29th day of May, 2003 by and between (i) DIVERSICARE ASSISTED LIVING SERVICES, INC., a Tennessee corporation ("DALS") and ADVOCAT INC., a Delaware corporation ("Advocat") and (ii) 570 CENTER STREET, LLC, a South Carolina limited liability company ("Lessor") and ALBERT M. LYNCH, an individual ("Prior Lessor"). RECITALS A. Lessor is the owner of the land and improvements comprising the assisted living facility located at 570 Center Street, Chester, South Carolina 29706 and known as Palmetto Village of Chester (the "Facility"). B. DALS is the current licensed operator of the Facility and leases the Facility from Lessor pursuant to that certain Lease Agreement (With Option to Purchase) made and entered into as of August 12, 1998 (the "Lease") by and between Prior Lessor, the predecessor in interest of Lessor under the Lease, and DALS, as Lessee, to which Lease reference is here made for a more particular description of its terms, provisions and conditions. C. Advocat has guaranteed the payment and performance by DALS of its obligations under the Lease pursuant to the terms and provisions of that certain Guaranty of Lease made by Advocat in favor of Lessor as of August 12, 1998 (the "Guaranty"), to which Guaranty reference is here made for a more particular description of its terms and conditions. D. Lessor and DALS now wish to terminate the Lease with possession of all of the Leased Property (as described and defined in the Lease), being turned over to Lessor and operation of the Facility being turned over to Senior Management, Inc. ("New Operator") pursuant to an Operations Transfer Agreement dated May 29, 2003 between DALS and New Operator (the "Operations Transfer Agreement") in order that New Operator may replace DALS as the licensed operator of the Facility and continue the operation of the Facility as a licensed assisted living facility. E. In order to terminate the Lease and facilitate an orderly transfer of the operation of the Facility from DALS to New Operator, the parties desire to enter into this Agreement to document the terms and conditions upon which such transactions will be consummated. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements of the parties set forth herein, the parties hereto agree as follows: AGREEMENT 1. Transfer Date; Surrender of Facility. 1.1 Transfer Date. Subject to satisfaction of all of the conditions to completion of the transactions contemplated herein, the termination of the Lease and the transfer to New Operator of the operation of the Facility, together with the transfer of possession and use of the Leased Property to Lessor, contemplated herein shall occur simultaneously and be effective as of 12:00:01 a.m., local time at the Facility, on June 1, 2003 (the "Transfer Date"). In the event that the Transfer Date is so extended, the parties shall promptly execute an addendum to this Agreement establishing such date as the Transfer Date for purposes of this Agreement and any documents executed in connection herewith. The parties acknowledge that DHEC Regulations require that DALS remain responsible for the operation of the Facility until the Operating License is issued to New Operator and the parties agree to cooperate with each other in order that the Operating License can be issued to New Operator as soon as reasonably permitted under the procedures established by DHEC for the issuance of a license in connection with the change of ownership of a licensed assisted living facility and the Provider Number can be issued as soon as reasonably permitted under the procedures established by DHHS for the issuance of a new provider number in connection with the change of ownership of a licensed assisted living facility. As of the Transfer Date, DALS shall vacate and deliver full possession of the Leased Property to Lessor and shall transfer operation of the Facility to New Operator. DALS acknowledges and agrees that title to (i) any governmental permits or approvals which, by their nature, pertain to the Facility, its ownership, use and occupancy and (ii) all certificates of need or similar certificates which, by their nature, pertain to the Facility, its ownership, use and occupancy, shall remain with the Facility; provided, however, that DALS shall retain, and Lessor shall not have, any rights in or to the use of the name "Advocat" or "Diversicare", or any derivative thereof, in connection the Facility. 1.2 Termination of Lease. Effective as of the Transfer Date, the Lease shall be and hereby is terminated, and all of its respective terms and conditions (including without limitation the option to purchase the Leased Property provided to the Lessee under the Lease) shall be and hereby are deemed to be of no further force and effect, with the same effect as if the Transfer Date was the expiration date of the Lease. Lessor and DALS hereby agree that, effective as of the Transfer Date, all obligations and duties of DALS as Lessee under the Lease arising after the Transfer Date shall terminate. As of the Transfer Date, DALS shall and does hereby release and forever discharge any and all right, title and interest in and to the Leased Property that it has, had or may have under the Lease, including without limitation the right and option to purchase the Leased Property provided to the Lessee under the Lease. On the Transfer Date, DALS and Lessor shall execute and deliver a Notice of Termination of Lease, in the form attached hereto as Exhibit A, evidencing the termination of the Lease and sufficient for recording in the real estate records of the county in which the Facility is located. 1.3 Delivery of Leased Property; Transfer of DALS's Personal Property. On the Transfer Date, DALS will vacate and surrender to Lessor, and will deliver possession and control to Lessor, of all of the Leased Property. On the Transfer Date, DALS will also transfer, assign and deliver to Lessor all of DALS's right, title and interest in and to, and the possession 2 and control of, all equipment, machinery, furniture, fixtures, trade fixtures, inventory of goods and supplies and all other tangible and intangible personal property owned or leased by DALS and located at or used in connection with or necessary for the operation of the Facility ("DALS's Personal Property"), but specifically excluding: (i) the following property which will be transferred by DALS to the New Operator: the right to the use of the name under which the Facility is doing business or has done business during DALS's use and occupancy, the Facility phone number, the full-sized Ford van currently used by the Facility to transport residents (the "Van"), all drugs and medical supplies, and all resident, medical, clinical, personnel files and other records related to operation of the Facility including, without limitation, the Operations Manual of Policies and Procedures for Meeting and Exceeding Minimum Licensure Standards (1999) (the so-called "Blue Book") that was at the Facility at the commencement of the Lease and subsequently modified and updated by DALS, (ii) any leased property, (iii) DALS's wide area network and associated software provided on the Diversicare wide area network, (iv) DALS's or its affiliate's Keys to Marketing and Continuous Quality Improvement program manuals and materials, management information systems, policy, procedure and educational manuals and materials, and similar proprietary property of DALS or its affiliates, and (v) any rights in or to the use of the name "Advocat" or "Diversicare", or any derivative thereof. On the Transfer Date, DALS will make, execute and deliver a Bill of Sale and Assignment in the form attached hereto as Exhibit B sufficient to transfer DALS's Personal Property to Lessor. The presence of the DALS's Personal Property at the Facility on the Transfer Date shall constitute delivery thereof. Any items of DALS's Personal Property containing the name or logo of "Diversicare" or "Advocat", or any derivative thereof, at the Facility as of the Transfer Date shall be replaced and either destroyed by Lessor or returned to DALS. 1.4 Modification of Advocat Guaranty. Effective as of the Transfer Date: (a) the Lessor and Advocat agree that, for purposes of the Guaranty, the term "Lease" shall mean the Lease and this Agreement, and the "Payment Obligations", "Performance Obligations" and "Obligations" shall be limited to those arising pursuant to the Lease prior to Transfer Date, (except as provided in Paragraph 2 hereof), but shall include all obligations of DALS arising pursuant to this Agreement, whether prior to, on or after the Transfer Date, including without limitation the Lease Termination Fee and, if applicable, Lessor's Liquidated Damages to be paid by DALS in accordance with Paragraph 1.5 hereof, and (b) Advocat confirms and restates its liabilities, obligations and agreements under the Guaranty and acknowledges and agrees that every right, power and remedy of the Lessor thereunder is in full force and effect, including without limitation such rights powers and remedies relating the Payment Obligations and Performance Obligations as defined herein. On the Transfer Date, Lessor and Advocat shall execute a Modification of Guaranty in substantially the form attached hereto as Exhibit D. 1.5 Lease Termination Payment. In consideration of the termination of the Lease and the other transactions contemplated herein, DALS shall pay and deliver to Lessor the sum of Three Hundred Fifty-Five Thousand Two Hundred Ninety Five and 00/100 Dollars ($355,295.00) (the "Lease Termination Fee") which shall be payable as follows: 1.5.1 On the Transfer Date, Seventy Five Thousand Two Hundred Ninety-Five and 00/100 Dollars ($75,295.00) shall be paid by wire delivery of immediately available, same day, federal funds, to the account of Lessor; and 3 1.5.2 Provided that New Operator has and is cooperating with DALS in connection with the efforts of DALS to bill and collect its accounts receivable from the Facility after the Transfer Date in accordance with the Transfer Agreement, the remaining Two Hundred Eighty Thousand and 00/100 Dollars ($280,000.00) shall be paid in monthly installments following the Transfer Date in accordance with the terms of a promissory note in substantially the form attached hereto as Exhibit C (the "Note") to be delivered by DALS to Lessor on the Transfer Date. 1.5.3 This Lease Termination Agreement, the payment by DALS of the Lease Termination Fee, and the other matters set forth herein, are being made and agreed to in full settlement, compromise and satisfaction of certain disputes and claims arising as a result of the termination of the Lease, including but not limited to Lessor's claim for loss or damages as a result of the termination of the Lease, and nothing contained herein shall be deemed or construed as an admission of fault or wrongdoing by any party in connection with the termination of the Lease. In consideration of the termination of the Lease and Lessor's acceptance of payment of the Lease Termination Fee as herein provided, DALS and Advocat hereby agree that if (i) DALS fails to make the payments of the Lease Termination Fee called for under the Note and, a result of such default, Lessor elects to accelerate the maturity of the remaining unpaid balance of the Lease Termination Fee by giving written notice of its election to exercise such option to both DALS and Advocat as provided in the Note ("Lessor's Acceleration Notice") and (ii) DALS or Advocat fail to deliver (or cause to be delivered) to Lessor payment of the full amount of the remaining unpaid balance of the Lease Termination Fee, and any interest due thereon, within thirty (30) days of the date DALS and Advocat receive Lessor's Acceleration Notice, then Lessor may and shall have the right after (but not before) the expiration of said thirty (30) day period, and without the necessity of any further demand or notice, to commence and prosecute legal action against DALS and Advocat, jointly or severally, to collect and recover the sum of One Million Three Hundred Thousand and 00/100 Dollars ($1,300,000.00) as full liquidated damages for termination of the Lease ("Lessor's Liquidated Damages"). Solely for purposes and in consideration of this Lease Termination Agreement, DALS, Advocat, Lessor and Prior Lessor hereby agree that, in view of the uncertainty and inconvenience of ascertaining the actual damages to Lessor as a result of the termination of Lease, the amount of Lessor's Liquidated Damages constitutes a reasonable estimate of the loss and damages that would be sustained by Lessor as a result of such termination and is not intended as a penalty. 1.5.3.1 Upon the payment by DALS or Advocat of (i) the full amount of the Lease Termination Fee, and, if applicable, any interest due thereon, in accordance with the terms and provisions of the Note or (ii) the full amount of the remaining unpaid balance of the Lease Termination Fee, together with any interest due thereon, within thirty (30) days after receipt of Lessor's Acceleration Notice as provided in Paragraph 1.5.3, above, then, upon the occurrence of either of such events, the right of Lessor to recover Lessor's Liquidated Damages provided in Paragraph 1.5.3, above, shall immediately and automatically terminate and be of no further force and effect, and any and all loss, damages, costs or expenses which Lessor may have suffered or incurred as a result of the termination of the Lease shall be deemed to be fully paid, satisfied and discharged forever. Promptly following such payment, the original Note, marked "paid-in-full", shall be returned to DALS. 4 1.5.3.2 Any and all payments of the Lease Termination Fee made by DALS or Advocat shall be a credit against the amount of Lessor's Liquidated Damages, which shall be reduced by the total amount of the Lease Termination Fee payments so made. Upon the commencement of any action by Lessor to recover Lessor's Liquidated Damages as provided in Paragraph 1.5.3, above, the Note shall be deemed to be cancelled and of no further force and effect and DALS and Advocat shall have no further obligation to make payment of the then remaining unpaid balance of the Lease Termination Fee, or any interest thereon, it being the intent of this Paragraph 1.5 that Lessor shall be entitled to receive either the Lease Termination Fee or Lessor's Liquidated Damages, but not both, in full settlement, discharge and satisfaction all sums due or to become due Lessor as a result of the termination of the Lease and transfer of the operations of the Facility to the New Operator. Promptly following the commencement of any such legal action, the original Note, marked "cancelled", shall be returned to DALS. 1.6 Security Deposit. DALS acknowledges that the Security Deposit in the amount of Thirty-Five Thousand Dollars ($35,000.00) called for under Section 4.4 of the Lease was never delivered to Lessor and releases any claim it may have with respect thereto. Lessor and Prior Lessor hereby release and discharge DALS and Advocat from any obligation to pay or deliver the Security Deposit. 2. As Is/Where Is. All of the Leased Property and DALS's Personal Property (collectively, the "Real and Personal Property") will be transferred and delivered to Lessor by DALS on the Transfer Date, and will be accepted by Lessor "as-is," "where-is," subject however to the provisions of Section 7.3 of the Lease, but with no other warranties, including the warranty of habitability, use or fitness for habitation with respect to any real estate and improvements and with no other warranties, including the warranty of merchantability or fitness for a particular purpose, with respect to all of the other property, and all of which warranties (both express and implied) DALS hereby disclaims. Lessor has, or will have on or before the Transfer Date, examined and inspected the Real and Personal Property and knows and is satisfied with, or will know and be satisfied with, its condition and is not now relying, and will not later rely, upon any representations or warranties made (or asserted to have been made) by DALS, Advocat or anyone claiming to act by, through or under or on their behalf concerning the Real and Personal Property except for the representations and warranties set forth in Section 7.3 of the Lease and the representations and warranties as to title and the representations and warranties as to liens and encumbrances set forth in this Agreement and the Bill of Sale and Assignment to be delivered on the Transfer Date in the form attached hereto as Exhibit B. Except for liabilities, obligations and responsibilities of DALS arising prior to the Transfer Date under Article 5, Section 7.3, Section 9.2, Article 11 and Article 19 of the Lease, Lessor shall and does hereby release and discharge DALS, effective as of the Transfer Date, from any liabilities, obligations or responsibilities that DALS had, has or may have with respect to the Real and Personal Property under the Lease whether arising prior to, on or after the Transfer Date, including without limitation any obligation to install a fire sprinkler system, radiation fire dampers and fire alarm indicator lights at the Facility as required by DHEC. Prior to the Transfer Date, Lessor shall have the right, upon reasonable advance notice and during normal business hours, to enter the 5 Facility for the purpose of inspecting the Real and Personal Property, subject to any security, health, safety or privacy requirements or rights of the residents and employees of each Facility. DALS shall have the right to have a representative present at all times during any such inspection by Lessor. 3. Prorations; Liabilities. 3.1 Real and personal property taxes shall be prorated between DALS and Lessor, as applicable, as of the Transfer Date. Such prorations shall be made on the basis of actual days elapsed in the relevant accounting or revenue period and shall be based on the most recent tax information or tax bills available to DALS and Lessor. 3.2 There shall be no proration of utility charges or any other payables or expenses attributable to the Facility as of the Transfer Date, it being the intent of the parties that DALS shall pay the bills therefore for the period prior to the Transfer Date and New Operator shall pay the bills therefore for the period on and after the Transfer Date. Utilities for the Facility will be cut off in DALS's name on the Transfer Date and DALS shall be entitled to the return of any deposit in respect thereof. New Operator shall be responsible for obtaining utility services in its own name for the Facility, ensuring that the same are available on the Transfer Date, and making any deposits necessary therefore prior to the Transfer Date. DALS will notify its suppliers that the cut off date for their provision of supplies or services to the Facility will be the last day prior to the Transfer Date. 3.3 Notwithstanding the fact that the Transfer Date occurs on the first day of a calendar month, there shall be no proration of and DALS shall not be required to pay all or any portion of the monthly installment of Rent which, by the terms of the Lease, is due on the first day of each calendar month. 4. Releases; Indemnification. 4.1 Mutual Releases. 4.1.1 Release by DALS. Effective as of the Transfer Date, DALS shall and does hereby release and forever discharge Lessor, Prior Lessor, their employees, agents, and representatives, from any and all liabilities or obligations, of whatever kind or nature, known or unknown, that Lessor, Prior Lessor, their agents, employees, or representatives, has, had or may have to DALS arising out of or based upon the Lease, or the use and occupancy of the Facility by DALS, except with respect to (i) any breach of this Agreement by Lessor; (ii) any future performance of Lessor required by this Agreement; or (iii) any claim for indemnification pursuant to Section 4.2, below. 6 4.1.2 Release by Lessor. Effective as of the Transfer Date, Lessor and Prior Lessor each shall and do hereby release and forever discharge DALS, its employees, agents and representatives, from any and all liabilities or obligations, of whatever kind or nature, known or unknown, that DALS or its agents, employees and representatives, has, had or may have to Lessor arising out of or based upon the Lease, or the use and occupancy of the Facility by DALS, except with respect to (i) any liabilities or obligations arising prior to the Transfer Date to the extent set forth in Section 2 and Section 4.2 of this Agreement; (ii) any breach of this Agreement by DALS; (iii) any future performance of DALS required by this Agreement; or (iv) any claim for indemnification pursuant to Section 4.2, below. 4.2 Indemnification. 4.2.1 DALS. DALS does hereby agree to indemnify and to defend and hold harmless Lessor, Prior Lessor, their successors and assigns, from and against any and all demands, claims, causes of action, fines, penalties, damages, liabilities, costs and expenses (including, without limitation, reasonable attorneys' and professional fees) incurred or suffered by Lessor or Prior Lessor in connection with or arising from (i) the inaccuracy of any representation, breach of any warranty or default in the performance of any covenant on the part of DALS contained in this Agreement or any document or instrument delivered by DALS pursuant to this Agreement; (ii) any default or alleged default on the part of DALS in the faithful performance of all of the terms, conditions, covenants and agreements contained in the Lease and arising prior to the Transfer Date, specifically including without limitation, any liability arising in connection with the placement or presence of any hazardous materials in or about the Leased Property, but specifically excluding any liability arising in connection with the condition of the Real and Personal Property (as defined in Paragraph 2, above); or (iii) any claim made by or for any third party against Lessor or Prior Lessor based upon the occupancy or operation of the Facility by DALS prior to the Transfer Date, including without limitation any claims, liabilities, penalties and sanctions for overpayment made to DALS under any Medicaid or other third party payor contract arising from services provided by DALS prior to the Transfer Date, or any claims for personal injury (including death) resulting from the acts, omissions or negligence of DALS or the contractors, agents, employees, invitees or visitors of DALS with respect to the Facility prior to the Transfer Date; provided, however, that nothing herein shall be construed as imposing any liability on DALS to indemnify, defend or hold harmless Lessor or Prior Lessor with respect to their own acts or omissions from and after the Transfer Date. 4.2.2 Lessor. Lessor and Prior Lessor do hereby, jointly and severally, agree to indemnify and to defend and hold harmless DALS, its successors and assigns, from and against any and all demands, claims, causes of action, fines, penalties, damages, liabilities, costs and expenses (including, without limitation, reasonable attorneys' fees) incurred or suffered by DALS in connection with or arising from (i) the inaccuracy of any representation, breach of any warranty or default in the performance of any covenant on the part of Lessor contained in this Agreement or any document or instrument delivered by Lessor pursuant to this Agreement; or (ii) any default or alleged default on the part of Lessor or Prior Lessor in the faithful performance of all of the terms, conditions, covenants and agreements contained in the Lease and arising prior to the Transfer Date; provided, however, that nothing herein shall be construed as imposing any 7 liability on Lessor or Prior Lessor to indemnify, defend or hold harmless DALS with respect to DALS's own acts or omissions from and after the Transfer Date. 4.2.3 Procedure for Indemnification. (a) Notice. Within thirty (30) days after receipt of written or actual notice of any action or claim (the "Claim") as to which it asserts a right to indemnification, the party seeking indemnification hereunder (the "Indemnitee") shall give written notice thereof (the "Notice") to the person from whom indemnification is sought (the "Indemnitor"), provided that the failure of the Indemnitee to give the Indemnitor notice within the specified number of days shall not relieve the Indemnitor of any of its obligations hereunder, but may create a cause of action for breach for damages directly attributable to such delay. Indemnitor shall be liable to Indemnitee with respect to a Claim only so long as Indemnitee gives Indemnitor written notice thereof prior to the expiration of the survival period set forth in Section 10.6. (b) Third Party Claims. (i) If any claim for indemnification by Indemnitee arises out of a Claim by a person other than Indemnitee, the Indemnitor shall be entitled to assume the defense thereof, by written notice to the Indemnitee within fifteen (15) days after receipt of the Notice. Indemnitor shall thereupon undertake to take all steps or proceedings to defeat or compromise any such Claim, including retaining counsel reasonably satisfactory to the Indemnitee. Except as otherwise provided herein, all costs, fees and expenses with respect to any such Claim shall be borne by Indemnitor. If the Indemnitor assumes the defense of a Claim, it shall not settle such Claim unless such settlement includes as an unconditional term thereof a release by the claimant of the Indemnitee, reasonably satisfactory to the Indemnitee and except that Indemnitor shall not, without the prior written consent of Indemnitee, directly or indirectly require Indemnitee to take or refrain from taking any action, or make any public statement, or consent to any settlement, which it reasonably considers to be against its interest. Indemnitee shall have the right to participate at its own expense, in such proceedings, but control of such proceedings shall remain exclusively with Indemnitor. (ii) If the Indemnitor shall fail to notify the Indemnitee of its desire to assume the defense of any such claim or action within the prescribed period of time, then the Indemnitee may assume such defense in such manner as it may deem appropriate, and the Indemnitor shall be bound by any determinations made or any settlements thereof effected by the Indemnitee. The Indemnitor shall be permitted, at its own expense, to join in such defense and to employ its own counsel but control of such proceedings shall remain exclusively with Indemnitee. (iii) Indemnitor and Indemnitee agree to make available to each other, their counsel and other representatives, all information and documents reasonably available to them reasonably requested by the other which relate to any such claim or action, and to render to each other such reasonable assistance as may be reasonably requested in order to insure the proper and adequate defense of such claim or action, but any costs or expenses related thereto shall be borne by Indemnitor; and provided that any failure (after written notice with 8 specificity and an opportunity to cure) shall not relieve the Indemnitor of any of its obligations hereunder but may create a cause of action for breach for damages directly attributable to such failure. (c) Other Claims. In the event of any Claim other than those provided for in subsection (b) hereof, Indemnitee shall be entitled to indemnification hereunder as provided herein. (d) Payment of Claims. Amounts payable by the Indemnitor to the Indemnitee shall be payable by the Indemnitor as incurred by the Indemnitee. In the event Indemnitor fails to pay, timely and fully, any such amounts, Indemnitee may pay such Claim. In such event, the Indemnitee may recover from the Indemnitor, in an addition to the amount so paid, reasonable attorneys' fees in connection with the enforcement of any payment due hereunder. 5. Representations, Warranties and Covenants. 5.1 Lessor hereby represents and warrants that it has all necessary power and authority to enter into this Agreement and to execute all documents and instruments referred to herein or contemplated hereby and all necessary action has been taken to authorize the individual executing this Agreement to do so, and this Agreement has been duly and validly executed and delivered by each of them and is enforceable against each of them in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy laws and general principles of equity. 5.2 Advocat and DALS each hereby represents and warrants that it has all necessary power and authority to enter into this Agreement and to execute all documents and instruments referred to herein or contemplated hereby and to consummate the transaction provided for herein, and all necessary action has been taken to authorize the individual executing this Agreement to do so, and this Agreement has been duly and validly executed and delivered by each of them and is enforceable against each of them in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy laws and general principles of equity. 5.3 DALS covenants and agrees that between the date hereof and the Transfer Date: (i) DALS will provide all necessary information requested by New Operator for the preparation and filing of any and all necessary applications or notifications to any federal or state governmental authority having jurisdiction over a change in the operational control of the Facility, and any other information reasonably required to effect an orderly transfer of the Facility (provided, however, that New Operator will be solely responsible for all cost and expense of the processing of such application), (ii) DALS shall use its reasonable best efforts to keep the business and organization of the Facility intact and to preserve for New Operator the goodwill of the suppliers, distributors, residents and others having business relations with DALS with respect to the Facility; (iii) except in the case of an emergency or if required by law, DALS shall not move or solicit the move of any residents presently situated at any of the Facility; (iv) DALS will continue to carry on its operation of the Facility in the substantially same manner as 9 it did prior to the date hereof, (v) DALS will continue to perform its obligations as Lessee under the Lease, (vi) DALS will not enter into any new contract or other agreement that will be an obligation affecting the Facility subsequent to the Transfer Date without the prior written consent of the New Operator, and (vii) DALS will not dispose of any equipment, machinery, furnishings, fixtures or inventory, except in the ordinary course of business. 5.4 DALS represents and warrants (i) that DALS has permitted no liens or encumbrances (except for the current year's taxes to be prorated as of the Transfer Date) to be placed upon any of the Leased Property; (ii) that none of DALS's Personal Property is leased or otherwise subject to any lien or encumbrance except as listed on Exhibit E attached hereto; and (iii) that as to any such lien or encumbrance on any of the Leased Property or any of DALS's Personal Property which is to be transferred to Lessor pursuant to this Agreement, DALS will cause the same to be removed prior to the Transfer Date. 6. Conditions to Close. The obligations of the parties to consummate the transactions contemplated by this Agreement are subject to the satisfaction of the following conditions on or prior to the Transfer Date or the dates designated elsewhere in this Agreement for the satisfaction of such conditions: (a) All of the representations and warranties of the parties contained herein shall be true and correct in all material respects as of the date of this Agreement and as of the Transfer Date; (b) As of the Transfer Date, each party shall have performed its obligations hereunder and all documents to be made executed and/or delivered on the Transfer Date shall have been tendered; (c) There shall exist no actions, suits, arbitrations, claims, attachments, proceedings, assignments for the benefit of creditors, insolvency, bankruptcy, reorganization or other proceedings, pending or threatened against any party hereto that would materially and adversely affect the ability of any party hereto to perform its obligations under this Agreement; (d) There shall exist no pending or threatened action, suit or proceeding with respect to any party hereto before or by any court or administrative agency which seeks to restrain or prohibit, or to obtain damages or a discovery order with respect to, this Agreement or the consummation of the transactions contemplated hereby; (e) The parties shall have obtained all consents, releases and approvals from all third parties from whom such consents, releases or approvals are necessary to consummate the transactions contemplated hereby, including without limitation, in the case of Advocat and DALS, the consent of AmSouth Bank, and in the case of the Lessor, the holders of any mortgages on the Facility; and (f) New Operator shall have entered into the Operations Transfer Agreement providing for the transfer of Facility operations from DALS to New Operator on the Transfer Date and shall have obtained all of the licenses, permits, approvals and certifications necessary 10 for its continued operation of the Facility as a licensed assisted living facility, including without limitation the Operating License and the Provider Number. 7. Termination. Notwithstanding anything in this Agreement to the contrary, this Agreement and the obligations of the parties hereunder may be terminated on or prior to the Transfer Date as follows: (a) By Advocat and DALS (i) in the event the transactions contemplated by this Agreement have been prohibited or enjoined by reason of any final judgment, decree or order entered or issued by a court of competent jurisdiction in litigation or proceedings involving any of the parties; or (ii) in the event Lessor breaches or violates any material provision of this Agreement or fails to perform any material covenant or agreement to be performed by Lessor under the terms of this Agreement, and Advocat or DALS has provided written notice thereof to Lessor giving reasonable specificity and Lessor has not cured same within a reasonable period of time and such breach is not waived by Advocat and DALS in writing. (b) By Lessor (i) in the event the transactions contemplated by this Agreement have been prohibited or enjoined by reason of any final judgment, decree or order entered or issued by a court of competent jurisdiction in litigation or proceedings involving any of the parties; or (ii) in the event Advocat or DALS breaches or violates any material provision of this Agreement or fails to perform any material covenant or agreement to be performed by Advocat or DALS under the terms of this Agreement and Lessor has provided written notice thereof to Advocat and DALS giving reasonable specificity and Advocat or DALS, as applicable, has not cured same within a reasonable period of time and such breach is not waived by Lessor in writing. (c) By Lessor (i) in the event the transactions contemplated by the Operations Transfer Agreement have been prohibited or enjoined by reason of any final judgment, decree or order entered or issued by a court of competent jurisdiction in litigation or proceedings involving any of the parties; or (ii) in the event DALS breaches or violates any material provision of the Operations Transfer Agreement or fails to perform any material covenant or agreement to be performed by DALS under the terms of the Operations Transfer Agreement and New Operator has provided written notice thereof to DALS giving reasonable specificity and DALS has not cured same within a reasonable period of time and such breach is not waived by New Operator in writing. (d) By Lessor, or by Advocat and DALS, (i) in the event New Operator breaches or violates any material provision of the Operations Transfer Agreement or fails to perform any material covenant or agreement to be performed by New Operator pursuant to the Operations Transfer Agreement, and DALS has provided written notice thereof to New Operator giving reasonable specificity and New Operator has not cured same within a reasonable period of time and such breach is not waived by DALS in writing; or (ii) if the Transfer Date hereunder shall not have taken place by June 1, 2003, or by such later date as shall be agreed upon by an appropriate amendment to this Agreement if the parties agree in writing to an extension, provided that a party shall not have the right to terminate under this subparagraph (c) if the conditions precedent to such party's obligation to close have been fully satisfied and such party 11 has failed or refused to close within a reasonable time after being requested in writing to close by the other party. 8. Further Assurances. Each of the parties hereto agrees to execute and deliver any and all further agreements, documents or instruments necessary to effectuate this Agreement and the transactions referred to herein or contemplated hereby or reasonably requested by the other party to perfect or evidence their rights hereunder. 9. Notices. All notices to be given by any party to this Agreement to the other party hereto shall be in writing, and shall be (a) given in person, (b) deposited in the United States mail, certified or registered, postage prepaid, return receipt requested or (c) sent by national overnight courier service, each addressed as follows: (a) If to Lessor: Freda B. Lynch, Manager 570 Center Street, LLC 9 Waterway Island Drive Isle of Palms, SC 29451 With a copy by facsimile to: Karen W. Kerrison, Esq. Young, Clement, Rivers & Tisdale, LLP 28 Broad Street Charleston, SC 29401 Facsimile: (843) 570-1394 (c) If to DALS or Advocat: Diversicare Assisted Living Services, Inc. 277 Mallory Station Road, Suite 130 Franklin, TN 37067 Attn: President With a copy by facsimile to: John N. Popham, Esq. Harwell, Howard, Hyne, Gabbert & Manner 315 Deaderick Street, Suite 1800 Nashville, Tennessee 37238 Facsimile: (615) 251-1059

Any such notice personally delivered shall be deemed delivered when actually received, any such notice deposited in the United States mail, registered or certified, return receipt requested, with all postage prepaid, shall be deemed to have been given on the earlier of the date received or the date when delivery is first refused, and any notice deposited with an overnight courier service for deliver shall be deemed delivered on the business day following such deposit. Any party to whom notices are to be sent pursuant to this Agreement may from time to time change its address for further communications thereunder by giving notice in the manner prescribed herein to all other parties hereto. 10. Payment of Expenses. Each party hereto shall bear its own legal, accounting and other expenses incurred in connection with the preparation and negotiation of this Agreement 12 and the consummation of the transaction contemplated hereby, whether or not the transaction is consummated. 11. Entire Agreement; Amendment; Waiver. This Agreement, together with the other agreements referred to herein, constitutes the entire understanding among the parties with respect to the subject matter hereof, superseding all negotiations, prior discussions and preliminary agreements. This Agreement may not be modified or amended except in writing signed by the parties hereto. No waiver of any term, provision or condition of this Agreement in any one or more instances, shall be deemed to be or be construed as a further or continuing waiver of any such term, provision or condition of this Agreement. No failure to act shall be construed as a waiver of any term, provision, condition or rights granted hereunder. 12. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the respective legal representatives, heirs, successors and assigns of the parties hereto. 13. No Joint Venture; Third Party Beneficiaries. Nothing contained herein shall be construed as forming a joint venture or partnership among the parties with respect to the subject matter hereof. The parties hereto do not intend that any third party shall have any rights under this Agreement. 14. Captions. The section headings contained herein are for convenience only and shall not be considered or referred to in resolving questions of interpretation. 15. Counterparts. This Agreement may be executed and delivered via facsimile and in one or more counterparts and all such counterparts taken together shall constitute a single original Agreement. 16. Governing Law. This Agreement and the legal relations between the parties shall be governed and construed in accordance with the laws of the State of South Carolina without application of conflict of law principles, and the parties hereto specifically agree to submit to and be bound by the jurisdiction of the courts, either federal or state, of the State of South Carolina. Venue for any action brought to enforce this Agreement, or to recover Lessor's Liquidated Damages in accordance with Paragraph 1.5.3, shall lie in Charleston County, South Carolina. 17. Attorneys' Fees. In the event that any party hereto shall bring an action to enforce the terms hereof or to declare rights hereunder, the prevailing party in any such action shall be entitled to court costs and reasonable attorneys' fees to be paid by the non-prevailing party as fixed by the court of appropriate jurisdiction, including, but not limited to, attorney's fees and court costs incurred in courts of original jurisdiction, bankruptcy courts, or appellate courts. 18. Public Announcements. DALS and Advocat agree not to make any public announcements or other public communications concerning this Agreement and the conveyance of the Facility operations prior to the Transfer Date, except to the extent necessary to comply with applicable law or any reporting requirements to which DALS or Advocat are subject, and except to the extent necessary to consummate the transactions contemplated by this Agreement. 13 19. Nature and Survival of Terms. All representations, warranties, and covenants of the parties set forth in this Agreement or in any document delivered in connection herewith, shall survive the closing of the transactions contemplated hereby, notwithstanding any investigation made by any party hereto. No modification, waiver, termination, rescission, discharge or cancellation of this Agreement shall affect the right of any party to enforce any claim, whether or not liquidated, which accrued prior to the date of such modification, waiver, termination, rescission, discharge or cancellation, and no waiver of any provisions of, or default under, this Agreement shall affect the right of any party thereafter to enforce said provision or to exercise any right or remedy in the event of any other default, whether or not similar. [SIGNATURE PAGE FOLLOWS] 14 IN WITNESS WHEREOF, the parties hereby execute this Lease Termination Agreement (Palmetto Village of Chester, SC) as of the day and year first set forth above. SIGNED, SEALED AND DELIVERED DIVERSICARE ASSISTED LIVING IN THE PRESENCE OF: SERVICES, INC. /s/ Glynn Riddle By: /s/ William R. Council, III - --------------------------------- ------------------------------ Name: William R. Council, III ------------------------------ /s/ Andrea Riley Title: President - --------------------------------- ------------------------------ ADVOCAT INC. /s/ Glynn Riddle By: /s/ William R. Council, III - --------------------------------- ------------------------------ Name: William R. Council, III ------------------------------ /s/ Andrea Riley Title: President - --------------------------------- ------------------------------ LESSOR: 570 CENTER STREET, LLC /s/ Barbara L. Morgan By: /s/ Freda B. Lynch - --------------------------------- ------------------------------ Name: Freda B. Lynch ------------------------------ /s/ Patricia A. Gulliford Title: Manager - --------------------------------- ------------------------------ PRIOR LESSOR: /s/ Barbara L. Morgan By: /s/ Albert M. Lynch - --------------------------------- ------------------------------ /s/ Patricia A. Gulliford Albert M. Lynch - ------------------------------- 15 STATE OF SOUTH CAROLINA ) ) ACKNOWLEDGMENT COUNTY OF CHARLESTON ) The foregoing instrument was acknowledged before me this 18th day of April, 2003 by 570 CENTER STREET, LLC acting herein by Freda B. Lynch, its Manager, on behalf of the said company. /s/ Patricia A. Gulliford (SEAL) ----------------------------------- Notary Public for South Carolina My Commission Expires 6-01-2010 ----------------- [Affix official notarial seal or stamp] STATE OF TENNESSEE ) --------------------- ) ACKNOWLEDGMENT COUNTY OF WILLIAMSON ) -------------------- The foregoing instrument was acknowledged before me this 29th day of May, 2003 by DIVERSICARE ASSISTED LIVING SERVICES, INC. acting herein by William R. Council, III its President, on behalf of the said company. /s/ Jacqueline S. Reed (SEAL) ----------------------------------- Notary Public for Tennessee --------------------- My Commission Expires 2/20/2006 ----------------- [Affix official notarial seal or stamp] STATE OF TENNESSEE ) --------------------- ) ACKNOWLEDGMENT COUNTY OF WILLIAMSON ) -------------------- The foregoing instrument was acknowledged before me this 29th day of May, 2003 by ADVOCAT, INC. acting herein by William R. Council, III its President, on behalf of the said company. /s/ Jacqueline S. Reed (SEAL) ----------------------------------- Notary Public for Tennessee --------------------- My Commission Expires 2/20/2006 ----------------- [Affix official notarial seal or stamp] 16 STATE OF SOUTH CAROLINA ) ) ACKNOWLEDGMENT COUNTY OF CHARLESTON ) The foregoing instrument was acknowledged before me this 18th day of April, 2003 by ALBERT M. LYNCH. /s/ Patricia A. Gulliford (SEAL) ----------------------------------- Notary Public for South Carolina --------------------- My Commission Expires 6-01-2010 ----------------- [Affix official notarial seal or stamp] 17 EXHIBIT A STATE OF SOUTH CAROLINA COUNTY OF CHESTER NOTICE OF TERMINATION OF LEASE AGREEMENT This NOTICE OF TERMINATION OF LEASE AGREEMENT ("Agreement") is made and entered into as of this ___ day of ____________, 2003, to be effective as of 12:01 a.m. EST, ____________ 1, 2003 by and between 570 CENTER STREET, LLC, a South Carolina limited liability company ("Lessor") and DIVERSICARE ASSISTED LIVING SERVICES, INC., a Tennessee corporation ("Lessee"). W I T N E S S E T H: WHEREAS, Lessor's predecessor in interest, Albert M. Lynch ("Prior Lessor") and Lessee have previously entered into a Lease Agreement (With Option to Purchase) (the "Lease") dated as of August 12, 1998 providing for the lease by Lessee from Lessor of certain real property, improvements, fixtures and equipment comprising an assisted living facility known as Palmetto Village of Chester, South Carolina and located in Chester County, South Carolina (collectively, the "Leased Property"); and WHEREAS, Lessor and Lessee entered into a Memorandum of Lease with Option dated December 11, 1998 and recorded January 12, 1999 in the Office of the Clerk of Court (now the Register of Deeds) for Chester County, South Carolina in Deed Book 750 at Page 119 to which reference is here made; and WHEREAS, Lessor and Lessee have elected to terminate the Lease and in connection therewith, the parties have entered into that certain Lease Termination Agreement dated _____________, 2003 (the "Termination Agreement") relating to the termination of the Lease, the surrender of possession and return to Lessor of the Leased Property, and the transfer of certain personal property of the Lessee to Lessor necessary or useful in the operation of the Leased Property; and NOW THEREFORE, in consideration of the foregoing premises, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and further for the purpose of providing notice of the termination of the Lease in accordance with the Termination Agreement, the parties hereby state, acknowledge and confirm as follows: 1. Termination. The Lease shall be and is hereby terminated, effective as of 12:00:01 a.m., E.S.T., ____________ 1, 2003 ("Effective Date"). As of the Effective Date, each of Lessor and Lessee shall be released in full from each and all of its respective covenants, agreements, duties, responsibilities, liabilities and obligations arising under the Lease on or after the Effective Date and Lessor and Lessee each hereby releases and forever discharges the other from any claims or demands that either party now has or may have against the other with respect thereto. 2. Surrender of Leased Property. Lessee shall and does hereby vacate and surrender possession of the Leased Property to Lessor as of the Effective Date and the Lessor accepts the Leased Property from Lessee in "as is" condition as of the Effective Date subject however to compliance by Lessee prior to the Effective Date with the provisions of Section 7.3 of the Lease. 3. Release of Leasehold Interest. As of the Effective Date, Lessee shall and does hereby release and forever discharge any right, title or interest it has, had or may have in and to the Leased Property under the Lease, including without limitation the right and option to purchase the Leased Property provided to Lessee under the Lease. IN WITNESS WHEREOF, the parties hereto have caused this Notice of Termination of Lease Agreement to be executed as of the effective date set forth herein. SIGNED, SEALED AND DELIVERED IN THE PRESENCE OF: LESSOR: 570 CENTER STREET, LLC - ------------------------------ By: ---------------------------------- Its: - ------------------------------ ---------------------------------- As to Lessor LESSEE: DIVERSICARE ASSISTED LIVING SERVICES, INC. [SEAL] - ------------------------------ By: ---------------------------------- Its: - ------------------------------ ---------------------------------- As to Lessee STATE OF SOUTH CAROLINA ) ) ACKNOWLEDGMENT COUNTY OF CHESTER ) The foregoing instrument was acknowledged before me this ____ day of _______, 2003 by 570 CENTER STREET, LLC acting herein by ___________________ its _________________________, on behalf of the said company. (SEAL) ----------------------------------- Notary Public for South Carolina My Commission Expires ----------------- [Affix official notarial seal or stamp] STATE OF ) --------------------- ) ACKNOWLEDGMENT COUNTY OF ) -------------------- The foregoing instrument was acknowledged before me this ____ day of ________, 2003 by DIVERSICARE ASSISTED LIVING SERVICES, INC. acting herein by ____________________ its ________________________, on behalf of the said company. (SEAL) ----------------------------------- Notary Public for --------------------- My Commission Expires ----------------- [Affix official notarial seal or stamp] EXHIBIT B BILL OF SALE AND ASSIGNMENT THIS BILL OF SALE AND ASSIGNMENT ("Bill of Sale") is made and entered into effective as of the ____ day of _____________, 2003 by and between DIVERSICARE ASSISTED LIVING SERVICES, INC., a Tennessee Corporation ("Grantor") and 570 CENTER STREET, LLC, a South Carolina limited liability company ("Grantee"). W I T N E S S E T H: WHEREAS, Grantor and Grantee, and certain of their affiliates, have entered into a certain Lease Termination Agreement dated as of _________, 2003 (the "Transfer Agreement") pursuant to which Grantor has agreed to transfer and deliver to Grantee certain personal property used by Grantor in the operation of an assisted living facility located at 570 Center Street, Chester, South Carolina known as Palmetto Village of Chester (the "Facility"), as described therein. NOW THEREFORE, in consideration of the foregoing premises, and pursuant to the Transfer Agreement and for the consideration therein specified and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Sale and Assignment. Except for the Excluded Assets described in Paragraph 2 hereof, Grantor hereby grants, bargains, sells, conveys, assigns, transfers, and delivers to Grantee, its successors and assigns, forever, all right, title and interest of Grantor in and to the following property owned by Grantor and located at or used in connection with, and necessary to the operation of the Facility: (a) All furniture, furnishings, trade fixtures, fittings, computers, appliances, apparatus, equipment, machinery, tools, leasehold improvements and fixtures, and all other tangible personal property of every kind and description, together with all accessions, additions, attachments, accessories, appurtenances and replacements parts thereto and thereof (collectively, "Personal Property"); (b) All assignable warranties, surety agreements or guaranties (express or implied) issued in connection with or arising out of the purchase, construction, repair or replacement of any of the foregoing Personal Property, and all rights of Grantor which have accrued or may accrue thereunder; (c) All inventories of consumable and disposable goods and supplies of every kind and description, including without limitation, raw materials, work in progress, stock in trade, finished goods, supplies, paper, food, cleaning materials, disposables, linens and office supplies, (collectively, "Inventory"); (d) All books and records pertaining to the above described Assets. Items (a) through (d) above are sometimes hereinafter collectively referred to as the "Assets". TO HAVE AND TO HOLD, all and singular the said property unto Grantee, Grantee's successors and assigns, to their own use and enjoyment forever. And the Grantor does hereby covenant with the Grantee that Grantor is, to the best of Grantor's knowledge, the lawful owner of the Assets, that the Assets are free from all liens and encumbrances claiming by, through or under Grantor, and that Grantor has good right and authority to sell the same as aforesaid. Grantor covenants on behalf of itself and its successors and assigns to warrant and forever defend the title to the Assets against all persons whomsoever lawfully claiming, or to claim, by, through or under Grantor, the same or any part thereof. 2. Excluded Assets. The following items of property are expressly excluded from the transfer of the Assets provided for herein and for purposes of this Bill of Sale are not, and shall not be deemed to be, a part of the "Assets" described herein: (i) the property being transferred to the New Operator of the Facility all of which is listed in Exhibit A attached hereto; (ii) any leased property all of which is listed on Exhibit B attached hereto, (iii) Grantor's wide area network and associated software provided on the Diversicare wide area network, (iv) Grantor's continuous quality improvement program, manuals and materials, management information systems, policy, procedure and educational manuals and materials, and similar proprietary property of Grantor, and (v) any rights in or to the use of the name "Advocat" or "Diversicare", or any derivative thereof. 3. As Is/Where Is. The Assets hereby conveyed and assigned are being transferred to and accepted by Grantee "as-is" "where-is", without any warranty, express or implied, statutory or otherwise, and including without limitation any warranty as to condition, merchantability or fitness for a particular purpose, all of which warranties (both express and implied) Grantor hereby disclaims. 4. Delivery of Documents; Further Assurances. Simultaneously with the execution of this Bill of Sale, Grantor has caused to be delivered to Grantee all agreements, books, instruments, documents, records, invoices, manuals, warranties and other materials, records and documents evidencing or relating to the Assets transferred hereby. If additional records or documents evidencing or relating to the Assets are subsequently found or received by Grantor, Grantor will immediately forward them to Grantee. Grantor further agrees to cooperate with Grantee and to execute and deliver, or cause to be executed and delivered, any and all such further documents, instruments, materials or records, as may be necessary or required or reasonably requested by Grantee in order to further perfect Grantee's right, title and interest in and to the Assets and to otherwise carry out the intent and purpose of this Bill of Sale. 5. Attorney-In-Fact. Grantor hereby constitutes and appoints Grantee, its successors and assigns, the true and lawful attorney, irrevocably, of Grantor with full power of substitution, in the name of Grantor or otherwise, and on behalf and for the benefit of Grantee, its successors and assigns, to demand and receive from time to time any and all property of Grantor hereby conveyed, transferred, assigned and delivered or intended so to be; to give receipts, releases, and acquitances for or in respect of the same or any part thereof; to collect for the account of Grantee all other items transferred to Grantee as provided herein, and to defend and compromise any and all actions, suits or proceedings in respect of any of the properties hereby assigned and transferred or intended so to be, that Grantee, its successors or assigns shall deem desirable. Grantor hereby declares that the foregoing powers are coupled with an interest and shall not be revocable by it in any manner or for any reason. Grantee shall indemnify and save Grantor harmless from any losses or expenses suffered by Grantor as a result of Grantee's exercise of the rights granted hereunder. 6. Effective Date. This Bill of Sale shall be effective as of 12:00:01 a.m., EST, on ___________ 1, 2003. 7. Binding Effect. This Bill of Sale shall be binding upon and shall inure to the benefit of the respective legal representatives, successors and assigns of the Grantor and Grantee. IN WITNESS WHEREOF, Grantor and Grantee have caused this Bill of Sale to be executed as of effective date stated herein. SIGNED, SEALED AND DELIVERED IN THE PRESENCE OF: GRANTOR: - ---------------------------- DIVERSICARE ASSISTED LIVING SERVICES, INC. - ---------------------------- As to Grantor By: -------------------------------- Its: -------------------------------- GRANTEE: - ---------------------------- 570 CENTER STREET, LLC - ---------------------------- As to Grantee By: -------------------------------- Its: -------------------------------- STATE OF SOUTH CAROLINA ) ) ACKNOWLEDGMENT COUNTY OF CHESTER ) The foregoing instrument was acknowledged before me this ____ day of _______, 2003 by 570 CENTER STREET, LLC acting herein by ___________________ its _________________________, on behalf of the said company. (SEAL) ----------------------------------- Notary Public for South Carolina My Commission Expires ----------------- [Affix official notarial seal or stamp] STATE OF ) --------------------- ) ACKNOWLEDGMENT COUNTY OF ) -------------------- The foregoing instrument was acknowledged before me this ____ day of ________, 2003 by DIVERSICARE ASSISTED LIVING SERVICES, INC. acting herein by ____________________ its ________________________, on behalf of the said company. (SEAL) ----------------------------------- Notary Public for --------------------- My Commission Expires ----------------- [Affix official notarial seal or stamp] EXHIBIT A (to Bill of Sale and Assignment) (a) All resident, medical, clinical, personnel files and other records related to the Facility (including both hard and microfiche copies) and all databases, computer programs, books and records used in operating the Facility, specifically including, without limitation, the Operations Manual of Policies and Procedures for Meeting and Exceeding Minimum Licensure Standards (1999) (the so-called "Blue Book") that was at the Facility at the commencement of the Lease and subsequently modified and updated by DALS (collectively, "Books and Records"); (b) All drugs and medical supplies; (c) All rights to use of the Facility phone number: (803) 581-7319; (d) All trade names under or by which the Facility may be operated or known and all trademarks, trade names and goodwill related to the Facility or the operation of the business of the Facility; and (e) One (1) 1998 Ford Van, Vehicle ID No. 1FBS31DOWHA84686 EXHIBIT B (to Bill of Sale and Assignment) LEASED PROPERTY One (1) Lanier Model No. 5618AG Digital Copier with DF71-RADF Serial No: 92840453 (copier), 2840395 (document feeder) Lanier Lease No: 001-0183668-099 The Leased Property as described and defined in that certain Lease Agreement (With Option to Purchase) made and entered into as of August 12, 1998 by and between Albert M. Lynch, as Lessor and Assignor, as Lessee. EXHIBIT C PROMISSORY NOTE $280,000.00 Charleston, South Carolina ____________, 2003 FOR VALUE RECEIVED the undersigned, DIVERSICARE ASSISTED LIVING SERVICES, INC., a Tennessee corporation (the "Maker"), promises to pay to 570 CENTER STREET, LLC (collectively, together with any subsequent holder of this note, referred to as the "Holder") or order, the principal sum of Two Hundred Eighty Thousand and 00/100 Dollars ($280,000.00) payable in lawful money of the United States, at the address of Holder or at such other place as the Holder hereof may designate in writing. Maker shall make payments of said principal sum in twelve equal consecutive monthly installments of Twenty-two Thousand Five Hundred and 00/100 Dollars ($22,500.00) each commencing on the first day of ________, 2003 and continuing on the first (1st) day of each and every month thereafter through and including _________, 2004 and one final payment of the entire remaining principal balance on ______, 2004. This Note may be prepaid at any time, without notice, in whole or in part without premium or penalty. Prepayments shall be applied to payments hereunder in the reverse order of their maturity. Any partial prepayment shall not release Maker from the obligation to make regularly scheduled payments hereunder remaining due after application of such partial prepayment to the principal balance due hereunder. If the full amount of any payment due hereunder is not received by Holder within five (5) business days following the date specified herein for payment, such unpaid amount shall thereafter bear interest from the due date thereof until payment at an annual rate of interest equal to three (3) percentage points above the rate of interest published by the Wall Street Journal from time to time as the Prime Rate (the "Overdue Rate"). In the event of default in full payment of any monthly installment when due hereunder which is not cured within ten (10) days following written notice for the first occurrence of such a default, or in the event of any subsequent default in payment of any such sum when due hereunder which is not cured within five (5) business days following the date specified herein for payment, the Holder may, upon written notice and demand therefore given to Maker and Advocat Inc., guarantor of the indebtedness evidenced hereby, declare the full amount of the remaining unpaid balance of the principal indebtedness evidenced by this note at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of any subsequent default. Immediately upon any such acceleration by Holder of the maturity of the indebtedness evidenced hereby, the entire unpaid principal balance then outstanding shall bear interest thereafter until paid at an annual rate equal to the lesser of (i) the rate that is five percentage points (5%) in excess of the above specified Overdue Rate or (ii) the maximum rate allowed by applicable law. All terms, covenants and conditions respecting this note are expressly limited so that in no event whatsoever, whether by reason of advancement of money, acceleration of maturity of the unpaid balance of this note, or otherwise, shall the amount paid or agreed to be paid to the Holder for the use, forbearance or detention of money to be advanced hereunder exceed the highest rate permitted by applicable law. If, under any circumstances, the Holder receives an amount which would exceed the highest rate permitted by applicable law, the interest shall be automatically reduced to the highest lawful rate, and all payments in excess thereof shall be applied to the reduction of principal due hereunder and not to the payment of interest. The Maker represents and warrants to the Holder that this note is part of a commercial transaction. All parties to this note, whether Maker, principal, surety, guarantor or endorser, hereby forever waive presentment for payment, demand, protest and notice of dishonor and nonpayment of this note, and all defenses on the ground of extension of time for the payment hereof, which may be given by the Holder to them or any one of them, or to anyone who has assumed the payment of this note, and agree to pay all reasonable costs and expenses of collection and enforcement of this note, including all court costs and reasonable attorneys' fees. ALL PARTIES TO THIS NOTE AND THE HOLDER FURTHER WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT TO A JURY TRIAL IN ANY LITIGATION CONCERNING THIS NOTE AND IN ANY LITIGATION CONCERNING ANY DEFENSE, CLAIM, COUNTERCLAIM, CLAIM OF SET-OFF, OR SIMILAR CLAIM OF ANY NATURE THAT MAY BE ASSERTED AGAINST THE HOLDER. Holder is not required to rely on any collateral for the payment of this note in the event of default by the Maker, but may proceed directly against the Maker and/or any endorsers or guarantors in such manner as Holder deems desirable. None of the rights and remedies of Holder hereunder shall be waived or affected by failure or delay to exercise them. All remedies conferred on Holder by this note or any other instrument or agreement shall be cumulative, and none is exclusive. Such remedies may be exercised concurrently or consecutively at the option of the Holder. Wherever possible each provision of this note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this note or portion thereof shall be prohibited by or be invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this note. This note shall inure to the benefit of the Holder and its successors and assigns, and shall be binding upon the undersigned Maker, its successors and assigns. This note and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of South Carolina, and the parties hereto specifically agree to submit to and be bound by the jurisdiction of the courts, either federal or state, of the State of South Carolina. Venue for any action brought to enforce this note shall lie in Charleston County, South Carolina. The individual executing this promissory note on behalf of the Maker, hereby represents and warrants that the Maker is duly organized and validly existing pursuant to the laws of the State of South Carolina, and that the execution, delivery and performance of this note has been approved by all requisite action and such individual has been duly authorized to execute and deliver this note to the Holder. THIS NOTE HAS BEEN MADE AND DELIVERED PURSUANT TO THE TERMS OF THAT CERTAIN LEASE TERMINATION AGREEMENT MADE AND ENTERED INTO AS OF THE ____ DAY OF ______________, 2003 BY AND BETWEEN MAKER, HOLDER AND CERTAIN AFFILIATED PARTIES, TO WHICH LEASE TERMINATION AGREEMENT REFERENCE IS HERE MADE, AND THIS NOTE IS SUBJECT TO CERTAIN TERMS AND CONDITIONS SET FORTH IN PARAGRAPH 1.5 THEREOF WITH RESPECT TO THE PAYMENTS MADE OR TO BE MADE UNDER THIS NOTE. IN WITNESS WHEREOF, the undersigned Maker has caused this promissory note to be executed, as of the day and year first above written. SIGNED, SEALED AND DELIVERED DIVERSICARE ASSISTED LIVING IN THE PRESENCE OF: SERVICES, INC. By: - --------------------------------- --------------------------------- Name: --------------------------------- Title: - --------------------------------- --------------------------------- STATE OF ) --------------------- ) ACKNOWLEDGMENT COUNTY OF ) -------------------- The foregoing instrument was acknowledged before me this ____ day of ________, 2003 by DIVERSICARE ASSISTED LIVING SERVICES, INC. acting herein by ____________________ its ________________________, on behalf of the said company. (SEAL) ----------------------------------- Notary Public for --------------------- My Commission Expires ----------------- [Affix official notarial seal or stamp] EXHIBIT D MODIFICATION OF GUARANTY OF LEASE This MODIFICATION OF GUARANTY OF LEASE ("Modification") is made and entered into as of the ___ day of ____, 2003 by and between (i) ALBERT M. LYNCH ("Prior Lessor") and 570 CENTER STREET, LLC, a South Carolina limited liability company ("Lessor") and (ii) ADVOCAT INC., a Delaware corporation ("Guarantor"). W I T N E S S E T H: WHEREAS, pursuant to that certain Guaranty of Lease made as of August 12, 1998 (the "Guaranty"), Guarantor has guaranteed the payment and performance by Diversicare Assisted Living Services, Inc. ("Lessee") under that certain Lease Agreement (With Option to Purchase) dated as of August 12, 1998 (the "Lease") by and between Lessee and Prior Lessor, all of the interests and obligations of Prior Lessor under the Lease having been transferred to and assumed by Lessor; and WHEREAS, pursuant to that certain Lease Termination Agreement dated as of ________, 2003 made by and among Guarantor, Lessee, Lessor and Prior Lessor (the "Lease Termination Agreement"), Guarantor and Lessor have agreed to modify the Guaranty as set forth herein. NOW, THEREFORE, in consideration of the execution of Lease Termination Agreement, the mutual promises, covenants, and conditions set forth therein, and other good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged, the parties hereto agree as follows: 1. GUARANTY. This Modification modifies and amends, and is attached to and forms a part of, the Guaranty and the provisions hereof are incorporated into and made a part of the Guaranty. Except where otherwise indicated, all terms used in this Modification shall have the same meanings as indicated in the Guaranty or the Lease Termination Agreement, as applicable. In the event of any conflict between the terms of the Guaranty and the terms of this Modification, the terms of this Modification shall prevail. 2. LIMITATION OF GUARANTY. Anything in the Guaranty to the contrary notwithstanding, it is understood and agreed that, effective as of the Transfer Date, the indebtedness, obligations and liabilities of Lessee to Prior Lessor and Lessor guaranteed by Guarantor under the Guaranty shall be and hereby are limited to, and the terms "Payment Obligations", "Performance Obligations" and "Obligations" as and when used in the Guaranty shall be and hereby are deemed to mean, include and apply only to, (i) those obligations, liabilities and responsibilities of Lessee arising pursuant to the Lease prior to the Transfer Date, except for any liabilities, obligations or responsibilities that Lessee had, has or may have with respect to the Real and Personal Property under the Lease whether arising prior to, on or after the Transfer Date (other than those set forth in Article 5, Section 7.3, Section 9.2, Article 11 and Article 19 of the Lease) or with respect to the Security Deposit and (ii) those obligations of Lessee arising pursuant to the Lease Termination Agreement, whether prior to, on or after the Transfer Date, including without limitation any obligations of Lessee to pay the Lease Termination Fee and, if applicable, Lessor's Liquidated Damages, in accordance with Paragraph 1.5 of the Lease Termination Agreement. 3. REAFFIRMATION. Guarantor hereby confirms and restates its liabilities, obligations and agreements under the Guaranty as modified herein, and agrees that, except as modified herein, every right, power and remedy of the Lessor thereunder remains in full force and effect. 4. BINDING EFFECT. This Modification shall be binding upon and inure to the benefit of the respective legal representatives, successors and assigns of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be duly executed as of the day of the year first written above. ADVOCAT INC. By: - ------------------------------- --------------------------------- Name: --------------------------------- Title: - ------------------------------- --------------------------------- LESSOR: 570 CENTER STREET, LLC By: - ------------------------------- --------------------------------- Name: --------------------------------- Title: - ------------------------------- --------------------------------- PRIOR LESSOR: By: - ------------------------------- --------------------------------- Albert M. Lynch - ------------------------------- STATE OF ) -------------------- ) ACKNOWLEDGMENT COUNTY OF ) ------------------- The foregoing instrument was acknowledged before me this ____ day of ________, 2003 by ADVOCAT, INC. acting herein by __________________ its ___________________, on behalf of the said company. (SEAL) ----------------------------------- Notary Public for --------------------- My Commission Expires ----------------- [Affix official notarial seal or stamp] STATE OF SOUTH CAROLINA ) ) ACKNOWLEDGMENT COUNTY OF CHARLESTON ) The foregoing instrument was acknowledged before me this _____ day of _______, 2003 by 570 CENTER STREET, LLC acting herein by Freda B. Lynch, its Manager, on behalf of the said company. (SEAL) ----------------------------------- Notary Public for South Carolina My Commission Expires ----------------- [Affix official notarial seal or stamp] STATE OF SOUTH CAROLINA ) ) ACKNOWLEDGMENT COUNTY OF CHARLESTON ) The foregoing instrument was acknowledged before me this _____ day of _______, 2003 by ALBERT M. LYNCH. (SEAL) ----------------------------------- Notary Public for South Carolina My Commission Expires ----------------- [Affix official notarial seal or stamp] EXHIBIT E LIENS, ENCUMBRANCES AND LEASES COVERING ANY OF DALS'S PERSONAL PROPERTY Liens: 1. Security interest in favor of AmSouth Bank on all of DALS's Personal Property. Leased Property: 1. One (1) Lanier copier with document feeder. EX-10.2 4 g84031exv10w2.txt EX-10.2 AMENDMENT TO BOND LEASE AGREEMENT 05/02/03 EXHIBIT 10.2 FOURTH AMENDMENT TO REVENUE BOND LEASE AGREEMENT and MORTGAGE AND INDENTURE OF TRUST THIS FOURTH AMENDMENT is entered into by and between THE MEDICAL CLINIC BOARD OF THE CITY OF HARTFORD, ALABAMA (the "Board"), DIVERSICARE LEASING CORP., (the "Tenant"), COLONIAL BANK ("Colonial"), CITY BANK OF HARTFORD ("City Bank") and SLOCOMB NATIONAL BANK ("Slocomb"), and is effective as of May 2, 2003. WHEREAS, on June 28, 1996 the Board executed and delivered to Colonial a $2,450,000.00 Mortgage and Indenture of Trust (the "First Mortgage") on the Project (as that term is defined in the First Mortgage). This First Mortgage pertains to the property described on Exhibit "A" attached hereto and is recorded in Official Record Book 273 at Pages 105 to 139 in the Office of the Judge of Probate of Geneva County, Alabama. This First Mortgage secures the obligations due under Revenue Bond - Series 1996 No. R1 (Diversicare Leasing Corp. Project) issued by the Board in the original principal amount of $2,450,000.00 (the "Colonial Bond"). WHEREAS, on June 28, 1996 the Board executed and delivered to Slocomb a $83,500.00 Mortgage and Indenture of Trust (the "Second Mortgage") on the Project (as that term is defined in the Second Mortgage). This Second Mortgage pertains to the property described on Exhibit "A" attached hereto and is recorded in Official Record Book 273 at Pages 140 to 174 in the Office of the Judge of Probate of Geneva County, Alabama. This Second Mortgage secures the obligations due under a Revenue Bond - Series 1996 No. R2 (Diversicare Leasing Corp. Project) issued by the Board in the original principal amount of $83,500.00 (the "Slocomb Bond"). WHEREAS, on June 28, 1996 the Board executed and delivered to City Bank a $83,500.00 Mortgage and Indenture of Trust (the "Third Mortgage") on the Project (as that term is defined in the Third Mortgage). This Third Mortgage pertains to the property described on Exhibit "A" attached hereto and is recorded in Official Book 273 at Pages 175 to 209 in the Office of the Judge of Probate of Geneva County, Alabama. This Third Mortgage secures the obligations due under a Revenue Bond - Series 1996 No. R3 (Diversicare Leasing Corp. Project) issued by the Board in the 1 original principal amount of $83,500.00 (the "City Bank Bond"). WHEREAS, the Second Mortgage and the Third Mortgage and the corresponding Slocomb Bond and the City Bank Bond are in parity each with the other. WHEREAS, on June 28, 1996, the Board and Tenant entered into a Lease Agreement (the "Lease") pertaining to the property described on Exhibit "A" attached hereto ("the Leased Realty") and the Project (as that term is defined in the Lease). The Lease is recorded in Official Book 273 at Pages 210- to 246 in the Office of the Judge of Probate of Geneva County, Alabama. WHEREAS, on August 1, 2001 the Board, the Tenant, Colonial, City Bank and Slocomb entered into a First Amendment to Revenue Bond, Lease Agreement and Mortgage and Indenture of Trust (the "First Amendment"). The First Amendment is recorded in Official Book 413 at Pages 125 to 135 in the Office of the Judge of Probate of Geneva County, Alabama. WHEREAS, effective August 1, 2002 the Board, the Tenant, Colonial, City Bank and Slocomb entered into a Second Amendment to Revenue Bond, Lease Agreement and Mortgage and Indenture of Trust (the "Second Amendment"). The Second Amendment is recorded in Official Book 445 at Pages 281 to 292 in the Office of the Judge of Probate of Geneva County, Alabama. WHEREAS, effective November 2, 2002 the Board, the Tenant, Colonial, City Bank and Slocomb entered into a Third Amendment to Revenue Bond, Lease Agreement and Mortgage and Indenture of Trust (the "Third Amendment"). The Third Amendment is recorded in Official Book 453 at Pages 149 to 160 in the Office of the Judge of Probate of Geneva County, Alabama. WHEREAS, Tenant has requested Board, Colonial, City Bank and Slocomb to extend the maturity date of the Colonial Bond, the City Bank Bond and the Slocomb Bond to November 2, 2003, and the Board, Colonial, City Bank, and Slocomb are agreeable to do so provided Tenant, Board, Colonial, City Bank and Slocomb enter into this agreement and cause the First Mortgage, Second Mortgage, Third Mortgage, Colonial Bond, City Bank Bond, Slocomb Bond, the Lease, and the documents executed in connection therewith to be modified as provided herein and to be ratified and reconfirmed as so modified. NOW THEREFORE, in consideration of the terms and conditions contained herein, and to induce Board, Colonial, City Bank and Slocomb to extend the maturity date of the Colonial Bond, the City Bank Bond and the Slocomb Bond, the First Mortgage, the Second Mortgage, the Third Mortgage, the Colonial Bond, the City Bank Bond, the Slocomb Bond, the Lease and the agreements executed in connection therewith are hereby amended as follows: 1. The maturity date or final payment date of the Colonial Bond is hereby extended to November 2, 2003, the number of payments due on the Colonial Bond is increased from fifty nine (59) to eighty-seven (87), and the second, third and fourth sentence of the Colonial Bond are hereby amended to state: 2 "Such principal and interest shall mature and be payable (unless duly redeemed prior thereto) in eighty-seven (87) consecutive monthly payments on the second (2nd) day of each month from August 2, 1996, through and including October 2, 2003, consisting of the amount of principal and interest at the greater of the Base Lending Rate of Bondholder plus one percent (1.00%) or 6.00% that is necessary to amortize the outstanding balance at such rate by August 2, 2021, and a final payment due on November 2, 2003, in the amount of all principal and interest outstanding on this obligation. Interest on the outstanding balance shall be calculated on the 360-day accrual method by multiplying the product of the principal amount outstanding by the applicable rate stated herein by the actual number of days elapsed divided by 360. The applicable interest rate is the greater of the Base Lending Rate plus one percent (1.00), or 6.00%." 2. The maturity date or final payment date of the Slocomb Bond is hereby extended to November 2, 2003, the number of payments due on the Slocomb Bond is increased from fifty nine (59) to eighty-seven (87), and the second, third and fourth sentence of the Slocomb Bond is hereby amended to state: "Such principal and interest shall mature and be payable (unless duly redeemed prior thereto) in eighty-seven (87) consecutive monthly payments on the second (2nd) day of each month from August 2, 1996, through and including October 2, 2003, consisting of the amount of principal and interest at the greater of the Base Lending Rate of Bondholder plus one percent (1.00%) or 6.00% that is necessary to amortize the outstanding balance at such rate by August 2, 2021, and a final payment due on November 2, 2003, in the amount of all principal and interest outstanding on this obligation. Interest on the outstanding balance shall be calculated on the 360-day accrual method by multiplying the product of the principal amount outstanding by the applicable rate stated herein by the actual number of days elapsed divided by 360. The applicable interest rate is the greater of the Base Lending Rate plus one percent (1.00), or 6.00%." 3. The maturity date or final payment date of the City Bank Bond is hereby extended to November 2, 2003, the number of payments due on the City Bank Bond is increased from fifty nine (59) to eighty-seven (87), and the second, third and fourth sentence of the City Bank Bond is hereby amended to state: "Such principal and interest shall mature and be payable (unless duly redeemed prior thereto) in eighty-seven (87) consecutive monthly payments on the second (2nd) day of each month from August 2, 1996, through and including October 2, 2003, consisting of the amount of principal and interest at the greater of the Base Lending Rate of Bondholder plus one percent (1.00%) or 6.00% that is necessary to amortize the outstanding balance at 3 such rate by August 2, 2021, and a final payment due on November 2, 2003, in the amount of all principal and interest outstanding on this obligation. Interest on the outstanding balance shall be calculated on the 360-day accrual method by multiplying the product of the principal amount outstanding by the applicable rate stated herein by the actual number of days elapsed divided by 360. The applicable interest rate is the greater of the Base Lending Rate plus one percent (1.00), or 6.00%." 4. The form of the Colonial Bond contained in the preamble of the First Mortgage is amended in conformity with paragraph 1 hereof. 5. The form of the Slocomb Bond contained in the preamble of the Second Mortgage is amended in conformity with paragraph 2 hereof. 6. The form of the City Bank Bond contained in the preamble of the Third Mortgage is amended in conformity with paragraph 3 hereof. 7. The Lease is hereby amended as follows: a. The duration of the Lease Term as set forth in Section 3.1 of the Lease is extended from midnight of August 2, 2001 to midnight of November 2, 2003, and the first sentence of Section 3.1 of the Lease is hereby amended as follows: "The term of this Lease Agreement and of the Lease herein made shall begin on the date of delivery of this Lease Agreement and, subject to the provisions of this Lease Agreement, shall continue until midnight of November 2, 2003. b. Tenant's option to renew contained in Section 9.2 of the Lease is only exercisable upon full payment of the Bonds. 8. Tenant acknowledges its obligations under the Lease to pay the Colonial Bond, the City Bank Bond and the Slocomb Bond in installments when same comes due in accordance with the terms thereof, and in full upon maturity. 9. Tenant further reaffirms and ratifies the Security Agreement entered into by Tenant for the benefit of Colonial, and agrees to be bound by the terms thereof. 10. Tenant further reaffirms and ratifies the Security Agreement entered into by Tenant for the benefit of Slocomb, and agrees to be bound by the terms thereof. 11. Tenant further reaffirms and ratifies the Security Agreement entered into by Tenant for the benefit of City Bank, and agrees to be bound by the terms thereof. 12. Tenant further reaffirms and ratifies the Hazardous Substances Indemnification and 4 Warranty Agreement entered into by Tenant for the benefit of Colonial, and agrees to be bound by the terms thereof. 13. Tenant further reaffirms and ratifies the Hazardous Substances Indemnification and Warranty Agreement entered into by Tenant for the benefit of Slocomb, and agrees to be bound by the terms thereof. 14. Tenant further reaffirms and ratifies the Hazardous Substances Indemnification and Warranty Agreement entered into by Tenant for the benefit of City Bank, and agrees to be bound by the terms thereof. In addition hereto, all of the documents and agreements executed in connection with the First Mortgage, the Second Mortgage, the Third Mortgage, the Colonial Bond, the City Bank Bond, the Slocomb Bond, the Lease or the agreements executed in connection therewith or pertaining thereto (the "Agreements") are hereby amended in accordance with the terms as herein cited. Tenant and Board hereby agree and direct Colonial, City Bank and Slocomb to take any action necessary to conform the First Mortgage, the Second Mortgage, the Third Mortgage, the Colonial Bond, the City Bank Bond, the Slocomb Bond, the Lease and the Agreements as to the terms as herein cited and by these presents accepts and confirms their liability under such documents and agreements with the terms as herein modified. All of the terms and provisions of the Third Amendment, Second Amendment, First Amendment, First Mortgage, Second Mortgage, Third Mortgage, Colonial Bond, City Bank Bond, Slocomb Bond and the Lease not specifically amended herein, are hereby reaffirmed, ratified and restated. This Amendment amends the agreements and is not a novation thereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall constitute one and the same instrument. This Agreement shall be construed and enforced in accordance with the laws of the State of Alabama. 5 IN WITNESS WHEREOF, we have hereunto set our hands and seals effective as of the 2st day of May, 2003. BOARD THE MEDICAL CLINIC BOARD OF THE CITY OF HARTFORD, ALABAMA SEAL BY: /s/ Hubert B. Strickland ---------------------------------- (Its Chairman) ATTEST: /s/ David W. Rousseau - ------------------------------- (Its Secretary-Treasurer) STATE OF ALABAMA COUNTY OF GENEVA I, the undersigned, a Notary Public in and for said County, in said State, hereby certify that Hubert B. Strickland, whose name as Chairman of THE MEDICAL CLINIC BOARD OF THE CITY OF HARTFORD, ALABAMA, a 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/she, as such officer, and with full authority, executed the same voluntarily, as an act of said corporation, acting in its capacity as aforesaid. Given under my hand and official seal, this the 27th day of July, 2003. /s/ Dolores S. Jones --------------------------------------- NOTARY PUBLIC My Commission Expires: 5-16-2004 ---------------- 6 TENANT: DIVERSICARE LEASING CORP., a Tennessee Corporation BY: /s/ William R. Council, III ------------------------------------ (Its President) STATE OF TENNESSEE -------------------------- COUNTY OF WILLIAMSON ------------------------- I, the undersigned, a Notary Public in and for said County, in said State, hereby certify that William R. Council, III, whose name as President & CEO of DIVERSICARE LEASING CORP., a 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/she, as such officer, and with full authority, executed the same voluntarily, as an act of said corporation, acting in its capacity as aforesaid. Given under my hand and official seal, this the 24th day of July, 2003. /s/ Jacqueline S. Reed --------------------------------------- NOTARY PUBLIC My Commission Expires: 2/20/2006 ---------------- 7 COLONIAL COLONIAL BANK BY: /s/ Blaine Brint ------------------------------------- (Its Senior Vice President) -------------------------- STATE OF ALABAMA COUNTY OF JEFFERSON I, the undersigned, a Notary Public in and for said County, in said State, hereby certify that Blaine Brint, whose name as Sr. V.P. of COLONIAL BANK, a 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/she, as such officer, and with full authority, executed the same voluntarily, as an act of said corporation, acting in its capacity as aforesaid. Given under my hand and official seal, this the 24th day of July, 2003. /s/ Jennifer M. Crosby --------------------------------------- NOTARY PUBLIC My Commission Expires: 10/19/03 ---------------- 8 CITY BANK CITY BANK OF HARTFORD BY: /s/ W.H. Kennedy ------------------------------------ (Its Pres/CEO) ---------------------- STATE OF ALABAMA COUNTY OF GENEVA I, the undersigned, a Notary Public in and for said County, in said State, hereby certify that W.H. Kennedy, whose name as President & CEO of CITY BANK OF HARTFORD, a 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/she, as such officer, and with full authority, executed the same voluntarily, as an act of said corporation, acting in its capacity as aforesaid. Given under my hand and official seal, this the 23rd day of July, 2003. /s/ Joy H. Enfinger --------------------------------------- NOTARY PUBLIC My Commission Expires: 7/20/04 ----------------- 9 SLOCOMB: SLOCOMB NATIONAL BANK BY: /s/ Joseph H. Johnson -------------------------------------- (Its E.V.P.) ------------------------ STATE OF ALABAMA COUNTY OF GENEVA I, the undersigned, a Notary Public in and for said County, in said State, hereby certify that Joseph H. Johnson, whose name as Executive Vice President of SLOCOMB NATIONAL BANK, a 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/she, as such officer, and with full authority, executed the same voluntarily, as an act of said corporation, acting in its capacity as aforesaid. Given under my hand and official seal, this the 24th day of July, 2003. /s/ Pamela J. Spivey ---------------------------------------- NOTARY PUBLIC My Commission Expires: 3/10/07 ------------------ 10 ACKNOWLEDGEMENT AND CONSENT BY GUARANTOR ADVOCAT INC. (the "Guarantor"), the guarantor of i) the Colonial Bond, ii) the Slocomb Bond, iii) the City Bank Bond, iv) the obligations of Tenant to Colonial, v) the obligations of Tenant to Slocomb, and vi) the obligations of Tenant to City Bank, hereby acknowledges and consents to this First Amendment, and Guarantor's obligations under its guaranty thereto, and hereby reaffirms and restates its guaranty obligations to Colonial, Slocomb, and City Bank as evidenced by those certain Guaranty(s) dated June 28, 1996 and delivered to Colonial, Slocomb and City Bank. ADVOCAT INC. BY: /s/ William R. Council, III -------------------------------------- (Its President) ------------------------ STATE OF TENNESSEE ----------------------------------- COUNTY OF WILLIAMSON ---------------------------------- I, the undersigned, a Notary Public in and for said County, in said State, hereby certify that William R. Council, III, whose name as President & CEO of ADVOCAT INC, a 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/she, as such officer, and with full authority, executed the same voluntarily, as an act of said corporation, acting in its capacity as aforesaid. Given under my hand and official seal, this the 24th day of July, 2003. /s/ Jacqueline S. Reed ----------------------------------------- NOTARY PUBLIC My Commission Expires: 2/20/2006 ------------------- 11 EXHIBIT "A" - -------------------------------------------------------------------------------- A parcel of land in the Town of Hartford, Geneva County, Alabama and being more particularly described as follows: Commencing at the accepted Southeast corner of the SW 1/4 of the NE 1/4 of Section 31, Township 2 North, Range 24 East, and thence South 86 degrees 55 minutes 23 seconds West 518.20 feet to the East right-of-way of Toro Road, thence North 62 degrees 02 minutes 38 seconds West along the East right-of-way of said road 321.72 feet, thence North 47 degrees 36 minutes 56 seconds West along the East right-of-way of said road a chord distance of 479.47 feet to the Point of Beginning; and thence North 25 degrees 18 minutes 41 seconds West along the East right-of-way of said road a chord distance of 258.31 feet, thence North 17 degrees 54 minutes 10 seconds West along the East right-of-way of said road 216.53 feet, thence North 86 degrees 42 minutes 53 seconds East along an existing fence 187.87 feet, thence North 86 degrees 51 minutes 44 seconds East 418.20 feet, thence South 03 degrees 35 minutes 50 seconds East 317.88 feet, thence South 70 degrees 52 minutes 05 seconds West 475.86 feet to the point of beginning. Said parcel being in the SW 1/4 of the NE 1/4 of Section 31, Township 2 North, Range 24 East, and containing 4.91 acres, more or less. - -------------------------------------------------------------------------------- THIS INSTRUMENT PREPARED BY AND AFTER RECORDATION SHOULD BE RETURNED TO: William B. Hairston III ENGEL HAIRSTON & JOHANSON, P.C. 4th Floor, 109 North 20th Street Birmingham, Alabama 35203 (205) 328-4600 12 EX-10.3 5 g84031exv10w3.txt EX-10.3 FOURTH AMENDMENT LOAN AGREEMENT 06/18/03 Exhibit 10.3 FOURTH AMENDMENT TO LOAN AGREEMENT This Fourth Amendment to Loan Agreement is made as of June 18, 2003, by and between DIVERSICARE ASSISTED LIVING SERVICES NC I, 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"). RECITALS: A. Borrower and the Lender entered that certain Loan Agreement dated June 4, 1999, as amended by that certain First Amendment to Loan Agreement dated as of July 1, 2002, as amended by that certain Second Amendment to Loan Agreement dated as of October __, 2002, and as further amended by that certain Third Amendment to Loan Agreement dated as of January 1, 2003 (the "Agreement"). Unless otherwise defined in this Fourth Amendment, capitalized terms shall have the meaning given to them in the Agreement. B. The Borrower and the Lender desire to amend the Agreement and have agreed to execute this Fourth Amendment to evidence such modification. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals, the Borrower and the Lender hereby amend the Agreement as follows: Paragraph 1.1, "Maturity Date" is hereby amended by changing the date to "July 1, 2003". Except as expressly amended hereby, the Agreement shall remain in full force and effect in accordance with its terms. 1 IN WITNESS WHEREOF, the Borrower and the Lender have caused this Fourth Amendment to be properly executed by their respective duly authorized officers as of the date first above written. DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company By: Diversicare Assisted Living Services NC, LLC Its: Sole Member By: /s/ William R. Council, III ---------------------------- Name: William R. Council, III Title: Chief Executive Officer GMAC COMMERCIAL MORTGAGE CORPORATION BY: /s/ Laura Y. McDonald ------------------------------ Its: Senior Vice President ---------------------------- 2 EX-10.4 6 g84031exv10w4.txt EX-10.4 FIFTH AMENDMENT PROMISSORY NOTE 06/18/03 Exhibit 10.4 FIFTH AMENDMENT TO PROMISSORY NOTE THIS FIFTH AMENDMENT TO PROMISSORY NOTE (this "Fifth Amendment") is entered into as of the 18 day of June, 2003, by and between DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company (the "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (the "Lender"). RECITALS A. The Borrower executed to the order of the Lender that certain Promissory Note dated June 4, 1999, in the principal amount of $12,770,000 as amended by that certain First Amendment to Promissory Note dated July 1, 2002, as amended by that Second Amendment to Promissory Note dated as of October 1, 2002, as amended by that Third Amendment to Promissory Note dated as of December 1, 2002, and as further amended by that certain Fourth Amendment to Promissory Note dated January 1, 2003 (the "Note"). Unless otherwise defined herein, capitalized terms shall have the meaning assigned to them in the Note. B. The Borrower has requested that the Lender extend the Maturity Date of the Note, and the Lender has agreed, upon certain conditions, one of which is the execution of this Fifth Amendment. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals and other good and valuable consideration, the Borrower and the Lender hereby amend the Note as follows: 1. Section 4 of the Note, Maturity Date, is hereby amended to extend the Maturity Date from April 1, 2003, until July 1, 2003. All references in the Note to the "Maturity Date" are hereby amended to mean July 1, 2003. Except as expressly amended herein, the Note shall remain in full force and effect in accordance with its terms and conditions. Notwithstanding the execution of this Fifth 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 disclosed by Borrower and Diversicare Management Services Co. in that certain Quarterly Compliance Statement & Census Data report and that certain Compliance Certificate, each for the period ending March 31, 2003, dated May 13, 2003, and signed by Borrower's Chief Financial Officer. 1 IN WITNESS WHEREOF, the Borrower and Lender have caused this Fifth Amendment to be executed by their respective duly authorized representatives, as of the date first set forth above. BORROWER: DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company By: Diversicare Assisted Living Services NC, LLC Its: Sole Member By: /s/ William R. Council, III -------------------------------------- Name: William R. Council, III Title: Chief Executive Officer LENDER: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation BY: /s/ Laura Y. McDonald ------------------------------ Its: Senior Vice President ----------------------------- 2 EX-10.5 7 g84031exv10w5.txt EX-10.5 FIFTH AMENDMENT PROMISSORY NOTE 06/18/03 EXHIBIT 10.5 FIFTH AMENDMENT TO PROMISSORY NOTE THIS FIFTH AMENDMENT TO PROMISSORY NOTE (this "Fifth Amendment") is entered into as of the 18 day of June, 2003, by and between DIVERISCARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company (the "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (the "Lender"). RECITALS A. The Borrower executed to the order of the Lender that certain Promissory Note dated June 4, 1999, in the principal amount of $12,480,000, as amended by that certain First Amendment to Promissory Note dated July 1, 2002, as amended by that certain Second Amendment to Promissory Note dated as of October 1, 2002, as amended by that certain Third Amendment to Promissory Note dated as of December 1, 2002, and as further amended by that certain Fourth Amendment to Promissory Note dated as of January 1, 2003 (the "Note"). Unless otherwise defined herein, capitalized terms shall have the meaning assigned to them in the Note. B. The Borrower has requested that the Lender extend the Maturity Date of the Note, and the Lender has agreed, upon certain conditions, one of which is the execution of this Fifth Amendment. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals and other good and valuable consideration, the Borrower and the Lender hereby amend the Note as follows: 1. Section 4 of the Note, Maturity Date, is hereby amended to extend the Maturity Date from April 1, 2003, until July 1, 2003. All references in the Note to the "Maturity Date" are hereby amended to mean July 1, 2003. Except as expressly amended herein, the Note shall remain in full force and effect in accordance with its terms and conditions. Notwithstanding the execution of this Fifth 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 disclosed by Borrower and Diversicare Management Services Co. in that certain Quarterly Compliance Statement & Census Data report and that certain Compliance Certificate, each for the period ending March 31, 2003, dated May 13, 2003, and signed by Borrower's Chief Financial Officer. 1 IN WITNESS WHEREOF, the Borrower and Lender have caused this Fifth Amendment to be executed by their respective duly authorized representatives, as of the date first set forth above. BORROWER: DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company By: Diversicare Assisted Living Services NC, LLC Its: Sole Member By: /s/ William R. Council, III ------------------------------------ Name: William R. Council, III Title: Chief Executive Officer LENDER: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation BY: /s/ Laura Y. McDonald ------------------------------ Its: Senior Vice President ----------------------------- 2 EX-10.6 8 g84031exv10w6.txt EX-10.6 FOURTH AMENDMENT LOAN AGREEMENT 06/18/03 EXHIBIT 10.6 FOURTH AMENDMENT TO LOAN AGREEMENT This Fourth Amendment to Loan Agreement is made as of June 18, 2003, by and between DIVERSICARE ASSISTED LIVING SERVICES NC II, 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"). RECITALS: A. Borrower and the Lender entered that certain Loan Agreement dated June 4, 1999, as amended by that certain First Amendment to Loan Agreement dated as of July 1, 2002, as amended by that certain Second Amendment to Loan Agreement dated as of October __, 2002, and as further amended by that certain Third Amendment to Loan Agreement dated January 1, 2003 (the "Agreement"). Unless otherwise defined in this Fourth Amendment, capitalized terms shall have the meaning given to them in the Agreement. B. The Borrower and the Lender desire to amend the Agreement and have agreed to execute this Fourth Amendment to evidence such modification. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals, the Borrower and the Lender hereby amend the Agreement as follows: Paragraph 1.1, "Maturity Date" is hereby amended by changing the date to "July 1, 2003". Except as expressly amended hereby, the Agreement shall remain in full force and effect in accordance with its terms. 1 IN WITNESS WHEREOF, the Borrower and the Lender have caused this Fourth Amendment to be properly executed by their respective duly authorized officers as of the date first above written. DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company By: Diversicare Assisted Living Services NC, LLC Its: Sole Member By: /s/ William R. Council, III -------------------------------- Name: William R. Council, III Title: Chief Executive Officer GMAC COMMERCIAL MORTGAGE CORPORATION By: /s/ Laura Y. McDonald ------------------------------- Its: Senior Vice President ------------------------------- 2 EX-10.7 9 g84031exv10w7.txt EX-10.7 CROSS-DEFAULT AGREEMENT 06/18/03 Exhibit 10.7 STATE OF TENNESSEE COUNTY OF WILLIAMSON CROSS-COLLATERALIZATION AND CROSS-DEFAULT AGREEMENT THIS CROSS-COLLATERALIZATION AND CROSS-DEFAULT AGREEMENT (this "Agreement") is executed as of the 18 day of June, 2003, by DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company (hereinafter called "Windsor House"), whose address is c/o Advocat Inc., 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067, DIVERSICARE PINEDALE, LLC, a Delaware limited liability company (hereinafter called "Pinedale"), whose address is c/o Advocat Inc., 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067, DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company, (hereinafter called "Afton Oaks"), whose address is c/o Diversicare Leasing Corp., 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067, DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company, whose address is c/o Advocat Inc., 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067 (hereinafter called "NC I") and DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company, whose address is c/o Advocat Inc., 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067 (hereinafter called "NC II"; Windsor House, Pinedale, Afton Oaks, NC I and NC II may be referred to collectively herein as the "Borrowers" or referred to individually as a "Borrower"), in favor of GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (hereinafter called "Lender"), whose address is 200 Witmer Road, Horsham, Pennsylvania 19044. RECITALS A. Windsor House is indebted to Lender pursuant to a loan (the "Windsor House Loan") in the principal sum of FOUR MILLION SEVEN HUNDRED NINE THOUSAND AND NO/100 DOLLARS ($4,709,000), which Windsor House Loan is evidenced by that certain Promissory Note dated March 29, 2001, from Windsor House to Lender (as the same may be renewed, extended, modified, or amended, being hereinafter referred to as the "Windsor House Note"), which Windsor House Note is secured by, among other things, a Mortgage and Security Agreement (as amended, the "Windsor House Mortgage"), recorded in the Office of the Judge of Probate of Madison County, Alabama, in Book 2780, Page 756 encumbering the real property more particularly described in Exhibit "A" hereto (the "Windsor House Property"). The Windsor House Note and the Windsor House Mortgage, together with all other documents listed on Exhibit "H" hereto under the caption "Windsor House Loan Documents," are collectively referred to herein as the "Windsor House Loan Documents". B. Pinedale is indebted to Lender pursuant to a loan (the "Pinedale Loan") in the principal sum of TWO MILLION NINE HUNDRED THIRTEEN THOUSAND AND NO/100 DOLLARS ($2,913,000), which Pinedale Loan is evidenced by that certain Promissory Note dated March 29, 2001, from Pinedale to Lender (as the same may be renewed, extended, modified, or amended, being hereinafter referred to as the "Pinedale Note"), which Pinedale Note is secured by, among other things, a Mortgage and Security Agreement (as amended, the "Pinedale Mortgage"), 1 recorded in the Office of the Clerk of Jackson County, Arkansas, in Book ____, Page ____, encumbering the real property more particularly described in Exhibit "B" hereto (the "Pinedale Property"). The Pinedale Note and the Pinedale Mortgage, together with all other documents listed on Exhibit "H" hereto under the caption "Pinedale Loan Documents," are collectively referred to herein as the "Pinedale Loan Documents". C. Afton Oaks is indebted to Lender pursuant to a loan (the "Afton Oaks Loan"); in the principal sum of THREE MILLION SEVEN HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($3,750,000), which Afton Oaks Loan is evidenced by that certain Promissory Note executed by Diversicare Management Services Co., a Tennessee corporation ("DMSC") and dated December 27, 1996, in the original principal amount of $3,750,000, 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 that certain Memorandum of Lender dated September 8, 2000, by that certain Fourth Amendment to Promissory Note dated September 29, 2000, by that certain Fifth Amendment to Promissory Note dated December 31, 2000, by that certain Memorandum of Lender dated January 26, 2001, by that certain Sixth Amendment to and Assumption of Promissory Note dated February 28, 2001 and by that certain Seventh Amendment to Promissory Note dated December __, 2002 (as the same may be renewed, extended, modified, or amended, being hereinafter referred to as the "Afton Oaks Note"). Pursuant to the terms of the Sixth Amendment to and Assumption of the Promissory Note dated February 28, 2001, the Afton Oaks Note was assumed by Afton Oaks. The Afton Oaks Note is secured by, among other things, a Deed of Trust and Security Agreement dated December 27, 1996, executed by Diversicare Leasing Corp. ("DLC") and recorded under Clerks' File No. S268193 in the Real Property Records of Harris County, Texas, as assumed by Afton Oaks pursuant to that certain Assumption of Deed of Trust and Security Agreement dated December 1, 2000, and recorded under Clerk's File No. U778174 in the Real Property Records of Harris County, Texas (as further amended, the "Afton Oaks Mortgage"), encumbering the real property more particularly described in Exhibit "C" hereto (the "Afton Oaks Property"). The Afton Oaks Note and the Afton Oaks Mortgage, together with all other documents listed on Exhibit "H" hereto under the caption "Afton Oaks Loan Documents," are collectively referred to herein as the "Afton Oaks Loan Documents". D. NC I is indebted to Lender pursuant to a loan (the "NC I Loan") in the principal sum of TWELVE MILLION SEVEN HUNDRED SEVENTY THOUSAND AND NO/100 DOLLARS ($12,770,000.00), which NC I Loan is evidenced by that certain Promissory Note dated June 4, 1999, from NC I to Lender (as the same may be, or has been, renewed, extended, modified, or amended, being hereinafter referred to as the "NC I Note"), which NC I Note is secured by, among other things, six (6) individual Deeds of Trust and Security Agreements more particularly described on Exhibit "D" attached hereto (collectively, as amended, the "NC I Mortgage"), encumbering the respective real property more particularly described on Exhibit "F" attached hereto (collectively, the "NC I Property"). The NC I Note and the NC I Mortgage, together with all documents listed on Exhibit "H" hereto, under the caption "NC I Loan Documents", are collectively referred to herein as the "NC I Loan Documents". 2 E. NC II is indebted to Lender pursuant to a loan (the "NC II Loan"; the Windsor House Loan, the Pinedale Loan, the Afton Oaks Loan, the NC I Loan and the NC II Loan are sometimes collectively referred to herein as the "Loans") in the principal sum of TWELVE MILLION FOUR HUNDRED EIGHTY THOUSAND AND NO/100 DOLLARS ($12,480,000.00), which NC II Loan is evidenced by that certain Promissory Note dated June 4, 1999, from NC II to Lender (as the same may be, or has been, renewed, extended, modified, or amended, being hereinafter referred to as the "NC II Note"), which NC II Note is secured by, among other things, seven (7) individual Deeds of Trust and Security Agreements more particularly described on Exhibit "E" hereto (collectively, as amended, the "NC II Mortgage"), encumbering the respective real property more particularly described on Exhibit "G" attached hereto (the "NC II Property"). The NC II Note and the NC II Mortgage, together with all documents listed on Exhibit "H" hereto, under the caption "NC II Loan documents", are collectively referred to herein as the "NC II Loan Documents". The Windsor House Loan Documents, the Pinedale Loan Documents, the Afton Oaks Loan Documents, the NC I Loan Documents and the NC II Loan Documents may be collectively referred to herein as the "Loan Documents". F. Pursuant to that certain Cross-Collateralization and Cross-Default Agreement dated , 2002, the Windsor House Loan and the Pinedale Loan were cross-collateralized and cross-defaulted with the Afton Oaks Loan. G. The Borrowers and the Lender have agreed to cross-collateralize and cross-default the NC I Loan and the NC II Loan with one another and with the Windsor House Loan, the Pinedale Loan and the Afton Oaks Loan. AGREEMENT NOW, THEREFORE, in consideration of the foregoing Recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers agree with Lender, and Lender agrees with the Borrowers, as follows: 1. Cross-Default. The Windsor House Loan, the Pinedale Loan, the Afton Oaks Loan, the NC I Loan and the NC II Loan are hereby cross-defaulted with one another, and the Borrowers agree that the occurrence of an "Event of Default" (as such term is defined in the Loan Documents) which is not cured within any applicable grace or curative periods set forth therein, shall constitute an immediate Event of Default (without need of notice or the expiration of any additional cure period other than as specified in such Related Loan Document) as defined in and under certain of the Loan Documents. 2. Cross-Collateralization. Subject to the rights, if any, of AmSouth Bank under that certain Intercreditor Agreement, as defined in the Loan Agreement between Afton Oaks and the Lender, as amended, the Windsor House Loan, the Pinedale Loan, the Afton Oaks Loan, the NC I Loan and the NC II Loan are hereby cross-collateralized with one another, and the Borrowers agree that the collateral described in the Loan Documents (the "Collateral") shall secure, in addition to the Loans, the obligations of the Borrowers, including, without limitation, the obligations of the Borrowers to pay the principal of and interest on the Windsor House Note, the Pinedale Note, the 3 Afton Oaks Note, the NC I Note and the NC II Note, and to pay all other indebtedness and other agreed charges and to perform all of the terms and conditions under all other Loan Documents, as the same may hereafter be renewed, modified, amended or extended. 3. Contribution. (a) Borrowers hereby acknowledge and agree that, due to the fact that the Windsor House Loan, the Pinedale Loan, the Afton Oaks Loan, the NC I Loan and the NC II Loan will be cross-defaulted and cross-collateralized as of the date hereof, the Borrowers have a direct and material interest in preventing the occurrence of an Event of Default under any of the Loan Documents. Accordingly, each Borrower is willing to commit to make or receive loans (each an "Intra-Borrower Loan", and collectively, the "Intra-Borrower Loans") in order to provide for the payment of all amounts due under the Loan Documents and, in so doing, to avoid an Event of Default thereunder. In the event and to the extent that the proceeds from the property of the Borrowers are applied to any payments due with respect to the property owned by a Borrower from and after the date hereof, then the Borrowers shall have the right to make an Intra-Borrower Loan to such Borrower in the amount of such proceeds so applied. Such Intra-Borrower Loan shall be made on a non-recourse basis and shall be repaid out of the future proceeds of the property owned by such Borrower, together with interest thereon at a rate to be agreed upon from time to time between the Borrowers. (b) All Intra-Borrower Loans made under this Agreement shall be evidenced by this Agreement, shall be an obligation of the applicable Borrower, and shall not be evidenced by any separate instrument. The Borrowers hereby waive presentment, notice of dishonor, protest and notice of non-payment or non-performance with respect to each Intra-Borrower Loan for which they are liable under this Agreement. Interest and principal on Intra-Borrower Loans shall be paid solely out of net proceeds from the property owned by the applicable Borrower and shall be subject in all cases to the terms and conditions of the applicable Loan Documents, and each such payment of principal or interest on Intra-Borrower Loans shall be subordinate and subject to the prior payment of all amounts payable under the applicable Loan Documents. To the extent such sources of payment are insufficient to pay interest and principal on any Intra-Borrower Loan, the applicable Borrower shall not have any claim against the other Borrower in any of the other assets of the applicable Borrower and no further or additional recourse shall be available against the Borrower. All payments pursuant to Intra-Borrower Loans shall be made on a net basis. All payments received on account of any Intra-Borrower Loan under this Agreement shall be credited first to interest, then to principal. Accrued but unpaid interest shall not be compounded. (c) Until all indebtedness under the Windsor House Loan, the Pinedale Loan, the Afton Oaks Loan, the NC I Loan and the NC II Loan has been paid in full, each Borrower waives the right of subrogation arising from any Intra-Borrower Loan it makes and waives any right to enforce any remedy which Lender now has or may hereafter have against any Borrower and any benefit of, and any right to participate in, any security now or hereafter held by Lender. 4. Miscellaneous. 4 (a) This Agreement is being given as additional collateral to secure the obligations of the Borrowers under the Loan Documents. (b) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 5. No Oral Agreements. The Loan Documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. 6. Controlling Law. This Agreement shall be governed by the laws of the State of Alabama. 7. Waiver of Jury Trial. BORROWERS HEREBY WAIVE ANY RIGHT 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, THE LOANS OR THE RELATED LOANS, OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWERS WITH RESPECT TO THE RELATED LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF ANY 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. BORROWERS AGREE THAT LENDER MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF BORROWERS IRREVOCABLY TO WAIVE THEIR RIGHT TO TRIAL BY JURY AS AN INDUCEMENT OF LENDER TO MAKE THE LOANS TO BORROWERS, AND THE OTHER RELATED LOANS TO AFFILIATES, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HERE) BETWEEN ANY BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. 5 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be properly executed as of the date set forth above. WITNESS: BORROWER: DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company /s/ Glynn Riddle _____________________ By: Diversicare Leasing Corp., a Tennessee corporation, its sole member Glynn Riddle _____________________ By: /s/ William R. Council III [Print Name] ________________________________________________ William R. Council III, Chief Executive Officer DIVERSICARE PINEDALE, LLC, a Delaware limited liability company /s/ Glynn Riddle _____________________ By: Diversicare Leasing Corp., a Tennessee corporation, its sole member Glynn Riddle _____________________ By: /s/ William R. Council III [Print Name] ________________________________________________ William R. Council III, Chief Executive Officer DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company /s/ Glynn Riddle _____________________ By: Diversicare Leasing Corp., a Tennessee corporation, its sole member Glynn Riddle _____________________ By: /s/ William R. Council III [Print Name] ________________________________________________ William R. Council III, Chief Executive Officer DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company /s/ Glynn Riddle _____________________ By: Diversicare Assisted Living Services NC, LLC Its: Sole Member Glynn Riddle _____________________ By: /s/ William R. Council, III [Print Name] ________________________________________________ Name: William R. Council, III Title: Chief Executive Officer 6 DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company /s/ Glynn Riddle - ----------------------------- By: Diversicare Assisted Living Services NC, LLC Its: Sole Member Glynn Riddle - ----------------------------- [Print Name] By: /s/ William R. Council, III ------------------------------------ Name: William R. Council, III Title: Chief Executive Officer WITNESS: LENDER: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation /s/ Peggy Scarborough - ----------------------------- Peggy Scarborough By: /s/ Laura Y. McDonald - ----------------------------- ----------------------------------- [Print Name] Its: Senior Vice President ----------------------------------- 7 STATE OF TENNESSEE) WILLIAMSON COUNTY) I, the undersigned, a Notary Public in and for said County in said State, hereby certify that William R. Council III, whose name as Chief Executive Officer of Diversicare Leasing Corp., a Tennessee corporation and the sole member of Diversicare Windsor House, LLC, a Delaware limited liability company, Diversicare Pinedale, LLC, a Delaware limited liability company, and Diversicare Afton Oaks, 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 each of said limited liability companies. Given under my hand and official seal this the 18th day of June, 2003. /s/ Jacqueline S. Reed ---------------------------------------- Notary Public AFFIX SEAL My commission expires: 2/20/2006 --------- 8 STATE OF ALABAMA) JEFFERSON COUNTY) I, the undersigned, a Notary Public in and for said County in said State, hereby certify that Laura Y. McDonald, whose name as Senior 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 18th day of June, 2003. Crissa K. Randolph Brice ___________________________________ Notary Public AFFIX SEAL My commission expires: 10-13-2005 ------------------- This instrument prepared by: Kay K. Bains, Esq. Walston, Wells, Anderson & Bains, LLP 505 20th Street North Suite 500 Birmingham, Alabama 35203 (205) 251-9600 9 EXHIBIT "A" WINDSOR HOUSE PROPERTY DESCRIPTION 10 EXHIBIT "B" PINEDALE PROPERTY DESCRIPTION 11 EXHIBIT "C" AFTON OAKS PROPERTY DESCRIPTION 12 EXHIBIT "D" NC I MORTGAGES 13 EXHIBIT "E" NC II MORTGAGES 14 EXHIBIT "F" NC I PROPERTY DESCRIPTION 15 EXHIBIT "G" NC II PROPERTY DESCRIPTION 16 EXHIBIT "H" WINDSOR HOUSE LOAN DOCUMENTS 1) Promissory Note 2) Loan Agreement 3) Mortgage and Security Agreement 4) Assignment of Leases and Rents 5) Guaranty Agreement of Advocat, Inc. 6) Cross-Collateralization and Cross-Default Agreement 7) Agreement to Amend or Comply 8) Collateral Assignment of Management Agreement 9) Subordination of Management Agreement 10) Operations and Maintenance Agreement 11) Debt Service Reserve Escrow and Security Agreement 12) Loan Closing Certification PINEDALE LOAN DOCUMENTS 1) Promissory Note 2) Loan Agreement 3) Mortgage and Security Agreement 4) Assignment of Leases and Rents 5) Guaranty Agreement of Advocat, Inc. 6) Cross-Collateralization and Cross-Default Agreement 7) Agreement to Amend or Comply 8) Collateral Assignment of Management Agreement 17 9) Subordination of Management Agreement 10) Operations and Maintenance Agreement 11) Debt Service Reserve Escrow and Security Agreement 12) Loan Closing Certification AFTON OAKS LOAN DOCUMENTS 1) Promissory Note 2) Loan Agreement 3) Deed of Trust and Security Agreement 4) Assignment of Occupancy Agreements, Security and Other Deposits, Service agreements and Assumption Agreement 5) Assignment of Noncompete Agreements NC I LOAN DOCUMENTS NC II LOAN DOCUMENTS 18 EX-10.8 10 g84031exv10w8.txt EX-10.8 SIXTH AMENDMENT PROMISSORY NOTE 07/01/03 EXHIBIT 10.8 SIXTH AMENDMENT TO PROMISSORY NOTE THIS SIXTH AMENDMENT TO PROMISSORY NOTE (this "Sixth Amendment") is entered into as of the 1st day of July, 2003, by and between DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company (the "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (the "Lender"). RECITALS A. The Borrower executed to the order of the Lender that certain Promissory Note dated June 4, 1999, in the principal amount of $12,480,000, as amended by that certain First Amendment to Promissory Note dated July 1, 2002, as amended by that certain Second Amendment to Promissory Note dated as of October 1, 2002, as amended by that certain Third Amendment to Promissory Note dated as of December 1, 2002, as amended by that certain Fourth Amendment to Promissory Note dated as of January 1, 2003, and as further amended by that certain Fifth Amendment to Promissory Note dated as of June 18, 2003 (the "Note"). Unless otherwise defined herein, capitalized terms shall have the meaning assigned to them in the Note. B. The Borrower has requested that the Lender extend the Maturity Date of the Note, and the Lender has agreed, upon certain conditions, one of which is the execution of this Sixth Amendment. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals and other good and valuable consideration, the Borrower and the Lender hereby amend the Note as follows: 1. Section 1.4 of the Note, LIBOR Rate, is hereby amended by deleting from the third line thereof the phrase "two and thirty-five hundredths percent (2.35%)" and replacing it with the phrase "three and thirty-five hundredths percent (3.35%)". 2. Section 4.1 of the Note, Maturity Date, is hereby amended to extend the Maturity Date from July 1, 2003, until June 30, 2004. All references in the Note to the "Maturity Date" are hereby amended to mean June 30, 2004. Except as expressly amended herein, the Note shall remain in full force and effect in accordance with its terms and conditions. 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, 1 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 any such Event of Default has been expressly waived in writing by the Beneficiary, or the Beneficiary has provided an express written forbearance. IN WITNESS WHEREOF, the Borrower and Lender have caused this Sixth Amendment to be executed by their respective duly authorized representatives, as of the date first set forth above. BORROWER: DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company By: Diversicare Assisted Living Services NC, LLC Its: Sole Member By: /s/ William R. Council, III ---------------------------------- Name: William R. Council, III Title: Chief Executive Officer LENDER: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation By: /s/ Laura Y. McDonald ----------------------------------- Its: Senior Vice President ----------------------------------- 2 EX-10.9 11 g84031exv10w9.txt EX-10.9 FIFTH AMENDMENT TO LOAN AGREEMENT 07/01/03 EXHIBIT 10.9 FIFTH AMENDMENT TO LOAN AGREEMENT This Fifth Amendment to Loan Agreement is made as of July 1, 2003, by and between DIVERSICARE ASSISTED LIVING SERVICES NC II, 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"). RECITALS: A. Borrower and the Lender entered that certain Loan Agreement dated June 4, 1999, as amended by that certain First Amendment to Loan Agreement dated as of July 1, 2002, as amended by that certain Second Amendment to Loan Agreement dated as of October 1, 2002, as amended by that certain Third Amendment to Loan Agreement dated as of January 1, 2003, and as further amended by that certain Fourth Amendment to Loan Agreement dated as of June 18, 2003 (the "Agreement"). Unless otherwise defined in this Fifth Amendment, capitalized terms shall have the meaning given to them in the Agreement. B. The Borrower and the Lender desire to amend the Agreement and have agreed to execute this Fifth Amendment to evidence such modification. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals, the Borrower and the Lender hereby amend the Agreement as follows: 1. Paragraph 1.1, "Maturity Date", is hereby amended by changing the date to "June 30, 2004". 2. Article I, "Definitions", is hereby amended by adding the following definitions: "Cross-Collateralization and Cross-Default Agreement" shall mean that certain Cross-Collateralization and Cross-Default Agreement dated as of June 18, 2003, by and Borrower, Afton Oaks, NC I, Pinedale, Windsor House and Lender. "Afton Oaks" shall mean Diversicare Afton Oaks, LLC. "Afton Oaks Facility" shall mean the facility known as "Afton Oaks Nursing Center," presently a 169-licensed bed (162 available) skilled nursing facility located on the Afton Oaks Property, as it may now or hereafter exist, together with any other general or specialized 1 care facilities, if any (including any Alzheimer's care unit, subacute, and any facility), now or hereafter operated on the Afton Oaks Property. "Afton Oaks Loan" means the loan in the principal sum of $3,750,000 made by Lender to Afton Oaks. "Afton Oaks Mortgage" means that certain Mortgage and Security Agreement from Afton Oaks in favor of or for the benefit of Lender and covering the Afton Oaks Property. "Afton Oaks Property" means the real estate located in Houston, Harris County, Texas, which is more particularly described in Exhibit "A" to the Afton Oaks Mortgage. "Collective Borrowers" means, collectively, the Borrower, Afton Oaks, NC I, Pinedale and Windsor House. "Collective Facilities" means, collectively, the Facilities, Afton Oaks Facility, the NC I Facilities, the Pinedale Facility and the Windsor House Facility. "Collective Loans" means, collectively, the Loan, the Afton Oaks Loan, the NC I Loan, the Pinedale Loan and the Windsor House Loan. "Collective Mortgage" means, collectively, the Mortgage, the Afton Oaks Mortgage, the NC I Mortgage, the Pinedale Mortgage and the Windsor House Mortgage. "Collective Properties" means, collectively, the Property, the Afton Oaks Property, the NC I Properties, the Pinedale Property and the Windsor House Property. "NC I" means Diversicare Assisted Living Services NC I, LLC. "NC I Facilities" shall mean the six (6) adult care facilities located on the NC I Properties described on Schedule A to the NC I Mortgages, as they 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 care facilities), now or hereafter operated on the NC I Properties. "NC I Loan" means the loan in the principal sum of $12,770,000 made by Lender to NC I. "NC I Mortgage" means collectively those certain Deeds of Trust and Security Agreements from NC I in favor of or for the benefit of Lender and covering the NC I Properties. "NC I Properties" means the real estate located in North Carolina, which are more particularly described in Exhibit "A" to the NC I Mortgages. "Pinedale" shall mean Diversicare Pinedale, LLC. 2 "Pinedale Facility" shall mean the facility known as "Pinedale Nursing and Rehabilitation Center," presently a 130-bed licensed skilled nursing facility located on the Pinedale 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 Pinedale Property. "Pinedale Loan" means the loan in the principal sum of $2,913,000 made by Lender to Pinedale. "Pinedale Mortgage" means that certain Mortgage and Security Agreement from Pinedale in favor of or for the benefit of Lender and covering the Pinedale Property. "Pinedale Property" means the real estate located in Newport, Jackson County, Arkansas, which is more particularly described in Exhibit "A" to the Pinedale Mortgage. "Windsor House" shall mean Diversicare Windsor House, LLC. "Windsor House Facility" shall mean 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 Windsor House 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 Windsor House Property. "Windsor House Loan" means the loan in the principal sum of $4,709,000 made by Lender to Windsor House. "Windsor House Mortgage" means that certain Mortgage and Security Agreement from Afton Oaks in favor of or for the benefit of Lender and covering the Windsor House Property. "Windsor House Property" means the real estate located in Huntsville, Madison County, Alabama, which is more particularly described in Exhibit "A" to the Windsor House Mortgage. 3. Paragraph 4.12(a), "Debt Service Coverage Requirements", is hereby amended by deleting subsections (i), (ii) and (iii) in their entirety and replacing them with the following: (i) commencing with the quarter ending June 30, 2003, a Debt Service Coverage for the Facilities, in the aggregate, after deduction of Assumed Management Fees, of not less than 1.0 to 1.0, to be tested quarterly based on the operation of the Facilities for the prior twelve (12) months; (ii) commencing with the quarter ending June 30, 2003, a Debt Service Coverage for the Facilities, in the aggregate, after deduction of Actual Management Fees, of not less than 1.0 to 1.0, to be tested quarterly based on the operation of the Facilities for the prior twelve (12) months; and 3 (iii) commencing with the quarter ending June 30, 2003, a Debt Service Coverage for the Collective Facilities, combined, after deduction of Assumed Management Fees, of not less than 1.15 to 1.0, to be tested quarterly based on the combined operations of the Collective Facilities for the prior twelve (12) months. 4. A new Paragraph 2.4, "Release of Collective Facilities", is hereby added as follows: 2.4 Release of Collective Facilities. (a) In the event of a refinancing of a Collective Loan or sale of any one of the Collective Facilities to a third party unrelated to Borrower, or Guarantor, and so long as no Default Event of Default has occurred and is continuing, or will occur as a result of a requested release, any one of the Collective Facilities may be released from the lien and security interest of the Cross-Collateralization and Cross-Default Agreement if, after giving effect to such release, the Collective Facilities remaining subject to the Cross-Collateralization and Cross-Default Agreement would have a combined Debt Service Coverage equal to 1.15 to 1.0 for the twelve (12) month testing period immediately preceding such proposed release, after an Assumed Management Fee. Additionally, the release of the Afton Oaks Facility, the Pinedale Facility and the Windsor House Facility shall require payment in full of their respective Loan. (b) In the event of a sale of all of the Facilities or all of the NC I Facilities to a third party unrelated to the Borrower or to Guarantor, so long as no Default or Event of Default has occurred and is continuing, or will occur as a result of a requested release, except for the bankruptcy of Advocat, all of the Facilities or all of the NC I Facilities may nevertheless be released from the lien and security interest of the Cross-Collateralization and Cross-Default Agreement upon fulfillment of the following conditions: (i) subject to the determination, review and approval by Lender in its sole discretion, the difference in the amount to pay in full the Loan or the NC I Loan, as the case may be, and the net sales proceeds to be paid pursuant to the sale (the "Deficiency") is reallocated among the remaining outstanding Collective Loans; (ii) after giving effect to such release, the Collective Facilities remaining subject to the Cross-Collateralization and Cross-Default Agreement would have a combined Debt Service Coverage equal to 1.15 to 1.0 for the 12-month testing period immediately preceding such proposed release, after an Assumed Management Fee based upon a reamortization of the Collective Loans on a twenty-five (25) year basis, and (iii) the Collective Borrowers and Guarantors execute such documents as Lender deems necessary to evidence and secure such reallocation of the Deficiency. (c) In the event the Borrower requests a release of a Facility or a NC I Facility (as opposed to all Facilities or all NC I Facilities, as contemplated in 2.4(b) above), the test required in Section 2.4(a) above shall be applicable, as will the release condition contained in Section 2.3 of the Agreement; provided, however, the test in Section 2.3 is hereby amended for releases related to a sale of a Facility or an NC I Facility to a third party unrelated to the Borrower or the Guarantor, or in the event of the damage, destruction or condemnation of a Facility or an NC I Facility, by deleting the phrase "the greater of (a) 1.25 to 1.0 or (b)", resulting in a release test in Section 2.3 of a combined Debt 4 Service Coverage equal to the Debt Service Coverage for all Facilities (including the to-be-released Facility) for the 12-month testing period immediately preceding such proposed release. For purposes of a refinance of a Facility or an NC I Facility, the test in Section 2.3 shall remain unchanged, without the deletion referenced above. (d) Any release pursuant to Sections 2.3, 2.4 (b) and 2.4 (c) shall be conditioned upon Lender's receipt of all net proceeds from the sale, refinance or damage, destruction or condemnation giving rise to the release provisions. 5. A new Paragraph 2.5, "Consent to Closure of Suttons Rest Home", is hereby added as follows: 2.5 Consent to Closure of Suttons Rest Home. Lender hereby (i) acknowledges that the Facility known as Suttons Rest Home is no longer being operated by Borrower as an adult care facility and (ii) consents to closure by Borrower of said Suttons Rest Home; provided, however, that the Property and Facility on which said Suttons Rest Home is located shall continue to serve as security for Borrower's Loan Obligations to Lender. 6. Forbearance. Provided no additional Event of Default occurs and provided that the Borrower is in compliance with the Debt Service Coverage Requirements set forth in Paragraph 4.12, as amended herein, the Lender hereby agrees to forbear from exercising any of its rights and remedies against the Borrower and the Guarantors for a violation of Paragraph 4.13 of the Agreement relating to certain occupancy requirements for the Facilities. This forbearance shall only be in connection with the Borrower's non-compliance with Lender's occupancy requirements set forth in Paragraph 4.13 of the Agreement and shall not apply to any other provision of the Agreement. Except as expressly amended hereby, the Agreement shall remain in full force and effect in accordance with its terms. 5 IN WITNESS WHEREOF, the Borrower and the Lender have caused this Fifth Amendment to be properly executed by their respective duly authorized officers as of the date first above written. DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company By: Diversicare Assisted Living Services NC, LLC Its: Sole Member By: /s/ William R. Council, III -------------------------------- Name: William R. Council, III Title: Chief Executive Officer GMAC COMMERCIAL MORTGAGE CORPORATION By /s/ Laura Y. McDonald ------------------------------------------- Its: Senior Vice President --------------------------------------- 6 EX-10.10 12 g84031exv10w10.txt EX-10.10 SIXTH AMENDMENT PROMISSORY NOTE 07/01/03 EXHIBIT 10.10 SIXTH AMENDMENT TO PROMISSORY NOTE THIS SIXTH AMENDMENT TO PROMISSORY NOTE (this "Sixth Amendment") is entered into as of the 1st day of July, 2003, by and between DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company (the "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (the "Lender"). RECITALS A. The Borrower executed to the order of the Lender that certain Promissory Note dated June 4, 1999, in the principal amount of $12,770,000 as amended by that certain First Amendment to Promissory Note dated July 1, 2002, as amended by that Second Amendment to Promissory Note dated as of October 1, 2002, as amended by that Third Amendment to Promissory Note dated as of December 1, 2002, as amended by that certain Fourth Amendment to Promissory Note dated January 1, 2003, and as further amended by that certain Fifth Amendment to Promissory Note dated as of June 18, 2003 (the "Note"). Unless otherwise defined herein, capitalized terms shall have the meaning assigned to them in the Note. B. The Borrower has requested that the Lender extend the Maturity Date of the Note, and the Lender has agreed, upon certain conditions, one of which is the execution of this Sixth Amendment. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals and other good and valuable consideration, the Borrower and the Lender hereby amend the Note as follows: 1. Section 1.4 of the Note, LIBOR Rate, is hereby amended by deleting from the third line thereof the phrase "two and thirty-five hundredths percent (2.35%)" and replacing it with the phrase "three and thirty-five hundredths percent (3.35%)". 2. Section 4.1 of the Note, Maturity Date, is hereby amended to extend the Maturity Date from July 1, 2003, until June 30, 2004. All references in the Note to the "Maturity Date" are hereby amended to mean June 30, 2004. Except as expressly amended herein, the Note shall remain in full force and effect in accordance with its terms and conditions. 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, 1 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 any such default has been expressly waived in writing by the Beneficiary, or the Beneficiary has provided an express written forbearance. IN WITNESS WHEREOF, the Borrower and Lender have caused this Sixth Amendment to be executed by their respective duly authorized representatives, as of the date first set forth above. BORROWER: DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company By: Diversicare Assisted Living Services NC, LLC Its: Sole Member By: /s/ William R. Council, III ------------------------------- Name: William R. Council, III Title: Chief Executive Officer LENDER: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation By: /s/ Laura Y. McDonald ---------------------------------- Its: Senior Vice President ---------------------------------- 2 EX-10.11 13 g84031exv10w11.txt EX-10.11 FIFTH AMENDMENT LOAN AGREEMENT 07/01/03 EXHIBIT 10.11 FIFTH AMENDMENT TO LOAN AGREEMENT This Fifth Amendment to Loan Agreement is made as of July 1, 2003, by and between DIVERSICARE ASSISTED LIVING SERVICES NC I, 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"). RECITALS: A. Borrower and the Lender entered that certain Loan Agreement dated June 4, 1999, as amended by that certain First Amendment to Loan Agreement dated as of July 1, 2002, as amended by that certain Second Amendment to Loan Agreement dated as of October 1, 2002, as amended by that certain Third Amendment to Loan Agreement dated as of January 1, 2003, and as further amended by that certain Fourth Amendment to Loan Agreement dated as of June 18, 2003 (the "Agreement"). Unless otherwise defined in this Fifth Amendment, capitalized terms shall have the meaning given to them in the Agreement. B. The Borrower and the Lender desire to amend the Agreement and have agreed to execute this Fifth Amendment to evidence such modification. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals, the Borrower and the Lender hereby amend the Agreement as follows: 1. Paragraph 1.1, "Maturity Date" is hereby amended by changing the date to "June 30, 2004". 2. Article I, "Definitions", is hereby amended by adding the following definitions: "Cross-Collateralization and Cross-Default Agreement" shall mean that certain Cross-Collateralization and Cross-Default Agreement dated as of June 18, 2003, by and Borrower, Afton Oaks, NC II, Pinedale, Windsor House and Lender. "Afton Oaks" shall mean Diversicare Afton Oaks, LLC. "Afton Oaks Facility" shall mean the facility known as "Afton Oaks Nursing Center," presently a 169-licensed bed (162 available) skilled nursing facility located on the Afton Oaks Property, as it may now or hereafter exist, together with any other general or specialized 1 care facilities, if any (including any Alzheimer's care unit, subacute, and any facility), now or hereafter operated on the Afton Oaks Property. "Afton Oaks Loan" means the loan in the principal sum of $3,750,000 made by Lender to Afton Oaks. "Afton Oaks Mortgage" means that certain Mortgage and Security Agreement from Afton Oaks in favor of or for the benefit of Lender and covering the Afton Oaks Property. "Afton Oaks Property" means the real estate located in Houston, Harris County, Texas, which is more particularly described in Exhibit "A" to the Afton Oaks Mortgage. "Collective Borrowers" means, collectively, the Borrower, Afton Oaks, NC II, Pinedale and Windsor House. "Collective Facilities" means, collectively, the Facilities, Afton Oaks Facility, the NC II Facilities, the Pinedale Facility and the Windsor House Facility. "Collective Loans" means, collectively, the Loan, the Afton Oaks Loan, the NC II Loan, the Pinedale Loan and the Windsor House Loan. "Collective Mortgage" means, collectively, the Mortgage, the Afton Oaks Mortgage, the NC II Mortgage, the Pinedale Mortgage and the Windsor House Mortgage. "Collective Properties" means, collectively, the Property, the Afton Oaks Property, the NC II Properties, the Pinedale Property and the Windsor House Property. "NC II" means Diversicare Assisted Living Services NC II, LLC. "NC II Facilities" shall mean the seven (7) adult care facilities located on the NC II Properties described on Schedule A to the NC II Mortgages, as they 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 care facilities), now or hereafter operated on the NC II Properties. "NC II Loan" means the loan in the principal sum of $12,480,000 made by Lender to NC II. "NC II Mortgage" means collectively those certain Deeds of Trust and Security Agreements from NC II in favor of or for the benefit of Lender and covering the NC II Properties. "NC II Properties" means the real estate located in North Carolina, which are more particularly described in Exhibit "A" to the NC II Mortgages. "Pinedale" shall mean Diversicare Pinedale, LLC. 2 "Pinedale Facility" shall mean the facility known as "Pinedale Nursing and Rehabilitation Center," presently a 130-bed licensed skilled nursing facility located on the Pinedale 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 Pinedale Property. "Pinedale Loan" means the loan in the principal sum of $2,913,000 made by Lender to Pinedale. "Pinedale Mortgage" means that certain Mortgage and Security Agreement from Pinedale in favor of or for the benefit of Lender and covering the Pinedale Property. "Pinedale Property" means the real estate located in Newport, Jackson County, Arkansas, which is more particularly described in Exhibit "A" to the Pinedale Mortgage. "Windsor House" shall mean Diversicare Windsor House, LLC. "Windsor House Facility" shall mean 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 Windsor House 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 Windsor House Property. "Windsor House Loan" means the loan in the principal sum of $4,709,000 made by Lender to Windsor House. "Windsor House Mortgage" means that certain Mortgage and Security Agreement from Afton Oaks in favor of or for the benefit of Lender and covering the Windsor House Property. "Windsor House Property" means the real estate located in Huntsville, Madison County, Alabama, which is more particularly described in Exhibit "A" to the Windsor House Mortgage. 3. Paragraph 4.12(a), "Debt Service Coverage Requirements", is hereby amended by deleting subsections (i), (ii) and (iii) in their entirety and replacing them with the following: (i) commencing with the quarter ending June 30, 2003, a Debt Service Coverage for the Facilities, in the aggregate, after deduction of Assumed Management Fees, of not less than 1.0 to 1.0, to be tested quarterly based on the operation of the Facilities for the prior twelve (12) months. (ii) commencing with the quarter ending June 30, 2003, a Debt Service Coverage for the Facilities, in the aggregate, after deduction of Actual Management Fees, of not 3 less than 1.0 to 1.0, to be tested quarterly based on the operation of the Facilities for the prior twelve (12) months; and (iii) commencing with the quarter ending June 30, 2003, a Debt Service Coverage for the Collective Facilities, combined, after deduction of Assumed Management Fees, of not less than 1.15 to 1.0, to be tested quarterly based on the combined operations of the Collective Facilities for the prior twelve (12) months. 4. A new Paragraph 2.4, "Release of Collective Facilities", is hereby added as follows: 2.4 Release of Collective Facilities. (a) In the event of a refinancing of a Collective Loan or sale of any one of the Collective Facilities to a third party unrelated to Borrower or Guarantor, and so long as no Default or Event of Default has occurred and is continuing, or will occur as a result of a requested release, any one of the Collective Facilities may be released from the lien and security interest of the Cross-Collateralization and Cross-Default Agreement if, after giving effect to such release, the Collective Facilities remaining subject to the Cross-Collateralization and Cross-Default Agreement would have a combined Debt Service Coverage equal to 1.15 to 1.0 for the 12-month testing period immediately preceding such proposed release, after an Assumed Management Fee. Additionally, the release of the Afton Oaks Facility, the Pinedale Facility and the Windsor House Facility shall require payment in full of their respective Loan. (b) In the event of a sale of all of the Facilities or all of the NC II Facilities to a third party unrelated to the Borrower or to Guarantor, so long as no Default or Event of Default has occurred and is continuing, or will occur as a result of a requested release, except for the bankruptcy of Advocat, all of the Facilities or all of the NC II Facilities may nevertheless be released from the lien and security interest of the Cross-Collateralization and Cross-Default Agreement upon fulfillment of the following conditions: (i) subject to the determination, review and approval by Lender in its sole discretion, the difference in the amount to pay in full the Loan or the NCII Loan, as the case may be, and the net sales proceeds to be paid pursuant to the sale (the "Deficiency") is reallocated among the remaining outstanding Collective Loans; (ii) after giving effect to such release, the Collective Facilities remaining subject to the Cross-Collateralization and Cross-Default Agreement would have a combined Debt Service Coverage equal to 1.15 to 1.0 for the 12-month testing period immediately preceding such proposed release, after an Assumed Management Fee based upon a reamortization of the Collective Loans on a twenty-five (25) year basis, and (iii) the Collective Borrowers and Guarantors execute such documents as Lender deems necessary to evidence and secure such reallocation of the Deficiency. (c) In the event the Borrower requests a release of a Facility or a NCII Facility (as opposed to all Facilities or all NCII Facilities, as contemplated in 2.4(b) above), the test required in Section 2.4(a) above shall be applicable, as will the release condition contained in Section 2.3 of the Agreement; provided, however, the test in Section 2.3 is hereby amended for releases related to a sale of a Facility or an NC II Facility to a third party unrelated to the 4 Borrower or the Guarantor, or in the event of the damage, destruction or condemnation of a Facility or an NC II Facility, by deleting the phrase "the greater of (a) 1.25 to 1.0 or (b) ", resulting in a release test in Section 2.3 of a combined Debt Service Coverage equal to the Debt Service Coverage for all Facilities (including the to-be-released Facility) for the 12-month testing period immediately preceding such proposed release. For purposes of a refinance of a Facility or an NC II Facility, the test in Section 2.3 shall remain unchanged, without the deletion referenced above. (d) Any release pursuant to Sections 2.3, 2.4 (b) and 2.4 (c) shall be conditioned upon Lender's receipt of all net proceeds from the sale, refinance or damage, destruction or condemnation giving rise to the release provisions. 5. Forbearance. Provided no additional Event of Default occurs and provided that the Borrower is in compliance with the Debt Service Coverage Requirements set forth in Paragraph 4.12, as amended herein, the Lender hereby agrees to forbear from exercising any of its rights and remedies against the Borrower and the Guarantors for a violation of Paragraph 4.13 of the Agreement relating to certain occupancy requirements for the Facilities. This forbearance shall only be in connection with the Borrower's non-compliance with Lender's occupancy requirements set forth in Paragraph 4.13 of the Agreement and shall not apply to any other provision of the Agreement. Except as expressly amended hereby, the Agreement shall remain in full force and effect in accordance with its terms. 5 IN WITNESS WHEREOF, the Borrower and the Lender have caused this Fifth Amendment to be properly executed by their respective duly authorized officers as of the date first above written. DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company By: Diversicare Assisted Living Services NC, LLC Its: Sole Member By: /s/ William R. Council, III ----------------------------- Name: William R. Council, III Title: Chief Executive Officer GMAC COMMERCIAL MORTGAGE CORPORATION By /s/ Laura Y. McDonald ------------------------------ Its: Senior Vice President ------------------------------ 6 EX-10.12 14 g84031exv10w12.txt EX-10.12 CONTRACT TO PURCHASE REAL PROPERTY Exhibit 10.12 OFFER TO PURCHASE AND CONTRACT Ronald F. McManus, as Buyer, hereby offers to purchase and Diversicare Assisted Living Services NC, LLC, as Seller, upon acceptance of said offer, agrees to sell and convey, all of that plot, piece or parcel of land described below, together with all improvements located thereon and such fixtures and personal property as are listed below (collectively referred to as "the Property"), upon the following terms and conditions: 1. REAL PROPERTY: Located in Morehead City, County of Carteret, State of North Carolina, being known as and more particularly described as: Street Address: NWC Guardian Ave and Symi Circle Zip: ------------------ Legal Description:------------------------------------------------------------- ([X] All [ ] A portion of the property in Deed Reference: Book---------------, Page No.----------, ----------------------------------------- County.) NOTE: Prior to signing the Offer to Purchase and Contract, Buyer is advised to review Restrictive Covenants, if any, which may limit the use of the Property, and to read the Declaration of Restrictive Convenants, By-Laws, Articles of Incorporation, Rules and Regulations, and other governing documents of the owners' association and/or the subdivision, if applicable. 2. FIXTURES: The following items, if any, are included in the purchase price free of liens: any built-in appliances, light fixtures, ceiling fans, attached floor coverings, blinds and shades including window hardware, window and door screens, storm windows, combination doors, awnings, antennas, satellite dishes and receivers, burglar/fire/smoke alarms, pool and spa equipment, solar energy systems, attached fireplace screens, gas logs, fireplace inserts, electric garage door openers with controls, outdoor plants and trees (other than in movable containers), basketball goals, storage sheds, mailboxes, wall and/or door mirrors, and any items attached or affixed to the Property, EXCEPT the following items: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3. PERSONAL PROPERTY: The following personal property is included in the purchase price: None. Int: 4. PURCHASE PRICE: The purchase price is $ 180,000.00 and shall be paid as follows: [ILLEGIBLE] (a) $ 5,000, EARNEST MONEY DEPOSIT by [ ] cash [X] personal check [ ] bank check [ ] certified check [ ] [ILLEGIBLE] other--------------------------------------------- to be deposited and held in escrow by Seller, until the sale is closed, at which time it will be credited to Buyer, or until this contract is otherwise terminated. In the event: (1) this offer is not accepted; or (2) any of the conditions hereto are not satisfied, then all earnest monies shall be returned to Buyer. In the event of breach of this contract by Seller, upon Buyer's request, all earnest monies shall be returned to Buyer, but such return shall not affect any other remedies available to Buyer for such breach. In the event this offer is accepted and Buyer breaches this contract, then all earnest monies shall be forfeited upon Seller's request, but receipt of such forfeited earnest monies shall not affect any other remedies available to seller for such breach. NOTE: in the event of a dispute between Seller and Buyer over the return or forfeiture of earnest money held in escrow by a broker, the broker is required by state law to retain said earnest money in the broker's trust or escrow account until a written release from the parties consenting to its disposition has been obtained or until disbursement is ordered by a court of competent jurisdiction. (b) $-----------, ADDITIONAL EARNEST MONEY DEPOSIT to be paid to escrow agent no later than --------------------. (c) $----------- BY ASSUMPTION of the unpaid principal balance and all obligations of Seller on the existing loan(s) secured by a deed of trust on the Property in accordance with the attached Loan Assumption Addendum. (d) $-----------, BY SELLER FINANCING in accordance with the attached Seller Financing Addendum. (e) $ 175,000, BALANCE of the purchase price in cash at closing. 5. CONDITIONS: (State N/A in each blank that is not a condition to this contract.) (a) The Buyer must be able to obtain a loan commitment on or before N/A, effective through the date of closing, for a [ ] FHA [ ] VA (attach FHA/VA Financing Addendum) [X] Conventional [ ] Other---------- loan at a [ ] Fixed Rate [ ] Adjustable Rate [ ] Other: N/A in the principal amount of $ N/A for a term of year(s), at an interest rate not to exceed % per annum, with ------ ------ mortgage loan discount points not to exceed % of the loan amount. Buyer ------ agrees to use his best efforts to secure such commitment. Buyer shall be responsible for all costs with respect to any loan obtained by Buyer, except if Seller is to pay any of the Buyer's loan closing costs including discount points, those costs are as follows:-------------------------------------------. In the event Buyer fails to provide Seller with written evidence of the loan commitment within five days after receipt of a written request from Seller (but such request may not be made before the loan commitment date listed above), then Seller may terminate this contract unless Buyer waives the loan commitment condition. (b) There must be no restriction, easement, zoning or other governmental regulation that would prevent the reasonable use of the real property for Assisted Living and/or Apartments purposes. (c) The Property must be in substantially the same or better condition at closing as on the date of this offer, reasonable wear and tear excepted. (d) All deeds of trust, liens and other charges against the Property, not assumed by Buyer, must be paid and satisfied by Seller prior to or at closing such that cancellation may be promptly obtained following closing. Seller shall remain obligated to obtain any such cancellations following closing. (e) Title must be delivered at closing by SPECIAL WARRANTY DEED unless otherwise stated herein, and must be fee simple marketable title, free of all encumbrances except: ad valorem taxes for the current year (prorated through the date of closing); utility easements and unviolated restrictive covenants that do not materially affect the value of the Property; and such other encumbrances as may be assumed or specifically approved by Buyer. The Property must have legal access to a public right of way. Int: [ILLEGIBLE] [ILLEGIBLE] 6. SPECIAL ASSESSMENTS: Seller warrants that there are no governmental special assessments, either pending or confirmed, for sidewalk, paving, water, sewer, or other improvements on or adjoining the Property, and no owners' association special assessments, except as follows: None, to Seller's knowledge. (Insert "None" or the identification of such assessments, if any.) Seller shall pay all confirmed owners' association assessments and all confirmed governmental assessments, if any, and Buyer shall take title subject to all pending assessments, if any, unless otherwise agreed as follows: - -------------------------------------------------------------------------------. 7. PRORATIONS AND ADJUSTMENTS: Unless otherwise provided, the following items shall be prorated and either adjusted between the parties or paid at closing: (a) Ad valorem taxes on real property shall be prorated on a calendar year basis through the date of closing; (b) Ad valorem taxes on personal property for the entire year shall be paid by the Seller unless the personal property is conveyed to the Buyer, in which case, the personal property taxes shall be prorated on a calendar year basis through the date of closing. (c) All late listing penalties, if any, shall be paid by Seller. (d) Rents, if any, for the Property shall be prorated through the date of closing. (e) Owners' association dues and other like charges shall be prorated through the date of closing. Seller represents that the regular owners' association dues, if any, are $ N/A ------- per -------. Int: 8. CLOSING EXPENSES: Seller shall pay for preparation of a deed and all other documents necessary to perform Seller's obligations under [ILLEGIBLE] this agreement. Buyer shall pay for recording the deed, for excise tax (revenue stamps required by law) and for preparation and [ILLEGIBLE] recording of all instruments required to secure the balance of the purchase price unpaid at closing. 9. FUEL: Buyer agrees to purchase from Seller the fuel, if any, situated in any tank on the Property at the prevailing rate with the cost of measurement thereof, if any, being paid by Seller. 10. EVIDENCE OF TITLE: Seller agrees to use his best efforts to deliver to Buyer as soon as reasonably possible after the acceptance of this offer, copies of all title information in possession of or available to Seller, including but not limited to: title insurance policies, attorney's opinions on title, surveys, covenants, deeds, notes and deeds of trust and easements relating to the Property. Int: 11. LABOR AND MATERIAL: Seller shall furnish at closing an affidavit and indemnification agreement in form satisfactory to [ILLEGIBLE] title company showing that all labor and materials, if any, furnished to the Property within 120 days prior to the date of [ILLEGIBLE] closing have been paid for and agreeing to indemnify title company against all loss from any cause or claim arising therefrom. NC Bar Association Form No. L-2, (c)1996. (SOFTPRO CORPORATION This Standard Form has been approved jointly by the: LOGO) NORTH CAROLINA BAR ASSOCIATION--NC Bar Form No. L-2 NORTH CAROLINA ASSOCIATION OF REALTORS(r), INC.--STANDARD FORM NO. 1-8 (ILLEGIBLE) IN WITNESS WHEREOF the parties have executed this Addendum as of the date last signed by the parties as set forth beneath their signatures below. Buyer: /s/ Ronald F. McManus -------------------------------- Ronald F. McManus Date: 3/18/03 --------------------------------- Seller: Diversicare Assisted Living Services, NC, LLC By: /s/ Glynn Riddle ----------------------------------- Its: VP & Chief Financial Officer ---------------------------------- Date: 3-14-2003 --------------------------------- 2 EX-10.13 15 g84031exv10w13.txt EX-10.13 MASTER LEASE AGREEMENT 05/01/03 EXHIBIT 10.13 MASTER LEASE AGREEMENT BETWEEN EMERALD-CEDAR HILLS, INC. A FLORIDA CORPORATION, EMERALD-GOLFVIEW, INC. A FLORIDA CORPORATION, EMERALD-SOUTHERN PINES, INC. A FLORIDA CORPORATION AND EMERALD-GOLFCREST, INC., A FLORIDA CORPORATION (COLLECTIVELY, LESSOR) AND SENIOR CARE FLORIDA LEASING, LLC A DELAWARE LIMITED LIABILITY COMPANY (LESSEE) TABLE OF CONTENTS
PAGE ---- ARTICLE 1........................................................................................................1 1.1 Lease and Leased Properties...........................................................................1 1.2 Master Lease of Leased Properties.....................................................................2 1.3 Definitions...........................................................................................3 ARTICLE 2........................................................................................................9 2.1 Term; Commencement Date...............................................................................9 ARTICLE 3........................................................................................................9 3.1 Representations, Warranties and Covenants of Lessor...................................................9 ARTICLE 4.......................................................................................................11 4.1 Base Rent............................................................................................11 4.2 Additional Rent......................................................................................11 4.3 Additional Charges...................................................................................11 4.4 Late Payment.........................................................................................11 4.5 Net Lease............................................................................................11 4.6 Method of Payment of Rent............................................................................12 4.7 Adjustment of Base Rent..............................................................................12 ARTICLE 5.......................................................................................................12 5.1 Property Taxes.......................................................................................12 5.2 Notice of Taxes......................................................................................13 5.3 Proration of Taxes...................................................................................13 5.4 License Fees and Business Taxes......................................................................13 5.5 Utility Charges......................................................................................13 5.6 Insurance Premiums...................................................................................13 ARTICLE 6.......................................................................................................14 6.1 Ownership of the Leased Properties...................................................................14 6.2 Lessee's Personal Property...........................................................................14 6.3 Grant of Security Interest in Lessee's Personal Property and Accounts................................14 ARTICLE 7.......................................................................................................15 7.1 Licenses and Permits.................................................................................15 7.2 Use of the Leased Properties.........................................................................15 7.3 Environmental Matters................................................................................16 ARTICLE 8.......................................................................................................17 8.1 Maintenance and Repair...............................................................................17 8.2 Surrender............................................................................................18 8.3 Replacement Property.................................................................................18 8.4 Signage..............................................................................................19 ARTICLE 9.......................................................................................................19 9.1 Improvements, Alterations and Additions by Lessee....................................................19 9.2 Liens................................................................................................19
ARTICLE 10......................................................................................................20 10.1 Permitted Contests...................................................................................20 ARTICLE 11......................................................................................................20 11.1 General Insurance Requirements.......................................................................20 11.2 Replacement Cost.....................................................................................21 11.3 Waiver of Subrogation................................................................................21 11.4 Lessee's Personal Property...........................................................................22 11.5 Blanket Policy.......................................................................................22 ARTICLE 12......................................................................................................22 12.1 Insurance Proceeds Payable on Damage or Destruction..................................................22 12.2 Restoration in the Event of Damage or Destruction Covered............................................22 12.3 Lessee's Personal Property; Business Interruption....................................................23 12.4 Excess Proceeds......................................................................................24 12.5 Standard of Work.....................................................................................24 12.6 Effect of Termination................................................................................24 12.7 Failure to Repair....................................................................................24 12.8 Unavoidable Delays...................................................................................24 ARTICLE 13......................................................................................................24 13.1 Condemnation.........................................................................................24 13.2 Awards...............................................................................................25 13.3 Standard of Work.....................................................................................25 13.4 Failure to Repair....................................................................................26 13.5 Unavoidable Delays...................................................................................26 ARTICLE 14......................................................................................................26 14.1 Event of Default.....................................................................................26 14.2 Remedies.............................................................................................27 14.3 Additional Expenses..................................................................................29 14.4 Legal Expenses.......................................................................................29 ARTICLE 15......................................................................................................29 15.1 Lessor's Right to Cure Lessee's Default..............................................................29 ARTICLE 16......................................................................................................29 16.1 Holding Over.........................................................................................29 ARTICLE 17......................................................................................................30 17.1 Subordination, Non-Disturbance and Attornment........................................................30 17.2 Facility Mortgage Agreements.........................................................................30 17.3 Estoppel Certificates................................................................................31 17.4 Relationship of Lessee to Existing Facility Mortgage.................................................31 ARTICLE 18......................................................................................................31 18.1 Indemnification......................................................................................31 ARTICLE 19......................................................................................................32 19.1 Assignment and Subletting............................................................................32 ARTICLE 20......................................................................................................33

ii 20.1 Lessor's Right to Inspect............................................................................33 ARTICLE 21......................................................................................................33 21.1 Quiet Enjoyment......................................................................................33 21.2 No Encumbrance by Lessor.............................................................................33 ARTICLE 22......................................................................................................33 22.1 Notices..............................................................................................33 ARTICLE 23. [INTENTIONALLY OMITTED].............................................................................34 ARTICLE 24......................................................................................................34 24.1 Lessor's Event of Default............................................................................34 24.2 Legal Expenses.......................................................................................35 ARTICLE 25......................................................................................................35 25.1 Miscellaneous........................................................................................35 ARTICLE 26......................................................................................................36 26.1 Arbitration..........................................................................................36

iii MASTER LEASE AGREEMENT THIS MASTER LEASE AGREEMENT ("Lease") is made and entered into as of the 1st day of May, 2003 by and between EMERALD-CEDAR HILLS, INC. a Florida corporation, EMERALD-GOLFVIEW, INC. a Florida corporation, EMERALD-SOUTHERN PINES, INC. a Florida corporation and EMERALD-GOLFCREST, INC., a Florida corporation (herein collectively called the "Lessor") and SENIOR CARE FLORIDA LEASING, LLC, a Delaware limited liability company (herein called the "Lessee"). RECITALS WHEREAS, Lessor owns certain real property located in the State of Florida as more particularly described on EXHIBITS A-1 THROUGH A-4 attached hereto on which there are located four (4) existing fully licensed nursing home facilities owned and operated by Lessor; and WHEREAS, Lessor desires to lease said facilities to the Lessee, and Lessee desires to lease the same from Lessor, upon the terms, covenants and conditions hereinafter set forth. NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties to this Lease hereby covenant and agree as follows: ARTICLE 1. 1.1 LEASE AND LEASED PROPERTIES. Upon and subject to the covenants, stipulations, terms and conditions hereinafter set forth, Lessor hereby leases, demises and lets to Lessee, and Lessee hereby leases, rents and hires from Lessor, for the Term hereof (beginning on the Commencement Date as more particularly set forth herein) the following described property (collectively, the "Leased Properties"): 1.1.1 the real property more particularly described in EXHIBIT A-1 THROUGH A-4 attached hereto and made a part hereof, together with all easements, rights, hereditaments and appurtenances thereto belonging or otherwise benefiting such real property including any easements, rights, rights of access, ingress and egress, parking or traffic circulation, or other interests of Lessor in, on or to any land, highway, street, road or avenue, open or proposed, in, on, across, in front of, abutting or adjoining such real property and any adjacent real property (the "Land"). 1.1.2 the Facilities (as hereinafter defined) and all structures, Fixtures (as hereinafter defined) and other improvements of every kind now or hereafter situated on the Land including, but not limited to, alleyways, crosswalks, sidewalks, utility pipes, conduits and lines (on-site and off-site), drainage and all above-ground and underground utility structures drives, parking areas and roadways appurtenant to such improvements (collectively, the "Leased Improvements"); 1.1.3 to the extent owned and installed in the Leased Improvements by Lessor, all permanently affixed equipment, machinery, fixtures, and other items of real and/or personal property, so permanently affixed or attached to or incorporated into the Land or Leased Improvements such that an interest in them arises under applicable real estate law and the same are deemed to be fixtures and accessions to the land and a part thereof, including all components thereof, now and hereafter located in, on or used in connection with, and permanently affixed to or incorporated into the Land or Leased Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus (other than individual units), sprinkler systems and fire and theft protection equipment, and built-in oxygen and vacuum systems, together with all replacements, modifications, alterations and additions thereto (collectively, the "Fixtures"), but specifically excluding all items included within the category of Lessee's Personal Property as defined below; 1.1.4 to the extent owned and installed in the Leased Improvements by Lessor, all equipment, machinery, furnishings, furniture, trade fixtures, appliances, computers (and all associated software) and other items of personal property, and all components thereof, now or hereafter installed on the Land by Lessor and used, maintained or operated in connection with the Leased Improvements (collectively, "Lessor's Personal Property"), but specifically excluding all items included within the category of Lessee's Personal Property; and 1.1.5 to the extent permitted by law, all permits, approvals and other intangible property or any interest therein now or hereafter owned or held by Lessor in connection with the Leased Properties or the use thereof or any business or businesses now or hereafter conducted by Lessee therefrom, including all licenses, permits, contract rights, agreements, water rights and reservations, zoning rights, business licenses and warranties (including those relating to construction or fabrication) related to the Leased Properties, or any part thereof, specifically including the right to use of, and Lessor hereby grants to Lessee the exclusive right to the use of the names "Emerald-Golfview," "Emerald-Golfcrest," "Emerald-Southern Pines," "Emerald-Cedar Hills" and any combinations and derivatives thereof (collectively, "Lessor's Permits and General Intangibles"). 1.2 MASTER LEASE OF LEASED PROPERTIES. The Leased Properties are leased subject to all covenants, conditions, restrictions, easements and other matters affecting each of the Leased Properties, whether or not of record, including the Permitted Encumbrances and other matters which would be disclosed by an inspection of the Leased Properties or by an accurate survey thereof, provided, however, that the foregoing matters shall not materially interfere with the Primary Intended Use of Leased Properties by Lessee as set forth in this Lease. This Lease constitutes one indivisible lease of the Leased Properties to the Lessee, and not separate leases governed by similar terms. The Leased Properties constitute one economic unit, and the Base Rent and all other provisions have been negotiated and agreed to based on a demise of all of the Leased Properties as a single, composite, inseparable transaction and would have been substantially different had separate leases or a divisible lease been intended. Except as expressly provided herein for specific, isolated purposes (and then only to the extent expressly 2 otherwise stated), all provisions of this Lease apply equally and uniformly to all the Leased Properties as one unit. An Event of Default with respect to any of the Leased Properties is an Event of Default as to all of the Leased Properties. The parties intend that the provisions of this Lease shall at all times be construed, interpreted and applied so as to carry out their mutual objective to create an indivisible lease of all the Leased Properties and, in particular but without limitation, that for purposes of any assumption, rejection or assignment of this Lease under 11 U.S.C. 365, this instrument, shall be one indivisible and non-severable lease and executory contract dealing with one legal and economic unit which must be assumed, rejected or assigned as a whole with respect to all and only all the Leased Properties covered hereby. 1.3 DEFINITIONS. For all purposes of this Lease, except as otherwise expressly provided or unless the context otherwise requires, (i) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular, (ii) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles as at the time applicable, consistently applied, (iii) all references in this Lease to designated "Articles", "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease and (iv) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subdivision. For purposes of this Lease, the following terms shall have the meanings indicated: Additional Charges: All Impositions and other amounts, liabilities and obligations which Lessee assumes or agrees to pay under this Lease. Advocat: Advocat Inc. a Delaware corporation. AmSouth: AmSouth Bank N.A. AmSouth Loan Documents: The documents evidencing and securing the indebtedness of Advocat and its Affiliates to AmSouth as of the effective date of this Agreement. Assessment: Any governmental assessment on any of the Leased Properties or any part thereof for public or private improvements or benefits, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term. Affiliate: When used with respect to any corporation or partnership, the term "Affiliate" shall mean any person which, directly or indirectly, controls or is controlled by or is under common control with such corporation or partnership. For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting shares, partnership interests or other equity interests. The term "person" shall mean any natural person, trust, partnership, corporation, joint venture or other legal entity. Base Rent: During the Term, the base rent shall be calculated on the basis of One Million Four Hundred Ninety-Eight Thousand and No/100 Dollars ($1,498,000.00) per annum, payable in equal monthly installments of One Hundred Twenty-Four Thousand Eight Hundred Thirty- 3 Three and 34/100 Dollars ($124,833.34) each; provided, however, that Base Rent for any partial Lease Year shall be pro-rated based on the number of days elapsed in such Lease Year. Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which federally chartered banks located in the State of Florida, are authorized, or obligated, by law or executive order, to close. Charge: As defined in Article 10, Section 10.1. Commencement Date: As defined in Article 2.1. Cost of Operations: All costs and expenses of operation of the Facilities, determined on an accrual basis using GAAP, including every cost or expense incurred in the discharge of matters heretofore referred to as being the responsibility of DMSC as manager under the February 20, 1996 Management Agreements between DMSC and each of the Lessor entities as a part of the obligation of DMSC to operate and manage the Facilities in a prudent manner, but expressly excluding Base Rent hereunder, depreciation or amortization of real or personal property used in the operation of the Facilities, management fees, if any, debt service and capital expenditures. DMSC: Diversicare Management Services Co., a Tennessee corporation. Encumbrance: Any mortgage, deed of trust, lien, encumbrance or other matter affecting title to the Leased Properties, or any portion thereof or interest therein, securing any borrowing or other means of financing or refinancing. Existing Facilities Mortgage: As defined in Article 17, Section 17.1. Facility and Facilities: A fully licensed nursing home or, plurally, the fully licensed skilled nursing home facilities located on the Land. Facility Mortgagee: The secured party to a Facility Mortgage, including without limitation Omega. Force Majeure: An event or condition beyond the control of a Person, including without limitation a flood, earthquake, or other Act of God; a fire or other casualty resulting in a complete or partial destruction of the Facility in question; a war, revolution, riot, civil insurrection or commotion, terrorism, or vandalism; unusual governmental action, delay, restriction, or regulation not reasonably to be expected; a contractor or supplier delay or failure in performance (not arising from a failure to pay any undisputed amount due), or a delay in the delivery of essential equipment or materials; bankruptcy or other insolvency of a contractor, subcontractor, or construction manager (not an Affiliate of the party claiming Force Majeure); a strike, slowdown, or other similar labor action; or any other similar event or condition beyond the reasonable control of the party claiming that Force Majeure is delaying or preventing such party from timely and fully performing its obligations under this Lease. Full Replacement Cost: As defined in Article 11, Section 11.2. 4 GAAP: Generally accepted accounting principles in effect at the time in question. Gross Revenues: All revenues received or receivable from or by reason of the operation of the Facilities, or any other use of the Leased Properties, including without limitation all patient revenues received or receivable for the use of or otherwise by reason of all rooms, beds, and other facilities provided, meals served, services performed, space or facilities subleased or goods sold on the Leased Properties and, except as provided below, any consideration received for any sublease, license or other arrangement with an unrelated third party in possession, or using, any portion of the Leased Properties. Gross Revenues shall not, however, include: (i) revenue from professional fees or charges by physicians when and to the extent such charges are paid over to such physicians or are accompanied by separate charges for use of a Facility or any portion thereof, (ii) non-operating revenues such as interest income or income from the sale of assets not sold in the ordinary course of business, (iii) contractual allowances and reasonable reserves (relating to any period during the Term) for billings not paid by or received from the appropriate governmental agencies, third party providers or other payors, (iv) all proper patient billing credits and adjustments according to generally accepted accounting principles relating to health care accounting, and (v) federal, state or local sales or excise taxes and any tax based upon or measured by said revenues which is added to or made a part of the amount billed to the patient or other recipient of such services or goods, whether included in the billing or stated separately. If any one or more of the Leased Properties or any part thereof is subleased, or a license permitting the use thereof is granted to an Affiliate of Lessee, Gross Revenues shall include all revenues received or receivable by the sublessee or licensee from its use of the Leased Properties and any rent or equivalent payment by the sublessee or licensee received or receivable by Lessee from such sublease or licensee shall be excluded from Gross Revenues (provided, however, that in the case of a sublease of space for the placement or erection of antennae or similar device, the rent or equivalent payment shall be included in Gross Revenues). Guarantor(s): Advocat, DMSC and Advocat Finance Inc., a Delaware corporation Guaranty: The Guaranty of even date herewith executed by the Guarantor(s). Hazardous Materials: Any material or substance that is defined or classified under any Hazardous Materials Laws as a hazardous or toxic substance, material, waste or pollutant, or toxic or hazardous pursuant to regulations promulgated now or hereafter under any Hazardous Materials Laws, or presents a risk to human health or the environment under other applicable federal, state or local laws, ordinances, or regulations, as now in effect or as may be passed or promulgated in the future. "Hazardous Materials" specifically includes asbestos or any substance containing asbestos, the group of organic compounds known as polychlorinated biphenyls, flammable explosives, radioactive materials, medical waste, chemicals known to cause cancer or 5 reproductive toxicity, pollutants, effluents, contaminants, emissions or related materials, petroleum and petroleum based products, and urea formaldehyde. Hazardous Materials Law: Any federal, state or local law, regulation or ordinance relating to environmental conditions, medical waste and industrial hygiene, including the Resource Conservation and Recovery Act of 1976 ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Hazardous Materials Transportation Act, the Federal Water Pollution Control Act, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act, the Safe Drinking Water Act, and all similar federal, state and local environmental statutes and ordinances, whether heretofore or hereafter enacted or effective and all regulations, orders, or decrees heretofore or hereafter promulgated thereunder. Impositions: Collectively, all taxes (including, without limitation, all capital stock and franchise taxes of Lessor, and all ad valorem, sales and use, single business, gross receipts, transaction privilege, rent or similar taxes to the extent the same are assessed against Lessor on the basis of its interest in the prospective Leased Properties), assessments (including Assessments), ground rents, water, sewer or other rents and charges, excises, tax levies, fees (including, without limitation, license, permit, inspection, authorization and similar fees), and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Leased Properties or the businesses conducted thereon by Lessee and/or the Rent (including all interest and penalties thereon), which at any time prior to, during or in respect of the Term may be assessed or imposed on or in respect of or be a lien upon (i) Lessor or Lessor's interest in the Leased Properties, (ii) Leased Properties or any part thereof or any rent therefrom or any estate, right, title or interest therein, (iii) any occupancy, operation, use or possession of, or sales from, or activity conducted on, or in connection with the Leased Properties or the leasing or use of the Leased Properties or any part thereof, or (iv) the Rent; notwithstanding the foregoing, Impositions shall not include: (i) except as provided above, any tax imposed on Lessor's gross and/or net income whether generally or specifically arising in connection with the Leased Properties, or (ii) any transfer or other tax imposed with respect to the sale, exchange or other disposition by Lessor of the Leased Properties or any part thereof or the proceeds thereof. If a tax is assessed against Lessor in part based on Lessor's interest in the Leased Properties and in part based on Lessor's gross and/or net income, the portion of the tax which is based on Lessor's interest in the Leased Properties shall be treated as an Imposition. Lessee's Incidental Personal Property: As defined in Article 6, Section 6.2. Lease Year: A period of twelve (12) successive calendar months commencing on the Commencement Date (as defined in Article 2 hereof) and on the same date in each successive calendar year during the Term of this Lease. Management Agreement: Any agreement pursuant to which management of a Facility is delegated by Lessee to any person not an employee of Lessee; provided, however, that at all times that the Lessee under this Lease is Senior Care Florida Leasing, LLC, a Delaware limited liability company (or another affiliate of Advocat), then the term "Management Agreement" 6 shall mean collectively the four (4) separate Management Agreements of even date with this Lease with DMSC as Manager of the Facilities. Manager: The Person to which management of the operation of a Facility is delegated pursuant to a Management Agreement; provided, however, that at all times the Lessee under this Lease is Senior Care Florida Leasing, LLC a Delaware limited liability company, (as another affiliate of Advocat), then the term "Manager" shall mean DMSC as Manager of the Facilities. Net Income: For any period, the net income (or loss) of Lessee and its subsidiaries for such period, determined on a consolidated basis and in accordance with GAAP, provided, however, that Lessee's Net Income shall not include: (a) any after-tax gains or losses attributable to returned surplus assets of any pension-benefit plan; (b) any extraordinary gains or nonrecurring gains; (c) any gains or losses realized upon the sale or other disposition of property which is not sold or otherwise disposed of in the ordinary course of business; (d) any gains or losses realized upon the sale or other disposition of any capital stock of any Person; (e) any gains from the disposal of a discontinued business; (f) the cumulative effect on prior years of any change in an accounting principle; (g) the income or loss of any Person acquired by Lessee or an Affiliate in a pooling of interests transaction for any period prior to the date of such acquisition; (h) the income from any sale of assets in which the book value of such assets had been the book value of any Person acquired in a pooling-of-interests transaction prior to the date such Person became an Affiliate of Lessee; (i) the income (or loss) of any Person (other than a subsidiary) in which Lessee has an ownership interest; provided, however, that (i) Lessee's Net Income shall include amounts in respect of the income of such Person when actually received in cash by Lessee in the form of dividends or similar distributions and (ii) Lessee's Net Income shall be reduced by the aggregate amount of all investments, regardless of the form thereof, made by Lessee in such Person for the purpose of funding any deficit or loss of such Person; 7 (j) the income of Lessee to the extent the payment of such income is not permitted, whether on account of any law, statute, judgment, decree or governmental order, rule or regulation applicable to such Lessee; (k) all amounts included in computing such net income (or loss) in respect of the write-up of any asset or the write-down of any Debt at less than face value after the later of the Commencement Date or the date on which such asset or Debt was first properly included on Lessee's balance sheet. (l) the reduction in income tax expense resulting from an increase in a deferred income tax asset due to the anticipation of future income tax benefits; or (m) the reduction in income tax expense resulting from an increase in a deferred income tax asset or from a decrease in a deferred income tax liability due to a change in a statutory tax rate. New Sub: One or more subsidiaries of Senior Care Florida Leasing, LLC established for the purpose of becoming a Sublessee hereunder. Non Disturbance Agreement: As defined in Article 17, Section 17.1. Notice: Any notice given hereunder in accordance with Article 22 hereof. Omega: Omega Healthcare Investors, Inc., a Maryland corporation. Overdue Rate: On any date, a rate of interest equal to three and one-half percent (3 1/2%) above the Prime Rate, but in no event greater than the maximum rate then permitted under applicable law. Permitted Alteration: As defined in Article 9, Section 9.1. Permitted Assignment: As defined in Article 19, Section 19.1. Pledge Agreement or Pledge Agreements, as applicable, means one or more of the Pledge Agreements executed by Diversicare Leasing Corp. respecting its equity interests in the Lessee or by the Lessee respecting its equity interests in the New Subs. Primary Intended Use: As defined in Article 7, Section 7.2, Subsection 7.2.1. Prime Rate: On any date, a rate of interest equal to the annual rate of interest published by The Wall Street Journal, from time to time, as the Prime Rate (such rate is currently published in the column "Money Rates" as the "base rate on corporate loans posted by at least 75% of the nation's 30 largest banks"). If a range of rates is published as the Prime Rate by The Wall Street Journal, then the "Prime Rate", for the purposes of this Lease, shall be the highest rate in such range. Each change in the Prime Rate as published by The Wall Street Journal shall be effective, for the purposes of this Lease, to change the Interest Rate as of the date that such change is published in The Wall Street Journal. 8 Rent: Collectively, the Base Rent, Additional Rent and Additional Charges. Replaced Property: As defined in Article 8, Section 8.1. Replacement Property: As defined in Article 8, Section 8.1. Security Agreement: The Security Agreement dated as of the date hereof between Lessor as secured party and Lessee as debtor. State: The State of Florida. Sublessee: A permitted sublessee of Lessee pursuant to the conditions of Section 19.1. Taxes: As defined in Article 5, Section 5.1. Term: Term of this Lease; Lease Term; Term hereof: As and when used in this Lease, the foregoing defined terms each shall mean and include the initial term of this Lease as defined in Article 2 hereof, and, to the extent this Lease is extended and renewed, the renewal term of this Lease. Term Expiration Date: December 31, 2005. ARTICLE 2. 2.1 TERM; COMMENCEMENT DATE. The term of this Lease (the "Term") and the payment of the Rent due hereunder shall commence on the 1st day of April, 2003 (the "Commencement Date") and shall remain in effect until the Term Expiration Date expiring at midnight on such date, unless terminated sooner pursuant to the provisions of this Lease. In the event that the Commencement Date is a date other than the first day of the month, all Rent otherwise due shall be prorated based upon the number of days elapsed in such month. ARTICLE 3. 3.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSOR. As a material inducement to Lessee to enter into this Lease, Lessor represents, warrants and covenants to Lessee that as of Commencement Date: 3.1.1 The Leased Improvements and Lessor's Personal Property are free from any material structural, electrical or mechanical defects and there is no physical condition of the Leased Improvements or Lessor's Personal Property of which Lessor is aware that could reasonably be expected to have a material adverse effect on the Lessee's ability to use and operate the Leased Properties for their Primary Intended Use (as defined in Section 7.2.1 hereof), unless disclosed in writing by Lessor to Lessee prior to the Commencement Date and acknowledged in writing by Lessee. 3.1.2 The Land is zoned or classified under applicable zoning ordinances or other land use regulations to permit the use and occupancy of the Lease Properties as skilled nursing facilities. The Leased Improvements are in compliance with all zoning or 9 other land use regulations, public health, building code or other similar laws applicable thereto. 3.1.3 Lessor is the sole owner of and will have good and marketable fee simple title to the Leased Properties, free and clear of all liens, encumbrances, rights or claims of other parties, limitations or restrictions on use, or other matters, except for (i) Taxes (as hereinafter defined) for the year 2003 which are not yet due and payable, (ii) easements for the installation and maintenance of public utilities serving the Leased Properties and such other easements that do not adversely affect, impede or hinder the use, occupancy and enjoyment of the Leased Properties by Lessee for its Primary Intended Use and (iii) those matters set forth on EXHIBIT B attached hereto ("Permitted Exceptions"). Lessor has all easements and rights necessary to allow Lessee to use the Leased Properties for its Primary Intended Use. 3.1.4 There are no encroachments upon the Land and no encroachments of any Leased Improvements onto adjacent property. None of the Leased Improvements violates set-back, building or side lines nor do they encroach on any easements located on any of the Leased Properties. All utilities serving each of such Facilities are adequate to operate each such Facility for its Primary Intended Use. Each of the Leased Properties has direct access, ingress and egress to and from a publicly dedicated street, road or highway, and there are located on the Land an adequate number of parking spaces to operate each such Facility for its Primary Intended Use. 3.1.5 Lessor has complied with, and to the best knowledge of Lessor, all prior owners, operators and occupants of the Leased Properties have complied with, all applicable Hazardous Materials Laws. Except as duly licensed or authorized by appropriate governmental authorities or otherwise permitted by such Hazardous Materials Laws, neither Lessor, its affiliates or agents have allowed the use, generation, treatment, handling, release, emission, manufacture, discharge, voluntary transmission, storage or removal of any Hazardous Materials on, at, over, in, from or upon any of the Leased Properties, nor, to the best knowledge of Lessor, has any of the Leased Properties ever been used for any of the foregoing. To the best knowledge of Lessor, there are no polychlorinated biphenyls or friable asbestos or any substance containing asbestos in condition or amount deemed hazardous by any Hazardous Materials Laws present at any of the Leased Properties. Lessor has not at any time engaged in nor permitted, nor to the best knowledge of Lessor, has any prior owner or any tenant or other occupant of any of the Leased Properties engaged in or permitted, any dumping discharge, disposal, spillage or leakage, whether legal or illegal, accidental or intentional, of Hazardous Materials at, on, in, from or about any of the Leased Properties that would subject such Leased Properties or Lessee to any clean-up obligations imposed by any governmental authorities. Lessor has not received or been issued any notice, demand, request for information, citation, summons, or complaint regarding an alleged failure to comply with any Hazardous Materials Laws. To the best knowledge of Lessor, none of the Leased Properties is subject to any existing, pending or threatened investigation or inquiry by any governmental authority for failure to comply with any Hazardous Materials Laws. To the best knowledge of Lessor, there are no underground storage tanks on the Leased Properties, and, to the best knowledge of Lessor, each of the Leased Properties is free of 10 dangerous levels of naturally emitted radon. To the best knowledge of Lessor, no portion of any of the Leased Properties has ever been used as a landfill, garbage or refuse dump site or waste disposal facility. Lessor will indemnify and hold harmless Lessee from and against all liabilities, obligations, claims, penalties, costs and expenses (including, without limitation, reasonable attorneys fees and expenses) which may be imposed upon, or incurred, suffered by, or asserted against Lessee by reason of the presence, use, maintenance, storage, release, disposal or discharge of any Hazardous Materials on, in, under or from any of the Leased Properties prior to the Commencement Date or any violation of any Hazardous Materials Laws arising out of or relating to conditions, circumstances or events prior to the Commencement Date. ARTICLE 4. 4.1 BASE RENT. Lessee covenants and agrees to pay as rent for the Leased Properties during each Lease Year of the Term of this Lease, in lawful money of the United States of America, Base Rent to be paid in twelve (12) equal monthly installments (other than the installment due for the first month which shall be prorated, if appropriate), each due and payable, in advance on the first day of each month of the Term. 4.2 ADDITIONAL RENT. In addition to the Base Rent, Lessee shall pay as rental under this Lease, on a quarterly basis, additional rent ("Additional Rent") equal to one half of an amount determined as Gross Revenues, less (i) the Cost of Operation, (ii) Base Rent and (iii) a management fee payable to DMSC pursuant to that certain Management Agreement with DMSC as Manager of the Facilities equal to seven percent (7%) of Gross Revenue. An example of the foregoing calculation of Additional Rent is attached hereto as EXHIBIT C solely for illustration purposes. In connection such Additional Rent, Lessee or each Sublessee, as applicable shall submit to Lessor (and to Omega, if and so long as Omega remains a Facility Mortgagee), on or before the forty fifth (45th) day following the end of a calendar quarter, a reconciliation statement, certified as true and complete by an authorized officer of Lessee, setting forth in detail the Cost of Operations incurred and paid during the prior quarter. Failure to timely furnish the quarterly reconciliation statement and/or to timely pay over the Additional Rent shall constitute an Event of Default. 4.3 ADDITIONAL CHARGES. In addition to Base Rent and Additional Rent, Lessee shall pay as rental under this Lease as and when due all Additional Charges. 4.4 LATE PAYMENT. If any installment of Rent owing by Lessee under this Lease shall not be paid within five (5) days of written notice from Lessor, such unpaid amount shall thereafter bear interest at the Overdue Rate from the due date thereof until the date of payment, which Lessee shall pay on demand as a late charge (to the extent permitted by law) and, in such event, the parties hereby agree that such late charge will represent a fair and reasonable estimate of the costs Lessor will incur by reason of the late payment by Lessee. 4.5 NET LEASE. The Rent shall be paid absolutely net to Lessor, so that this Lease shall yield the full amount of the Rent payable hereunder throughout the Term, subject only to any provisions of the Lease which expressly provide for adjustment or abatement of Rent or other charges. 11 4.6 METHOD OF PAYMENT OF RENT. Lessor hereby instructs Lessee to make payment of all Rent due under this Lease directly to Omega as Facility Mortgagee for application, as and when received, to amounts owed by Lessor under the Existing Facility Mortgages. Such instruction by Lessor to make payment directly to Omega as Facility Mortgagee shall be irrevocable during the Term of this Lease. Notwithstanding the foregoing provisions for payment of Rent to Omega as Facility Mortgagee, the first Ten Thousand and No/100 Dollars ($10,000.00) of Rent per Facility per Lease Year (for a total of Forty Thousand and No/100 Dollars ($40,000.00) per Lease Year) shall be paid by Lessee directly to the Lessor to pay certain expenses incurred by the Lessor related to its ownership of the Facilities, including but not limited to income or intangible taxes due and payable by the Lessor, accountant's fees and attorney's fees related to this Lease and/or the preparation of financial statements and tax returns related to ownership of the four (4) Facilities subject to this Lease and any other out-of-pocket expenses for professional services actually incurred by Lessor with regard to this Lease and any of the four (4) Facilities subject to this Lease. Lessee shall be deemed to have discharged its obligations to pay Rent as set forth in this Lease to the extent of any payments made pursuant to these provisions. 4.7 ADJUSTMENT OF BASE RENT. In the event that this Lease is terminated as to one or more of the Facilities due to a casualty loss as provided under Section 12.2.1 or as a result of condemnation as provided under Section 13.1.1 or in the event of a sale or other disposition of a Facility by an assignment or subletting under this Lease, then the Base Rent otherwise due and payable under this Lease shall be reduced by the same proportion as the debt under the Facility Mortgage applicable to the affected Facility bears to the entire indebtedness under all Facility Mortgages. Such reduction shall be effective as of the date of the next installment of Base Rent which shall be due and payable after such termination or such disposition. ARTICLE 5. 5.1 PROPERTY TAXES. Subject to Article 10 relating to permitted contests, Lessee will pay, or cause to be paid, all real and personal property taxes and assessments levied or assessed against the Leased Properties and applicable to the periods of time within the Term of this Lease (collectively "Taxes") before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing authorities where feasible or required, and will promptly, upon request, furnish to Lessor copies of receipts or other satisfactory proof evidencing such payments. If any such Taxes may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Taxes), Lessee may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Taxes) in installments and in such event, shall pay such installments during the Term hereof as the same respectively become due and before any fine, penalty, premium, further interest or cost may be added thereto. Lessee may, at Lessee's sole cost and expense, protest, appeal or institute such other proceedings as Lessee may deem appropriate to effect a reduction of Taxes and Lessor, at Lessee's expense as aforesaid, shall cooperate with Lessee in such protest, appeal or other action. Lessee shall reimburse Lessor for Lessor's direct costs of cooperating with Lessor in such protest, appeal or other action. If Lessee elects not to contest Taxes, Lessor shall have the right to do so in its own name and at its sole cost and expense. If any refund shall be due from any 12 taxing authority in respect of any Taxes paid by Lessee, the same shall be paid over to or retained by Lessee. In case any person or entity to whom any sum is directly payable by the Lessee under any of the provisions of this Lease shall refuse to accept payment of such sum from the Lessee, the Lessee shall thereupon give written notice of such fact to the Lessor and shall pay such sum directly to Lessor, and Lessor shall thereupon pay such sum to such person or entity. To the extent Lessee so pays any taxes to Lessor, Lessee shall be relieved of its obligation under this Lease to pay such Taxes to the applicable taxing authority to which such Taxes would otherwise be due and to the extent Lessee pays any Taxes due to the applicable taxing authority, Lessee shall be relieved of its obligation under this lease to pay such item as an Additional Charge under this Lease. Lessor and Lessee shall, upon request of the other, provide such data and information as is maintained by the party to whom the request is made with respect to the Leased Properties as may be necessary to prepare any required returns and reports with any taxing authorities. 5.2 NOTICE OF TAXES. Lessor shall give prompt Notice to Lessee of all Taxes payable by Lessee hereunder of which Lessor at any time has knowledge, but Lessor's failure to give any such Notice shall in no way diminish Lessee's obligations hereunder to pay such Taxes, but such failure shall obviate any default hereunder for a reasonable time after Lessee receives Notice of any Taxes which it is obligated to pay. 5.3 PRORATION OF TAXES. Taxes imposed in respect of the tax-fiscal period during which the Term of this Lease commences and terminates shall be adjusted and prorated between Lessor and Lessee, whether or not such Taxes is imposed before or after such commencement or termination, so that the Lessor shall be responsible for Taxes assessed and imposed on the Leased Properties prior to the Commencement Date and after the termination of the lease Term. Lessee's obligation to pay its prorated share thereof after termination shall survive such termination. 5.4 LICENSE FEES AND BUSINESS TAXES. Lessee shall pay directly to the applicable taxing or governmental authority having jurisdiction all license fees (including all application fees), business occupation taxes and sales taxes, if any, charged or assessed by the State of Florida and any political subdivision thereof for the licensing and operation of skilled nursing facilities applicable to periods of time within the Term of this Lease which are levied, rated, charged or assessed against or in respect of the business carried on in the Leased Properties by Lessee or in respect of the use, operation or occupancy thereof or any part thereof by the Lessee. 5.5 UTILITY CHARGES. Lessee will pay or cause to be paid when due, to the appropriate supplier, all charges and deposits for electricity, power, gas, oil, water and all other utilities used in, on or by the Leased Properties during the Term. 5.6 INSURANCE PREMIUMS. Lessee will contract for, in its own name, and will pay or cause to be paid all premiums for the insurance coverage required to be maintained by Lessee pursuant to Article 11 during the Term. 13 ARTICLE 6. 6.1 OWNERSHIP OF THE LEASED PROPERTIES. Lessee acknowledges that each of the Leased Properties is the Property of Lessor and that Lessee has only the right to the exclusive possession and use of the Leased Properties upon the terms and conditions of this Lease. Lessee will not, at any time during the Term: (i) file any income tax return or other associated documents; (ii) file any other document with or submit any document to any governmental body or authority; (iii) enter into any written contractual arrangement; or (iv) release any financial statements of Lessee, in each case, that takes a position other than that Lessor is the owner of the Leased Properties for federal, state and local income tax purposes and that the Lease is a "true lease". 6.2 LESSEE'S PERSONAL PROPERTY. All machinery, equipment, furniture, furnishings, inventory, supplies, movable walls or partitions, computers (and all associated software), trade fixtures or other personal property at the Leased Properties now or hereafter owned by Lessee (or leased by Lessee from parties other than Lessor) and located at or used in connection with the business operated by Lessee on the Leased Properties, together with all replacements, alterations, additions and accessions thereto, shall belong to Lessee and be a part of "Lessee's Personal Property." Lessee may, at its expense, from time to time during the Term of this Lease install, affix or assemble or place on the Land or in the Leased Improvements any items of the Lessee's Personal Property and may remove, replace or substitute for the same, from time to time, in the ordinary course of Lessee's business. Such property shall at all times remain the personal property of Lessee. Except for those items of Personal Property listed on EXHIBIT D attached hereto and subject, however, to the prior rights, if any, held by AmSouth under the AmSouth Loan Documents or any extensions, renewals, amendments, modifications or replacements thereof, upon the expiration of the Term or the earlier termination of this Lease, without the payment of any additional consideration by Lessor, Lessee shall be deemed to have sold, assigned, transferred and conveyed to Lessor all of Lessee's right, title and interest in and to any of Lessee's Personal Property that, in Lessor's reasonable judgment, is necessary or integral to the Primary Intended Use (or if some other use thereof has been approved by Lessor as required herein, such other use as is then being made by Lessee) and Lessor shall have the option to purchase any of Lessee's Personal Property that is not then necessary or integral to such use ("Lessee's Incidental Personal Property") for an amount equal to the then book value thereof. Such option shall be exercised by written notice to Lessee not more than 120 days nor less than ninety (90) days before expiration of the Term. In connection with any Personal Property sold, assigned, transferred or conveyed to Lessor pursuant to the preceding sentence, Lessor shall assume any lease or equipment financing obligations of Lessee. Without Lessor's prior written consent, Lessee shall not remove Lessee's Personal Property that is in use at the expiration or earlier termination of the Term from the Leased Properties until such option to purchase has expired or been sooner waived in writing by Lessor. Any of Lessee's Incidental Personal Property that is not purchased by Lessor pursuant hereto, together with the Personal Property listed on EXHIBIT D attached hereto, may be removed by Lessee. 6.3 GRANT OF SECURITY INTEREST IN LESSEE'S PERSONAL PROPERTY AND ACCOUNTS. Subject to the prior written consent of AmSouth (and subject further to any terms conditions or limitations required for or arising from such consent and approvals), the Lessee will grant to Lessor a security interest in the Collateral as defined in the Security Agreement, which includes, 14 without limitation, Lessee's Personal Property as defined herein and Lessee's Accounts as defined in the Security Agreement. ARTICLE 7. 7.1 LICENSES AND PERMITS. Lessee shall make timely application to such governmental regulatory bodies as may be required for the issuance of licenses to operate the Facilities as skilled nursing homes and provide to Lessor written confirmation of filing by the Lessee of its application for licensure and status thereof. Lessee shall diligently pursue the issuance of such licenses. Lessor shall cooperate with and use commercially reasonable efforts, where necessary or required, to assist Lessee in obtaining licenses. Lessor shall commit no act that would hinder Lessee's ability to obtain licensure to operate the Facilities as a nursing homes. At no time during the Term of this Lease shall Lessee surrender its license to operate the Leased Properties as nursing homes, nor transfer or make any attempt to transfer its licenses to operate the Leased Properties as skilled nursing homes either in whole or in part, to any other location or facility. Lessor covenants that during the Term of this Lease it will cooperate with Lessee and use commercially reasonable efforts, where necessary or required from Lessor as the owner of the Leased Properties, to enable Lessee to obtain and maintain any licenses, permits and approvals needed by Lessee to use and operate the Leased Properties for their Primary Intended Use under applicable local, state and federal law. 7.2 USE OF THE LEASED PROPERTIES. 7.2.1 PRIMARY INTENDED USE. Lessee shall use or cause the Leased Properties to be used as skilled nursing home facilities licensed by the State of Florida for the provision of skilled nursing services to the elderly and/or other health-care oriented services for the elderly, and, in connection therewith, may use the Leased Properties for the provision of food services, recreational services, rehabilitative and/or health care services and for such other uses as may be necessary or incidental to such use (such use is herein referred to as the "Primary Intended Use"). Lessee shall not use the Leased Properties or any portion thereof for any other use without the prior written consent of Lessor, which consent will not be unreasonably withheld. No use shall be made or permitted to be made of the Leased Properties by Lessee, and no acts shall be done, which will cause the cancellation of any insurance policy covering any Leased Properties, or any part thereof, nor shall Lessee sell or otherwise provide to residents or patients therein, or permit to be kept, used or sold in or about the Leased Properties any article which may be prohibited by law or by the standard form of fire insurance policies, or any other insurance policies required to be carried hereunder, or fire underwriter's regulations. Lessee shall not use the Leased Properties for any unlawful purposes. 7.2.2 NO WASTE. Lessee shall not commit or suffer to be committed any waste on the Leased Properties, or in the Facilities, nor shall Lessee cause or permit any nuisance thereon. 7.2.3 NO TITLE. Lessee shall neither suffer nor permit the Leased Properties or any portion thereof, to be used in such a manner as (i) might reasonably tend to impair 15 Lessor's title thereto or to any portion thereof, or (ii) may reasonably make possible a claim or claims for adverse possession. 7.2.4 COMPLIANCE. Except as otherwise provided and described in EXHIBIT E, Lessee shall, at all times during the Term hereof, comply with the rules and regulations of the State of Florida, with regard to the operation of the nursing home facilities on the Leased Properties. In conjunction with Lessee's compliance, it agrees to promptly upon its receipt thereof provide Lessor with copies of all annual surveys, follow-up surveys, special surveys and all correspondence between Lessee and the State of Florida concerning surveys of the Leased Properties. Lessee shall notify Lessor within three (3) Business Days of its receipt in writing from any federal or state governmental or regulatory agency having jurisdiction of any termination or enforcement notice of any kind pertaining to the operation of the Facilities as a nursing home facilities. 7.2.5 EASEMENTS. Lessor will, from time to time, at the request of Lessee and at Lessee's cost and expense, but subject to the approval of Lessor and any Facility Mortgagee (a) grant easements and other rights in the nature of easements, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Leased Properties, (c) dedicate or transfer unimproved portions of the Leased Properties for road, highway or other public purposes, (d) execute petitions to have the Leased Properties annexed to any municipal corporation or utility district, (e) execute amendments to any covenants and restrictions affecting the Leased Properties, and (f) execute and deliver to any person such instruments as may be necessary or appropriate to conform or effect such grants, releases, dedications and transfers (to the extent of its interest in the Leased Properties), provided that such grant, release, dedication, transfer, petition or amendment is required or beneficial for and not detrimental to the properties conduct of the business of Lessee on the Leased Properties and does not reduce the value thereof. 7.3 ENVIRONMENTAL MATTERS. Lessee will not store (except in compliance with all statutes, laws, ordinances, rules and regulations) and will not dispose of any medical waste, hazardous waste, contaminants, oil, radioactive or other material ("Hazardous Materials") the removal of which is required or the maintenance of which is prohibited or penalized by any applicable federal, state or municipal statutes, laws, ordinances, rules or regulations ("Hazardous Materials Laws") on the Leased Properties or otherwise, (except in compliance with all statutes, laws, ordinances, rules and regulations) and will not directly or indirectly transport or arrange for the transportation of any Hazardous Materials (except in compliance with all statutes, laws, ordinances, rules and regulations). Lessee covenants and agrees to maintain all of the Leased Properties at all times free of any Hazardous Materials, (except in compliance with all statutes, laws, ordinances, rules and regulations). As to the Leased Properties, Lessee agrees promptly: (i) to observe and comply with any and all statutes, laws, ordinances, rules and regulations, licensing requirements or conditions relating to the use, maintenance and disposal of Hazardous Materials and all orders or directives from any official, court or agency of competent jurisdiction relating to the use or maintenance or requiring the removal, treatment, remediation, containment or other disposition thereof, and (ii) to pay or otherwise dispose of any fine or charge related thereto which, if unpaid, would constitute a lien on the Leased Properties (other than any fine or charge that Lessee establishes was caused by Lessor, its predecessors in interest or those for 16 whom the Lessor is in law responsible), unless contested in good faith by appropriate proceedings and in accordance with the provisions of Article 10, and the right to use and the value of the Leased Properties is not materially and adversely affected thereby. Lessee will protect, indemnify and save harmless Lessor, its principals, officers, directors, agents and employees from and against all liabilities, obligations, claims, damages, penalties, costs and expenses (including, without limitation, reasonable attorneys fees and expenses) which may be imposed upon or incurred by or asserted against any of them by reason of any failure on the part of Lessee to perform or comply with any of the terms of this Section 7.3. Anything herein to the contrary notwithstanding, Lessor acknowledges and agrees that the terms of this Section 7.3, and the representations, warranties, agreements and indemnity set forth herein, shall not be deemed to apply to (i) any Hazardous Materials present or suspected to be present in, on or under the Leased Properties, or any portion thereof, including the soil, groundwater or soil vapor, as a result of any use, maintenance, storage, discharge, dumping, release or spillage (accidental or otherwise) of any Hazardous Materials on, upon or onto the Leased Properties, or any portion thereof, prior to the Commencement Date, or (ii) any violation of any Hazardous Materials Laws by Lessor or Lessor's predecessors in interest or those for whom the Lessor is in law responsible, their respective officers, employees, contractors and agents, prior to the Commencement Date or (iii) any violation of any Hazardous Materials Laws occurring during the Term of this Lease which arises out of the presence, release or discharge of Hazardous Materials in, on, under or from the Leased Properties prior to the Commencement Date (each a "Prior Environmental Condition"). Lessor agrees to promptly observe and comply with all orders or directives from any official, court or agency of competent jurisdiction requiring the removal treatment, remediation, containment or other disposition of any Prior Environmental Condition and to pay or otherwise dispose of any fine or charge related to any Prior Environmental Condition which, if unpaid, would constitute a lien on the Leased Properties, unless contested in good faith by appropriate proceedings and the right to use and the value of the Leased Properties is not materially and adversely affected thereby. ARTICLE 8. 8.1 MAINTENANCE AND REPAIR. Exclusive of the matters described on EXHIBIT E ("Excluded Physical Plant Obligations") Lessee, at its expense, will keep the Leased Properties and all fixtures thereon and all landscaping, private roadways, sidewalks and curbs appurtenant thereto and which are under Lessee's control in good order and repair, whether or not the need for such repairs occurs as a result of Lessee's use, the elements or the age of the Leased Properties, or any portion thereof, or any cause whatever, and, except as otherwise provided in Article 12 and Article 13, Lessee will make all necessary and appropriate repairs thereto of every kind and nature, whether interior or exterior, structural or non-structural, ordinary or extraordinary, foreseen or unforeseen. Lessee's repair and maintenance obligations provided for hereunder shall include, without limitation, the roof, foundation, plumbing and utility service lines within the Facilities, air conditioning, and heating equipment, ceiling, floors, floor coverings, plate glass and walls, whether structural or non-structural and whether exterior or interior, of the Facilities, excluding, however matters described on EXHIBIT E. Anything herein to the contrary notwithstanding, Lessor acknowledges and agrees that (i) the terms of this Section 8.1 shall not be deemed to be breached by Lessee's maintaining the Leased Properties in good order and repair in at least the same condition in all material respects as on the 17 Commencement Date, ordinary wear and tear excepted and (ii) Lessee's repair and maintenance obligations hereunder shall not include matters described on EXHIBIT E, or any maintenance or repair caused or necessitated by the negligence or willful misconduct of or breach of this Lease by Lessor or those for whom it may in law be responsible, or repairs necessitated by the failure of Lessor or Lessor's predecessors in interest to keep the Leased Properties in good working order and repair, reasonable wear and tear excepted, prior to the Commencement Date, all of which shall be the obligation of Lessor to correct. Except for such deficiencies, non-conformance, non-compliance or improvements or repairs which are the result of (i) any such items described on EXHIBIT E, or (ii) the negligence or willful misconduct of, or breach of this Lease by Lessor or those for whom it may in law be responsible, or (iii) failure of Lessor or Lessor's predecessors in interest to keep the Leased Properties in good working order and repair, Lessee covenants and agrees to keep, maintain and repair the Leased Properties in such a manner that the Facilities will continue to be serviceable for their Primary Intended Use. 8.2 SURRENDER. Upon termination of this Lease other than as a result of the purchase of one or more of the Leased Properties by Lessee in accordance with the purchase rights, if any, contained in this Lease, Lessee shall peaceably vacate and surrender the Leased Properties to Lessor in the state of repair required of it pursuant to this Lease, ordinary wear and tear, loss or damage due to casualty or taking by condemnation, excepted. To the extent not then prohibited by applicable law, upon such vacation and surrender of the Leased Properties, Lessee shall, to the extent allowed by law, execute all documents reasonably necessary or required to transfer the nursing home license for the Leased Properties to Lessor, or its designee, provided that the reasonable out of pocket costs and expenses of any such transfer or the processing of any application shall be paid by Lessor or its designee. 8.3 REPLACEMENT PROPERTY. Lessee may, from time to time, replace with other operational equipment or parts or property (the "Replacement Property") any of the Fixtures and Lessor's Personal Property (the "Replaced Property") which shall have (a) become worn out, obsolete or unusable for the purposes for which it is intended, (b) been taken by Condemnation, in which event Lessee shall be entitled to that portion of any award made therefore, or (c) been lost, stolen damaged or destroyed, in which event Lessee shall be entitled to that portion of any insurance proceeds paid with respect thereto; provided, however, that the Replacement Property shall (1) be in good operating condition, (2) have a then value and useful life at least equal to the value and estimated useful life of the Replaced Property as of the date thereof for Replaced Property specified in subparagraph (a), above, or have a then value and useful life at least equal to the value and estimated useful life of the Replaced Property immediately prior to the time that the Replaced Property specified in subparagraphs (b) and (c), above, had become so taken or so lost, stolen, damaged or destroyed, and (3) be suitable for a use which is the same or similar to that of the Replaced Property. All Replacement Property will be and remain Lessor's Personal Property and shall be a part of the Leased Properties under this Lease. All Replaced Property may be removed and shall become the property of Lessee. The proceeds from the sale of any Replaced Property shall be paid to Lessee and Lessee may trade in any worn out or obsolete Replaced Property on the purchase of any Replacement Property. Lessor shall execute, upon written request from Lessee, any and all bills of sale, assignments or other documents necessary or required to dispose of any Replaced Property in accordance with this Section 8.3. Anything herein to the contrary notwithstanding, Lessee shall have no obligation to replace, and Lessee may from time to time during the Term of this Lease discard and not replace, any inadequate, 18 obsolete, worn out, unsuitable, undesirable or unnecessary Fixtures or Lessor's Personal Property forming a non-essential part of the Leased Properties if in the reasonable business judgment of Lessee it is not cost effective to do so. 8.4 SIGNAGE. Lessee may, at its own expense, erect and maintain identification signs at the Leased Properties, provided such signs comply with all applicable laws, ordinances and regulations and further provided that Lessee shall restore any damage to the Leased Properties caused by the removal of such signs. ARTICLE 9. 9.1 IMPROVEMENTS, ALTERATIONS AND ADDITIONS BY LESSEE. Lessee shall have the right to and may make, at its sole cost and expense, such alterations, additions and improvements to the Leased Properties from time as it may, in its reasonable business judgment, determine are necessary or reasonably desirable for the continuing and proper use, operation and maintenance of the Leased Properties for their Primary Intended Use, provided however, alterations which effect a structural change in any Facility shall not be made, unless and until Lessee shall have caused plans and specifications therefor to have been prepared, at Lessee's expense, by a licensed architect, and shall have obtained the prior written approval of Lessor, which approval Lessor shall not unreasonably withhold. Lessor shall, within ten (10) Business Days of request therefore, advise Lessee of its approval or disapproval of the proposed alteration, improvement or addition. If not approved, then Lessor shall specify such alternative conditions, if any, upon which Lessor will approve of the proposed alteration, improvement or addition. Lessee shall cause the work on any alterations, improvements or additions permitted to be made hereunder (the "Permitted Alteration") to be performed, at its expense, promptly, in a good and workmanlike manner by a licensed general contractor, in accordance with good construction practices, and in compliance with all existing codes and regulations applicable to the Leased Properties, which improvements shall, in any event, constitute a complete architectural unit in keeping with the character of the Leased Properties and the area in which the Leased Properties are located and which will not change the Primary Intended Use of the Leased Properties. Each and every such improvement, alteration or addition shall immediately become a part of the affected Leased Properties and shall belong to Lessor subject, to the terms and conditions of this Lease. All materials which are scrapped or removed in connection with the making of any Permitted Alteration, or any other alteration, addition or improvement to any Leased Property shall be removed from the affected Leased Property at Lessee's expense and disposed of by Lessee in accordance with all applicable laws. 9.2 LIENS. The Lessee shall ensure that no construction liens or other liens or encumbrances shall be registered against or shall otherwise affect any of the Leased Properties or any part thereof or the Lessor's interest therein in respect of material supplied or work done or to be done by the Lessee or on behalf of the Lessee. Lessee agrees to obtain and deliver to Lessor written waivers of mechanic's 19 liens against the Leased Properties for all work, labor and services performed and materials furnished in connection with any alternations, additions or improvements made to any of the Leased Properties by the Lessee or on behalf of the Lessee, in form reasonably satisfactory to Lessor's attorney, the same to be executed by all contractors, subcontractors, materialmen, laborers and workmen involved in such work having a right or claim of lien therefore under applicable law. Notwithstanding the foregoing if any mechanic's lien is filed against any of the Leased Properties, Lessee shall be responsible for the reasonably timely payment and/or discharge of such lien. If the Lessee fails to discharge or cause any such lien to be discharged (by filing any bond required by law, payment or otherwise) within thirty (30) Business Days after receipt of Notice from the Lessor of the filing of the lien, then, in addition to any other rights or remedies of the Lessor, the Lessor may (shall not be obligated to) discharge the lien by paying the amount claimed into court and the amount so paid and all costs and expenses (including attorneys costs and expenses) plus interest at the Overdue Rate, shall be immediately due and payable by the Lessee to the Lessor forthwith upon demand. ARTICLE 10. 10.1 PERMITTED CONTESTS. Lessee, after ten (10) days' prior written notice to Lessor, on its own or on Lessor's behalf (or in Lessor's name), but at Lessee's expense, may contest, protest or appeal by appropriate legal or administrative proceedings conducted in good faith and with due diligence, the amount, determination, validity, assessment, imposition or application, in whole or in part, of any Florida law, Imposition, legal requirements, lien, attachment, levy, encumbrance, charge or claim (collectively "Charge") which is required to be paid, discharged, observed or complied with by Lessee under this Lease; provided that (a) in the case of an unpaid Charge, the commencement and continuation of such proceedings or the posting of a bond as may be permitted by applicable law shall suspend the collection thereof from Lessor and from the Leased Properties; (b) none of the Leased Properties nor any Rent therefrom nor any part thereof or interest therein would be in any immediate danger of being sold, forfeited, attached or lost; (c) Lessor would not be in any immediate danger of civil or criminal liability for failure to comply therewith pending the outcome of such proceedings; and (d) if such contest be finally resolved against Lessor or Lessee, Lessee shall promptly pay the amount required to be paid, together with all interest and penalties accrued thereon, or otherwise comply with the applicable Charge. Lessor, at Lessee's expense, shall execute and deliver to Lessee such authorizations and other documents as may reasonably be required in any such action and, if reasonably requested by Lessee or if Lessor so desires and then at its own expense, Lessor shall join as a party therein. Lessor will cooperate fully and in good faith with Lessee in such contest and shall do all things reasonably requested by Lessee in connection with any such action. Lessee shall indemnify and save Lessor harmless against any liability, cost or expense of any kind that may be imposed upon Lessor in connection with any such action. ARTICLE 11. 11.1 GENERAL INSURANCE REQUIREMENTS. During the Term of this Lease, Lessee, at its sole cost and expense, shall at all times keep the Leased Properties insured with the kinds and amounts of insurance described below. This insurance shall be written by reputable companies authorized to do insurance business in the State of Florida, with a rating as measured by Best's Key Rating Insurance Guide of not less than "A-". The policies must name Lessor as an additional insured. Losses shall be payable to Lessor and Lessee as provided in Article XII. In addition, the policies shall name as an additional insured the holder of any mortgage, charge, deed of trust or other security agreement or encumbrance on the Leased Properties or the Lessor's interest therein as to which Lessee has been given written notice identifying such holder and the nature of its interest (all of the aforesaid being referred to as a "Facility Mortgage" and the holder thereof being referred to as a "Facility Mortgagee") by way of a standard form of 20 mortgagee's loss payable clause. If available, each of the insurance policies required of Lessee hereunder shall contain an agreement, by endorsement on the policy or by independent instrument furnished to Lessor, that the insurer will endeavor to give to Lessor (and to any Facility Mortgagee, if required by the same) at least thirty (30) days written notice before the policy or policies in question shall be materially altered, allowed to expire or canceled. Evidence of insurance shall be deposited with Lessor and, if requested of Lessee in writing, with any Facility Mortgagee. The policies on the Leased Properties, including the Leased Improvements, shall insure against the following risks: 11.1.1 Loss of or damage to the Leased Improvements and Lessor's Personal Properties by fire, vandalism and malicious mischief, extended coverage perils known as "Special Risk" and all physical loss perils normally included in such Special Risk insurance, including but not limited to sprinkler leakage, in an amount not less than one hundred percent (100%) of the then full replacement cost thereof (as defined in Section 11.2, below); 11.1.2 Loss of rental under a blanket earnings and expense coverage endorsement covering risk of loss during reconstruction necessitated by the occurrence of any of the hazards described in Section 11.1.1. (but in no event for a period more than twelve (12) months) in an amount sufficient to prevent Lessor and Lessee from becoming a co-insurer; 11.1.3 Claims for personal injury, including death, and property damage occurring upon, in or about any of the Leased Properties under one or more policies of comprehensive general liability insurance, written on a broad form comprehensive basis including limits, in accordance with the minimum requirements of the State of Florida for skilled nursing homes; 11.1.4 Claims arising out of professional malpractice in accordance with the minimum requirements of the State of Florida for skilled nursing homes; 11.1.5 Lessee shall at all times during the Term of this Lease maintain adequate worker's compensation insurance coverage for all persons employed by Lessee on the Leased Properties, if required by law. Such worker's compensation insurance shall be in accordance with the requirements of applicable local, state, and federal law. Lessee may self insure for worker's compensation in strict compliance with the laws of the State of Florida. 11.2 REPLACEMENT COST. The term "Full Replacement Cost" as used herein, shall mean the actual replacement cost of the Leased Improvements requiring replacement, from time to time, of like kind and quality, less exclusions normally provided in the standard form of All Risk Broad Form Policy. In all events full replacement cost shall be an amount sufficient that neither Lessor nor Lessee is deemed a co-insurer of the Leased Properties. 11.3 WAIVER OF SUBROGATION. Each party hereto waives any and every claim which arises or may arise in its favor against the other party hereto during the Term of this Lease for any and all loss of or damage to any of its property located within or upon or constituting a part 21 of the Leased Properties, which loss or damage is required by terms of this Lease to be covered by valid and collectible fire and extended coverage insurance policies to the extent that such loss or damage is recoverable under said insurance policies. Said mutual waivers shall be in addition to, and not in limitation or derogation of, any other waiver or release contained in this Lease with respect to any loss of, or damage to, property of the parties hereto. Inasmuch as the above mutual waivers will preclude the assignment of the aforesaid claim by way of subrogation, or otherwise, to an insurance company, or to any other person, each party hereby agrees immediately to give each insurance company which has issued to it or them policies of fire and extended coverage insurance, written notice of the terms of said mutual waivers. All fire and casualty and property damage insurance policies required to be carried by Lessee covering the Leased Properties shall expressly waive any right of subrogation on the part of the insurer against the other party. 11.4 LESSEE'S PERSONAL PROPERTY. Lessee shall be solely responsible for keeping Lessee's Personal Property located upon the Leased Properties insured against loss or damage by fire or other casualty. 11.5 BLANKET POLICY. Notwithstanding anything to the contrary contained in this Article 11, Lessee's obligations to carry the insurance provided for herein may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessee; provided, however, that the coverage afforded Lessor will not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance, and provided further that the requirements of this Article 11 are otherwise satisfied and provided further that Lessee maintains specific allocations acceptable to Lessor. ARTICLE 12. 12.1 INSURANCE PROCEEDS PAYABLE ON DAMAGE OR DESTRUCTION. Except as provided in Section 12.3 below, all proceeds payable by reason of any loss or damage to one or more of the Leased Properties, or any portion thereof, and insured under any policy of insurance required by Article 11 of this Lease shall be paid to Lessor and held by Lessor in accordance with the provisions of this Article 12. Lessor shall, unless this Lease is terminated by the Lessee pursuant to this Article 12 (in which event the Lessor shall be entitled to retain such proceeds), apply the proceeds solely to the construction and completion of any restoration or repair, as the case may be, of any damage to or destruction of the affected Leased Properties, or any portion thereof, as provided herein. 12.2 RESTORATION IN THE EVENT OF DAMAGE OR DESTRUCTION COVERED. 12.2.1 In the event one or more of the Leased Properties, or any part thereof, is totally or partially destroyed or damaged by fire or other casualty such that the affected Facility is rendered untenantable or otherwise cannot be operated on a commercially practicable basis for its Primary Intended Use ("Unsuitable for its Primary Intended Use"), and it is reasonably anticipated that the necessary repair or restoration of such damage or destruction cannot be sufficiently completed within one hundred fifty (150) days after the date of the destruction or damage so as to make the affected Leased 22 Property or Leased Properties fully tenantable and allow Lessee to use and occupy the same for its Primary Intended Use with at least the same number of licensed nursing home beds as existed immediately prior to such damage or destruction, then Lessee shall have the option to terminate this Lease as to the affected Facility or Facilities upon such date as is set forth in a Notice given to Lessor within sixty (60) days after the date of such destruction or damage, which termination shall be deemed effective, and Rent shall abate as of the date of such casualty. Lessee shall promptly pay to Lessor any Rent or other charges due Lessor under this Lease, and Lessor shall promptly refund to Lessee any Rent or other charges theretofore paid by Lessee, each prorated as of such date. As soon as possible, but not later than forty-five (45) days after the destruction or damage, Lessor shall furnish to Lessee its good faith estimate of the cost and time required to so restore or repair the affected Leased Property or Leased Properties and the failure or inability of Lessor to do so may be deemed by Lessee to be reasonable anticipation that the necessary repair or restoration cannot be completed in the time and manner required hereunder. In addition to Lessee's termination rights set forth above, Lessor shall have the right to terminate this Lease upon thirty (30) days written notice to Lessee in the event insurance proceeds payable in respect of a casualty are retained by Lessor's Facility Mortgagee for payment of the indebtedness secured by the Facility Mortgage. 12.2.2 In all other events in which one or more of the Leased Properties, or any part thereof, is destroyed or damaged by fire or other casualty, this Lease shall continue in full force and effect, and Lessor, at Lessor's cost and expense, shall within thirty (30) days of such casualty commence and proceed with reasonable diligence to restore the affected Leased Properties so damaged to substantially the same or better condition with at least the same number of licensed nursing home beds as existed immediately prior to such casualty and complete such repair or restoration within one hundred fifty (150) days of the casualty. In performing such restoration or repair, and as a condition to Lessor's obligation to restore and repair the affected Leased Property or Leased Properties, Lessor (or its Facility Mortgagee) shall receive insurance proceeds payable as the result of such fire or other casualty, in an amount sufficient to effect such restoration and repair, and Lessee shall promptly deliver to Lessor (or its Facility Mortgagee) any insurance proceeds it receives pertaining to the affected Leased Properties, except as provided in Section 12.3. 12.2.3 If the Lease is not terminated pursuant to Section 12.2.1, then the Rent payable under this Lease thereafter shall be reduced during the period required for repair or restoration in direct proportion that the number of licensed nursing home beds remaining useable by the Lessee bears to the number of licensed nursing home beds existing at the time of such fire or other casualty until such time as the required repairs to the affected Leased Properties have been completed. 12.3 LESSEE'S PERSONAL PROPERTY; BUSINESS INTERRUPTION. All insurance proceeds payable by reason of any loss of or damage to any of Lessee's Personal Property shall be paid to Lessee, and Lessee shall hold such proceeds in trust to be used to restore and replace Lessee's Personal Property in the event that Lessor repairs or restores the affected Leased Property or Leased Properties as herein provided. All insurance proceeds payable by reason of the interruption of Lessee's business during repair or restoration of the Leased Properties shall be 23 paid to and belong to Lessee, provided that Lessee shall use such proceeds to pay Rent to the extent due hereunder. 12.4 EXCESS PROCEEDS. If there remains any surplus of insurance proceeds after completion of the repair or restoration of the affected Leased Properties, such surplus shall belong and be paid to Lessee. 12.5 STANDARD OF WORK. All work commenced by Lessor under this Article 12 to repair or restore the affected Facility or Facilities or other Leased Improvements shall be diligently prosecuted to completion in a good and workmanlike manner, using materials of comparable quality as used in the original construction of such Facilities or other Leased Improvements requiring repair or restoration. 12.6 EFFECT OF TERMINATION. Anything herein to the contrary notwithstanding, in the event of any termination of this Lease as to one or more of the Facilities as a result of fire or other casualty as provided in this Article 12, any and all insurance proceeds payable as a result of such fire or other casualty in respect of the Leased Improvements and Lessor's Personal Property shall belong to and be the property of Lessor, and the Rent and other charges payable under this Lease shall be adjusted as of the date of such damage or destruction. Lessee shall promptly pay to Lessor any Rent or other charges due Lessor under this Lease and Lessor shall promptly refund to Lessee any Rent or other charges theretofore paid by Lessee, each prorated as of such date. 12.7 FAILURE TO REPAIR. Anything herein to the contrary notwithstanding, in the event that any damage or destruction to one or more of the Leased Properties, total or partial, the repair or restoration of which is commenced by Lessor hereunder, cannot be or is not repaired or restored so as to make the affected Leased Properties fully tenantable and allow the Lessee to use and occupy the same for its Primary Intended Use with the same number of licensed nursing home beds as existed immediately prior to such damage or destruction within one hundred fifty (150) days of the occurrence of the damage or destruction, then the Lessee may elect to terminate this Lease upon thirty (30) days Notice to Lessor as to the affected Facility or Facilities. 12.8 UNAVOIDABLE DELAYS. Provided that Lessor is proceeding diligently and in good faith, all periods of time for restoration and repair of the Leased Properties shall be extended for any delays caused by acts or omissions to act of Lessee and for any Unavoidable Delays, provided that any such extension shall not extend the time for completion of restoration and repair of the Leased Properties beyond twelve (12) months from the date of the damage or destruction requiring such restoration and repair. ARTICLE 13. 13.1 CONDEMNATION. 13.1.1 If during the Term of this Lease, the whole of any of the Leased Properties or a substantial portion thereof rendering the remaining portion Unsuitable for Its Primary Intended Use, is taken or condemned by any competent public or quasi-public authority, this Lease shall terminate upon such taking by the condemning authority as to the 24 affected Facility or Facilities. Lessee's obligations for the payment of Rent under this Lease shall be prorated as to the date of such termination. 13.1.2 In the event such taking or condemnation results in a taking of less than a substantial part of the affected Leased Property or Leased Properties so that such Leased Property can continue to be licensed as a skilled nursing facility and used for its Primary Intended Use, this Lease shall continue in full force and effect, excepting that Rent shall be reduced from the date of such taking in direct proportion that the number of licensed nursing home beds remaining useable by the Lessee after such taking bears to the number of licensed nursing home beds existing at the time of the taking. In such case, Lessor, shall, within thirty (30) days of such taking, commence and proceed with reasonable diligence to repair or restore the affected Leased Property or Leased Properties to a complete architectural unit of the same general character and condition (as nearly as may be practical under the circumstances) as existed immediately prior to such taking such that such Leased Properties can be occupied and used for its Primary Intended Use. Lessor shall complete such repair or restoration within one hundred fifty (150) days of such taking. In the event that during such repair or restoration the number of licensed skilled nursing facility rooms usable by Lessee is reduced, the Rent shall be reduced during the period of such repair or restoration in the proportion that the reduction bears to the number of licensed skilled nursing facility rooms existing at the time of the taking. Lessor shall refund to Lessee any Rent paid by Lessee to which Lessee may be entitled as a result of the abatement provided for herein. Lessor shall contribute to the cost of restoration and repair the amount of any and all awards of damages resulting from such taking payable to Lessor. Anything herein to the contrary notwithstanding, if the expense of repair and restoration exceeds the condemnation award received by Lessor, then Lessor shall have thirty (30) days after such partial taking within which to decide whether to make the repair and restoration or terminate this Lease. If, within this period, Lessor gives written notice of termination to Lessee, then this Lease shall terminate as of the date of such taking as to such affected Facility or Facilities and Lessee's obligations for the payment of Rent shall be prorated as of the date of such termination. If Lessor fails to give Lessee written notice of termination within this period, then Lessor shall proceed to make the required restoration and repair as herein provided. 13.2 AWARDS. All compensation awarded upon any taking or condemnation of any one or more of the Leased Properties, or any part thereof shall belong to Lessor, and Lessee shall have no claim thereto, except that if and only to the extent that the award includes such items, Lessee may make its claim against the condemning authority and shall be entitled to receive and retain that portion of the award, if any, for moving expenses, business dislocation damages, the cost of Lessee's Personal Property and leasehold improvements. Nothing contained herein, however, shall be construed to preclude Lessee from prosecuting any claim directly against the condemning authority for any award to which Lessee may at law be entitled provided that any such claim does not diminish the award to Lessor. 13.3 STANDARD OF WORK. All work commenced by Lessor under this Section 13 to repair or restore the affected Leased Property or Leased Properties shall be diligently prosecuted to completion in a good and workmanlike manner using materials of comparable quality as used in the original construction of the Leased Properties. 25 13.4 FAILURE TO REPAIR. Anything herein to the contrary notwithstanding, in the event that any partial taking of one or more of the Leased Properties, the repair or restoration of which as been commenced by Lessor hereunder, cannot be restored within one hundred fifty (150) days of the date of such partial taking so as to make the portion of such Leased Property not so taken fully tenantable and allow the Lessee to occupy and use the affected Leased Property or Leased Properties for the Primary Intended Use with the same number of licensed skilled nursing home beds as existed immediately prior to such taking, then Lessee may elect to terminate this Lease as to the affected Facility or Facilities upon thirty (30) days Notice given to Lessor. 13.5 UNAVOIDABLE DELAYS. Provided that Lessor is proceeding diligently and in good faith, all periods of time for restoration and repair of the affected Leased Properties shall be extended for any delays caused by acts or omissions to act of Lessee and for any Unavoidable Delays, provided that any such extension shall not extend the time for completion of any required restoration and repair of such Leased Properties beyond twelve (12) months from the date of taking by the condemning authority. ARTICLE 14. 14.1 EVENT OF DEFAULT. The occurrence of any one or more of the following events shall constitute an event of default (individually, an "Event of Default" and, collectively or more than one, "Events of Default") under this Lease: 14.1.1 If Lessee shall fail to make payment of Rent payable by Lessee under this Lease when the same becomes due and payable and such failure is not cured by Lessee within a period of five (5) days after Notice thereof from Lessor; or 14.1.2 If Lessee shall: 14.1.2.1 admit in writing its inability to pay its debts generally as they become due, 14.1.2.2 file a petition seeking reorganization or relief under any applicable laws relating to the bankruptcy or insolvency, 14.1.2.3 make a general assignment for the benefit of its creditors, 14.1.2.4 consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, 14.1.2.5 institute proceedings to be adjudicated a bankrupt or insolvent, or 14.1.2.6 consent to the institution of bankruptcy or insolvency proceedings against it, or 14.1.3 If Lessee shall, on a petition in bankruptcy filed against it, be adjudicated a bankrupt or have an order for relief thereunder entered against it or a court of competent jurisdiction shall enter an order or decree appointing, without the consent of Lessee, a 26 receiver of Lessee, or of the whole or substantially all of its property, or approving a petition filed against Lessee, seeking reorganization or arrangement of Lessee, under the federal bankruptcy laws or any other applicable law, and such judgment, order or decree shall not be vacated or set aside or stayed within sixty (60) days from the date of the entry thereof; or 14.1.4 If Lessee shall voluntarily surrender or attempt to surrender its license to operate one or more of the Leased Properties as a nursing home; transfer or attempt to transfer the license to operate one or more of the Leased Properties as a nursing home to any other location; or 14.1.5 If Lessee shall fail to observe or perform any other term, covenant or condition of this Lease, and such failure is not cured by Lessee within a period of thirty (30) days after Notice thereof from Lessor, unless such failure, by its nature, cannot with due diligence be cured within a period of thirty (30) days, in which case such failure shall not be deemed to continue if Lessee proceeds promptly and with due diligence to cure the failure within said thirty (30) day period and diligently prosecutes such cure to completion; 14.1.6 Failure of Lessee to cure, abate, stay, clear, correct, or cause to be cured, abated, stayed, cleared or corrected, any violation or deficiency of which Lessee has been given written notice by the State of Florida or any other applicable governmental or regulatory agency having jurisdiction, within the applicable time deadlines set by the State of Florida or such agency documenting such violation or deficiency, and which if not so cured, abated, stayed, cleared and/or corrected causes or results in: A. a termination or revocation of the license(s) and/or certification(s) of the Facility or Facilities to operate as a nursing home; B. the removal of patients from such Facility or Facilities by order of such agency. No notice shall be required to immediately terminate this Lease in the Event of Default under this subsection 14.1.6. 14.1.7 A default occurs under the Guaranty, under the Security Agreement or under one or more of the Pledge Agreements which default is not cured within the applicable cure period. 14.1.8 Lessee or an Affiliate of the Lessee defaults beyond any applicable grace period in the payment of any material amount or the performance of any material act required of the Lessee or such Affiliate by the terms of any other lease or other agreement between the Lessee or any Affiliate of the Lessee and Omega. 14.2 REMEDIES. If an Event of Default shall have occurred and be continuing past any applicable grace period, Lessor shall have the right, at its election, then or at any time thereafter, to pursue any one or more of the following remedies, in addition to any remedies which may be 27 permitted by law or by other provisions of this Lease, without further notice or demand, except as hereinafter provided: 14.2.1 Without any notice or demand whatsoever, Lessor may take any one or more actions permissible at law to ensure performance by Lessee of Lessee's covenants and obligations under this Lease. In this regard, it is agreed that Lessor may enter upon and take possession of such Leased Properties with or without terminating this Lease and thereupon continue to demand from Lessee the monthly rentals and other charges provided in this Lease. Lessor shall use its best efforts to relet the Leased Properties. If Lessor does relet the Leased Property such action by Lessor shall not be deemed as an acceptance of Lessee's surrender of the Leased Properties, unless Lessor expressly notifies Lessee of such acceptance in writing pursuant to subsection 14.2.2 of this Section 14.2, Lessee hereby acknowledging that Lessor shall otherwise be reletting as Lessee's agent. It is further agreed in this regard that in the event of any Event of Default described in Section 14.1.5, Lessor shall have the right to enter upon the Leased Properties and do whatever Lessee is obligated to do under the terms of this Lease, and Lessee agrees to reimburse Lessor on demand for any reasonable expenses which Lessor may incur in thus effecting compliance with Lessee's obligations under this Lease, and further agrees that Lessor shall not be liable for any damages resulting to the Lessee from such action provided that Lessor is not negligent in its actions. 14.2.2 Lessor may terminate this Lease by Notice to Lessee, in which event Lessee shall immediately surrender the Leased Properties to Lessor, and if Lessee fails to do so, Lessor may, without prejudice to any other remedy which Lessor may have for possession or arrearage in Rent, enter upon and take possession of the Leased Properties, expel or remove Lessee, and, at Lessor's option, or if required by law in mitigation of Lessor's damages, relet or operate the Leased Properties. In addition, Lessee agrees to pay to Lessor, on demand, the amount of all loss and damage which Lessor may suffer by reason of any termination effected pursuant to subsection 14.1.5. Lessee shall pay to Lessor the difference between the Rent provided in this Lease for each calendar month and the monthly rentals and other charges or net income from the operation of the Leased Properties actually collected by Lessor for such month. If it is necessary for Lessor to bring suit in order to collect any deficiency, Lessor shall have a right to allow such deficiencies to accumulate and to bring an action on several or all of the accrued deficiencies at one time. Any such suit shall not prejudice in any way the right of Lessor to bring a similar action for any subsequent deficiency or deficiencies. Any amount collected by Lessor from subsequent tenants for any calendar month or from the operation of the Leased Properties in excess of the Rent and other charges provided in this Lease shall be credited to Lessee in reduction of Lessee's liability for any calendar month for which the amount collected by Lessor will be less than the monthly rentals and other charges provided in this Lease; but Lessee shall have no right to such excess other than the above described credit. 14.2.3 The rights and remedies of Lessor hereunder are cumulative, and pursuit of any of the above remedies shall not preclude pursuit of any other of the above remedies, any other remedies prescribed in other Sections of this Lease, or any other remedies provided by law or equity. Forbearance by Lessor to enforce one or more of the 28 remedies herein provided upon an Event of Default shall not be deemed or construed to constitute a waiver of such Event of Default. 14.3 ADDITIONAL EXPENSES. In addition to payments required pursuant to subsections 14.2.3 and 14.2.2 above, Lessee shall compensate Lessor for all reasonable expenses incurred by Lessor in repossessing the Leased Properties and all reasonable expenses incurred by Lessor in reletting (including repairs, remodeling, replacements, advertisements and brokerage fees). 14.4 LEGAL EXPENSES. In case suit shall be brought for recovery of possession of the Leased Properties, for the recovery of Rent or any other amount due under the provisions of this Lease, or because of the breach of any other covenant herein contained on the part of the Lessee to be kept or performed and a breach shall be established, Lessor shall be entitled to recover from Lessee its attorneys' fees and other legal expenses incurred in connection therewith. ARTICLE 15. 15.1 LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT. If Lessee shall fail to make any payment or to perform any act required to be made or performed under this Lease, and to cure the same within the relevant time periods provided in Section 14.1, Lessor, without further Notice to or demand upon Lessee, and without waiving or releasing any obligation of Lessee, and without waiving or releasing any obligation or default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of Lessee, and may, to the extent permitted by law, enter upon the Leased Properties for such purpose and take all such action thereon as, in Lessor's sole opinion, reasonably exercised, may be necessary or appropriate therefor. No such entry shall be deemed an actual or constructive eviction of Lessee. All sums so paid by Lessor and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses, in each case, to the extent permitted by law) so incurred, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessor, shall be paid by Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor contained in this Article shall survive the expiration or earlier termination of this Lease. ARTICLE 16. 16.1 HOLDING OVER. If Lessee shall, for any reason hold over and remain in possession of a Leased Property or the Leased Properties after the expiration of the Term hereof, such possession shall be as a month-to-month tenant during which time Lessee shall pay as rental each month an amount equal to one hundred twenty five per cent (125%) of the then prevailing monthly Rent under this Lease pursuant to the provisions of this Lease with respect to the particular Leased Property or Leased Properties; provided, however, that any holding over at the request of or with the acquiescence of the Lessor or of a Facility Mortgagee including Omega shall be at the prevailing monthly Rent under this Lease. During such period of month-to-month tenancy, Lessee shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease, and shall have such rights hereunder to continue its occupancy and use of the Leased Properties as afforded under the terms of this Lease. Nothing contained herein, however, shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease. 29 ARTICLE 17. 17.1 SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT. Lessor may, subject to the terms and conditions set forth in this Article 17, from time to time, create or otherwise cause to exist any Facility Mortgage upon the Leased Properties to secure any borrowing or other means of financing or refinancing from or with a commercial bank or savings and loan association, trust company, insurance company, pension or retirement fund, real estate investment trust, college, university, charitable or religious organization or other similar institutional lenders authorized to make loans in the State of Florida. The parties acknowledge that, as of the Commencement Date, the Leased Property will be subject to an existing Facility Mortgage in favor of Omega (the "Existing Facility Mortgage"). Provided that Lessor shall have first obtained and delivered to Lessee a Non-Disturbance Agreement (as hereinafter defined and described) from the Facility Mortgagee of any such Facility Mortgage, this Lease and all the rights of Lessee hereunder will be subordinate to such Facility Mortgage and to all modifications, extensions, substitutions and refinancings thereof and all advances made or hereafter to be made thereunder. This clause shall be self-operative and no further instrument of subordination shall be required in order to effect such subordination. In connection with and as a condition precedent to such subordination on the part of Lessee to such Facility Mortgage, Lessor shall provide Lessee with a non-disturbance agreement (the "Non Disturbance Agreement") reasonably acceptable to Lessee executed by the Facility Mortgagee and providing that should such Facility Mortgagee (or a purchaser at a judicial or non-judicial sale or foreclosure) acquire title or control of or sell the Land and Leased Improvements, or any part thereof, of which a Leased Property or the Leased Properties are a part by way of the exercise of a power of sale, foreclosure or deed in lieu of power of sale or foreclosure, or otherwise, that such Facility Mortgagee, or any purchaser at such sale or other grantee or transferee of the Land and Leased Improvements, or any part thereof, (unless, at Lessee's option, Lessee elects otherwise) shall acquire or hold the same subject to this Lease and will not disturb Lessee's possession under this Lease for the remainder of the Term hereof and will recognize Lessee's rights under this Lease. In such event, Lessee hereby agrees to attorn to and reorganize such purchaser or other grantee or transferee as Lessor under this Lease. Lessee acknowledges that, as of the Commencement Date, it has made, executed, delivered and entered into a non-disturbance agreement acceptable to both Lessee and the Existing Facility Mortgagee in satisfaction of the requirements of this Section 17.1. 17.2 FACILITY MORTGAGE AGREEMENTS. Lessor covenants and agrees to use commercially reasonable efforts to induce each Facility Mortgagee to permit insurance proceeds or condemnation awards, as the case may be, to be used for any restoration or repair required by the provisions of this Lease as set forth in Articles 12 and 13 hereof. So long as Lessee has timely paid all Rent due hereunder, Lessor covenants that it will timely and properly remit all mortgage payments (or otherwise cause such payments to be made directly by Lessee to the Facility Mortgage) in accordance with the terms and provisions of any Facility Mortgage. Lessor will utilize its best efforts to obtain a commitment from each Facility Mortgagee to notify Lessee of any default under its Facility Mortgage and to grant Lessee the same opportunity to cure any default as that afforded to Lessor (but Lessee shall not be obligated to do so). If Lessor is unable to obtain such a commitment, Lessor will give Lessee notice of each such default and afford Lessee an opportunity to cure such default (but Lessee shall not be obligated to do so) if Lessor is unable to cure the same within the applicable cure period, if any. Provided that Lessee is given the Non-Disturbance Agreement provided for herein, Lessee, will afford the Facility 30 Mortgagee a party thereto with a copy of any Notice of default given by Lessee to Lessor and an opportunity to cure any default of Lessor under this Lease, such cure right to be the same as that afforded to Lessor and to run concurrently with the cure rights of Lessor under this Lease. 17.3 ESTOPPEL CERTIFICATES. In contemplation of the sale or mortgage of the Leased Properties, Lessee agrees to deliver an estoppel certificate which shall, at a minimum, state to the extent true: (1) that the Lease provided to the lender or purchaser is a true and correct copy of the Lease and that it has not been modified or terminated, except as set forth, (2) that the Rent in the Lease has not been modified, (3) that there are no disputes between Lessor and Lessee existing as to the Lease, (4) that to the best of Lessee's knowledge, Lessor has complied with the terms of this Lease to the date of the certificate, (5) that there has been no Rental paid more than thirty (30) days in advance, and (6) such other statements, acknowledgments and information as is customarily called for in estoppel certificates delivered in connection with commercial tenancies. 17.4 RELATIONSHIP OF LESSEE TO EXISTING FACILITY MORTGAGE. Lessee further acknowledges that, as of the Commencement Date, it has been provided with a copy of that certain Loan Agreement made as of February 22, 1996 by and between Omega as lender and the respective entities comprising the Lessor, together with the form of the Mortgage, Security Agreement and Fixture Filing executed by each such Lessor's entity to secure the obligations of the Lessor to Omega (the "Omega Lending Documents"). To the extent that the Omega Lending Documents impose operating restrictions related solely to the use and operation of the Leased Properties, Lessee hereby covenants and agrees, on behalf of the Lessor, to use reasonable efforts to perform and to comply with such requirements, excluding, however, any requirement relating to items described on EXHIBIT E hereto, except as and to the extent provided in EXHIBIT E. In addition, the Lessee also expressly acknowledges and agrees to comply with the reporting requirements contained in Section 23.1 of that certain Consolidated Amended and Restated Master Lease dated November 8, 2000, effective October 1, 2002 by and between Sterling Acquisition Corp. and Diversicare Leasing Corporation (the "Existing Master Lease") as and fully to the extent such provisions would pertain to the Leased Properties as if incorporated therein. Lessee further expressly acknowledges that Omega is a third party beneficiary of the covenants of Lessee set forth in the Section 17.4 and elsewhere in this Lease to the extent that such covenants make reference to Omega or the "Facility Mortgage", and that all such covenants represent a material inducement to Omega to permit this Lease under the Omega Lending Documents. ARTICLE 18. 18.1 INDEMNIFICATION. Lessee will protect, indemnify, save harmless and defend Lessor, from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses), to the extent permitted by law, imposed upon or incurred by or asserted against Lessor by reason of: (i) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Properties during the Lease Term, (ii) any failure on the part of Lessee to perform or comply with any of the terms of this Lease to be performed or complied with by Lessee and (iii) any business or other activity carried on, permitted or suffered with respect to the Leased Properties by Lessee during the Term or thereafter during any time in which Lessee is in 31 possession of the Leased Properties; provided, however, that such indemnity will not apply to the extent that any of the foregoing is caused by or attributable to the negligence or willful misconduct of Lessor or those for whom it may in law be responsible, or the breach or default by Lessor of its covenants, agreements or obligations under this Lease Lessor will protect, indemnify, save harmless and defend Lessee, from and against any and all liabilities, obligations, claims (including, without limitation, professional malpractice claims), damages, penalties, causes of action, costs and expenses (including reasonable attorneys' fees and expenses) imposed upon, suffered or incurred by, or asserted against Lessee by reason of, or arising out of, or related to: (i) the use or operation of, or any activity conducted on or from, the Leased Properties prior to the Commencement Date, (ii) the breach or untruth of the representations, warranties and covenants as to the condition of the Leased Properties made in Article 3 hereof, (iii) any accident, injury to or death of persons or loss of property occurring on or about the Leased Properties, prior to the Commencement Date, or (iv) any breach by Lessor or failure on the part of Lessor to perform or comply with any of its obligations, covenants or agreements under this Lease; provided, however, that such indemnity will not apply to the extent that any of the foregoing is caused by or attributable to the negligence or willful misconduct of Lessee or those for whom it may in law be responsible, or the breach or default by Lessee of its covenants agreements or obligations under this Lease. ARTICLE 19. 19.1 ASSIGNMENT AND SUBLETTING. Lessee shall not be entitled to assign all or any part of Lessee's interest in this Lease or sublet or part with the possession of the whole or any part of any one or more of Leased Properties without the prior written consent of the Lessor, which consent shall not be unreasonably withheld, conditioned, or delayed. A sublease of rooms to residents of the Facilities or public areas shall not be considered a sublease for purposes of this Article 19. As a condition to any permitted assignment or sublease, Lessee shall remain and continue to be obligated for all of the terms and provisions of this Lease, including the payment of Rent, unless specifically released therefrom in writing by Lessor. In the event of any permitted assignment of this Lease, said assignee shall assume in writing all obligations of the Lessee under this Lease which shall accrue after such assignment. Anything in this Section 19.1 to the contrary notwithstanding, Lessor's consent to an assignment or subletting shall not be required for (i) an assignment of all (but not a portion) of Lessee's right, title and interest in and to this Lease to an Affiliate of Lessee including a subletting to one or more New Subs, or (ii) a transfer, in a single transaction, of all (but not a portion) of the ownership and voting interests in Lessee to an Affiliate of Lessee or (iii) an assignment or subletting of the Lessee's interest in one or more of the Facilities to a successor operator provided that such successor (1) has prior experience operating similar healthcare facilities having the same Primary Intended Use, (2) is able to obtain all licenses, permits and approvals necessary to operate the affected Facility or Facilities for their Primary Intended Use and (3) is reasonably acceptable to Omega or any successor Facility Mortgagee (each of (i), (ii), and (iii) herein a "Permitted Assignment"), provided that (a) at the time that such assignment becomes effective, no Event of Default on the part of Lessee then exists under the Lease, (b) such assignment is made by a written assignment and assumption agreement in form reasonably satisfactory to Lessor. Upon a Permitted Assignment, the Lessee and its Affiliates shall all be 32 released from all obligations under this Lease and under all documents related to this Lease by virtue of such assignment. ARTICLE 20. 20.1 LESSOR'S RIGHT TO INSPECT. Lessee shall permit Lessor and its authorized representatives, upon reasonable prior notice and subject to any privacy and security requirements of the residents of the Facilities the right to inspect the Leased Properties during usual business hours, subject to any security, health, safety or confidentiality requirements of any governmental agency or insurance requirement relating to the Leased Properties, or imposed by law or applicable regulations. Lessor agrees to exercise its privilege in such a way that there will be no unreasonable interference with the business conducted by Lessee from the Leased Properties. Lessee shall have the right to have a representative present at all times during any such inspection. ARTICLE 21. 21.1 QUIET ENJOYMENT. Lessor covenants that Lessor is lawfully seized and possessed of the Leased Properties, has the full power, right and authority to execute and deliver this Lease and to perform its obligations hereunder without the necessity of the consent or joinder of any other person or party, and that the Leased Properties are free and clear of any liens, encumbrances, rights, interests or claims of any other parties or limitations or restrictions on its use, of any kind or nature, other than the Permitted Exceptions listed on EXHIBIT B attached hereto. So long as there is no Event of Default on the part of Lessee hereunder which has not been timely cured, Lessor covenants and agrees that Lessee shall peaceably and quietly have, hold and enjoy the exclusive right to the Leased Properties for the full Term of this Lease, free from any hindrance, disturbance, interference, or claim by any other person or party. 21.2 NO ENCUMBRANCE BY LESSOR. In furtherance of Lessee's right to quiet enjoyment of the Leased Properties during the Term hereof, Lessor agrees that it will not grant, convey, create, suffer, or permit or allow to be created or incurred or to exist, any lien, restriction, encumbrance or other exception to its title to and interest in the Leased Properties, or any part thereof, other than the Permitted Exceptions listed on EXHIBIT B attached hereto and Facility Mortgages in compliance with Article 17 hereof. ARTICLE 22. 22.1 NOTICES. All notices, demands, requests, consents, approvals and other communications required or permitted to be made or given hereunder shall be in writing and (i) personally delivered or (ii) sent by facsimile transmission or by certified or registered mail (postage prepaid), return receipt requested, or by a recognized national courier service, addressed to the respective parties as follows: 22.1.1 if to the Lessee: Senior Care Florida Leasing, LLC c/o Advocat Inc. 277 Mallory Station Road, Suite 130 33 Franklin, Tennessee 37067 Attention: Chief Financial Officer Telefax No.: (615) 771-7409 with a copy to: Harwell Howard Hyne Gabbert & Manner, P.C. 315 Deaderick Street, Suite 1800 Nashville, Tennessee 37238 Attention: J. Mark Manner Telefax No.: (615) 251-1057 22.1.2 if to the Lessor: c/o Emerald Healthcare, Inc. 211 Sabine Drive Pensacola Beach, Florida 32561 Attention: R. Brent Maggio, President Telefax No.: 904/432-8557 with a copy to: Shell, Fleming, Davis and Menge P.O. Box 1831 226 Palafox Place 7th Floor Seville Tower Pensacola, Florida 32592-1831 Attention: Charles Hoffman Telefax No.: 850/435-1074 or to such other address as any party may hereafter designate in writing to the other party. Notice shall be deemed effectively delivered when personally delivered, when actually received by facsimile transmission or overnight courier if such facsimile transmission or delivery is made on a Business Day, or if not, on the first Business Day after delivery or facsimile transmission, or four (4) Business Days after being deposited in the United States mail, with postage prepaid, by certified or registered mail, return receipt requested. If the postal service is interrupted or is substantially delayed, any Notice must be given by personal delivery, courier service or facsimile transmission. ARTICLE 23. [INTENTIONALLY OMITTED] ARTICLE 24. 24.1 LESSOR'S EVENT OF DEFAULT. Lessor shall be in default ("Lessor's Event of Default") under this Lease if Lessor shall breach or fail to keep, observe or perform any term, provision, agreement, representation, warranty or covenant of this Lease to be kept, observed or performed by Lessor, and Lessor does not cure such breach or failure within thirty (30) days 34 after Notice thereof from Lessee to Lessor and any Facility Mortgagee with respect to which Lessor has notified Lessee (or if such breach or failure cannot be cured within thirty (30) days, Lessor does not commence to cure said breach or failure prior to the expiration of said thirty (30) day period and diligently pursue such cure to completion). In the event of such a default on the part of Lessor under this Lease, in addition to any other rights or remedies to which it may be entitled under applicable law, all of which shall be cumulative, Lessee shall have the right upon further Notice to Lessor and any such Facility Mortgagee to (a) cure or attempt to cure such Lessor's Event of Default and Lessor shall reimburse Lessee for all reasonable costs and expenses actually incurred and paid by Lessee on written demand therefor failing which Lessee shall have the right to and may set off against and deduct from each one of the next successive monthly installments of Rent due under this Lease the amount of such costs and expenses, together with interest thereon at the Overdue Rate from the due date until paid, until such time as the entire amount, together with interest, has been paid to Lessee in full; or (b) if (i) the cost and expense to cure such breach or failure on the part of Lessor exceeds more than three (3) months Rent or (ii) such breach or failure on the part of Lessor renders or causes the Leased Properties to be Unsuitable for its Primary Intended Use, and such breach or failure remains uncured for a period of sixty (60) days, then Lessee may terminate this Lease by giving Lessor and any such Facility Mortgagee at least thirty (30) days' prior Notice of such termination on or after the sixty-first (61st) day of such breach or failure; provided however, no such notice of termination shall be effective if Lessor or any such Facility Mortgagee cures such failure prior to the expiration of such thirty (30) day period. 24.2 LEGAL EXPENSES. In the event it becomes necessary for Lessee to employ an attorney to enforce the terms, covenants and conditions of this Lease to be observed or performed by Lessor, or to cure any default by Lessor with respect thereto, then Lessor will pay and reimburse Lessee, on demand therefore, the reasonable attorney's fees, costs and expenses, including court costs, incurred by Lessee in connection therewith. ARTICLE 25. 25.1 MISCELLANEOUS 25.1.1 CHOICE OF LAW. This Lease shall be governed by and construed in accordance with the laws of the State of Florida. 25.1.2 CONSENTS. Whenever the consent or approval of Lessor or Lessee is required hereunder, such consent or approval shall, unless otherwise specifically provided for herein, not be unreasonably withheld or delayed. 25.1.3 ENTIRE AGREEMENT; AMENDMENTS IN WRITING. This Lease set forth the entire agreement between the parties hereto as to the leasing of the Leased Properties and supersedes and cancels any and all prior negotiations, arrangements, representations, agreements and understandings, oral or written, between the parties hereto and any Affiliate of either of them as to the leasing of the Leased Properties. No amendment or modification of this Lease shall be binding or valid, unless expressed in a writing executed by both parties hereto. 35 25.1.4 SEVERABILITY. If any provision of this Lease or the application of such provision to any person, entity or circumstance is found invalid or unenforceable by a court of competent jurisdiction, such determination shall not affect the other provisions of this Lease and all other provisions of this Lease shall be deemed valid and enforceable. 25.1.5 SUCCESSORS. All rights and obligations of the parties under this Lease shall extend to and bind the respective legal representatives, successors and permitted assigns of the parties hereto. 25.1.6 NO WAIVER. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. 25.1.7 REMEDIES CUMULATIVE. To the extent permitted by law, each legal, equitable or contractual right, power and remedy of Lessor or Lessee now or hereafter provided either in this Lease or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Lessor or Lessee of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Lessor or Lessee of any or all of such other rights, powers and remedies. 25.1.8 NO PARTNERSHIP. Nothing contained in this Lease shall be deemed or construed to create a partnership or joint venture between Lessor and Lessee or to cause either party to be responsible in any way for the debts or obligations of the other or any other party, it being the intention of the parties that the only relationship hereunder is that of lessor and lessee. 25.1.9 RECORDATION OF LEASE. Upon the request of either party hereto, the other party shall join in the execution of a memorandum of this Lease for the purpose of registration. Said memorandum shall be prepared and registered at the expense of the party requesting registration and shall be in substantially the form as attached as EXHIBIT F hereto. 25.1.10 TIME. Time is of the essence of this Lease. 25.1.11 HEADINGS. The descriptive headings used in this Lease are for convenience only and shall not control or affect the meaning or construction of any of its provisions. ARTICLE 26. 26.1 ARBITRATION. In case any controversy or dispute shall arise between the parties hereto as to any of the requirements of this Lease or the performance thereof, which the parties shall be unable to settle by agreement or as otherwise provided herein, such controversy shall be determined by arbitration. Such arbitration shall be conducted by three (3) arbitrators selected in accordance with the procedures of the American Arbitration Association and in accordance with 36 its rules and procedures. The arbitration shall be conducted in a location mutually agreeable to both Lessor and Lessee and, failing agreement upon such location, the arbitration shall be conducted in Atlanta, Georgia. Any party may be represented by counsel or other authorized representative. The parties may offer such evidence as is relevant and material to the dispute. In rendering their decision, the arbitrators shall determine the rights and obligations shall determine the rights and obligations of the parties according to the substantive and procedural laws of the State of Florida and the terms and provisions of this Lease. The decision of the arbitrators shall be final and binding, and enforceable in any court of competent jurisdiction. Such decision shall set forth in writing the basis for the decision. In rendering such decision and award, the arbitrators shall not add to, subtract from or otherwise modify the provisions of this Lease. The arbitrators may award costs, including reasonable attorneys fees to the prevailing party, if any, as determined by the arbitrators in accordance with the terms and provisions of this Lease. The fees and costs of the arbitrators shall be paid by the non-prevailing party as determined by the arbitrators in their discretion. SIGNATURES ON FOLLOWING PAGE. 37 IN WITNESS WHEREOF, the parties have executed this Lease by their duly authorized officers as of the date first above written. LESSOR: EMERALD-CEDAR HILLS, INC. By: /s/ R. Brent Maggio --------------------------------------- Name: R. Brent Maggio Its: President EMERALD-GOLFVIEW, INC. By: /s/ R. Brent Maggio --------------------------------------- Name: R. Brent Maggio Its: President EMERALD-SOUTHERN PINES, INC. By: /s/ R. Brent Maggio --------------------------------------- Name: R. Brent Maggio Its: President EMERALD-GOLF CREST, INC. By: /s/ R. Brent Maggio --------------------------------------- Name: R. Brent Maggio Its: President LESSEE: SENIOR CARE FLORIDA LEASING, LLC By: /s/ William R. Council III --------------------------------------- Its: CEO -------------------------------------- 38 EXHIBIT A-1 (RECITALS, P.1) DESCRIPTION OF LAND LEGAL DESCRIPTION OF MORTGAGE PROPERTY - CEDAR HILLS All of Lot 1, Block 1, ORTEGA FARMS, according to the Plat thereof recorded in Plat Book 3, Page 79, Public Records of Duval County, Florida. 39 EXHIBIT A-2 (RECITALS, P.1) DESCRIPTION OF LAND LEGAL DESCRIPTION OF MORTGAGE PROPERTY - GOLFCREST Lots 7, 8, 9, 10, 11 and 12, in Block 51, of the Town of Hollywood, according to the plat thereof recorded in Plat Book 1, at Page 21, of the Public Records of Broward County, Florida. 40 EXHIBIT A-3 (RECITALS, P.1) DESCRIPTION OF LAND LEGAL DESCRIPTION OF MORTGAGE PROPERTY - GOLFVIEW Lots 1, 2, 3, 4, 5, 6, 7 (less the easterly two feet of Lot 7) and 23, Block 7, Flora Villa Park, according to plat thereof recorded in Plat Book 9, Page 150, Public Records of Pinellas County, Florida. 41 EXHIBIT A-4 (RECITALS, P.1) DESCRIPTION OF LAND LEGAL DESCRIPTION OF MORTGAGE PROPERTY - SOUTHERN PINES The South 316.10 feet of the North 589.53 feet of Tract 41, Port Richey Land Company Subdivision of Section 4, Township 26 South, Range 16 East as shown on a plat thereof recorded in Plat Book 1, Page 61, Public Records of Pasco County, Florida, less and except that portion taken for right of way for Congress Street. Together with easements appurtenant thereto over part of the South 70 feet of said Tract 41 as granted by instrument recorded in Official Records Book 3439, Page 651, Public Records of Pasco County, Florida; and also together with an easement appurtenant thereto over an existing driveway leading off the above described property to the Northwest, as granted be deed recorded in Official Records Book 730, Page 468 (Docket #373813) Public Records of Pasco County, Florida, subject to the rights of Grantors therein to relocate said driveway at their expense. 42 EXHIBIT B (SECTION 3.1.3) PERMITTED EXCEPTIONS Permitted Encumbrances - Southern Pines Taxes for 1996 and matters set forth in Schedule B-II, items 5, 6 and 7 of Attorney Title Insurance Fund Commitment No. C2262507. Permitted Encumbrances - Golfview Taxes for 1996 and matters set forth in Schedule B-II, items 5A thru E of Attorneys Title Insurance Fund Commitment No. C2262509. Permitted Encumbrances - Golfcrest Taxes for 1996 Permitted Encumbrances - Cedar Hills Taxes for 1996 and matters set forth in Schedule B-II, items 4, 5, 6 and 7 of Attorneys Title Insurance Fund Commitment No. C2262506. [THESE NEED TO BE UPDATED] 43 EXHIBIT C (SECTION 4.2) EXAMPLE OF ADDITIONAL RENT COMPUTATION Assumed Gross Revenue for Quarter Ending 03/31/03 $4,500,000.00 Cost of Operations Ending 03/31/03 <$3,000,000.00> Base Rent <$ 450,000.00> Fee Payable to DMSC <$ 315,000.00> ============= $ 735,000.00

(.50) ($735,000.00) = $367,500.00 44 EXHIBIT D (SECTION 6.2) LESSEE'S PERSONAL PROPERTY ITEMS REMOVABLE FROM FACILITY UPON TERMINATION EXCLUDED PERSONAL PROPERTY OF LESSEE 1. Lessee's continuous quality improvement program, manuals and materials; management information systems; policy, procedure and educational manuals and materials and similar proprietary property. 2. Computer hardware, and related equipment which is integrated with the computer system maintained by Advocat, and computer software, provided, however, that Lessee shall cause all data that is reasonably necessary for the continuing operation of one or more of the Facilities, and which may be accessed through such computers or software, to be made available to Lessor in a reasonably accessible form without material cost to Lessee. 45 EXHIBIT E (SECTION 8.1) EXCLUDED PHYSICAL PLANT OBLIGATIONS Lessee's Obligations for Recommended Physical Plant Improvements Lessee is aware that certain existing circumstances or conditions of one or more of the Leased Properties have been reviewed by licensing, building code, state fire marshal, other third parties with competent authority over the Leased Properties, or one or more insurance inspectors (collectively the "Inspectors"). The Inspectors have, from time to time, required corrective actions for certain of such matters as have been identified to Lessor and Lessor's mortgagee ("Mortgagee") with respect to the Lease Properties (the "Recommended Improvements"). The Lessee expects that Inspectors may, during the Term of the Lease, identify one or more other improvements to the physical plant of the Leased Properties which improvements as of the Commencement Date are unknown to the Lessee and which are required by the Inspectors for the continued operation of the Leased Properties for their Primary Intended Purposes, or for their continued operation with commercially reasonable insurance premiums (collectively, "Future Physical Plant Improvements"). Prior to the Commencement Date of the Lease, the Lessor has been able to obtain waivers, exceptions or other relief (collectively "Waivers") from various Inspectors so that the Leased Properties could continue to operate on an interim basis in compliance with applicable legal and insurance requirements without implementing the Recommended Improvements. After the Commencement Date, the Lessee will use all necessary and reasonable efforts to maintain such Waivers, and to obtain such further and additional Waivers (or, in the case of insurance related Waivers, to find alternative coverage) as may be necessary to permit the continued operation of the Leased Premises without implementing any Future Physical Plant Improvements, but no assurance can be given as to the availability, extent or duration or the continued effectiveness of such Waivers after the Commencement Date. In light of the foregoing circumstances, the Lessee shall not be required under this Lease to commence, prosecute or complete such Recommended Improvements or to fund or finance any or all such Recommended Improvements and/or Future Physical Plant Improvements in excess of One Hundred Sixty-nine Thousand and No/100 Dollars ($169,000.00) per year, on a cumulative basis, in the aggregate allocated on a pro-rata basis per bed per facility during the Term of the Lease (the "Threshold Amount"). In connection with the foregoing, Lessee shall provide prompt written notice to Lessor and Mortgagee of any Recommended Improvements and/or Future Physical Plant Improvements for which Waivers have been withdrawn or terminated, or for which Waivers have not been obtained, in either event after Lessee has used best reasonable efforts to have such Waivers continued, extended or obtained, together with a good faith estimate of the cost to implement such Recommended Improvements and/or Future Physical Plant Improvements. 46 If (1) any Recommended Improvements and/or Future Physical Plant Improvements are required in writing to be performed by an Inspector, (2) unless such improvements are performed (a "Required Improvement"), either (a) the Facility will no longer be permitted under applicable law to operate for their Primary Intended Use, (b) the Facility will lose 25% or more of its licensed beds, or (c) the cost of fire or casualty insurance will be so high that it would be commercially unreasonable to continue to operate the Facility, and (3) there is a Funding Shortfall (as defined below), then Lessee shall promptly notify Lessor and Mortgagee of such Required Improvement, the reasonable estimated cost of performing such Required Improvement, and the amount of the Funding Shortfall. Within the earlier of (a) thirty (30) days of receipt of notice from Lessee or (b) the date the Facility would no longer be entitled under applicable law to operator for its Primary Intended Use, Lessor may, at its option, either (i) fund the Funding Shortfall (which funding may, with the consent of the Mortgagee, be in the form of an agreement to abate rent for a period of time); or (ii) provide written notice to Lessee and Mortgagee that it is unable or unwilling to fund such Funding Shortfall. If Lessor provides written notice that it is unable or unwilling to fund the Funding Shortfall, then within the earlier of (a) thirty (30) days of receipt of notice from Lessor or (b) the date the Facility would no longer be entitled under applicable law to operator for its Primary Intended Use, Mortgagee may, at its option, either (i) commit to fund the Funding Shortfall; or (ii) provide written notice to Lessee and Mortgagee that it is unable or unwilling to fund such Funding Shortfall. If neither Lessor nor Mortgagee elect to fund the Funding Shortfall, then, within thirty (30) days of such determination by Mortgagee, Lessee may either (i) perform the Required Improvement at its own cost and expense, or (ii) terminate this Lease as to the particular Leased Property to which the Required Improvements pertain by written notice to Lessor and Mortgagee. If the Lessee terminates this Lease pursuant to this Exhibit E as to a Leased Property, the Base Rent under this Lease shall be reduced in the same proportion as the number of licensed beds in the applicable Leased Property bears to the total number of licensed beds for all Leased Properties. As used in this Exhibit E, a "Funding Shortfall" means (1) If the Required Improvement relates to a legal requirement, the amount by which the estimated cost of such Required Improvement exceeds the sum of (i) the amount required to be expended by Lessee pursuant to the Lease for such improvements, plus (ii) the accrued amounts of Additional Rent as computed in Section 4.2 of this Lease as of the date the Required Improvement is to be made; or (2) If the Required Improvement relates to an insurance requirement, the amount by which the lesser of (a) the estimated cost of such Required Improvement or (b) the increase in insurance premium, exceeds the sum of (i) the amount required to be expended by Lessee pursuant to the Lease for such improvements, plus (ii) the accrued amounts of Additional Rent as computed in Section 4.2 of this Lease as of the date the Required Improvement is to be made. 47 EXHIBIT F (SECTION 25.1.9) FORM OF MEMORANDUM OF LEASE THIS INSTRUMENT PREPARED BY, AND AFTER RECORDING, RETURN TO: Richard E. Rabbideau, Esq. DYKEMA GOSSETT PLLC 400 Renaissance Center Detroit, Michigan 48243-1668 MEMORANDUM OF CONSOLIDATED, AMENDED AND RESTATED LEASE THIS MEMORANDUM OF MASTER LEASE, made and entered into as of April ___ 2003, by and between _____________, a Florida corporation, having its principal office at 211 Sabine Drive, Pensacola Beach, Florida 32561 as Lessor and Senior Care Florida Leasing, LLC, a Delaware limited liability company, having its principal office at c/o. Advocat, Inc. 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067 as Lessee with respect to the real property identified in Exhibit "A" attached hereto and located in ________________ Florida. WITNESSETH: 1. Lessor and Lessee have entered into a Master Lease of even date herewith (the "Lease"). 2. For and in consideration of the rents reserved and the other covenants contained in the Lease, Lessor has and does hereby continue to lease to Lessee, and Lessee has and does hereby continue to take and rent from Lessor, all of Lessor's rights and interest in and to the parcel of real property described in Exhibit "A" and the improvements, fixtures, personal and other property included within the definition of "Leased Properties" as set forth in the Lease. 3. The Initial Term of the Lease is approximately _______(___) years, commencing April ___, 2003 (the "Commencement Date") and ending on December 31, 2005. 4. This instrument is executed and recorded for the purpose of giving notice of Lessee's interest in the Leased Properties and giving notice of the existence of the Lease, to which reference is made for a full statement of the terms and conditions thereof. The respective addresses of the parties hereto are: Lessee: ------ c/o Advocat, Inc. 277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067 Attention: Chief Financial Officer Telephone: (615) 771-7575 Telecopier: (615) 771-7409 Lessor: ------ c/o Emerald Healthcare, Inc. 211 Sabine Drive Pensacola Beach, Florida 32561 Attn: R. Brent Maggio, President Telephone: Telecopier: IN WITNESS WHEREOF, the parties have caused this instrument to be executed by their duly authorized officer or officers and general partners, as applicable, all as of the day and date first above written. LESSOR: LESSOR: - ------ ------ - -------------------------------- Senior Care Florida Leasing, LLC a Florida corporation Delaware limited liability company By: By: -------------------------- ------------------------------ Name: Name: -------------------------- ------------------------------ Its: Its: -------------------------- ------------------------------ 2 EX-10.14 16 g84031exv10w14.txt EX-10.14 WORKING CAPITAL LOAN AGREEMENT 04/01/03 EXHIBIT 10.14 WORKING CAPITAL LOAN AGREEMENT $2.0 MILLION REVOLVING CREDIT FACILITY BETWEEN OMEGA HEALTHCARE INVESTORS, INC., AS LENDER, AND SENIOR CARE FLORIDA LEASING, LLC, SENIOR CARE GOLFVIEW, LLC, SENIOR CARE GOLFCREST, LLC, SENIOR CARE SOUTHERN PINES, LLC, AND SENIOR CARE CEDAR HILLS, LLC, AS BORROWERS APRIL 1, 2003 TABLE OF CONTENTS
Section Page - ------- ---- Section 1 - Definitions....................................................1 Section 2 - Warranties and Representations.................................7 Section 3 - The Loan.......................................................9 Section 4 - Advance Procedures; Limit on Advances.........................10 Section 5 - Conditions Precedent to Advances..............................11 Section 6 - Security and Release of Collateral............................12 Section 7 - Affirmative Covenants.........................................13 Section 8 - Negative Covenants............................................15 Section 9 - Application of Proceeds.......................................16 Section 10 - Events of Default and Remedies................................16 Section 11 - Acceptance of Proceeds........................................17 Section 12 - Miscellaneous.................................................18
WORKING CAPITAL LOAN AGREEMENT This Working Capital Loan Agreement (this "Agreement") is made as of April 1, 2003, between Omega Healthcare Investors, Inc., a Maryland corporation (the "Lender"), and Senior Care Florida Leasing, LLC, a Delaware limited liability company ("Senior Care Florida"), Senior Care Golfview, LLC, a Delaware limited liability company ("Golfview"), Senior Care Golfcrest, LLC, a Delaware limited liability company ("Golfcrest"), Senior Care Southern Pines, LLC, a Delaware limited liability company ("Southern Pines"), and Senior Care Cedar Hills, LLC, a Delaware limited liability company ("Cedar Hills"). RECITALS: A. The four (4) Florida Emerald Facilities are owned by the Emerald Operating Entities. The Emerald Operating Entities are wholly-owned subsidiaries of Emerald Healthcare. B. Pursuant to the Omega Mortgage Documents, the Lender has made a loan to Emerald Healthcare which is secured by, among other things, mortgages granted by the Emerald Operating Entities covering the Florida Emerald Facilities. C. Contemporaneously with the execution of this Agreement, Senior Care Florida has entered into a Master Lease with the Emerald Operating Entities, pursuant to which the Emerald Operating Entities will lease the Florida Emerald Facilities to Senior Care Florida (the "Senior Care Master Lease"). D. The Sublessees are wholly-owned subsidiaries of Senior Care Florida. E. The Sublessees are subleasing the Florida Emerald Facilities from Senior Care Florida pursuant to Sublease Agreements dated the same date as this Agreement (each a "Sublease" and, collectively, the "Subleases"). F. The Borrowers have requested that the Lender extend the credit facility described below, the proceeds of which will be used by the Borrowers for the purpose of funding working capital at the Florida Emerald Facilities. G. The Lender is willing to extend the credit facility on the terms and subject to the conditions set forth in this Agreement. The parties agree as follows: SECTION 1 - DEFINITIONS In addition to the terms defined elsewhere in this Agreement, the following definitions shall apply for purposes of this Agreement: 1 "Account" means any right to payment for goods sold or leased or services rendered, whether or not evidenced by an instrument or chattel paper, including, without limitation, the right to payment of management and/or consulting fees. "Account Debtor" means any Person obligated on any Account of a Borrower, including without limitation, any Insurer and any Medicaid/Medicare Account Debtor. "Advance" means an advance of Loan proceeds to or for the account of the Borrower. "Advance Date" means a Business Day on which an Advance is made. "Affiliate" means, when used with respect to any corporation, limited liability company or partnership, any person who directly or indirectly controls or is controlled by or is under common control with such corporation, limited liability company or partnership. For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the majority ownership of voting securities, partnership interests or other equity interests. The term "person" shall mean any natural person, trust, partnership, corporation, joint venture or other legal entity. "Agreement" means this Working Capital Loan Agreement, as this Agreement hereafter may be amended. "Borrower" and "Borrowers" are Senior Care Florida, Golfview, Golfcrest, Southern Pines and Cedar Hills. "Borrowing Base" means, on any date of determination, an amount equal to 80% of the net amount of Eligible Accounts; provided that the percentage set forth above may be increased pursuant to Section 4.3.2, all as evidenced by the most recent Borrowing Base Certificate; and provided further, that prior to August 31, 2003, the Borrowing Base shall not be less than One Million Dollars ($1,000,000). "Borrowing Base Certificate" means a certificate in the form and substance acceptable to the Lender delivered by the Borrowers to the Lender pursuant to the terms of this Agreement. "Collateral" means all of the real property and tangible and intangible personal property now or hereafter serving as security for the obligations of a Borrower or any of its Affiliates to the Lender or any of its Affiliates, including but not necessarily limited to that described in Section 5 of this Agreement. "Collateral Documents" means the Security Agreements, the Pledge Agreement, the Guaranty, the Non-disturbance Agreement and all other documents and agreements that evidence, secure or otherwise relate to the Loan, this Agreement, the Security Agreements, the Pledge Agreements, the Guaranty, the Non-disturbance Agreement, and the transactions 2 contemplated by such agreements, and all renewals, extensions, amendments, modifications or replacements of any of the foregoing. "Eligible Account" means those accounts of the Borrowers, on a consolidated basis, that meet the following criteria: (a) the Account arises from services provided or performed by the Borrowers in the ordinary course of the Borrowers' business under an enforceable contract, and such services have been provided or performed for the appropriate account debtors in accordance with such contract; (b) the title of the Borrowers to the Account is absolute and is not subject to any prior assignment, claim, lien or security interest; (c) the Account is in the amount shown on the books of the Borrowers, and on any invoice or statement delivered to Lender is owing to the Borrowers, and no partial payment has been made thereon by anyone; (d) the Account is not subject to any claim of reduction, counterclaim, setoff, recoupment, or any claim for credits, allowances or adjustments by the Account Debtor because of unsatisfactory services, or for any other reason which has been asserted to Borrower or is known to Borrowers, except for customary discounts allowed for prompt payment; (e) the Account is due and payable not more than thirty (30) days from the date of the invoice therefore; (f) the Account is not more than one hundred twenty (120) days old, dating from the original invoice dates (not due dates) as set forth in the terms or the respective invoices; (g) the Account does not arise out of a contract with, or order from, an Account Debtor that, by its terms, forbids or makes the assignment of that account to Lender void or unenforceable; (h) none of the Borrowers has received any note, trade acceptance, draft or other instrument with respect to or in payment of the Account, and if any such instrument is received, the Borrowers will immediately notify Lender and, at the latter's request, endorse or assign and deliver the same to Lender; (i) none of the Borrowers nor Lender has received any notice of the dissolution, termination of existence, insolvency, business failure, appointment of a receiver for any part of the property of, assignment for the benefit of creditors by, or the filing of a petition in bankruptcy or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the Account Debtor; 3 (j) the Account Debtor is not an Affiliate of any Borrower, or in any way related by common ownership to any Borrower; (k) the Account is not owed by an Account Debtor having its principal place of business or executive office outside the United States; (l) the Account is not owed by an Account Debtor (other than a Medicaid/Medicare Account Debtor) with respect to which the total unpaid Accounts of such Account Debtor exceed ten percent (10%) of the net amount of all Eligible Accounts (including Medicaid/Medicare Account Debtors); and (m) no material covenant, representation or warranty contained in this Agreement or the Collateral Documents has been breached with respect to such Account. "Emerald Healthcare" means Emerald Healthcare, Inc., a Florida corporation. "Emerald Operating Entities" means Emerald-Cedar Hills, Inc., Emerald-Golfview, Inc., Emerald-Golfcrest, Inc. and Emerald-Southern Pines, Inc. "Event of Default" has the meaning given such term in Section 10 of this Agreement. "Financing Statement" means the Financing Statement executed by the Borrowers and delivered to the Lender for filing pursuant to Section 6 of this Agreement. "Florida Emerald Facility" means one of, and "Florida Emerald Facilities" means one or more of, the following skilled nursing facilities:
FACILITY NAME LOCATION ------------- -------- Golfview Nursing Home 3636 10th Avenue North, St. Petersburg, Florida 33713 Golfcrest Nursing Home 600 North 17th Avenue, Hollywood, Florida 33020 Southern Pines Nursing Center 6140 Congress Avenue, New Port Richey, Florida 34653 Cedar Hills Nursing Center 2061 Hyde Park Road, Jacksonville, Florida 32210
"GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U. S. accounting profession), which are applicable to the circumstances as of the date of determination. "Governmental Authority" means and includes any federal, state, District of Columbia, county, municipal, or other government and any department, commission, board, bureau, agency or instrumentality thereof, whether domestic or foreign. 4 "Guaranty" means that certain Guaranty dated the same date as this Agreement from Advocat, Inc., a Delaware corporation, Advocat Finance, Inc., a Delaware corporation, and Diversicare Management Services, Inc., a Tennessee corporation, in favor of Lender. "Insurer" means a Person that insures a Patient against certain of the costs incurred in the receipt by such Patient of Medical Services, or that has an agreement with a Borrower to compensate a Borrower for providing services to a Patient. "Lender" is defined in the preamble to this Agreement. "Loan" means the working capital loan described in this Agreement. "Loan Balance" means, at any time, the then outstanding principal balance of the Loan. "Material Adverse Effect" means any material adverse effect whatsoever upon (a) the validity, performance or enforceability of any Transaction Document, (b) the properties, contracts, business operations, profits or condition (financial or otherwise) of a Borrower, or (c) the ability of a Borrower to fulfill its obligations under the Transaction Documents. "Maximum Loan Amount" means Two Million Dollars ($2,000,000) during the first twenty-four months after the date of this Agreement. In the twenty-fifth month after the date of this Agreement, and each subsequent month thereafter, on the first day of such month, the Maximum Loan Amount shall decrease by Ten Thousand Dollars ($10,000). "Medicaid/ Medicare Account Debtor" means any Account Debtor which is (a) the United States of America acting under the Medicaid/Medicare program established pursuant to the Social Security Act, (b) any state or the District of Columbia acting pursuant to a health plan adopted pursuant to Title XIX of the Social Security Act or (c) any agent, carrier, administrator or intermediary for any of the foregoing. "Medical Services" means medical and health care services provided to a Patient, including, but not limited to, medical and health care services provided to a Patient and performed by a Borrower which are covered by a policy of insurance issued by an Insurer, and includes physician services, nurse and therapist services, dental services, hospital services, skilled nursing facility services, comprehensive outpatient rehabilitation services, home health care services, residential and out-patient behavioral healthcare services, and medicine or health care equipment provided by a Borrower to a Patient for a necessary or specifically requested valid and proper medical or health purpose. "Non-disturbance Agreement" means the Subordination, Non-Disturbance, and Attornment Agreement dated the same date as this Agreement by and among Lender, Florida Lessor - Emerald, Inc., a Maryland corporation, Senior Care Florida, and the Emerald Operating Entities. "Note" means any promissory note executed and delivered by one or more Borrowers pursuant to this Agreement, together with all renewals, extensions, amendments, modifications 5 or replacements thereof, including without limitation the Secured Working Capital Promissory Note dated the same date as this Agreement from the Borrowers in favor of the Lender. "Notice of Requested Borrowing" has the meaning given such term in Section 4.1 of this Agreement. "Omega Mortgage Documents" means the Mortgages and the Amended Transaction Documents, as each is defined in the Non-disturbance Agreement, and all other documents and agreements that evidence, secure or otherwise relate to the Mortgages and the Amended Transaction Documents, and the transactions contemplated by such agreements, and all renewals, extensions, amendments, modifications or replacements of any of the foregoing. "Ordinary Course" means, when used with respect to a Borrower, any activity performed in accordance with the historical or customary practices of such Borrower. "Patient" means any Person receiving Medical Services from a Borrower and all Persons legally liable to pay a Borrower for such Medical Services other than Insurers. "Permitted Liens" means (a) security interests, mortgages and liens in favor of the Lender; (b) liens for taxes not delinquent or, in a jurisdiction where payment of taxes is deferred during the period of any contest, being contested in good faith by appropriate proceedings as prescribed by law, with adequate reserves therefor being set aside on the Borrowers' books; and (c) inchoate materialmens', mechanics', workmens', repairmens' or other like liens arising in the Ordinary Course and, in each case, not delinquent. "Person" means an individual, partnership, corporation, trust, joint venture, joint stock company, limited liability company, association, unincorporated organization, Governmental Authority, or any other entity. "Pledge Agreements" means the separate Pledge Agreements dated the same date as this Agreement in favor of the Lender pledging 100% of the outstanding equity interests in each of the Borrowers. "Replacement Master Lease" means the form of Amended and Restated Master Lease executed and to be delivered pursuant to the Non-disturbance Agreement. "Security Agreements" means the separate Security Agreements dated the same date as this Agreement from each of the Borrowers in favor of the Lender. "Senior Care Master Lease" is defined in Recital B to this Agreement. "Sublessees" means Golfview, Golfcrest, Southern Pines and Cedar Hills. "Subleases" is defined in Recital C to this Agreement. 6 "Transaction Documents" means this Agreement, the Note, the Collateral Documents, the Replacement Master Lease, the Senior Care Master Lease, the Subleases, and all other documents and agreements that evidence, secure or otherwise relate to the Loan, this Agreement, the Note, the Collateral Documents, the Replacement Master Lease, the Senior Care Master Lease, the Subleases, and the transactions contemplated by such agreements, and all renewals, extensions, amendments, modifications or replacements of any of the foregoing. "Termination Date" means the date that is the earlier to occur of (i) December 31, 2005, and (ii) four (4) months after the termination of the later to terminate of the Senior Care Master Lease or the Replacement Master Lease. "UCC" means the Uniform Commercial Code. SECTION 2 - WARRANTIES AND REPRESENTATIONS To induce the Lender to enter into this Agreement and to make the Loan, the Borrowers represent and warrant to the Lender that the following statements are true, correct and accurate both before and after giving effect to the transactions contemplated by the Transaction Documents: 2.1 Each of the Borrowers is a limited liability company duly organized and validly existing under the laws of the State of Delaware. Senior Care Florida owns legal and equitable title to 100% of outstanding equity interests in each Sublessee. Diversicare Leasing Corp., a Tennessee corporation, owns legal and equitable title to 100% of the outstanding equity interests Senior Care Florida. 2.2 The Borrowers have all requisite legal power and authority and all necessary licenses and permits to own and operate the Florida Emerald Facilities. The Borrowers are in compliance with all laws, rules, and regulations, the non-compliance with which would have a Material Adverse Effect. 2.3 Neither this Agreement nor any other written statement furnished by or on behalf of the Borrowers to the Lender in connection with the negotiation of the Loan contains any untrue statement of a material fact. 2.4 There are no proceedings pending, or, to the Borrowers' knowledge threatened, before any court, governmental authority or arbitration board or tribunal, against or affecting the Borrowers, or any one or more of them, that might have a Material Adverse Effect. The Borrowers are not in default with respect to any order, judgment or decree of any court, governmental authority or arbitration board or tribunal. 2.5 The Borrowers have full power and authority to execute, deliver and perform the Transaction Documents; the execution, delivery and performance of the Transaction Documents required to be given hereunder by the Borrowers have been duly authorized by appropriate action and will not violate the provisions of the articles of incorporation or organization, operating agreement or bylaws of the Borrowers or of any law, rule, judgment, order, agreement or 7 instrument to which a Borrower is a party or by which it is bound, or to which any of its assets are subject, nor do the same require any approval or consent of any public authority or other third party; and the Transaction Documents have been duly executed and delivered by, and are the valid and binding obligations of, the parties thereto, enforceable in accordance with their terms. 2.6 The execution, delivery and performance by a Borrower of each Transaction Document to which it is a party, the issuance, delivery and performance of the Note, and the consummation of the transactions contemplated hereby or related hereto do not and will not (a) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any contractual obligation of a Borrower, or (b) require any approval or consent of any governmental authority or other person or entity that, as of the date of this Agreement, has not been obtained in writing and delivered to the Lender. 2.7 All of the equity interests of the Borrowers are validly issued, fully paid and nonassessable. 2.8 None of the Borrowers is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any contractual obligation of a Borrower, and no condition exists that, with the giving of notice or the lapse of time, or both, would constitute such a default. 2.9 Lender may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by a Borrower with respect to any Account or Accounts. Unless otherwise indicated in writing to Lender, with respect to each Eligible Account, the Borrowers represent that: (a) The Account is genuine and in all respects what it purports to be, and is not evidenced by a judgment; (b) The Account arises out of a completed, bona fide sale and delivery of goods or rendition of Medical Services by a Borrower in the Ordinary Course and in accordance with the terms and conditions of all purchase orders, contracts, certification, participation, certificate of need, or other documents relating thereto and forming a part of the contract between a Borrower and the Account Debtor; (c) The Account is for a liquidated amount maturing as stated in a duplicate claim or invoice covering such sale or rendition of Medical Services, a copy of which has been furnished or is available to Lender; (d) The Account, and Lender's security interest in such Account, is not, and will not, be in the future, subject to any offset, lien, deduction, defense, dispute, counterclaim or any other adverse condition asserted to Borrowers or is known to Borrowers, and each such Account is absolutely owing to a Borrower and is not contingent in any respect or for any reason; 8 (e) There are no facts, events or occurrences known to Borrowers which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the claim or invoice and statements delivered to Lender with respect thereto; (f) The Account Debtor under the Account had the capacity to contract at the time any contract or other document giving rise to the Account was executed and such Account Debtor is solvent; (g) There are no proceedings or actions known to Borrowers which are threatened or pending against any Account Debtor under the Account which might result in any material adverse change in such Account Debtor's financial condition or the collectibility of such Account; (h) The Account has been billed and forwarded to the Account Debtor for payment in accordance with applicable laws and in material compliance and conformity with any and requisite procedures, requirements and regulations governing payment by such Account Debtor with respect to such Account, and such Account if due from a Medicaid/Medicare Account Debtor is properly payable directly to a Borrower; and (i) Each Borrower has obtained and currently has all certificates of need, Medicaid and Medicare provider numbers, licenses, permits and authorizations that are necessary in the generation of such Accounts. SECTION 3 - THE LOAN 3.1 The Loan shall be Advanced subject to and in conformity with the following terms and conditions: Loan Maximum Maximum Loan Amount. Minimum Draw $10,000 Frequency of Draws No more frequently than monthly. Payments As set forth in the Note. Due Date As set forth in the Note. Interest Rate As set forth in the Note. Purpose Advances shall be used solely for working capital at the Florida Emerald Facilities. 3.2 Subject to the terms and conditions of this Agreement, the Lender shall be obligated from time to time to make Advances subject to and in accordance with the terms and conditions contained in this Agreement. 9 3.3 The Borrower may terminate this credit facility at any time upon thirty (30) days' prior written notice to the Lender and payment in full of the Loan Balance and all accrued and unpaid interest. Upon the expiration of thirty (30) days after delivery of such notice to the Lender, the Lender shall have no further obligation to make any further Advances. Except as expressly provided in this Section, termination of the credit facility by the Borrower pursuant to this Section shall not modify or otherwise affect the rights or obligations of the parties under any of the Transaction Documents as then in effect. 3.4 Interest on Advances shall be computed on the basis of a 360-day year and the actual number of days elapsed in the period during which it accrues. In computing interest on any Advance, the date of the making of the Advance shall be included and the date payment is received shall be excluded; provided, that if an Advance is repaid on the same day on which it is made, one day's interest shall be paid on that Advance. SECTION 4 - ADVANCE PROCEDURES; LIMIT ON ADVANCES 4.1 The Borrowers shall give the Lender notice of its request for each Loan Advance (each a "Notice of Requested Borrowing") not later than 12:00 noon, Baltimore, Maryland time, at least five (5) Business Days before the date upon which such Advance is requested to be made. Subject to the terms and conditions of this Agreement, the proceeds of each such requested Advance shall be made available to the Borrower by wire transfer of funds to the Borrower's account specified in the Notice of Requested Borrowing. The Notice of Requested Borrowing shall include the following: (1) The amount of the Advance requested; and (2) A certification from an officer of Lessee that (A) no Event of Default exists, and (B) no event has occurred or condition exists that with the giving of notice or the passage of time, or both, would constitute an Event of Default. 4.2 Each Advance shall be limited to the lesser of (1) the Maximum Loan Amount minus the Loan Balance on the Advance Date; and (2) the Borrowing Base minus the Loan Balance and the amount of unpaid interest on the Loan on the Advance Date. 4.3 Borrowing Base. 4.3.1. Notwithstanding anything to the contrary contained in this Agreement or in any other Transaction Document, the Loan Balance hereunder shall at no time exceed the lesser of (i) the Borrowing Base and (ii) the Maximum Loan Amount. The Borrower agrees that if at any time any such excess shall arise, it shall, without presentment, 10 demand, protest or notice of any kind from the Lender, all of which it hereby expressly waives, immediately repay Loans in the amount necessary to eliminate such excess. 4.3.2. The Borrowing Base will be redetermined by the Lender once a month upon receipt of the Borrowing Base Certificates described in Section 4.3.3. In addition, the Lender may redetermine the Borrowing Base at other times in its discretion as necessary to reduce the Borrowing Base as a result of its reasonable determination that Accounts included therein are no longer Eligible Accounts. The Lender may in the exercise of its discretion in determining the Borrowing Base, at any time and from time to time, increase the advance percentages to be applied to Eligible Accounts which are set forth in the definition of "Borrowing Base" in Section 1. 4.3.3. The Borrowers shall keep accurate and complete records of its Accounts and, as frequently as the Lender shall require, but not less frequently than once per month on the tenth Business Day following the last day of each fiscal month, the Borrowers shall deliver to the Lender a Borrowing Base Certificate covering all of its Accounts, together with (if requested by the Lender) formal written assignments of such Accounts and copies of the invoices related thereto. The Borrowers shall also make available to the Lender for its inspection, upon demand, the original copy of all documents (and will deliver any such original copy to the Lender if required by the Lender to enforce its rights and remedies hereunder), including, without limitation, repayment histories, present status reports and shipment reports, relating to the Accounts included in any Borrowing Base Certificate and such other matters and information relating to the status of then existing Accounts as the Lender shall reasonably request. 4.3 Subject to the terms and conditions of this Agreement, amounts borrowed under the Loan may be repaid and re-borrowed. 4.4 In any event, the obligation of the Lender to make Advances shall cease on the first to occur of (i) an Event of Default, and (ii) the Termination Date. SECTION 5 - CONDITIONS PRECEDENT TO ADVANCES In addition to the other conditions precedent to Advances described in this Agreement, each Loan advance requested under this Agreement shall be subject to prior satisfaction of the following conditions: 5.1 The Borrowers, or any one of them, shall have received and shall maintain all governmental licenses, approvals and permits as are necessary to enable a Borrower to lawfully lease and operate the Florida Emerald Facilities from and after the Date of this Agreement and shall have satisfied any and all conditions to the effectiveness thereof; provided, however, that as of the date of this Agreement such licenses, approvals and permits may be provisional licenses, approvals or rights to occupy in which case the Borrowers shall use diligent efforts to satisfy all conditions for such licenses, approvals or rights to become permanent in a timely manner. 11 5.2 The representations and warranties contained herein and in the other Transaction Documents shall be true, correct and accurate in all material respects on and as of the Advance Date of such requested Advance, except for those relating to specific dates or time periods and as changed as permitted by this Agreement. 5.3 The Borrowers shall have performed in all material respects all agreements and satisfied all conditions that this Agreement and each of the other Transaction Documents provides shall be performed by a Borrower on or before such Advance Date. 5.4 No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain the Lender from making such advance. 5.5 There shall not be pending or, to the best of Borrowers' knowledge threatened: (a) any action, suit, proceeding, governmental investigation or arbitration against or affecting a Borrower or an Affiliate, or any property of a Borrower or an Affiliate, that, in the opinion of the Lender, could reasonably be expected to have a Material Adverse Effect upon a Borrower or an Affiliate; and (b) there shall have occurred no development in any action, suit, proceeding, governmental investigation or arbitration previously disclosed to the Lender pursuant to this Agreement, that, in the opinion of the Lender, could reasonably be expected to have a Material Adverse Effect upon a Borrower or an Affiliate. No injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, this Agreement or the making of the Loan hereunder. 5.6 Since the date of the most recent financial statements submitted to the Lender pursuant to the Transaction Documents, nothing shall have occurred or become known that the Lender shall have determined has a Material Adverse Effect upon a Borrower or an Affiliate. 5.7 No Event of Default shall exist and be continuing. 5.8 No event has occurred or condition exists that with the giving of notice or the passage of time, or both, would constitute an Event of Default. 5.9 The Lender shall have received a Notice of Requested Borrowing at the time and in the form required by Section 4.1 above. The furnishing by the Borrower of a Notice of Requested Borrowing shall be deemed to constitute a representation and warranty of the Borrower to the effect that all the conditions set forth in this Agreement for the requested advance are satisfied as of the date of delivery and will be satisfied on the applicable Advance Date. 5.10 The Transaction Documents (other than the Senior Care Master Lease and the Subleases if promptly replaced by the Replacement Master Lease pursuant to the terms of the Non-disturbance Agreement) shall remain in full force and effect. 12 SECTION 6 - SECURITY AND RELEASE OF COLLATERAL 6.1 Without limiting the terms and conditions of any of the Transaction Documents, to secure payment of all obligations and indebtedness of the Borrowers to the Lender under this Agreement and all other indebtedness and obligations now and hereafter owing by the Borrowers and their Affiliates to the Lender or any of its Affiliates, the Borrowers shall execute and deliver to the Lender (or, in the case of documents to be executed and delivered by others, shall cause such documents to be executed and delivered to the Lender): (a) the Note; (b) the Security Agreements; (c) the Pledge Agreement; (d) the Guaranty; (f) the Non-disturbance Agreement; and (e) all financing statements, assignments, documents of title, and other documents, agreements, and instruments as the Lender reasonably may request in connection with the creation, perfection and priority of any security described above. SECTION 7 - AFFIRMATIVE COVENANTS Beginning on the date of this Agreement and continuing until the Lender has no further obligation to make advances of the Loan to the Borrowers pursuant to this Agreement and the Loan and all other indebtedness of the Borrowers to the Lender under the Transaction Documents have been repaid in full, the Borrowers shall: 7.1 Furnish to the Lender any and all certificates and reports concerning the condition of the Florida Emerald Facilities or compliance with the Transaction Documents or this Agreement, as and when the same are so furnished to such other party or parties. In addition, the Borrowers shall furnish to the Lender within ten (10) Business Days after receipt of Lender's request, such other information, books and records as the Lender may reasonably request, in such form and at such time and place as the Lender may reasonably request, concerning the Borrowers' activities and plans that are prepared by or for one or more of the Borrowers in the Ordinary Course. 7.2 Promptly inform the Lender of the occurrence of any Event of Default, or of any occurrence that, with the giving of notice or the lapse of time, or both, would be an Event of Default, and of any other occurrence that has a Material Adverse Effect; grant to the Lender or its representatives the right to examine the Borrowers' books and records and the Collateral at any reasonable time or times on reasonable notice; maintain complete and accurate books and records of its transactions in accordance with good accounting practices; and furnish to the 13 Lender any information that it reasonably may request concerning the Borrowers' financial affairs that is prepared by or for a Borrower in the Ordinary Course within ten (10) Business Days after receipt of a request for that information. 7.3 Maintain insurance, including, but not limited to, fire and extended coverage insurance, workers' compensation insurance, and casualty and liability insurance with responsible insurance companies on each Florida Emerald Facility and against such risks and in such amounts as is required by the Senior Care Master Lease, or, if in effect, the Replacement Master Lease, and furnish to the Lender upon its request the details with respect to that insurance and satisfactory evidence of that insurance coverage. Each insurance policy required under this Section 7.3 shall be, to the extent practicable, written or endorsed so as to make losses, if any, payable to the Borrowers and the Lender as their respective interests may appear, and shall include, where appropriate, a mortgage clause or endorsement in favor of the Lender in form and substance satisfactory to the Lender. 7.4 Pay and discharge, as often as the same may become due and payable, all taxes, assessments and other governmental monetary obligations, of whatever nature, that may be levied or assessed against it or any of its properties, unless and to the extent only that in a jurisdiction where payment of taxes and assessments is abated during the period of any contest, those taxes or assessments shall be contested in good faith by appropriate proceedings and that the Borrowers shall have set aside on its books adequate reserves with respect to those taxes and assessments. 7.5 Pay and perform at the time such payment or performance is due, all indebtedness and obligations owing by it, and pay all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable, except any indebtedness, obligation or claim being contested in good faith by appropriate proceedings and for which the Borrower shall have set aside on its books adequate reserves with respect to such indebtedness, obligation or claim. 7.6 Maintain their existence as a corporation or limited liability company under the laws of the State of Delaware; conduct and operate its business in compliance with all laws, governmental rules, regulations, and orders applicable to it, the failure to comply with which would or may have a Material Adverse Effect. 7.7 Act prudently and in accordance with customary industry standards in managing or operating its assets, properties, business and investments and keep in good working order and condition, ordinary wear and tear excepted, all of its assets and properties that are necessary to the conduct of its business. 7.8 At all times preserve, renew and keep in full force and effect the rights, licenses, permits, franchises, agency agreements, trade names, patents, trademarks, copyrights, licenses and service marks, the loss of which could have a Material Adverse Effect. 7.9 Permit representatives of the Lender, on reasonable notice, during the Borrowers' normal business hours, to enter the Borrowers' premises, review the Borrowers' business 14 records, and interview the Borrowers' employees as reasonably required by the Lender to conduct periodic audits of the Borrowers' business and the Borrowers' compliance with its obligations under this Agreement. 7.10 If the Replacement Master Lease is not in effect, comply with all of the terms and conditions of the Senior Care Master Lease. 7.11 If the Replacement Master Lease is in effect, comply with all of the terms and conditions of the Replacement Master Lease. If the Replacement Master Lease is in effect, to the extent any of the provisions of this Section 7 are inconsistent with the terms of the Replacement Master Lease, the Replacement Master Lease shall control. SECTION 8 - NEGATIVE COVENANTS Beginning on the date of this Agreement and continuing until the Lender has no further obligation to make advances of the Loan to the Borrowers pursuant to this Agreement and the Loan and all other indebtedness of the Borrowers to the Lender under the Transaction Documents has been repaid in full, the Borrowers shall not, without the prior written consent of the Lender: 8.1 Create or permit to exist any lien, mortgage, pledge, attachment, garnishment, execution, or other legal process, or encumbrance on any of the Collateral, except Permitted Liens. 8.2 Guarantee, endorse, assume or otherwise incur or suffer to exist any contingent liability in respect of any obligation of any other person, firm or corporation, except by the endorsement of negotiable instruments for deposit or collection in the Ordinary Course. 8.3 Purchase or otherwise acquire all, or substantially all, of the assets, obligations or capital stock or equity interests in any other person or legal entity. 8.4 Subordinate any indebtedness owing to a Borrower by any person, firm or corporation to indebtedness of that person, firm or corporation owing to any other person, firm or corporation. 8.5 Engage, directly or indirectly, in any line of business other than the operation of the Florida Emerald Facilities. 8.6 Issue, incur, assume or permit to remain outstanding any indebtedness, other than indebtedness owing to the Lender or any of Lender's Affiliates or indebtedness which has been subordinated to the indebtedness owed to the Lender pursuant to written agreements in form and substance acceptable to the Lender. 8.7 Change its fiscal year or method of accounting except as required by GAAP. 15 8.8 Change its name without prior written approval from the Lender; except that a Borrower may change its name if such Borrower has given sixty (60) days' prior written notice of the name change to Lender and has taken such action as the Lender deems necessary to continue the perfection of the security interests and liens granted to the Lender under the Transaction Documents. SECTION 9 - APPLICATION OF PROCEEDS The proceeds of the Loan shall be used by the Borrowers solely to fund Borrowers' working capital needs at the Florida Emerald Facilities. SECTION 10 - EVENTS OF DEFAULT AND REMEDIES 10.1 The following events shall constitute an "Event of Default" under this Agreement, the occurrence of which shall entitle the Lender to pursue any and all rights and remedies, legal and equitable, available to it under any Transaction Document or otherwise. The occurrence of an Event of Default under this Agreement shall constitute a default under each and every other Transaction Document. The Lender's rights and remedies are cumulative and may be exercised concurrently or successively from time to time. Any action by the Lender against any property or party shall not serve to release or discharge any other security, property or party in connection with this transaction. The Events of Default are as follows: (a) Failure to pay the principal or interest on the Borrowers' present or future indebtedness to the Lender pursuant to this Agreement and the other Transaction Documents, when and as the same shall be due and payable, whether by acceleration or otherwise; (b) An Event of Default (whether described as an "Event of Default", "Default", "Guaranty Default", "Security Agreement Default" or similar term or not specifically defined) under any Collateral Document or any other Transaction Document; (c) An Event of Default under the Senior Care Master Lease or any Sublease, or the Replacement Master Lease; (d) An Event of Default occurs under the Omega Mortgage Documents that is a result, directly or indirectly, of the actions or inactions of a Borrower. (e) Failure to pay, observe and discharge in the Ordinary Course all indebtedness and other obligations of a Borrower to any third party, unless the same is being contested in good faith by appropriate proceedings in accordance with the procedures set forth in the Senior Care Master Lease or in Article XII of the Replacement Master Lease, as may then be applicable. (f) The discovery by the Lender of any material inaccuracy in any statement, assurance, representation, covenant, warranty, term or condition by a Borrower 16 contained in this Agreement or in any document delivered or to be delivered by or on behalf of the Borrowers pursuant to this Agreement, which inaccuracy would result in a Material Adverse Effect. (g) The filing of a petition by or against a Borrower seeking relief under the Federal Bankruptcy Code, 11 U.S.C. Sec. 101, et seq., and any amendments thereto, or any similar law or regulation, whether federal, state or local, not dismissed within 30 days. (h) The commencement of a proceeding by or against a Borrower under any statute or other law providing for an assignment for the benefit of creditors, the appointment of a receiver, or any other similar law or regulation, whether federal, state or local, not dismissed within 30 days. (i) The garnishment, attachment, levy or other similar action taken by or on behalf of any creditor of the Borrower, or any of their respective properties which could have a Material Adverse Effect. 10.2 The Lender may, at its option, terminate its obligation to make Advances, without notice to the Borrowers: (a) upon the occurrence and continuance of any Event of Default; or (b) upon the occurrence and continuance of any event that, with the giving of notice or the lapse of time, or both, would constitute an Event of Default. 10.3 Upon the occurrence and continuance of any Event of Default, the Lender shall have the right (a) to declare all outstanding principal and accrued interest on the Loan, and on any other indebtedness of the Borrowers, or any one of them, to the Lender (whether or not arising under this Agreement) to be immediately due and payable, without presentment, demand or notice of any kind, all of which are hereby expressly waived by the Borrowers, and (b) to exercise any and all remedies that it may have for default under any Transaction Document or at law or in equity, and such remedies may be exercised concurrently or separately until all of the Borrowers' indebtedness to the Lender (whether or not arising under this Agreement) and each and every one of the Borrowers' obligations to the Lender (whether or not arising under the Transaction Documents) have been fully satisfied. In connection with the enforcement of any such remedies of the Lender, the Lender and its employees, attorneys, agents and other persons and entities designated by the Lender, shall have the right, without notice, to enter the Borrowers' places of business for such purposes as reasonably may be required to permit the Lender to preserve, protect, take possession of and/or sell or otherwise dispose of any Collateral, and to store the Collateral at the Borrowers' places of business, without charge, for such periods as may be determined by the Lender. SECTION 11 - ACCEPTANCE OF PROCEEDS The acceptance of the proceeds of the Loan and any Advance shall constitute the representation and warranty by the Borrowers to the Lender that all of the applicable conditions specified herein have been satisfied as of that time, except for such conditions that have been expressly waived in writing hereunder by the Lender. 17 SECTION 12 - MISCELLANEOUS 12.1 The Borrowers shall reimburse the Lender for all reasonable costs (including but not limited to reasonable fees and expenses for appraisers, attorneys, architects, accountants, brokers, copy services, court reporters, engineers, expert witnesses, overnight couriers, recording fees and taxes, title and lien searches, and surveyors) incurred by the Lender in: (a) creating and perfecting a first priority security interest in the Collateral; (b) preserving and protecting the Collateral; (c) enforcing any provision of any of the Transaction Documents; (d) collecting the Loan; and (e) foreclosing any lien or security interest in any of the Collateral, or in taking action in lieu of foreclosure. 12.2 The Borrowers acknowledges that the Lender shall have the right, upon an Event of Default, or any event that with the giving of notice or lapse of time, or both, would constitute an Event of Default, to set off any indebtedness from time to time owing to the Borrowers by the Lender against any indebtedness that shall at any time be due and payable by the Borrowers to the Lender. 12.3 Each and every right granted to the Lender hereunder or under any other Transaction Document, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Lender to exercise, and no delay in exercising, any right shall operate as a waiver thereof or as a waiver of any other right. No single or partial exercise by the Lender of any right or remedy shall preclude any other future exercise of it or the exercise of any other right or remedy. No waiver or indulgence by the Lender of any default shall be effective unless in writing and signed by the Lender, nor shall a waiver on one occasion be construed as a bar to or waiver of that right on any future occasion. This Agreement may not be amended except by a writing signed by all the parties hereto. 12.4 The relationship between the Borrowers and the Lender is solely that of borrower and lender. The Lender has no fiduciary responsibilities to the Borrowers as a result of this Loan Agreement, the other Transaction Documents or the consummation of the transactions contemplated hereby or thereby. The Lender does not undertake any responsibility to the Borrowers to review or inform the Borrowers of any matter in connection with any phase of the Borrowers' business or operations. The Borrowers shall rely entirely upon its own judgment with respect to its business, and any review, inspection, supervision, or information supplied to the Borrowers by the Lender is for the protection of the Lender and none of the Borrowers or any third party is entitled to rely thereon. 12.5 This Agreement is made in the State of Maryland. The validity of this Agreement, and the validity of any documents incorporated herein or executed in connection herewith, and the construction, interpretation and enforcement thereof, and the rights of the parties thereto, shall be determined under and construed in accordance with the internal laws of the State of Maryland, without regard to principles of conflicts of law. 12.6 Any and all notices or other communications required or permitted under this Agreement shall be in writing, and shall be served either personally or by certified United States mail with postage thereon full prepaid addressed: 18 To the Borrowers at: Senior Care Florida Leasing, LLC c/o Advocat, Inc. 277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067 Attention: Chief Financial Officer Telefax No.: 615-771-7409 with a copy (which shall not constitute notice) to: Harwell Howard Hyne Gabbert & Manner, P.C. 315 Deaderick Street, Suite 1800 Nashville, Tennessee 37238 Attn: J. Mark Manner Telefax No.: 615-251-1057 and to the Lender at: Omega Healthcare Investors, Inc. 9690 Deereco Road, Timonium, Suite 100 Maryland 21093 Attn.: Daniel J. Booth Telephone No.: 410/427-1700 Facsimile No.: 410/427-8800 with a copy (which shall not constitute notice) to: Myers Nelson Dillon & Shierk PLLC 125 Ottawa Ave., N.W., Suite 370 Grand Rapids, Michigan 49503 Attention: Mark E. Derwent Telephone: (616) 233-9640 Fax: (616) 233-9642 or such other place or places as any party shall designate by written notice served upon other parties. Notice shall be deemed to have been given (a) on the date of personal delivery to a Borrower or the transmission to a Borrower by facsimile to the number set forth in this Section, or (b) on the date on which a duly authorized representative of a Borrower acknowledges receipt of such written notice, or (c) on the day after sending such written notice to a Borrower by a commonly recognized overnight courier service, such as Federal Express, Purolator, UPS or the like, or (d) on the third day after or by depositing the same in the United States mail, postage prepaid, for delivery to a Borrower. 19 12.7 This Agreement shall be binding upon and shall inure to the benefit of the Borrowers and the Lender and their respective successors and assigns. The Borrowers shall not have any right to assign, transfer, hypothecate or otherwise transfer or dispose of any of its rights or obligations under this Agreement or the other Collateral Documents (voluntarily, by operation of law, as security, by gift or otherwise) without the Lender's consent, which consent may be withheld in the sole discretion of the Lender. The Lender may, without the consent of the Borrower, assign, negotiate, pledge or otherwise hypothecate all or any portion of this Agreement, or grant participations herein and in the Collateral Documents, or in any of its rights or security hereunder or thereunder, including, without limitation, the instruments securing the Borrowers' obligations hereunder; provided, however, that the Lender promptly will inform the Borrowers of any such assignment, negotiation, pledge or other hypothecation and of the parties involved therewith. In connection with any assignment or participation, the Lender may disclose to the proposed assignee or participant any information that the Borrower is required to deliver to the Lender pursuant to this Agreement. 12.8 The Borrowers waive and release any and all right that they may have to require that the Lender marshal any of the Collateral. The Borrowers shall upon the request of the Lender promptly execute and deliver to the Lender a written statement, in form and substance reasonably satisfactory to the Lender, identifying all of the Collateral in which the Lender holds an interest as security for the Loan made pursuant to this Agreement. The Lender may file or record such written statements in the appropriate public records as determined by the Lender in its sole and absolute discretion. 12.9 Should any part, term or provision of this Agreement, or of any documents incorporated herein or executed in connection herewith, be determined by the courts to be illegal, unenforceable or in conflict with any law of the State of Maryland, federal law or any other applicable law, the validity and enforceability of the remaining portions or provisions of such document(s) shall not be affected thereby. 12.10 The Borrowers shall execute any and all additional or supplemental documentation as the Lender may reasonably require to give full effect to the terms and conditions of this Agreement. The Borrowers authorize the Lender to file such financing statements as it deems appropriate to perfect its security interests in the Collateral. 12.11 Time is of the essence with respect to all provisions of this Agreement. 12.12 The headings in this Agreement have been inserted for convenience only and shall not affect the meaning or interpretation of this Agreement. 12.13 This Agreement may be executed in one or more counterparts, each of which shall be considered an original and all of which shall constitute the same instrument. 12.14 This Agreement contains the entire agreement of the parties hereto with respect to the subject matter hereof. The parties hereto shall not be bound by any other different, additional or further agreements or understandings except as consented to in writing by them. 20 12.15 The Recitals are incorporated into and form a part of this Agreement. 12.16 The Lender and the Borrowers, after consulting or having had the opportunity to consult with counsel, knowingly, voluntarily and intentionally waive any right either of them may have to a trial by jury in any litigation based upon or arising out of this Agreement or any related instrument or agreement or any of the transactions contemplated by this Agreement or any course of conduct, dealing, statements (whether oral or written), or actions of either of them. Neither the Lender nor the Borrowers shall seek to consolidate, by counterclaim or otherwise, any such action in which a jury trial has been waived with any other action in which a jury trial cannot be or has not been waived. These provisions shall not be deemed to have been modified in any respect or relinquished by either the Lender or Borrowers except by a written instrument executed by both of them. 12.17 There are no third party beneficiaries of this Agreement. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 21 IN WITNESS WHEREOF, the parties have executed this Working Capital Loan Agreement as of the day and year first above written. "BORROWERS": SENIOR CARE FLORIDA LEASING, LLC, a SENIOR CARE GOLFVIEW, LLC Delaware limited liability company SENIOR CARE GOLFCREST, LLC SENIOR CARE SOUTHERN PINES, LLC By: Diversicare Leasing Corp., its sole SENIOR CARE CEDAR HILLS, LLC member By: /s/ William R. Council, III By: Senior Care Florida Leasing, LLC, its ----------------------------------- sole member Name: William R. Council, III ----------------------------------- Its: President By: Diversicare Leasing Corp., its sole ----------------------------------- member By: /s/ William R. Council, III -------------------------------------- Name: William R. Council, III -------------------------------------- Its: President --------------------------------------

"LENDER": Omega Healthcare Investors, Inc. By: /s/ Taylor Pickett -------------------------- Name: Taylor Pickett -------------------------- Its: CEO -------------------------- 22 EX-10.15 17 g84031exv10w15.txt EX-10.15 WORKING CAPITAL PROMISSORY NOTE EXHIBIT 10.15 SECURED WORKING CAPITAL PROMISSORY NOTE $2,000,000 Baltimore, Maryland April 1, 2003 1. Promise to Pay. The undersigned, Senior Care Florida Leasing, LLC, a Delaware limited liability company, Senior Care Golfview, LLC, a Delaware limited liability company, Senior Care Golfcrest, LLC, a Delaware limited liability company, Senior Care Southern Pines, LLC, a Delaware limited liability company, Senior Care Cedar Hills, LLC, a Delaware limited liability company, (each a "Borrower", and collectively, the "Borrowers") promise to pay, jointly and severally, to Omega Healthcare Investors, Inc., a Maryland corporation, at its principal office at 9690 Deereco Road, Suite 100, Timonium, Maryland 21093 (hereinafter "Omega"), or at such other place as Omega may designate in writing, or to order, in lawful money of the United States of America, the principal sum of TWO MILLION AND NO/100 DOLLARS ($2,000,000), or such lesser sum as is indicated on Omega's records, with interest thereon as provided in Section 3 hereof and all other amounts that may become owing hereunder. 2. Definitions. For all purposes of this Secured Working Capital Promissory Note (this "Note") except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Section have the meanings assigned to them in this Section and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles as at the time applicable, and (c) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Note as a whole and not to any particular Section or other subdivision: Affiliate: As defined in the Loan Agreement. Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which national banks in the City of New York, New York, are authorized or obligated, by law or executive order, to close. Default Interest Rate: The Interest Rate plus four percent (4%). Due Date: The earlier of: (a) Termination Date, and (b) the date upon which Omega duly accelerates the due date of all unpaid principal and interest owed by the Borrowers to Omega. Event of Default: The occurrence of any of the following shall constitute an Event of Default: (a) the Borrowers fail to pay amounts due and payable under the terms of this Note when due and payable, whether by acceleration or otherwise, or (b) an Event of Default under the Loan Agreement or any other Transaction Document. Interest Rate: An annual rate of interest of Eight and one-half percent (8.5%). Loan Agreement: The Working Capital Loan Agreement dated of even date herewith between the Borrowers and Omega. Loan Balance: As defined in the Loan Agreement. Notice: As defined in the Loan Agreement. Payment Date: Any due date for the payment of the installments of interest or any other sums payable under this Note. Termination Date: As defined in the Loan Agreement. Transaction Documents: As defined in the Loan Agreement. 3. Interest and Principal Payments. 3.1 Monthly Payment of Interest. Commencing on the first Business Day of the first calendar month after the date of this Note, and continuing in each month thereafter until the Due Date on the first Business Day of each month, the Borrowers shall pay accrued interest on the Loan Balance. 3.2 Payments of Principal. The Borrowers shall make all payments of principal required pursuant to Section 4.3.1 of the Loan Agreement. 3.3 Default Interest. Notwithstanding anything to the contrary contained in this Note, if an Event of Default occurs, then interest shall be due and payable on the Loan Balance from the date of such default until the Event of Default is fully cured at the Default Interest Rate. 4. Line of Credit. Pursuant to the Loan Agreement, Omega has authorized a credit facility to the Borrowers in a principal amount not to exceed the face amount of this Note. The credit facility is in the form of loans made from time to time by Omega to the Borrowers and evidenced by, among other things, credits to the Borrowers' accounts. This Note evidences the Borrowers' obligation to repay those loans. The aggregate principal amount of debt evidenced by this Note shall be the amount reflected from time to time in the records of Omega. Subject to the terms and conditions of the Loan Agreement, until maturity, the Borrowers may borrow, repay, and reborrow under this Note so long as the aggregate principal amount outstanding at any one time does not exceed the face amount of this Note. 5. Method of Payment. All payments to be paid by the Borrowers to Omega under this Note shall, unless otherwise specified in writing by Omega to the Borrowers, be paid by electronic funds transfer debit transactions or through wire transfer of immediately available funds and shall be initiated by the Borrowers for payment on or before the first day of each month in which a payment is due; provided, however, if such day is not a Business Day, then payment shall be made on the next succeeding day that is a Business Day. Omega shall provide the Borrowers in writing with appropriate wire transfer information. Once given, such information shall remain in effect until changed by subsequent written instructions. The 2 Borrowers shall inform Omega of payment by sending to Omega a facsimile transmission of the Borrowers' wire transfer confirmation as soon as reasonably practicable. 6. Usury Not To Be Collected. In no event shall the interest rate in effect from time to time under this Note exceed the highest rate allowed by law. If Omega reasonably shall determine that the interest rate under this Note has been adjudicated to be usurious or is otherwise limited by statute, interest in excess of the applicable legal rate paid or collected by Omega shall be deemed to have been automatically and immediately credited by Omega to the principal balance under this Note and shall not be charged to interest, it being the intention of Omega that no interest in excess of the legal rate shall be taken or received. 7. Late Charge. Omega shall have the right, in Omega's discretion, to charge the Borrowers with a late charge of not more than two cents ($.02) for each dollar of any payment under this Note that is not paid on or before the date that is five (5) days after the date on which the payment is due to defray the costs involved in processing and collecting a late payment and to compensate Omega for amounts which it may be required to pay to its financing sources. The Borrowers shall pay such late charge to Omega immediately upon receipt of notice of same. 8. Payment on Due Date. The entire unpaid principal balance hereof not yet paid, together with all accrued and unpaid interest under Section 3, and any other amounts owing to Omega under this Note, shall be due and payable on the Due Date. The Borrowers acknowledge that the monthly payments required hereunder will not amortize the indebtedness evidenced hereby by the Due Date, and that the final payment due hereunder at maturity will be a balloon payment of all then outstanding principal and accrued interest due hereunder. 9. Payments to be Made Without Regard to Setoffs and Counterclaims. All payments by the Borrowers shall be paid in full without setoff or counterclaim and without reduction for and free from any and all taxes, levies, imposts, duties, fees, charges, deductions or withholdings of any type or nature imposed by any government or any political subdivision or taxing authority thereof. 10. Prepayment. The Borrowers may pre-pay the amounts due under this Note at any time without premium. 11. Acceleration Upon Event of Default. Upon the occurrence of any Event of Default, the entire principal balance owing under this Note, together with all accrued and unpaid interest and any other amounts owing under this Note, at Omega's option, will become immediately due and payable, all without formal demand, presentment or notice of any kind, all of which are expressly waived. Acceptance by Omega of any payment in an amount less than the amount then due shall be deemed an acceptance on account only, and Omega's acceptance of any such partial payment shall not constitute a waiver of Omega's right to receive the entire amount due. Upon any Event 3 of Default, neither the failure of Omega to promptly exercise its right to declare the outstanding principal and accrued unpaid interest hereunder to be immediately due and payable, nor the failure of Omega to demand strict performance of any other obligation of one or more of the Borrowers or any other person who may be liable hereunder, shall constitute a waiver of any such rights, nor a waiver of such rights in connection with any future default on the part of the Borrowers or any other person who may be liable hereunder. 12. Application of Payments; Partial Payments. Unless an Event of Default has occurred and not been fully cured, all payments received by Omega hereunder shall be applied first against interest that has accrued and not been paid under Section 3 and second to principal, with the balance applied against any other amounts that may be owing to Omega hereunder. Following the occurrence of an Event of Default, and until such Event of Default is fully cured, Omega may apply any payment that it receives, whether directly from the Borrowers or as a consequence of realizing upon any security that it holds, in its sole and absolute discretion, to any amount owing to it under this Note or any other Transaction Documents. 13. Security for Note. This Note is made pursuant to the Loan Agreement, and is secured by all security interests, liens, assignments and encumbrances granted concurrently herewith and/or from time to time hereafter granted by a Borrower or any Affiliate of a Borrower to Omega or any Affiliate of Omega, including, but not limited to, the security interests and liens granted pursuant to the other Transaction Documents. Reference is hereby made to the Loan Agreement and the other Transaction Documents for a complete description of the collateral securing this Note and for additional terms and conditions concerning this Note. 14. Choice of Law; Venue; Jurisdiction. This Note shall be deemed to have been made and delivered by the Borrowers to Omega at Omega's principal place of business in Baltimore, Maryland. This Note shall be governed and controlled as to validity, enforcement, interpretation, construction, effect and in all other respects, including, but not limited to, the legality of the interest charged hereunder, by the statues, laws and decisions of the State of Maryland. The Borrowers, in order to induce Omega to accept this Note and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, agree that all actions or proceedings arising directly, indirectly or otherwise in connection with, out of, related to or from this Note shall be litigated, in Omega's sole discretion and at Omega's sole election, only in courts having a situs within the State of Maryland. For the purposes of the foregoing, the Borrowers hereby consent and submit to the jurisdiction of any local, state or federal court located within the State of Maryland. The Borrowers hereby waive any right a Borrower may have to transfer or change the venue of any litigation brought against a Borrower by Omega in accordance with this paragraph. 15. Miscellaneous Provisions. 15.1 This Note may not be amended or modified, and revision hereto shall not be effective, except by an instrument in writing executed by the Borrowers and Omega. 4 15.2 Any notice to be given hereunder shall be given in the manner provided in the Loan Agreement. 15.3 Nothing contained in this Note or in any other Transaction Document shall be deemed or construed as creating a partnership or joint venture between one or more of the Borrowers and Omega or between Omega and any other person, or cause the holder hereof to be responsible in any way for the debts or obligations of a Borrower or any other person. 15.4 Each Borrower hereby waives presentment, protest and demand, notice of protest, dishonor and nonpayment of this Note, and expressly agrees that, without in any way affecting the liability of the Borrowers hereunder, Omega may extend the time for payment of any amount due hereunder, accept additional security, release any party liable hereunder and release any security now or hereafter securing this Note without in any other way affecting the liability and obligation of the Borrowers. The obligations of the Borrowers under this Note are joint and several. 15.5 Every provision of this Note is intended to be severable. If any term or provision hereof is declared by a court of competent jurisdiction to be illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the balance of the terms and provisions hereof, which shall remain binding and enforceable. 15.6 Headings at the beginning of each numbered Section of this Note are intended solely for convenience of reference and are not to be deemed or construed to be a part of this Note. 15.7 The Borrowers, and any other person who may be liable hereunder in any capacity, agree to pay all costs of collection, including reasonable attorney fees, in case the principal of this Note or any payment of interest thereon is not paid as it becomes due, or in case it becomes necessary to protect the security for this Note, whether suit is brought or not. Signatures on following page. 5 IN WITNESS WHEREOF, each Borrower has executed this Secured Capital Expenditure Promissory Note as of the date first set forth above. SENIOR CARE FLORIDA LEASING, LLC, a SENIOR CARE GOLFVIEW, LLC Delaware limited liability company SENIOR CARE GOLFCREST, LLC SENIOR CARE SOUTHERN PINES, LLC By: Diversicare Leasing Corp., its sole SENIOR CARE CEDAR HILLS, LLC member By: /s/ William R. Council, III By: Senior Care Florida Leasing, LLC, its -------------------------------- sole member Name: William R. Council, III -------------------------- Its: President By: Diversicare Leasing Corp., its sole --------- member By: /s/ William R. Council, III --------------------------- Name: William R. Council, III ----------------------- Its: President ---------

6 EX-10.16 18 g84031exv10w16.txt EX-10.16 SECURITY AGREEMENT 04/01/03 EXHIBIT 10.16 SECURITY AGREEMENT (Working Capital Loan) THIS SECURITY AGREEMENT (the "Security Agreement") is made and entered into as of April 1, 2003 by and between SENIOR CARE FLORIDA LEASING, LLC, a Delaware limited liability company ("Lessee"), SENIOR CARE GOLFVIEW, LLC, a Delaware limited liability company, ("Golfview"), SENIOR CARE GOLFCREST, LLC, a Delaware limited liability company, ("Golfcrest"), SENIOR CARE SOUTHERN PINES, LLC, a Delaware limited liability company, ("Southern Pines"), and SENIOR CARE CEDAR HILLS, LLC, a Delaware limited liability company, ("Cedar Hills", and together with Lessee, Golfview, Golfcrest and Southern Pines, collectively referred to herein as "Debtor"), and OMEGA HEALTHCARE INVESTORS, INC., a Maryland corporation ("Secured Party"). RECITALS: A. Capitalized terms used and not otherwise defined herein shall have the meanings given them in Article I below. B. Debtor and Secured Party have entered into the Loan Agreement pursuant to which Secured Party will make certain loans to Debtor in connection with the Debtor's use and operation of the Facilities. C. As a condition to Secured Party's agreement to enter into the Loan Agreement, Secured Party has required Debtor to enter into this Security Agreement and to grant security interests to Secured Party as herein provided. NOW, THEREFORE, in order to induce Secured Party to enter into the Loan Agreement, and for other good and valuable consideration the receipt and sufficiency of which hereby are acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS This Security Agreement is executed and delivered in connection with the Loan Agreement. Terms defined in the Commercial Code (as hereinafter defined) or in the Loan Agreement and not otherwise defined in this Security Agreement or in the Loan Agreement shall have the meanings ascribed to those terms in the Commercial Code. In addition to the other definitions contained herein, when used in this Security Agreement the following terms shall have the following meanings: "Collateral" means the collateral described in Article II, Section 2 below. "Commercial Code" means the Uniform Commercial Code, as enacted and in force from time to time in the State of Maryland. "Facilities" means the healthcare facilities identified on attached Schedule 1. "Loan Agreement" means the Working Capital Loan Agreement executed concurrently 1 herewith by Secured Party, as lender, and Debtor, as borrowers and pursuant to which Secured Party will make certain loans to Debtor, in connection with Debtor's use and operation of the Facilities, in the maximum principal amount of $2,000,000.00, evidenced by, among other things, a Secured Working Capital Promissory Note of even date herewith. ARTICLE II AGREEMENT 1. GRANT OF SECURITY INTEREST. (a) Debtor hereby grants to Secured Party a security interest in the Collateral to secure the payment of all amounts now or hereafter due and owing to Secured Party from Debtor under the Loan Agreement, or any extension or renewal thereof, and any and all other obligations incurred in connection therewith, whether direct or indirect, whether primary, secondary, absolute, contingent or otherwise, now or hereafter existing (including future advances), due or to become due, plus all interest, costs, out-of-pocket expenses and reasonable attorneys' fees which may be made or incurred by Secured Party in the disbursement, administration, and collection thereof, and in the protection, maintenance, and liquidation of the Collateral (the "Liabilities"). (b) If the Debtor shall at any time acquire a commercial tort claim, as defined in Article 9 of the Commercial Code ("Article 9"), Debtor shall immediately notify the Secured Party, in a writing signed by Debtor, of the details thereof and grant to Secured Party in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Security Agreement, with such writing to be in form and substance satisfactory to Secured Party. 2. COLLATERAL. The "Collateral" covered by this Security Agreement is all of the personal property described below that Debtor now owns or shall hereafter acquire or create, immediately upon the acquisition or creation thereof, and that is located at, arises in connection with and/or is related to the Facilities, consisting of the following: All personal and fixture property of every kind and nature including, without limitation, all furniture, fixtures, equipment, raw materials, inventory, other goods, accounts, accounts receivable, contract rights (including rights under any management agreement or franchise agreement with respect to the Facilities), rights to the payment of money, prepaid items, choses in action, insurance refund claims and all other insurance claims and proceeds, commercial tort claims, chattel paper, electronic chattel paper, documents, instruments, securities and all other investment property, deposits, deposit accounts, rights to proceeds of letters of credit, letter-of-credit rights, supporting obligations of every nature, and general intangibles, including, without limitation, to the extent permitted by applicable law: (i) all tax refund claims, license fees, patents, patent applications, trademarks, trademark applications, trade names, copyrights, copyright applications, rights to sue and recover for past infringement of patents, trademarks and copyrights, computer programs, computer software, engineering drawings, service marks, customer lists, goodwill, and all licenses, permits, agreements of any kind or nature pursuant to which (a) the Debtor operates or has authority to operate, (b) the Debtor possesses, 2 uses or has authority to possess or use property (whether tangible or intangible) of others, or (c) others possess, use, or have authority to possess or use property (whether tangible or intangible) of the Debtor; and (ii) all recorded data of any kind or nature, regardless of the medium of recording, including, without limitation, all software, writings, plans, specifications, and schematics; and (iii) to the extent permitted by law, all rights under 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; and (iv) to the extent permitted by law, all rights under 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; and (v) any and all contracts, authorizations, agreements or consents made by or on behalf of any patient or resident of any of the Facilities, or any other person seeking or obtaining services or goods from Debtor, pursuant to which Debtor provides skilled nursing care, intermediate care, personal care and/or assisted living facilities, or any form of patient or residential care, as well as related services at any of the Facilities (as such contracts, authorizations, agreements or consents may be amended, supplemented, renewed, replaced, extended or modified from time to time); including consents to treatment and assignments of payment of benefits; and (vi) to the extent permitted by law, the (a) operating licenses for each of the Facilities, any certificate of need, any other license, permit, approval or certificate which from time to time, may be issued or is required to be issued by the United States, any state or local government, or any agency or instrumentality of any of the foregoing with respect to the construction, installation or operation of any of the Facilities or any portion or component of any of the Facilities, the providing of any professional or other services by the Debtor, the purchase, sale, dispensing, storage, prescription or use of drugs, medications or the like by Debtor, or any other operations or businesses of Debtor; and (b) certifications and eligibility for participation by Debtor, in respect of its operation of any of the Facilities and any related businesses or operations, in programs or arrangements of or reimbursement from any third-party payors, including Medicare and Medicaid; and (c) all other licenses permits and certificates used or useful in connection with the ownership, operation, use or occupancy of any of the Facilities; and 3 (vii) to the extent permitted by law, all rights to third-party reimbursement contracts for the Facilities 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; and (viii) all ledgers, printouts, papers, data, file materials and information pertaining to any of the above described property, relating to any account debtors in respect thereof, and/or to the operation of the Debtor's business relating to the Facilities, and all rights of access to such books, records, ledgers, printouts, data, file materials and information, and all property in which such books, records, ledgers, printouts, data, file materials and information are stored, including but not limited to any computer readable memory and any computer hardware or software necessary to process such memory, wherever located. and all rights, remedies, powers and/or privileges of Debtor with respect to any of the foregoing and all proceeds therefrom owned by Debtor or in which Debtor has an interest, which are now or at any time hereafter in possession or under the control of Secured Party or in transit by mail or carrier to or from Secured Party or in the possession of any third party acting on behalf of Secured Party, without regard to whether Secured Party received the same in pledge, for safekeeping, as agent for collection or transmission or otherwise, or whether Secured Party has conditionally released the same. The Debtor acknowledges and agrees that, with respect to any term used herein that is defined in either (i) Article 9 in effect as of the date this Security Agreement is signed by the Debtor, or (ii) Article 9 as in force at any time hereafter, the meaning ascribed thereto with respect to any particular item of property shall be that under the more encompassing of the two definitions. The description of the Collateral to be included on any financing statements executed in connection herewith shall be as follows: "All personal property of Debtor, as described in that certain Security Agreement between Debtor and Secured Party and that is located at, arises in connection with and/or is related to the real property described on Exhibit(s) "A" attached hereto and incorporated herein. 3. PERFECTION OF SECURITY INTEREST. (a) Perfection by Filing. Debtor hereby irrevocably authorizes Secured Party, at any time and from time to time, pursuant to the provisions of this Security Agreement, to take any and all actions Secured Party may reasonably determine to be necessary to assure that the security interests granted hereby are and remain perfected, including without limitation, filing financing statements, continuation statements and amendments thereto that describe the Collateral as all assets of Debtor or words of similar effect and which contain any other information required by Part 5 of Article 9 for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether that Debtor is an organization, the type of organization and any organization identification number(s) issued to the Debtor. Debtor agrees to furnish any 4 such information to Secured Party promptly upon request. Any such financing statements, continuation statements or amendments may be signed by Secured Party on behalf of Debtor, and may be filed at any time in any jurisdiction deemed appropriate by Secured Party; provided that in any state in which an indebtedness tax is imposed upon the filing of a financing statement, Secured Party shall only file in such state if necessary under applicable law to perfect the security interest created pursuant to this Agreement or if Secured Party otherwise agrees to pay such indebtedness tax. Debtor further agrees to execute and deliver to Secured Party, concurrently with Debtor's execution of this Security Agreement, and at any time or times hereafter at the request of Secured Party, all financing statements and continuation financing statements (where not covered by the first sentence of this paragraph), assignments, affidavits, reports, notices, letters of authority, vehicle title notations and all other documents that Secured Party may reasonably request, in a form reasonably satisfactory to Secured Party, to perfect and maintain perfected Secured Party's security interests in the Collateral. Debtor also agrees to make appropriate entries on its books and records disclosing Secured Party's security interests in the Collateral. (b) Other Perfection, etc. Debtor shall at any time and from time to time take such steps as Secured Party may reasonably request for Secured Party (i) to obtain an acknowledgment, in form and substance satisfactory to Secured Party, of any bailee having possession of any of the Collateral that the bailee holds such Collateral for the benefit of Secured Party, (ii) to obtain "control" of any investment property, deposit accounts, letter-of-credit rights or electronic chattel paper, with any agreements establishing control to be in form and substance satisfactory to Secured Party, and (iii) otherwise to insure the continued perfection and priority of Secured Party's security interest in any of the Collateral and of the preservation of its rights therein. Debtor authorizes Secured Party to file financing statements describing any statutory liens held by Secured Party. 4. WARRANTIES AND COVENANTS. In addition to the warranties and representations, if any, made in the Loan Agreement, Debtor warrants, represents and agrees that: (a) To the extent permitted by law, Debtor has rights in or the power to transfer the Collateral, and is and will be the lawful owner or lessee of all of the Collateral, with the right, to the extent permitted by law, to subject the Collateral to the security interests of Secured Party hereunder; (b) Except for the security interests in the Collateral herein granted to Secured Party, there are no other adverse claims, liens, restrictions on transfer or pledge, or security interests in the Collateral that are known to Debtor, and there are no financing statements covering any of the Collateral filed in any public office created by or known to Debtor prior to the date hereof. Debtor shall defend Secured Party against any claims and demands of any and all other persons to the Collateral inconsistent with this Security Agreement; (c) All of the Collateral that constitutes tangible personal property is or will be (upon delivery) located at the Facilities or at the chief executive offices of Debtor; 5 (d) Except as permitted under the Loan Agreement or hereunder, Debtor shall not remove the Collateral from the Facilities or its chief executive offices without Secured Party's prior written consent and shall not use or permit the Collateral to be used for any unlawful purpose whatsoever. Except as permitted under the Loan Agreement or hereunder, Debtor shall not remove any Collateral from the state in which the Facilities or its chief executive offices are located, without the prior written consent of Secured Party; (e) Except as permitted under the Loan Agreement, Debtor shall not conduct business under any name at the Facilities other than that given above or set forth on attached Schedule 1, nor will Debtor change or reorganize the type of business entity under which it presently does business, except upon prior and express written approval of Secured Party, and, if such approval is granted, Debtor agrees that all documents, instruments and agreements reasonably requested by Secured Party and relating to such change shall be prepared, filed and recorded at Debtor's expense before the change occurs; (f) Debtor shall not remove any records concerning the Collateral located at the Facilities or its chief executive offices nor keep any of its records concerning the same at any other location unless written notice thereof is given to Secured Party at least ten (10) days prior to the removal of such records to any new addresses; (g) Debtor has the right and power and is duly authorized to enter into this Security Agreement. The execution of this Security Agreement does not and will not constitute a breach of any provision contained in any agreement or instrument to which Debtor is or may become a party or by which Debtor is or may be bound or affected; (h) Debtor shall not change its location (as that term is defined in Section 9.307 of the Commercial Code). Debtor shall not change its corporate name without providing Secured Party thirty (30) days prior written notice; (i) Debtor's (i) chief executive office is located in the state of Tennessee; (ii) location (as that term is defined in Section 9.307 of the Commercial Code) is the State of Delaware (the "Debtor State"); (iii) exact legal name is as set forth in the first paragraph of this Security Agreement, (iv) Taxpayer Identification Number is 62-1873941 (for Lessee), 62-1873941 (for Lessee), 62-1873944 (for Golfview), 62-1873943 (for Golfcrest), 62-1873947 for (Southern Pines) and 62-1873948 for (Cedar Hills); and (v) filing number with the Debtor State is 3429591 (for Lessee), 3429599 (for Golfview), 3429597 (for Golfcrest), 3429600 for (Southern Pines) and 3429592 for (Cedar Hills); (j) The Debtor shall maintain the Collateral in good order and repair and with reasonable promptness make all necessary and appropriate repairs thereto of every kind and nature whether ordinary or extraordinary, foreseen or unforeseen, or arising by reason of a condition whether or not existing prior to the date of this Security Agreement. It 6 is the intention of this provision that the level of maintenance of the Collateral shall be not less than that of a first class nursing home operator making use of the Collateral for its intended use; (k) All agreements and papers required to be filed, registered or recorded in order to create in favor of the Secured Party a perfected lien in the Collateral are true and correct, have been, or will be, filed, registered or recorded in the appropriate filing offices, and to the best of Debtor's no further or subsequent filing, refiling, registration, reregistration, recorded or rerecording is necessary in any jurisdiction, except as provided under applicable law with respect to the filing of continuation statements; (l) Except as otherwise permitted pursuant to the terms of this Security Agreement or the Loan Agreement, Debtor will not sell, lease assign, transfer, grant any other security interest in, pledge, license or otherwise dispose of or encumber any Collateral to any third party while this Security Agreement is in effect without the prior and express written consent of Secured Party; and 5. COLLECTION OF ACCOUNTS. (a) Secured Party conditionally authorizes Debtor to collect accounts from Debtor's account debtors provided, however, this privilege may be terminated by Secured Party at any time upon an Event of Default and, upon such Event of Default, Secured Party shall have all of Debtor's rights, title, and interest in the accounts (to the extent permitted under applicable law), including a right of stoppage in transit. After the occurrence of an Event of Default, Secured Party (to the extent permitted under applicable law) may notify any account debtor(s) of Secured Party's security interest in Debtor's accounts and shall be entitled to collect same, and Debtor will thereafter receive all accounts payments as the agent of and as trustee for Secured Party and will deliver to Secured Party on the day of receipt, all checks, cash, drafts, acceptances, notes and other accounts payments and, until such delivery, Debtor shall not use or commingle any accounts payments and shall at all times keep all such remittances separate and apart from Debtor's own funds, capable of identification as the Secured Party's property. Secured Party and its representatives are hereby authorized to endorse in Debtor's name, any item received by the Secured Party representing any payment on or proceeds of any of the Collateral, and may sign Debtor's name upon all accounts, invoices, assignments, financing statements, notices to debtors, bills of lading, storage receipts, or other instruments or documents in respect to the account debtors, the proceeds therefrom, or property related thereto. Debtor shall promptly give Secured Party copies of all accounts statements, accompanied by such additional information, documents, or copies thereof, as Secured Party may request. Debtor shall maintain all records with respect to the accounts and with respect to the general conduct and operation of Debtor's business, including balance sheets, operating statements and other financial information, in accordance with generally accepted accounting principles and as Secured Party may request. (b) Until such time as Secured Party shall notify Debtor of the revocation of such power and authority by reason of an Event of Default (and effective only during the continuance thereof), Debtor (i) may, only in the ordinary course of business, at its own expense, sell, lease or 7 furnish under contracts of service any of the inventory normally held by Debtor for such purpose; (ii) may use and consume any raw materials, work in process or materials, the use and consumption of which is necessary in order to carry on Debtor's business; (iii) replace equipment in accordance with the provisions of the Loan Agreement; and (iv) shall, at its own expense, endeavor to collect, as and when due, all amounts due with respect to any of the Collateral, including the taking of such action with respect to such collection as Secured Party may request or, in the absence of such request, as Debtor may deem advisable. A sale, lease, furnishing of services or other transfer of the Collateral as a partial or total satisfaction of any debt of Debtor shall not constitute a sale in the ordinary course of business. 6. INSPECTIONS/INFORMATION. Debtor shall permit Secured Party or its agents upon reasonable written request and during business hours to have access to and to inspect any of the Collateral. Secured Party may from time to time inspect, check, make copies of, or extracts from the books, records and files of Debtor relating to the Collateral, and Debtor shall make the same available to Secured Party upon reasonable written notice and during business hours. Secured Party's right of access and inspection shall be subject to any prohibitions or limitations on disclosure under applicable law, including any so-called "Patient's Bill of Rights" or similar legislation, including such limitations as may be necessary to preserve the confidentiality of the Facility-patient relationship and the physician-patient relationship. Debtor agrees to promptly supply Secured Party with such financial and other information concerning its financial and business affairs, assets and liabilities as Secured Party may from time to time request, and Debtor agrees that Secured Party or its agents may from time to time verify Debtor's continuing compliance with any of Debtor's warranties and covenants made in Paragraph 4 above, at Debtor's cost and expense. 7. DEFAULT/REMEDIES. (a) The occurrence of any of the following shall constitute an Event of Default under this Security Agreement without any additional notice or grace period: (i) An Event of Default as defined in the Loan Agreement; (ii) Debtor fails to observe or perform any term, covenant or condition of this Security Agreement and the failure is not cured by Debtor within a period of fifteen (15) days after written notice thereof from Secured Party, unless the failure cannot with due diligence be cured within a period of fifteen (15) days, in which case such failure shall not be deemed an Event of Default if and for so long as Debtor proceeds promptly and with due diligence to cure the failure and completes the cure prior to the time that the same causes a default under the Loan Agreement and prior to the time that the same results in civil or criminal penalties to Secured Party, Debtor, any affiliates of either or to the Facilities, however in no event to exceed a period of sixty (60) days; or (iii) Any of the representations or warranties of the Debtor contained herein prove to be untrue when made in any material respect, the Secured Party or Collateral is materially and adversely affected thereby, and same is not cured within fifteen (15) days after written notice from Secured Party thereof. 8 (b) Whenever an Event of Default shall have occurred and so long as its continues, Secured Party may exercise from time to time any rights and remedies, including the right to immediate possession of the Collateral, available to it under the Loan Agreement, this Security Agreement or applicable law. Secured Party shall have the right to hold any property then in or upon the Facilities (but excluding any property belonging to patients at the Facilities) at the time of repossession not covered by this Security Agreement until return is demanded in writing by Debtor. Debtor agrees, in case of the occurrence of an Event of Default and upon the request of Secured Party, to assemble, at its expense, all of the Collateral at a convenient place acceptable to Secured Party and to pay all costs of Secured Party of collection of all the Liabilities, and enforcement of rights hereunder, including reasonable attorneys' fees and legal expenses, including participation in bankruptcy proceedings, and the expenses of locating the Collateral and the expenses of any repairs to any realty or other property to which any of the Collateral may be affixed or be a part. If the Collateral is disposed of at a public sale, the parties agree that (i) a public sale with at least ten (10) calendar days prior notice to Debtor and notice to the public by one publication in a local newspaper is commercially reasonable, and (ii) a disclaimer of warranties at a public or private sale is commercially reasonable. If any notification of intended disposition of any of the Collateral is required by law, such notification, if mailed, shall be deemed reasonably and properly given if sent at least ten (10) days before such disposition, by first class mail, postage prepaid, addressed to the Debtor either at the address set forth in the notice section hereof, or at any other address of the Debtor appearing on the records of Secured Party. (c) TO THE EXTENT PERMITTED BY LAW, DEBTOR AGREES THAT SECURED PARTY SHALL, UPON THE OCCURRENCE OF ANY EVENT OF DEFAULT, HAVE THE RIGHT TO PEACEFULLY RETAKE ANY OF THE COLLATERAL. DEBTOR WAIVES ANY RIGHT IT MAY HAVE, IN SUCH INSTANCE, TO A JUDICIAL HEARING PRIOR TO SUCH RETAKING. (d) The obligations of Debtor under this Security Agreement, the Loan Agreement and other agreements and instruments executed by Debtor and its Affiliates in connection with the Loan Agreement are cross-defaulted and cross-collateralized such that upon an Event of Default under the Loan Agreement, this Security Agreement and/or any such other agreements and instruments, the Secured Party has the right to declare such Event of Default to be an Event of Default without the benefit of any notice or grace periods contained under any or all of this Security Agreement, the Loan Agreement and such other agreements and instruments and without limitation to resort to any or all of the Collateral and the other collateral securing such obligations in pursuit of its remedies thereunder. (e) Debtor acknowledges and agrees that in the event that any of the Collateral is sold by the Secured Party for credit, then credit shall be made against the Liabilities only as, if and when cash payments are actually received by the Secured Party for such Collateral. 8. INDEMNITY. In addition to the indemnities set forth in the Loan Agreement, Debtor shall protect (except to the extent same is caused by the gross negligence or willful misconduct of Secured Party), indemnify and hold harmless Secured Party and its officers, employees, directors and agents from and against all liabilities, obligations, claims, damages, penalties, causes of action, and out-of-pocket costs and expenses whatsoever (including, without 9 limitation, reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against Secured Party or its officers, employees, directors or agents, by reason of the ownership, use, construction and operation of the Collateral by Debtor, its officers, directors, servants, agents and employees or by reason of enforcement of Secured Party's rights hereunder or under the Loan Agreement. As used in this Security Agreement, the term "attorneys' fees" includes fees incurred in any appeal and/or enforcement proceedings. In case any action, suit or proceeding is brought against Secured Party by reason of the enforcement of Secured Party's rights hereunder or under the Loan Agreement, Debtor, upon request of Secured Party, shall at Debtor's expense cause such action, suit or proceeding to be resisted and defended by counsel approved by Secured Party with respect to proceedings and matters involving Secured Party. Any amounts payable to Secured Party under this Section 8 which are not paid within thirty (30) days after written demand therefor shall bear interest at the Default Interest Rate as specified in the Loan Agreement from the date of such demand, and such amounts, together with such interest, shall be indebtedness secured by this Security Agreement. The obligations of Secured Party under this Section 8 shall survive the expiration or earlier termination of the Term of the Loan Agreement for a period of three (3) years; provided, however, if Secured Party has delivered notice to Debtor of a claim or potential claim under this Section 8, then the obligations of Debtor shall be extended with respect to such claim or potential claim until the final resolution of such claim or potential claim by the parties thereto. 9. GENERAL. (a) Time. Time shall be deemed of the essence with respect to this Security Agreement. (b) Condition of Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if it takes such action for that purpose as Debtor requests in writing, but failure of Secured Party to comply with any such request shall not of itself be deemed a failure to exercise reasonable care. Failure of Secured Party to preserve or protect any rights with respect to such Collateral against any prior parties shall not be deemed a failure to exercise reasonable care in the custody and preservation of such Collateral. (c) Waivers. Any delay on the part of Secured Party in exercising any power, privilege or right under the Loan Agreement, this Security Agreement or under any other instrument or document executed by Debtor in connection herewith shall not operate as a waiver thereof. No single or partial exercise thereof, or the exercise of any other power, privilege or right shall preclude other or further exercise thereof, or the exercise of any other power, privilege or right. The waiver by Secured Party in writing of any default by Debtor shall not constitute a waiver of any subsequent defaults but shall be restricted to the default so waived. (d) Rights Cumulative. All rights, remedies and powers of Secured Party hereunder are irrevocable and cumulative, and nothing contained herein shall be construed as in any way modifying, limiting, creating an alternative to or exclusive of, and shall be in addition to all rights, remedies and power is given by the Loan Agreement or the Commercial Code, or any other applicable rules of decision, regulations or laws now existing or hereafter enacted. 10 (e) Rules of Construction. In this Security Agreement, words in the singular include the plural, and in the plural include the singular; words of the masculine gender include the feminine and the neuter, and when the sense so indicates words of the neuter gender may refer to any gender and the word "or" is disjunctive but not exclusive; and the words "include", "including" or "includes" are not limiting terms. The captions and section numbers appearing in this Security Agreement are inserted only as a matter of convenience. They do not define, limit or describe the scope or intent of the provisions of this Security Agreement. (f) Severability. If any term or provision set forth in this Security Agreement shall be held invalid or unenforceable, the remainder of this Security Agreement, or the application of such terms or provisions to persons or circumstances, other than those to which it is held invalid or unenforceable, shall be construed in all respects as if such invalid or unenforceable term or provision were omitted. (g) Counterparts. This Security Agreement may be executed in any number of counterparts, all of which shall constitute one and the same instrument, and any party hereto may execute this Security Agreement by signing and delivering one or more counterparts. (h) Successors. The terms of this Security Agreement shall be binding upon the Debtor, its successors, assigns, heirs, executors and personal representatives, including all "new debtors" within the meaning of the Commercial Code, and shall inure to the benefit of Secured Party, its successors and any holder, owner or assignee of any rights in the Loan Agreement and will be enforceable by them as their interest may appear. (i) Enforcement Expenses. In the event of any action to enforce this Security Agreement or to protect the security interest of Secured Party in the Collateral, or to protect, preserve, maintain, process, assemble, develop, insure, market or sell any Collateral, Debtor agrees to pay the costs owed and expenses thereof, together with reasonable and documented attorneys' fees (including fees incurred in appeals and post judgment enforcement proceedings). (j) Choice of Law. THIS SECURITY AGREEMENT SHALL BE CONSTRUED, AND THE RIGHTS AND OBLIGATIONS OF THE DEBTOR AND SECURED PARTY SHALL BE DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, EXCEPT THAT THE LAWS OF THE STATE WHERE THE COLLATERAL IS LOCATED SHALL GOVERN THIS SECURITY AGREEMENT (A) TO THE EXTENT NECESSARY TO PERFECT AND/OR ENFORCE THE LIENS CREATED BY THIS SECURITY AGREEMENT AND TO THE EXTENT NECESSARY TO OBTAIN THE BENEFIT OF THE RIGHTS AND REMEDIES SET FORTH HEREIN WITH RESPECT TO THE COLLATERAL, AND (B) FOR PROCEDURAL REQUIREMENTS THAT MUST BE GOVERNED BY THE LAWS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED. (k) Jurisdiction, Venue, Service of Process. DEBTOR CONSENTS TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL COURTS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED AND MARYLAND AND AGREES THAT ALL DISPUTES CONCERNING THIS SECURITY AGREEMENT BE HEARD IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE IN WHICH THE COLLATERAL IS LOCATED 11 OR IN MARYLAND. DEBTOR AGREES THAT SERVICE OF PROCESS MAY BE EFFECTED UPON IT UNDER ANY METHOD PERMISSIBLE UNDER THE LAWS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED OR MARYLAND, AND DEBTOR IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN THE STATE AND FEDERAL COURTS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED AND MARYLAND. (l) Amendments. No amendment to this Security Agreement shall be effective unless the same shall be in writing and signed by the party to be charged. (m) Notices. All notices, demands or requests required or permitted to be given to any party hereto shall be given and deemed effective as provided in the Loan Agreement. The parties hereby agree that a notice sent as specified in this paragraph at least ten (10) days before the date of any intended public sale or the date after which any private sale or other intended disposition of the Collateral is to be made shall be deemed to be reasonable notice of such sale or other disposition. (n) Joint Preparation. This Security Agreement shall be deemed to have been prepared jointly by the parties hereto. Any ambiguity herein shall not be interpreted against any party hereto and shall be interpreted as if each of the parties hereto had prepared this Security Agreement. (o) Entire Agreement. This Security Agreement, the schedules and exhibits hereto and the agreements and instruments required to be executed and delivered hereunder set forth the entire agreement of the parties with respect to the subject matter hereof and supersede and discharge all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter and negotiations. There are no oral conditions precedent to the effectiveness of this Security Agreement. (p) Joint and Several. If more than one Debtor has signed this Security Agreement, their obligations shall be joint and several. [Signature Page Follows] 12 SIGNATURE PAGE TO LESSEE SECURITY AGREEMENT IN WITNESS WHEREOF, the parties have executed this Security Agreement as of the date first written above. SECURED PARTY: OMEGA HEALTHCARE INVESTORS, INC., a Maryland corporation By: /s/ Taylor Pickett -------------------------------- Its: CEO ------------------------------- DEBTOR: SENIOR CARE FLORIDA LEASING, LLC, a By: SENIOR CARE GOLFVIEW, LLC Delaware limited liability company SENIOR CARE GOLFCREST, LLC SENIOR CARE SOUTHERN PINES, LLC By: Diversicare Leasing Corp., its sole SENIOR CARE CEDAR HILLS, LLC member By: /s/ William R. Council, III ---------------------------------- Name: William R. Council, III By: Senior Care Florida Leasing, LLC, its ----------------------- sole member Its: President ------------------------------ By: Diversicare Leasing Corp., its sole member By: /s/ William R. Council, III --------------------------- Name: William R. Council, III ----------------------- Its: President ---------

SCHEDULE 1 DEBTOR: OMEGA HEALTHCARE INVESTORS, INC. SECURED PARTY: SENIOR CARE FLORIDA LEASING, LLC SENIOR CARE GOLFVIEW, LLC SENIOR CARE GOLFCREST, LLC SENIOR CARE SOUTHERN PINES, LLC SENIOR CARE CEDAR HILLS, LLC FACILITIES: 1. Golfview Nursing Home, 3636 10th Avenue North, St. Petersburg, Florida 33713 2. Golfcrest Nursing Home, 600 North 17th Avenue, Hollywood, Florida 33020 3. Southern Pines Nursing Center, 6140 Congress Street, New Port Richey, Florida 34653 4. Cedar Hills Nursing Center, 2061 Hyde Park Road, Jacksonville, Florida 32210 EX-10.17 19 g84031exv10w17.txt EX-10.17 FIRST AMENDMENT TO PROMISSORY NOTE Exhibit 10.17 FIRST AMENDMENT TO REDUCED AND MODIFIED RENEWAL REVOLVING PROMISSORY NOTE THIS FIRST AMENDMENT TO REDUCED AND MODIFIED RENEWAL REVOLVING PROMISSORY NOTE is made and entered into by and among AMSOUTH BANK (the "Bank") and DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation (the "Borrower"). W I T N E S S E T H: _ _ _ _ _ _ _ _ _ _ WHEREAS, Borrower executed to Bank that certain Reduced and Modified Renewal Revolving Promissory Note dated December 15, 2002, in the original principal amount of TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 ($2,500,000.00) DOLLARS (the "Note"); and WHEREAS, the terms of the Note provided for payment of all principal and unpaid interest at maturity on the 11th day of July 2003 (the "Maturity Date"); and WHEREAS, the Borrower has requested that the Maturity Date of the Note be extended for one month, until August 11, 2003, and Bank has agreed to such extension; and WHEREAS, the parties have agreed that the Note should be amended to reflect this extension of the Maturity Date. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The Note is amended to provide that "All principal and unpaid interest shall be payable at maturity on the 11th day of August, 2003 (the "Maturity Date"). 2. The Note is amended as stated herein, but no further or otherwise, and the terms and provisions of the Note, as hereby amended, shall be and continue to be in full force and effect. Nothing herein is intended to operate to release or diminish any right of Bank under the Note or with respect to any collateral securing the Note or with respect to any guaranty or suretyship agreement for the Note, all of which shall remain in full force and effect. This instrument constitutes the entire agreement of the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, this instrument has been executed as of the 11th day of July, 2003. DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation By: /s/ William R. Council III ------------------------------ William R. Council III Title: President BANK: AMSOUTH BANK By: /s/ Tim McCarthy ------------------------------ Tim McCarthy, Vice President EX-10.18 20 g84031exv10w18.txt EX-10.18 FIRST AMENDMENT TO PROMISSORY NOTE EXHIBIT 10.18 FIRST AMENDMENT TO RENEWAL PROMISSORY NOTE THIS FIRST AMENDMENT TO RENEWAL PROMISSORY NOTE is made and entered into by and among AMSOUTH BANK (the, "Bank") and ADVOCAT, INC., a Delaware corporation (the "Borrower"). W I T N E S S E T H : WHEREAS, Borrower executed to Bank that certain Renewal Promissory Note dated December 15, 2002, in the original principal amount of TWO MILLION SIX HUNDRED NINETEEN THOUSAND TWO HUNDRED FIFTY ONE AND 53/100 ($2,619,251.53) DOLLARS, which Renewal Promissory Note renewed and replaced the Reimbursement Promissory Note dated October 1, 2000 executed by Borrower in the original principal amount of $3,000,000.00 (the "Note"); and WHEREAS, Bank has agreed to modify the Note in accordance with the terms and conditions of the Third Amendment to Master Amendment dated as of July 11, 2003, executed by Bank, and Debtors (as defined therein). NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The Note is amended to provide that the Maturity Date, as defined in the Note, shall be changed from July 11, 2003 to January 9, 2004. 2. The Note is amended as stated herein, but no further or otherwise, and the terms and provisions of the Note, as hereby amended, shall be and continue to be in full force and effect. Nothing herein is intended to operate to release or diminish any right of Bank under the Note or with respect to any collateral securing the Note or with respect to any guaranty or suretyship agreement for the Note, all of which shall remain in full force and effect. This instrument constitutes the entire agreement of the parties with respect to the subject matter hereof. 1 IN WITNESS WHEREOF, this instrument has been executed on the ___ day of ____________________, 2003 to be effective on the 11th day of July, 2003. BORROWER: ADVOCAT, INC., a Delaware corporation By: /s/ William R. Council, III ---------------------------- Name: William R. Council, III Title: President BANK: AMSOUTH BANK By: /s/ Tim McCarthy ------------------------------ Tim McCarthy, Vice President 2 EX-10.19 21 g84031exv10w19.txt EX-10.19 THIRD AMENDMENT TO PROMISSORY NOTE EXHIBIT 10.19 THIRD AMENDMENT TO RENEWAL PROMISSORY NOTE THIS THIRD AMENDMENT TO RENEWAL PROMISSORY NOTE is made and entered into by and among AMSOUTH BANK (the, "Bank") and DIVERSICARE ASSISTED LIVING SERVICES, NC, LLC, a Tennessee limited liability company (the "Borrower"). W I T N E S S E T H : WHEREAS, Borrower executed to Bank that certain Renewal Promissory Note dated October 1, 2000, in the original principal amount of NINE MILLION FOUR HUNDRED TWELVE THOUSAND THREE HUNDRED EIGHTY THREE AND 87/100 ($9,412,383.87) DOLLARS, as amended by the First Amendment to Renewal Promissory Note executed by Borrower in December, 2000, as amended by that Second Amendment to Renewal Promissory Note executed by Borrower and Bank effective as of December 15, 2002 (the "Note"); and WHEREAS, Bank has agreed to further modify the Note in accordance with the terms and conditions of the Third Amendment to Master Amendment dated as of July 11, 2003, executed by Bank and Debtors (as defined therein). NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The Note is amended to provide that the Maturity Date, as defined in the Note, shall be changed from July 11, 2003 to January 9, 2004. 2. The Note is amended as stated herein, but no further or otherwise, and the terms and provisions of the Note, as hereby amended, shall be and continue to be in full force and effect. Nothing herein is intended to operate to release or diminish any right of Bank under the Note or with respect to any collateral securing the Note or with respect to any guaranty or suretyship agreement for the Note, all of which shall remain in full force and effect. This instrument constitutes the entire agreement of the parties with respect to the subject matter hereof. 1 IN WITNESS WHEREOF, this instrument has been executed on the ___ day of ______________, 2003 to be effective on the 11th day of July, 2003. BORROWER: DIVERSICARE ASSISTED LIVING SERVICES, NC, LLC, a Tennessee limited liability company By: /s/ William R. Council, III ------------------------------------ Name: William R. Council, III Title: President BANK: AMSOUTH BANK By: /s/ Tim McCarthy ------------------------------- Tim McCarthy, Vice President 2 EX-10.20 22 g84031exv10w20.txt EX-10.20 THIRD AMENDMENT TO PROMISSORY NOTE EXHIBIT 10.20 THIRD AMENDMENT TO RENEWAL PROMISSORY NOTE (OVERLINE FACILITY) THIS THIRD AMENDMENT TO RENEWAL PROMISSORY NOTE (the "Overline Facility") is made and entered into by and among AMSOUTH BANK (the, "Bank") and DIVERSICARE MANAGEMENT SERVICES, CO., a Tennessee corporation (the "Borrower"). W I T N E S S E T H : WHEREAS, Borrower executed to Bank that certain Renewal Promissory Note (Overline Facility) dated October 1, 2000, in the original principal amount of THREE MILLION FIVE HUNDRED THOUSAND AND NO/100 ($3,500,000.00) DOLLARS as amended by the First Amendment to Renewal Promissory Note (Overline Facility) executed by Borrower in December, 2000, as further amended by the Second Amendment to Renewal Promissory Note (Overline Facility) executed by Borrower and Bank to be effective as of December 15, 2002 (the "Note"); and WHEREAS, Bank has agreed to further modify the Note in accordance with the terms and conditions of the Third Amendment to Master Amendment dated as of July 11, 2003, executed by Bank and Debtors (as defined therein). NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The Note is amended to provide that the Maturity Date, as defined in the Note, shall be changed from July 11, 2003 to January 9, 2004. 2. The Note is amended as stated herein, but no further or otherwise, and the terms and provisions of the Note, as hereby amended, shall be and continue to be in full force and effect. Nothing herein is intended to operate to release or diminish any right of Bank under the Note or with respect to any collateral securing the Note or with respect to any guaranty or suretyship agreement for the Note, all of which shall remain in full force and effect. This instrument constitutes the entire agreement of the parties with respect to the subject matter hereof. 1 IN WITNESS WHEREOF, this instrument has been executed on the ___ day of ______________, 2003 to be effective on the 11th day of July, 2003. BORROWER: DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation By: /s/ William R. Council, III ----------------------------------- Name: William R. Council, III Title: President BANK: AMSOUTH BANK By: /s/ Tim McCarthy ----------------------------------- Tim McCarthy, Vice President 2 EX-10.21 23 g84031exv10w21.txt EX-10.21 SECOND AMENDMENT TO PROMISSORY NOTE EXHIBIT 10.21 SECOND AMENDMENT TO REDUCED AND MODIFIED RENEWAL REVOLVING PROMISSORY NOTE THIS SECOND AMENDMENT TO REDUCED AND MODIFIED RENEWAL REVOLVING PROMISSORY NOTE is made and entered into by and among AMSOUTH BANK (the "Bank") and DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation (the "Borrower"). W I T N E S S E T H : WHEREAS, Borrower executed to Bank that certain Reduced and Modified Renewal Revolving Promissory Note dated December 15, 2002, in the original principal amount of TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 ($2,500,000.00) DOLLARS, as amended by that First Amendment to Reduced and Modified Renewal Note executed by Borrower and Bank on July 11, 2003 (the "Note"); and WHEREAS, Bank has agreed to further modify the Note in accordance with the terms and conditions of the Third Amendment to Master Amendment dated as of July 11, 2003, executed by Bank and Debtors (as defined therein). NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The Note is amended to provide that the Maturity Date, as defined in the Note, shall be changed from August 11, 2003 to January 9, 2004. 2. The Note is amended as stated herein, but no further or otherwise, and the terms and provisions of the Note, as hereby amended, shall be and continue to be in full force and effect. Nothing herein is intended to operate to release or diminish any right of Bank under the Note or with respect to any collateral securing the Note or with respect to any guaranty or suretyship agreement for the Note, all of which shall remain in full force and effect. This instrument constitutes the entire agreement of the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, this instrument has been executed on the ___ day of ______________, 2003. DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation By: /s/ William R. Council, III ----------------------------------- William R. Council, III Title: President BANK: AMSOUTH BANK By: /s/ Tim McCarthy ----------------------------------- Tim McCarthy, Vice President EX-10.22 24 g84031exv10w22.txt EX-10.22 THIRD AMENDMENT TO MASTER DOCUMENTS EXHIBIT 10.22 THIRD AMENDMENT TO MASTER AMENDMENT TO LOAN DOCUMENTS AND AGREEMENT THIS THIRD AMENDMENT TO MASTER AMENDMENT TO LOAN DOCUMENTS AND AGREEMENT is made and entered into by and between AMSOUTH BANK, successor in interest by merger to First American National Bank (hereinafter referred to as "AmSouth" or as "First American"), ADVOCAT INC., a Delaware corporation (herein referred to as "Advocat"), DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation and wholly-owned subsidiary of Advocat ("DMS"), ADVOCAT FINANCE, INC., a Delaware corporation and wholly-owned subsidiary of DMS ("AFI"), DIVERSICARE LEASING CORP., a Tennessee corporation and wholly-owned subsidiary of AFI ("DLC"), ADVOCAT ANCILLARY SERVICES, INC., a Tennessee corporation and wholly-owned subsidiary of DMS ("AAS"), DIVERSICARE CANADA MANAGEMENT SERVICES CO., INC., a corporation organized under the laws of Canada and wholly-owned subsidiary of DLC ("DCMS"), DIVERSICARE GENERAL PARTNER, INC., a Texas corporation and wholly-owned subsidiary of DLC ("DGP"), FIRST AMERICAN HEALTH CARE, INC., an Alabama corporation and wholly-owned subsidiary of DLC ("FAHC"), DIVERSICARE LEASING CORP. OF ALABAMA, an Alabama corporation and wholly-owned subsidiary of DLC ("DLCA"), ADVOCAT DISTRIBUTION SERVICES, INC., a Tennessee corporation and wholly-owned subsidiary of DMS ("ADS"), DIVERSICARE ASSISTED LIVING SERVICES, INC., a Tennessee corporation and a wholly-owned subsidiary of AFI ("DALS"), DIVERSICARE ASSISTED LIVING SERVICES, NC, LLC, a Tennessee limited liability company formed by DMS and DALS ("DALS-NC"), DIVERSICARE ASSISTED LIVING SERVICES, NC I, LLC, a Delaware limited liability company ("DALS-NC I"), DIVERSICARE ASSISTED LIVING SERVICES, NC II, LLC, a Delaware limited liability company ("DALS-NC II") both of DALS-NC I and DALS-NC II being subsidiary entities of DALS-NC, STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky corporation and wholly-owned subsidiary of DLC ("SHCM"), DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company ("DAO"), DIVERSICARE GOOD SAMARITAN, LLC, a Delaware limited liability company ("DGS"), DIVERSICARE PINEDALE, LLC, a Delaware limited liability company ("DP"), DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company ("DWH"), each of DAO, DGS, DP and DWH being subsidiary entities of DLC, (Advocat and all of its direct and indirect subsidiaries, as identified hereinabove, being sometimes referred to herein collectively as the "Debtors," whether in their capacity as a Borrower, Guarantor, Pledgor, Subsidiary or otherwise, as defined in the Loan Documents referred to below), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation being one and the same as GMAC-CM Commercial Mortgage Corporation ("GMAC"). W I T N E S S E T H: WHEREAS, pursuant to the terms of Master Amendment to Loan Documents and Agreement executed on November 8, 2000 and dated as of October 1, 2000 (the Master Amendment to Loan Documents and Agreement, executed by the parties on November 8, 2000 and dated as of October 1, 2000, as amended by that First Amendment to Master Amendment to Loan Documents and Agreement executed by the parties on November 28, 2000 and dated as of October 1, 2000, and as amended by that Second Amendment to Master Amendment to Loan 1 Documents and Agreement executed by the parties to be effective as of December 15, 2002, and as further amended as herein set forth, being herein called the "Master Amendment"), AmSouth agreed to modify the Indebtedness and the Loan Documents ("Indebtedness" and "Loan Documents" being defined in the Master Amendment); and WHEREAS, pursuant to the terms of a Second Amendment to Master Amendment to Loan Documents and Agreement executed by the parties hereto to be effective as of December 15, 2002 (the "Second Amendment") AmSouth agreed to further modify the Indebtedness and the Loan Documents; and WHEREAS, pursuant to the terms of the Second Amendment, Advocat executed a Capitalized Interest Note, as defined in the Second Amendment, which Capitalized Interest Note has been paid in full by Debtors; and WHEREAS, pursuant to the terms of the Second Amendment, DMS executed a Modified Revolving Note, as defined in the Second Amendment, which Modified Revolving Note was further modified by First Amendment to Reduced and Modified Renewal Revolving Promissory Note dated July 11, 2003; and WHEREAS, pursuant to the terms of the Second Amendment, Advocat executed a Renewal Reimbursement Note, as defined in the Second Amendment; and WHEREAS, pursuant to the terms of the Second Amendment, AmSouth and DMS executed a Second Amendment to Renewal Promissory Note (Overline Facility) (the original Renewal Promissory Note (Overline Facility) and all amendments thereto being referred to herein as the "Overline Note"); and WHEREAS, pursuant to the terms of the Second Amendment, DALS-NC and AmSouth executed a Second Amendment to Renewal Promissory Note (the original Renewal Promissory Note and all amendments thereto being referred to herein as the "NC Bridge Loan Note"); and WHEREAS, the Modified Revolving Note, the Renewal Reimbursement Note, the Overline Note and the NC Bridge Loan Note matured on July 11, 2003 and Debtors have failed to satisfy the indebtedness arising thereunder; and WHEREAS, pursuant to the terms of the Second Amendment, the Debtors agreed that Senior Care Florida Leasing, LLC, a Delaware limited liability company ("SCFL"), Senior Care Cedar Hills, LLC, a Delaware limited liability company ("SCCH"), Senior Care Golfcrest, LLC, a Delaware limited liability company ("SCGC"), Senior Care Golfview, LLC, a Delaware limited liability company ("SCGV"); and Senior Care Southern Pines, LLC, a Delaware limited liability company ("SCSP")would, upon formation, be joined as parties to the Master Amendment and the Loan Documents and would execute Continuing Guaranty and Suretyship Agreements in accordance with the terms of the Master Amendment; and WHEREAS, the Indebtedness and Loan Documents are fully enforceable and are not subject to any defense or counterclaim, or any claim of setoff or recoupment; and 2 WHEREAS, the Debtors are presently in default of the Indebtedness and their respective obligations arising under the Loan Documents and Debtors have again represented to AmSouth that because of their financial conditions, they are unable to pay the full amount of their liability for the Indebtedness; and WHEREAS, AmSouth has agreed to extend the maturity dates of the Modified Revolving Note, the Renewal Reimbursement Note, the Overline Note, and the NC Bridge Loan Note and AmSouth has agreed to temporarily forbear from exercising its remedies upon default subject to the terms and conditions herein set forth; and WHEREAS, each of the parties acknowledges that it has been represented by counsel in connection with the negotiation and execution of this Agreement, that the same represents an arms-length transaction, and that each of the other parties has acted in good faith in the making of this Agreement; and WHEREAS, all terms capitalized herein, but not specially defined herein, are intended to have the meanings ascribed to them in the Loan Documents, unless the context clearly indicates otherwise; and WHEREAS, the parties stipulate and agree that the facts recited hereinabove are true and correct; and WHEREAS, the parties have agreed to modify the Indebtedness and Loan Documents, and have otherwise agreed all as more particularly set forth herein. NOW, THEREFORE, for and in consideration of the foregoing recitals (all of which are incorporated herein as agreements, representations, warranties or covenants of the Debtor), of the mutual covenants and promises contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereby covenant, amend and agree as follows: 1. In regard to the Renewal Reimbursement Note, paragraph (a) of the Renewal Reimbursement Note is hereby amended only to extend the Maturity Date from July 11, 2003 to January 9, 2004 in accordance with a First Amendment to the Renewal Reimbursement Promissory Note executed by Advocat and AmSouth of even date herewith. 2. In regard to the Modified Revolving Note, as amended on July 11, 2003 pursuant to the First Amendment to the Reduced and Modified Renewal Revolving Promissory Note executed by DMS and AmSouth, the first full paragraph of the Modified Revolving Note is hereby amended on to extend the Maturity Date from August 11, 2003 to January 9, 2004 in accordance with a Second Amendment to the Reduced and Modified Renewal Revolving Promissory Note executed by DMS and AmSouth of even date herewith. 3. In regard to the NC Bridge Loan Note, as amended by the First Amendment to Renewal Promissory Note executed by DALS-NC in December, 2000, and as amended by the Second Amendment to Renewal Promissory Note executed by DALS-NC and AmSouth effective as of December 15, 2002, the parties will execute a Third Amendment to Renewal 3 Promissory Note which shall change the Maturity Date defined therein from July 11, 2003 to January 9, 2004. 4. In regard to the current Overline Note, as amended by the First Amendment to Renewal Promissory Note (Overline Facility) executed by DMS in December, 2000, and as amended by the Second Amendment to Renewal Promissory Note (Overline Facility) executed by DMS and AmSouth effective as of December 15, 2002, the parties will execute a Third Amendment to Renewal Promissory Note (Overline Facility) which shall change the Maturity Date defined therein from July 11, 2003 to January 9, 2004. 5. In regard to Letter of Credit numbered 1813094 in favor of Continental Health Properties of Thomasville, LLC in the amount of $200,000.00 (the "Letter of Credit") the parties agree that, absent a default under this Agreement or the Loan Documents, the Letter of Credit shall continue in accordance with its terms, unless earlier terminated pursuant to an agreement of between the account party and beneficiary thereunder. If the Letter of Credit is drawn prior to its termination date, Debtors shall pay to AmSouth monthly payments, the first monthly payment being due thirty (30) days after the draw, in the amount of $33,333.00 plus interest compounded from the date of draw until either (a) payment in full or (b) the earlier of default or January 9, 2004. Provided that there is no default, interest shall be compounded from the date of draw until January 9, 2004, at the rate of seven and one-half percent (7.5%) per annum. After default or January 9, 2004, interest shall accrue at the lesser of fifteen percent (15%) per annum or the maximum rate allowed by applicable law. 6. Debtors acknowledge that they are presently in default of the amended financial covenants appearing in Section 2 (c) of the Master Amendment. Debtors also acknowledge that they are presently in default of Section 5.1 (c)(iii) of the Master Credit Security Agreement executed by the parties as of December 27, 1996. Provided that there exists no other default under this Agreement or the Loan Documents, as amended, AmSouth expressly agrees to forbear from exercising its remedies under default of these amended financial covenants but only until January 9, 2004. 7. Debtors shall, in good faith, make reasonable efforts to obtain the written consent to this Agreement and the transactions contemplated hereby, of GMAC. Debtors expressly acknowledge that failure of GMAC to consent in writing to this Agreement will not result in a waiver of any of the Debtors' obligations hereunder. Debtors shall also procure the written consent of Omega to this Agreement and the transactions contemplated herein, if such consent is reasonably required by AmSouth in the future. 8. All indebtedness and obligations now or hereafter owing to AmSouth by Advocat, DMS, DALS-NC, or any other of the Debtors, or any combination thereof, including but not limited to the Indebtedness, whether evidenced by the Reimbursement Note, the Letters of Credit remaining outstanding, the Working Capital Line, the Overline Facility, the NC Bridge Loan, Renewal Reimbursement Note, or the Modified Revolving Note shall be guaranteed by all of Debtors and shall continue to be evidenced by the Additional Continuing Guaranty and Suretyship Agreements which shall continue in full force and effect. 4 9. A default in any of the Loan Documents, this instrument, any additional instruments and documents executed pursuant hereto, or in any indebtedness or obligation now or hereafter owing by any, some or all of Debtors to AmSouth, shall, at the option of AmSouth, constitute a default in any or all of the Loan Documents or indebtedness now or hereafter owing by any, some or all of the Debtors to AmSouth, provided that as between AmSouth and GMAC the further provisions of the Intercreditor Agreement shall be applicable. 10. Advocat shall pay a commitment fee to AmSouth in the total amount of $40,000.00 for the commitment and obligations of AmSouth as expressed herein as follows: Advocat shall pay to AmSouth upon execution of this Amendment the sum of $20,000.00, and on September 30, 2003, Advocat shall pay the balance of $20,000.00 to AmSouth. 11. In regard to Paragraph 10 of the Master Amendment, provided that the Debtors and SCFL, SCCH, SCGC, SCGV, and SCSP are not in default of the additional covenants set forth in Paragraph 12 below, AmSouth agrees that the direct and indirect subsidiaries of DLS referred to herein as SCFL, SCCH, SCGC, SCGV and SCSP shall not be required to be joined as parties to the Master Amendment and Loan Documents, shall not be required to execute continuing Guaranty and Suretyship Agreements in accordance with the terms of the Master Amendment and shall not be required to pledge the membership interests in such entities as security for the Indebtedness. 12. In addition to all other covenants set forth in the Loan Documents, Debtors shall not, without the prior written consent of AmSouth, loan or otherwise transfer to SCFL, SCCH, SCGC, SCGV, or SCSP, the proceeds of the Modified Revolving Note, or any assets whatsoever, including but not limited to, cash, certificates of deposit, stock certificates, real property, personal property, membership interests, fixtures, furniture, notes, accounts receivable, and any other tangible or intangible assets. AmSouth acknowledges that in the ordinary course of business, Debtors provide certain services to each of SCFL, SCCH, SCGC, SCGV and SCSP, including operational and financial management, insurance, employee benefits, and other similar services. In providing these services, Debtors may purchase goods and services and subsequently receive reimbursement for such purchases. AmSouth hereby consents to Debtors providing these services and receiving reimbursement for these purchases and payments for management services. 13. The Debtors hereby ratify and restate all of the covenants, warranties and representations contained in the Loan Agreement, as amended, and the Master Amendment, as amended, as of the date hereof, and each hereby acknowledges and confirms that the terms and conditions of the Loan Agreement, as amended, and the Master Amendment, as amended, remain in full force and effect. In addition, the Debtors expressly agree that they shall provide AmSouth with copies of all monthly or other periodic operating, financial or restructuring status reports that are generated by any Debtor for the senior management of any Debtor or any of Debtors' boards of directors when provided to management or the boards of directors. The Debtors shall provide AmSouth with weekly written reports, unless AmSouth, in its sole discretion has approved a verbal report regarding the following: (i) negotiations or discussions regarding the sale of any Debtor entities or assets owned by any Debtor, (ii) negotiations with other secured creditors of Debtors, and (iii) other information as AmSouth may reasonably request to be included in the weekly report. Debtors shall provide the Lender with (i) monthly 5 borrowing base reports and monthly aging report of accounts receivable and accounts payable, (ii) monthly (within 30 days), quarterly (within 45 days) and annually (within 90 days) consolidated income statements, balance sheets and cash flow statements prepared in conformity with GAAP, inclusive of management's analysis and discussion of operating, and financial results and activities. Debtors shall also provide AmSouth with a monthly compliance certificate evidencing that the Debtors are in compliance with their obligations under this Agreement. AmSouth representatives, accountants, consultants, attorneys or other professionals shall have reasonable access to the premises, upon reasonable advance notice, and books and records of the Debtors for the purpose of (i) inspecting the collateral of the AmSouth and (ii) reviewing and copying such books and records as reasonably determined by AmSouth. 14. Debtors further covenant and agree that, upon execution of this Agreement, they will cause to be paid all of the fees and expenses incurred by AmSouth, its agents, attorneys, accountants, appraisers, employees and representatives, pursuant to all actions contemplated by the Loan Documents no later than fifteen (15) days after presentment of invoices for such fees and expenses to Debtors by AmSouth. Failure of Debtors to timely pay such invoices shall constitute a default hereunder. 15. The indebtedness evidenced by the Modified Revolving Note, the Renewal Reimbursement Note, Overline Facility and NC Bridge Loan, may be prepaid at any time without premium. 16. The Master Credit and Security Agreement, as amended, and any other Loan Documents affected hereby, are amended to the extent necessary to conform such instruments and documents to the provisions set forth herein. 17. Debtors hereby acknowledge and stipulate that none of them has any claims or causes of action against AmSouth of any kind whatsoever. Debtors hereby release AmSouth, and AmSouth's officers, directors, employees, representatives, agents, attorneys, accountants and consultants. from any and all claims, causes of action, demands and liabilities of any kind whatsoever, whether direct or indirect, fixed or contingent, liquidated or non-liquidated, disputed or undisputed, known or unknown, which Debtors, or any of them, has or which arises out of any acts or omissions occurring prior to the execution of this Agreement relating in any way to any event, circumstances, action or failure to act from the beginning of time to the execution of this Agreement. 18. To the extent required by the Loan Documents, as amended, or the Master Amendment, as amended, GMAC has executed this Amendment for purposes of consenting to the terms hereof. 6 IN WITNESS WHEREOF, the parties hereto have executed this instrument this ____ day of August, 2003, to be effective July 11, 2003. AMSOUTH BANK, successor in interest by merger to First American National Bank By: /s/ Tim McCarthy ---------------------------------------------- Tim McCarthy, Senior Vice President DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President ADVOCAT INC., a Delaware corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President DIVERSICARE LEASING CORP., a Tennessee corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President ADVOCAT ANCILLARY SERVICES, INC., a Tennessee corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President 7 DIVERSICARE CANADA MANAGEMENT SERVICES CO., INC., an Ontario, Canada corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President DIVERSICARE GENERAL PARTNER, INC., a Texas corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President FIRST AMERICAN HEALTH CARE, INC., an Alabama corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President ADVOCAT DISTRIBUTION SERVICES, INC., a Tennessee corporation By: /s/ William R. Council, III --------------------------------------------- Name: William R. Council, III Title: President ADVOCAT FINANCE, INC., a Delaware corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President 8 DIVERSICARE LEASING CORP. OF ALABAMA, INC., an Alabama corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President DIVERSICARE ASSISTED LIVING SERVICES, INC., a Tennessee corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President DIVERSICARE ASSISTED LIVING SERVICES, NC, LLC, a Tennessee limited liability company By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company By: /s/ William R. Council, III --------------------------------------------- Name: William R. Council, III Title: President 9 STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky corporation By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President DIVERSICARE GOOD SAMARITAN, LLC, a Delaware limited liability company By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President DIVERSICARE PINEDALE, LLC, a Delaware limited liability company By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company By: /s/ William R. Council, III ---------------------------------------------- Name: William R. Council, III Title: President GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation By: ----------------------------------------------- Name: -------------------------------------- Title: ------------------------------------- 10 EX-31.1 25 g84031exv31w1.txt EX-31.1 302 CERTIFICATION OF THE CEO Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, William R. Council, III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Advocat Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)4 and 15d-15(e)4) for the registrant and have: a Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b Any fraud, whether or not material, that involves management or other employees who b have a significant role in the registrant's internal controls over financial reporting. August 13, 2003 /s/ William R. Council, III --------------------------------- William R. Council, III Chief Executive Officer EX-31.2 26 g84031exv31w2.txt EX-31.2 302 CERTIFICATION OF THE CFO Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, L. Glynn Riddle, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Advocat Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)4 and 15d-15(e)4) for the registrant and have: a Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b Any fraud, whether or not material, that involves management or other employees who b have a significant role in the registrant's internal controls over financial reporting. August 13, 2003 /s/ L. Glynn Riddle, Jr. ------------------------------- L. Glynn Riddle, Jr. Chief Financial Officer EX-32 27 g84031exv32.txt EX-32 906 CERTIFICATION OF THE CEO AND THE CFO Exhibit 32 CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q OF ADVOCAT INC. FOR THE QUARTER ENDED JUNE 30, 2003 The undersigned hereby certify, pursuant to 18 U.S.C. Section 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned's best knowledge and belief, the Quarterly Report on Form 10-Q for Advocat Inc. ("Issuer") for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (a) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. A signed original of this written statement required by Section 906 has been provided to Advocat Inc. and will be retained by Advocat Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. ss. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. This Certification is executed as of August 13, 2003. /s/ William R. Council, III ------------------------------------- William R. Council, III Chief Executive Officer /s/ L. Glynn Riddle, Jr. ------------------------------------- L. Glynn Riddle, Jr. Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----