ADVOCAT INC. - FORM 10-Q


	Nine Months Ended September 30,
(in thousands)	2005			2004			Change			%
REVENUES:
Patient revenues, net	$	149,426		$	140,058		$	9,368			6.7	%
Resident revenues		9,543			9,162			381			4.2

Net revenues		158,969			149,220			9,749			6.5

EXPENSES:
Operating		123,602			116,940			6,662			5.7
Lease		11,950			11,494			456			4.0
Professional liability		(4,837	)		(2,185	)		(2,652	)		121.4
General and administrative		10,577			9,316			1,261			13.5
Depreciation and amortization		3,719			3,540			179			5.1

Total expenses		145,011			139,105			5,906			4.2

OPERATING INCOME		13,958			10,115			3,843			38.0

OTHER INCOME (EXPENSE):
Foreign currency transaction gain		136			496			(360	)		(72.6	)
Interest income		401			155			246			158.7
Interest expense		(2,417	)		(2,280	)		(137	)		6.0

		(1,880	)		(1,629	)		(251	)		15.4

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		12,078			8,486			3,592			42.3
PROVISION (BENEFIT) FOR INCOME TAXES		(150	)		186			(336	)		(180.6	)

NET INCOME FROM CONTINUING OPERATIONS	$	12,228		$	8,300		$	3,928			47.3	%

Percentage of Net Revenues


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
REVENUES:
Patient revenues, net		94.1	%		94.0	%		94.0	%		93.9	%
Resident revenues		5.9			6.0			6.0			6.1

Net revenues		100.0			100.0			100.0			100.0


EXPENSES:
Operating		78.5			77.9			77.8			78.4
Lease		7.3			7.4			7.5			7.7
Professional liability		1.8			4.8			(3.1	)		(1.5	)
General and administrative		6.2			6.6			6.7			6.2
Depreciation and amortization		2.4			2.2			2.3			2.4

Total expenses		96.2			98.9			91.2			93.2

OPERATING INCOME		3.8			1.1			8.8			6.8

OTHER INCOME (EXPENSE):
Foreign currency transaction gain		0.5			0.6			0.1			0.3
Interest income		0.2			0.2			0.2			0.1
Interest expense		(1.6	)		(1.5	)		(1.5	)		(1.5	)

		(0.9	)		(0.7	)		(1.2	)		(1.1	)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		2.9			0.4			7.6			5.7
PROVISION (BENEFIT) FOR INCOME TAXES		(0.3	)		0.0			(0.1	)		0.1

NET INCOME FROM CONTINUING OPERATIONS		3.2	%		0.4	%		7.7	%		5.6	%

Three Months Ended September 30, 2005 Compared With Three Months Ended September 30, 2004

As noted in the overview, the Company has entered into several divestiture and lease termination transactions in recent periods, and the consolidated financial statements of the Company have been reclassified to present such transactions as discontinued operations. Accordingly, the related revenue, expenses, assets, liabilities and cash flows have been reported separately, and the discussion below addresses principally the results of the Company’s continuing operations.

Revenues. Net revenues increased to $54.5 million in 2005 from $51.7 million in 2004, an increase of $2.8 million, or 5.3%. Patient revenues increased to $51.3 million in 2005 from $48.6 million in 2004, an increase of $2.7 million, or 5.4%. The increase in patient revenues is due to Medicare rate increases that became effective October 1, 2004, increased Medicare utilization, increased Medicaid rates in certain states and a 0.7% increase in census in 2005 as compared to 2004. As a percentage of total census, Medicare days increased to 13.0% in 2005 from 12.8% in 2004. Medicare revenues were 29.5% of patient revenue in 2005 and 28.5% in 2004, while Medicaid and similar programs were 58.2% in 2005 compared to 60.4% in 2004.

Resident revenues increased to $3.2 million in 2005 from $3.1 million in 2004, an increase of $0.1 million, or 3.7%. This increase is attributable to increased rates in 2005 as compared to 2004 and to a 2.1% increase in census in 2005 as compared to 2004.

Ancillary service revenues, prior to contractual allowances, increased to $10.9 million in 2005 from $8.9 million in 2004, an increase of $2.0 million, or 22.3%. The increase is primarily attributable to increased utilization of ancillary service programs. Certain per person annual Medicare reimbursement limits on therapy services have been suspended until December 31, 2005. The limits impose a $1,590 per patient annual ceiling on physical, speech and occupational therapy services. Current Federal budget reconciliation discussions and draft legislation by Congress includes a provision for an additional one year deferral of this provision, delaying implementation of this rule until January 1, 2007. The Company is unable to quantify the impact that these limitations will have. However, it is expected that the reimbursement limitations, if implemented, will reduce therapy revenues, and negatively impact the Company’s operating results and cash flows.

Operating expense. Operating expense increased to $42.8 million in 2005 from $40.3 million in 2004, an increase of $2.5 million, or 6.2%. As a percentage of patient and resident revenues, operating expense increased to 78.5% in 2005 from 77.9% in 2004. The increase in operating expense is primarily attributable to cost increases related to wages and benefits.

The largest component of operating expenses is wages, which increased to $25.0 million in 2005 from $23.5 million in 2004, an increase of $1.5 million, or 6.2%. This increase is primarily attributable to an increase in wages as a result of competitive labor markets in most of the areas in which the Company operates and increased census.

Lease expense. Lease expense increased to $4.0 million in 2005 from $3.8 million in 2004. The increase in rent expense is primarily due to contingent rent expense incurred in connection with certain leases, and to increased expense in connection with a lease for one facility that was renewed effective April 2005.

Professional liability. Professional liability expense decreased to $1.0 million in 2005 from $2.5 million in 2004, a decrease of $1.5 million. The provision for current liability claims recorded during the three months ended September 30, 2005 was partially offset by downward adjustments in the liability primarily resulting from the quarterly actuarial valuations, resulting in a net expense of $1.0 million in the period. These reductions from the quarterly actuarial valuation were primarily the result of the effects of settlements of certain claims for amounts less than had been reserved in prior periods and the resulting effect of these settlements on the assumptions inherent to the actuarial estimate. These 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 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.

General and administrative expense. General and administrative expense was approximately $3.4 million in both 2005 and 2004. As a percentage of total net revenues, general and administrative expense was approximately 6.2% in 2005 and 6.6% and 2004.

Depreciation and amortization. Depreciation and amortization expense increased to $1.3 million in 2005 from $1.2 million in 2004, an increase of $0.1 million or 8.7%. The increase was primarily due to capital expenditures made during the periods.

Foreign currency transaction gain. A foreign currency transaction gain of $258,000 was recorded in 2005, compared to a gain of $303,000 in 2004. These gains result from foreign currency translation of a note receivable from the sale of the Company’s Canadian operations.

Interest income. Interest income increased to $132,000 in 2005 from $111,000 in 2004, an increase of $21,000. The majority of this interest income is non-cash interest income related to amortization of discount on a note receivable recorded in connection with the 2004 sale of the Company’s Canadian subsidiary.

Interest expense. Interest expense increased to $0.9 million in 2005 from $0.8 million in 2004, in increase of $0.1 million or 14.5%. Interest expense increased as a result of new notes issued in connection with the acquisition of a facility and the settlement of certain professional liability claims and other disputes, and interest rate increases on the Company’s variable rate debt. These increases were offset by reduction in interest as a result of the payment of debt.

Income from continuing operations before income taxes; income from continuing operations per common share. As a result of the above, continuing operations reported income before income taxes of $1.6 million in 2005 compared to income before income taxes of $0.2 million in 2004. The benefit for income taxes was $170,000 in 2005, compared to a provision for income taxes of $32,000 in 2004. The Company’s effective tax rate differs materially from the statutory rate mainly due to changes in the Company’s valuation allowance for net deferred tax assets. The basic and diluted income per share from continuing operations were $0.29 and $0.27, respectively, in 2005, as compared to a basic and diluted income per share from continuing operations of $0.02 each, respectively, in 2004.

Income from discontinued operations. As discussed in the overview at the start of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company has

completed several divestitures, and has reclassified its consolidated financial statements to present these divestitures as discontinued operations for all periods presented. Loss from discontinued operations, net of taxes, was approximately $0.5 million in 2004, while there was no loss from discontinued operations in the third quarter of 2005, as the related divestitures were completed in earlier periods. Gains from the disposition of discontinued operations of $8,000, net of related taxes, were recorded in the third quarter of 2005, compared to a gain of $77,000 recorded in the third quarter of 2004.

Nine Months Ended September 30, 2005 Compared With Nine Months Ended September 30, 2004

Revenues. Net revenues increased to $159.0 million in 2005 from $149.2 million in 2004, an increase of $9.8 million, or 6.5%. Patient revenues increased to $149.4 million in 2005 from $140.1 million in 2004, an increase of $9.3 million, or 6.7%. The increase in patient revenues is due to Medicare rate increases that were effective October 1, 2004, increased Medicare utilization and increased Medicaid rates in certain states, partially offset by a 0.3% decline in census in 2005 as compared to 2004. As a percentage of total census, Medicare days increased to 13.3% in 2005 from 13.0% in 2004. Medicare revenues were 30.2% of patient revenue in 2005 and 29.3% in 2004, while Medicaid and similar programs were 58.1% in 2005 compared to 59.6% in 2004.

Resident revenues increased to $9.5 million in 2005 from $9.2 million in 2004, an increase of $0.3 million, or 4.2%. This increase is attributable to increased rates in 2005 as compared to 2004 and to a 0.7% increase in census in 2005 as compared to 2004.

Ancillary service revenues, prior to contractual allowances, increased to $31.1 million in 2005 from $27.4 million in 2004, an increase of $3.7 million, or 13.4%. The increase is primarily attributable to increased utilization of ancillary service programs. Certain per person annual Medicare reimbursement limits on therapy services have been suspended until December 31, 2005. The limits impose a $1,590 per patient annual ceiling on physical, speech and occupational therapy services. Current Federal budget reconciliation discussions and draft legislation by Congress includes a provision for an additional one year deferral of this provision, delaying implementation of this rule until January 1, 2007. The Company is unable to quantify the impact that these limitations will have. However, it is expected that the reimbursement limitations, if implemented, will reduce therapy revenues, and negatively impact the Company’s operating results and cash flows.

Operating expense. Operating expense increased to $123.6 million in 2005 from $116.9 million in 2004, an increase of $6.7 million, or 5.7%. As a percentage of patient and resident revenues, operating expense decreased to 77.8% in 2005 from 78.4% in 2004. The increase in operating expense is primarily attributable to cost increases related to wages and benefits. The decrease in operating costs as a percent of patient and resident revenues is primarily due to the effects of increases in Medicare and Medicaid rates and increased Medicare utilization, as discussed above.

The largest component of operating expenses is wages, which increased to $72.2 million in 2005 from $68.0 million in 2004, an increase of $4.2 million, or 6.0%. This increase is primarily

attributable to an increase in wages as a result of competitive labor markets in most of the areas in which the Company operates and increased Medicare census. Partially offsetting this increase, the Company experienced a decrease in wages as a result of reduced costs associated with reduced Medicaid census.

Lease expense. Lease expense increased to $12.0 million in 2005 from $11.5 million in 2004. The increase in rent expense is primarily due to contingent rent expense incurred in connection with certain leases, and to increased expense in connection with a lease for one facility that was renewed effective April 2005.

Professional liability. Professional liability expense in 2005 resulted in a net benefit of $4.8 million, compared to a benefit of $2.2 million in 2004, an increase in net benefit of $2.6 million. During the nine months ended September 30, 2005, the Company reduced its total recorded liabilities for self-insured professional liability risks to $34.4 million, down from $42.9 million at December 31, 2004. Downward adjustments in the liability primarily resulting from the quarterly actuarial valuations were partially offset by the provision for current liability claims recorded during the nine months ended September 30, 2005, resulting in a net benefit of $4.8 million in the period. These reductions were primarily the result of the effects of settlements of certain claims for amounts less than had been reserved in prior periods and the resulting effect of these settlements on the assumptions inherent to the actuarial estimate. These 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 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.

General and administrative expense. General and administrative expense increased to $10.6 million in 2005 from $9.3 million in 2004, an increase of $1.3 million or 13.5%. The increase is primarily attributable to increased compensation costs. As a percentage of total net revenues, general and administrative expense was approximately 6.7% in 2005 and 6.2% and 2004.

Depreciation and amortization. Depreciation and amortization expense increased to $3.7 million in 2005 from $3.5 million in 2004, an increase of $0.2 million or 5.1%. The increase was primarily due to capital expenditures made during the periods.

Foreign currency transaction gain. A foreign currency transaction gain of $136,000 was recorded in 2005, compared to a gain of $496,000 in 2004. These gains result from foreign currency translation of a note receivable from the sale of the Company’s Canadian operations.

Interest income. Interest income increased to $401,000 in 2005 from $155,000 in 2004, an increase of $246,000. The majority of this interest income is non-cash interest income related to amortization of discount on a note receivable recorded in connection with the May 2004 sale of the Company’s Canadian subsidiary.

Interest expense. Interest expense increased to $2.4 million in 2005 from $2.3 million in 2004, an increase of $0.1 million or 6.0%. Interest expense increased as a result of new notes issued in connection with the acquisition of a facility and the settlement of certain professional liability claims and other disputes, and interest rate increases on the Company’s variable rate debt. These increases were offset by reduction in interest as a result of the payment of debt.

Income from continuing operations before income taxes; income from continuing operations per common share. As a result of the above, continuing operations reported income before income taxes of $12.1 million in 2005 compared to income before income taxes of $8.5 million in 2004. The benefit for income taxes was $150,000 in 2005, compared to a provision for income taxes of $186,000 in 2004. The Company’s effective tax rate differs materially from the statutory rate mainly due to changes in the Company’s valuation allowance for net deferred tax assets. The basic and diluted income per share from continuing operations were $2.09 and $1.87, respectively, in 2005, as compared to a basic and diluted income per share from continuing operations of $1.43 and $1.29, respectively, in 2004.

Income from discontinued operations. As discussed in the overview at the start of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company has completed several divestitures, and has reclassified its consolidated financial statements to present these divestitures as discontinued operations for all periods presented. Loss from discontinued operations, net of taxes, was approximately $0.3 million in 2005 compared to a loss of $1.5 million in 2004. In addition, gains from the disposition of discontinued operations of $0.4 million and $0.2 million, net of related taxes, were recorded in 2005 and 2004, respectively.

Liquidity and Capital Resources

At September 30, 2005, the Company had negative working capital of $46.2 million and a current ratio of 0.37, compared with negative working capital of $45.5 million and a current ratio of 0.36 at December 31, 2004. Although the Company reported profits for the nine month periods ended September 30, 2005 and 2004, such profits resulted partially from downward adjustments in the Company’s accrual for self-insured risks associated with professional liability claims. The Company has recorded total liabilities for reported professional liability claims and estimates for incurred but unreported claims of $34.4 million as of September 30, 2005. The Company does not have cash or available resources to pay these accrued professional liability claims or any significant portion thereof. The Company has limited resources available to meet its operating, capital expenditure and debt service requirements during 2005.

Certain of the Company’s debt agreements contain various financial covenants, the most restrictive of which relate to current ratio requirements, tangible net worth, cash flow, net income (loss) and limits on the payment of dividends to shareholders. As of September 30, 2005, 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. Accordingly, the Company has classified the related debt principal amounts as current liabilities in the accompanying consolidated financial statements as of September 30, 2005. 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 September 30, 2005, the Company has $35.1 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 $48.3 million of debt as current liabilities as of September 30, 2005.

In April 2005, 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, that had an aggregate outstanding balance of $7.8 million at March 31, 2005. The new agreement extended the maturity date of these borrowings to January 29, 2006 and reduced the maximum amount available under the working capital line of credit to $2.3 million. The bank further agreed to temporarily forbear from exercising its remedies upon default subject to the terms and conditions set forth in the amendment. The interest rate on indebtedness other than the working capital line was revised to prime rate plus 1/2% up to a maximum of 7.5%, and the interest rate on the working capital line of credit remained unchanged at either LIBOR plus 2.5% or the bank’s prime rate plus 1/2% (up to a maximum of 9.5%). In connection with this transaction, a $250,000 certificate of deposit has been pledged as collateral for certain funds transfer services used by the Company. This amount is included in “restricted cash” in the accompanying balance sheet.

In April 2005, the Company entered into an agreement with a commercial mortgage lender to refinance certain loans secured by one nursing home. The financing agreement provided $3.7 million in financing, payable in monthly installments based on a twenty-five year amortization, with a final balloon payment in 2008, and bears interest at LIBOR plus 4%.

In May 2005, the Company entered into an agreement to extend the maturities of certain borrowings from a commercial mortgage lender. Under terms of the agreement, the lender agreed to extend the maturity dates of mortgage indebtedness with an aggregate outstanding balance of approximately $23.6 million to April 1, 2006. The interest rate and other terms of the indebtedness did not change.

In August 2005, the Company purchased a 120-bed skilled nursing facility in Oak Ridge, Tennessee. The Company had operated this facility since 1990 under a lease agreement that was to expire in February 2006. The Company purchased the nursing home for approximately $6.7 million with financing provided by a commercial finance company. The financing agreement provided $8.0 million in financing, payable in monthly installments based on a twenty-five year amortization, with a final balloon payment in 2008, and bears interest at LIBOR plus 4%. Proceeds from this loan were used to fund the acquisition and related transaction costs and to retire other debt.

The existing events 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 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 $4.6 million as of September 30, 2005. 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.

If the Company is unable to generate sufficient cash flow from its operations, is unable to successfully negotiate debt or lease amendments, or is subject to a significant judgment not covered by insurance, 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 of liabilities that might result should the Company be unable to continue as a going concern. The report of the independent registered public accounting firm on the Company’s financial statements at December 31, 2004, 2003 and 2002 includes a paragraph with regards to the uncertainty of the Company’s ability to continue as a going concern.

As of September 30, 2005, and for the nine months then ended, the Company had no borrowings under its working capital line of credit. The maximum outstanding balance of the working capital line of credit is $2.3 million. There are certain limitations based on borrowing base restrictions. The working capital line of credit matures in January 2006 with interest at either LIBOR plus 2.5% or the bank’s prime rate plus 0.50% (up to a maximum of 9.5%). Given that events of default exist under the Company’s debt agreements, 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 2005 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 Company has numerous pending liability claims, disputes and legal actions for professional liability and other related issues. The Company has limited, and sometimes no, professional liability insurance with respect to many of these claims. In the event a significant judgment is entered against the Company in one or more of these legal actions in which there is no or insufficient professional liability insurance, the Company does not anticipate that it will have the ability to pay such a judgment or judgments. As of September 30, 2005, future committed settlements total $1.7 million over the next twelve months, and $2.2 million in total. Certain of these commitments have been evidenced by promissory notes which have been included with debt in the accompanying balance sheet. Additionally, payments made or due in connection with settlement of disputed claims could have a material adverse impact on the Company’s ability to meet its obligations as they become due.

Net cash provided by operating activities of continuing operations totaled $6.1 million and $4.5 million in the nine month periods ended September 30, 2005 and 2004, respectively. These amounts primarily represent the cash flows from net operations plus changes in non-cash components of operations and by working capital changes. Discontinued operations used cash of $59,000 in the nine month period ended September 30, 2005, and provided cash of $738,000 in the nine month period ended September 30, 2004.

Investing activities used cash of $8.7 million in the nine month period ended September 30, 2005, and provided cash of $3.2 million in the nine month period ended September 30, 2004. These amounts primarily represent purchases of property plant and equipment, the purchase of a facility in 2005 and proceeds from the sale of the Company’s Canadian subsidiary in 2004. The Company has used between $2.5 million and $4.0 million for capital expenditures of continuing operations in the three calendar years ending December 31, 2004. Substantially all such expenditures were for facility improvements and equipment, which were financed principally through working capital. For the year ending December 31, 2005, the Company anticipates that capital expenditures for improvements and equipment for its existing facility operations will be approximately $4.0 million to $4.5 million.

Financing activities provided cash of $2.2 million in the nine month period ended September 30, 2005, and used cash of $7.2 million in the nine month period ended September 30, 2004. In 2005, proceeds of debt issuance provided cash of $11.7 million. These funds were used to acquire a

facility and to retire existing debt. Proceeds from the sale of discontinued operations in 2005 and 2004 were used to pay 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 of continuing operations attributable to the provision of patient and resident services at September 30, 2005 and December 31, 2004 totaled $18.4 million and $17.6 million, respectively, representing approximately 32 and 30 days revenue in accounts receivable, respectively. The allowance for bad debt was $2.0 million and $1.7 million at September 30, 2005 and December 31, 2004, respectively.

The Company continually evaluates the adequacy of its bad debt reserves based on patient mix trends, aging 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.

Stock Exchange

The Company’s stock is quoted on the NASD’s OTC Bulletin Board under the symbol AVCA.

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 December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29. This Statement amends APB Opinion No. 29, Accounting for Non-monetary Transactions. The amendments made by SFAS No. 153 are based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The provisions of SFAS 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company adopted SFAS 153 beginning July 1, 2005. The future effect of SFAS 153 on the Company’s financial statements will depend on whether the Company enters into certain non-monetary transactions. The Company, however, does not

expect the adoption of this Statement to have a significant impact on its financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment. SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The Company will be required to apply this Statement beginning January 1, 2006. The scope of SFAS 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The future effect of SFAS 123R on the Company’s financial statements will depend on whether the Company enters into any transactions involving share-based payment.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. Thus, the statement becomes effective for the Company for accounting changes and error corrections made on or after January 1, 2006. Early adoption of this standard is permitted for accounting changes and error corrections made in fiscal years beginning after June 1, 2005. The Company does not expect the adoption of Statement 154 to have a significant impact on its financial position or 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, 2004. 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 accuracy of the Company’s estimate of its anticipated professional liability expense, 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, 2004 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 September 30, 2005, the Company had outstanding borrowings of approximately $48.7 million, including $3.3 million in fixed-rate borrowings and $45.4 million in variable-rate borrowings. In the event that interest rates were to change 1%, the impact on future cash flows would be approximately $454,000 annually, representing the impact of increased or decreased interest expense on variable rate debt.

The Company has a note receivable denominated in Canadian dollars related to the sale of its Canadian operations. This note is currently recorded on the Company’s balance sheet at $5.6 million US based on the outstanding balance of the note and the exchange rate as of September 30, 2005. The carrying value of the note in the Company’s financial statements will be increased or decreased each period based on fluctuations in the exchange rate between US and Canadian currencies, and the effect of such changes will be included as income or loss in the Company’s statement of operations in the period of change. In the nine month period ended September 30, 2005, the Company reported a transaction gain of $136,000 as a result of the effect of changes in the currency exchange rates on this note. A further change of 1% in the exchange rate between US and Canadian currencies would result in a corresponding increase or decrease to other income (expense) of approximately $56,000.

ITEM 4. CONTROLS AND PROCEDURES

The Company, with the participation of its principal executive and financial officers has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of September 30, 2005. Based on this evaluation, the principal executive and financial officers have determined that such disclosure controls and procedures are effective 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.

There has been no change (including corrective actions with regard to significant deficiencies or material weaknesses) in the Company’s internal control over financial reporting that has occurred during the Company’s fiscal quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are 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 and the Company is no exception in this regard. The Company has numerous pending liability claims, disputes and legal actions 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 September 30, 2005, the Company is engaged in 17 professional liability lawsuits. Some of these matters are currently scheduled for trial within the next year and additional cases may be set for trial during this period. The ultimate results of these or any other of the Company’s professional liability claims and disputes cannot be predicted. The Company has limited, and sometimes no, professional liability insurance with regard to most of these claims. In the event a significant judgment is entered against the Company in one or more of these legal actions in which there is no or insufficient professional liability insurance, the Company would not have available cash resources to satisfy the judgment. Further, settlement of these and other cases may require cash resources that would be in excess of the Company’s available cash or other resources. These potential future payments, whether of a judgment or in settlement of a disputed claim, could have a material adverse impact on the Company’s financial position and cash flows.

On September 8, 2004, the Company entered into a settlement agreement with the attorney General of the State of Arkansas setting forth the terms by which the Company resolved all civil claims and investigations commenced by the State of Arkansas prior to the entry of the agreement, including seven lawsuits then pending in the Circuit Court of Pulaski County, Arkansas alleging violations of the Arkansas Abuse of Adults Act and violation of the Arkansas Medicaid False Claims Act with respect to certain residents of facilities operated by the Company in Arkansas. This agreement was subsequently amended to settle one additional case. Under the terms of the settlement, the Company is obligated (i) to pay $417,000 in equal monthly installments of $16,667 beginning on September 1, 2004 and ending on September 1, 2006, and (ii) to pay by no later than September 1, 2007, no less than $600,000 to install sprinkler systems in nursing homes within the State of Arkansas to be selected by the Company. The Company has incurred expenditures of approximately $309,000 through September 30, 2005 toward the requirement to install sprinkler systems.

In 2003, the Company’s insurance carriers for claims incurred in 1997 and 1998 were ordered to pay one-half respectively of a final judgment entered against the Company in a professional liability case tried in Mena, Arkansas in 2001. The Company’s 1997 policy included primary coverage of up to $1 million through one carrier that has been declared insolvent. The umbrella carrier has demanded that the Company pay this $1 million portion of the judgment. The Company has denied responsibility for this liability, and the carrier has not filed any action seeking to recover this amount.

In January 2005, the Company’s Medicare Fiscal intermediary implemented a prepayment review on approximately 80 Medicare Part B occupational therapy claims at 26 of the Company’s facilities. As

a result, payments for occupational therapy and any other services on the same bill were initially withheld, and payment was denied on approximately 22 of these claims. The Company believes that this prepayment review was a widespread review of occupational therapy services and was not limited to the Company’s facilities. The amounts billed are believed to be appropriate, and the Company is appealing the denied claims. A widespread denial of claims of this type or a material change in reimbursement for these services could have an adverse impact on the Company.

The Company cannot currently predict with certainty the ultimate impact of any of the above cases on the Company’s financial condition, cash flows or results of operations. An unfavorable outcome in any of the lawsuits, any investigation or lawsuit alleging violations of fraud and abuse laws or of elderly abuse laws or any state or Federal False Claims Act case could have a material adverse impact on the Company’s financial condition, cash flows or results of operations and could also subject the Company to fines, penalties and damages. Moreover, the Company could be excluded from the Medicare, Medicaid or other state or federally-funded health care programs, which would also have a material adverse impact on the Company’s financial condition, cash flows or results of operations.

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 6. EXHIBITS

The exhibits filed as part of this report on Form 10-Q are listed in the Exhibit Index immediately following the signature page.

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.

November 9, 2005

	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. Executive 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		Promissory Note dated August 31, 2005, in the amount of $8,000,000 in the favor of GMAC Commercial Mortgage Corporation

10.2		Loan Agreement re Briarcliff Health Care Center dated as of August 31, 2005, by and between a subsidiary of the Company, and GMAC Commercial Mortgage Corporation

10.3		Purchase and Sale Agreement dated July 5, 2005 by and between Osborne F. Wilson Development Corp., Inc. and a subsidiary of the Company.

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).

The attachments referenced in these exhibits are not included in this filing but are available from Advocat upon request.

EX-10.1 2 g98061exv10w1.txt EX-10.1 PROMISSORY NOTE 08/31/05 EXHIBIT 10.1 PROMISSORY NOTE $8,000,000.00 OAK RIDGE, TENNESSEE AUGUST 31, 2005 FOR VALUE RECEIVED, the undersigned DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company, having an address at c/o Advocat Inc., 1621 Galleria Blvd., Brentwood, Tennessee 37027 (the "BORROWER"), hereby promises to pay to the order of GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation, having an address at 200 Witmer Road, Horsham, Pennsylvania 19044-0809 (the "LENDER"), its successors and assigns as holder of this Note or, if this Note has then been endorsed "to bearer," to the bearer of this Note (Lender, its said successors and assigns, and any such bearer, being hereinafter sometimes referred to collectively as the "HOLDER"), at Lender's said address or at such other place or to such other person as may be designated in writing to Borrower by Lender, the principal sum of EIGHT MILLION AND NO/100 Dollars ($8,000,000.00) (the "LOAN"), together with interest on the unpaid balance thereof at the rate hereinafter set forth. ON THE TERMS AND SUBJECT TO THE CONDITIONS which are hereinafter set forth: Section 1. Interest Rate and Payment Dates. 1.1 Initial Rate and Initial Payment. Interest shall accrue on the outstanding principal balance hereunder from time to time from and after the date hereof at the rate of 7.67% per annum until the first Rate Adjustment Date (as defined below). On each successive Rate Adjustment Date, the rate of interest at which interest accrues shall be adjusted to the then applicable Note Rate (as defined in Section 1.4). Interest for the period beginning on the date of this Note and ending on and including the last day of the month in which this Note is dated shall be payable on the date hereof. Interest shall be paid in arrears and shall be computed on the basis of a 360-day year and actual number of days elapsed for any whole or partial month in which interest on this Note is being calculated and shall be charged on the principal balance outstanding from time to time. 1.2 Rate Adjustment Date and Payment Adjustment Dates. The rate of interest on the outstanding principal balance hereof from time to time shall be adjusted on the following dates (each being a "RATE ADJUSTMENT DATE"): the first Rate Adjustment Date shall be September 1, 2005, and subsequent Rate Adjustment Dates shall fall on the first day of each calendar month thereafter. The first payment adjustment date shall be October 1, 2005, and subsequent payment adjustment dates shall fall on the first day of each calendar month thereafter during the term of the Loan. 1.3 Default Interest Rate. If Borrower fails to make any payment of principal, interest or fees on the date on which such payment becomes due and payable (including applicable grace periods) whether at maturity or by acceleration or on any other date, such payment shall accrue interest from the date on which such payment was due (and not the date of the payment default) until paid at the fluctuating rate ("DEFAULT RATE") which is the lesser of (a) five percent (5%) per annum above the then applicable Note Rate and (b) the maximum rate permitted by applicable law. 1.4 Note Rate. The "NOTE RATE" shall mean four percent (4%) per annum plus the average of London Interbank Offered Rates ("LIBOR") for a term of one month determined solely by Holder as of each Rate Adjustment Date in the following manner: on each Rate Adjustment Date, Holder will obtain the one month LIBOR (in U.S. Dollar deposits) from the appropriate Bloomberg display page available as of the close of business announced on the last business day of the month immediately preceding the Rate Adjustment Date; in the event Bloomberg ceases publication or ceases to publish the one month LIBOR, Holder shall select a comparable publication to determine the one month LIBOR and provide notice thereof to Borrower; LIBOR may or may not be the lowest rate based upon the market for U.S. Dollar deposits in the London Interbank Eurodollar Market at which Holder prices loans on the date on which the Note Rate is determined by Holder as set forth above. 1.5 Note Rate Adjustments. This Note shall bear interest at the rate set forth above or at the applicable Note Rate until a new Note Rate is determined on each Rate Adjustment Date in accordance with the provisions hereof; provided, however, that, if Holder at any time determines, in the sole but reasonable exercise of its discretion that it has miscalculated the amount of the monthly payment of principal and/or interest (whether because of a miscalculation of the Note Rate or otherwise), Holder shall give notice to Borrower of the corrected amount of such monthly payment (and the corrected amount of the Note Rate, if applicable) and (a) if the corrected amount of such monthly payment represents an increase thereof, Borrower shall, within ten (10) calendar days after the date of such notice, pay to Holder any sums that Borrower would have otherwise been obligated under this Note to pay to Holder had the amount of such monthly payment not been miscalculated or (b) if the corrected amount of such monthly payment represents a decrease thereof, and Borrower is not otherwise in breach or default under any of the terms and provisions of the Note or the Loan Agreement of even date herewith by and between Borrower and Lender (the "LOAN AGREEMENT"), Borrower shall, within ten (10) calendar days thereafter be paid the sums that Borrower would not have otherwise been obligated to pay to Holder had the amount of such monthly payment not been miscalculated. 1.6 LIBOR Unascertainable. If (a) on any date on which the Note Rate would otherwise be set, Holder shall have determined in good faith (which determination shall be conclusive) that (i) adequate and reasonable means do not exist for ascertaining the one month LIBOR or (ii) a contingency has occurred which materially and adversely affects the London Interbank Eurodollar Market at which Holder prices loans on the date on which the Note Rate is determined by Holder as set forth above, or (b) at any time Holder shall have determined in good faith (which determination shall be conclusive) that the making, maintenance or funding of any part of the Loan has been made impracticable or unlawful by compliance by Holder in good faith with any law or guideline or interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof or with any request or directive of any such governmental authority (whether or not having the force of law) then, and 2 in any such event, Holder may notify Borrower of such determination. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given), the obligation of Holder to charge interest to Borrower at the Note Rate shall be suspended until Holder shall have later notified Borrower of Holder's determination in good faith (which determination shall be conclusive) that the circumstances giving rise to such previous determination no longer exist. 1.7 U.S. Treasury Securities. If Holder notifies Borrower of a determination under subsection 1.6 hereof for purposes of calculating the Note Rate, the one month LIBOR shall automatically be converted to the "INDEX" of the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board forty-five (45) days prior to the Rate Adjustment Date. 1.8 Reimbursement for Increased Costs. If any law or guideline or interpretation or application thereof by any governmental authority charged with the interpretation or administration thereof or compliance with any request or directive of any governmental authority (whether or not having the force of law) now existing or hereafter adopted (a) subjects Holder to any tax or changes the basis of taxation with respect to this Note, the Loan or payments by Borrower of principal, interest or other amounts due from Borrower hereunder or thereunder (except for taxes on the overall net income or overall gross receipts of Holder imposed as a result of a present or former connection between the jurisdiction of the governmental authority imposing such tax on Holder, provided that this exclusion shall not apply to a connection arising solely from Holder having executed, delivered, performed its obligations under, or received a payment under, or enforced, any of the Loan Documents (as defined in Section 8.1.1 below)), or (b) imposes upon Holder any other condition or expense with respect to this Note, the Loan or its making, maintenance or funding of any part of the Loan or any security therefor, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including, without limitation, loss of margin) upon, Holder with respect to the Note, or the making, maintenance or funding of any part of the Loan, by an amount which Holder deems to be material, Holder may from time to time notify Borrower of the amount determined in good faith (using any averaging and attribution methods) by Holder (which determination shall be conclusive) to be necessary to compensate Holder for such increase, reduction or imposition and, if Borrower is by law prohibited from paying any such amount, Holder may elect to declare the unpaid principal balance hereof and all interest accrued thereon immediately due and payable. Such amount shall be due and payable by Borrower to Holder ten (10) days after such notice is given. Section 2. Principal and Interest Payments. Commencing on October 1, 2005, and continuing on the first day of each calendar month thereafter through and including the Maturity Date (defined below), monthly payments of principal and interest shall adjust monthly and be made in such amount, taking into account the then effective Note Rate, as is sufficient to fully amortize the unpaid principal balance of the Note on the date that is twenty-five (25) years after the first Rate Adjustment Date. Section 3. Application of Payments. Payments made by Borrower on account hereof shall be applied, first, toward any Late Fees (hereinafter defined) or other fees and charges due 3 hereunder, second, toward payment of any interest due at the Default Rate, third, toward payment of any interest due at the then applicable Note Rate set forth in Section 1.4 above, and fourth, toward payment of principal. Notwithstanding the foregoing, if any advances made by Holder under the terms of any instruments securing this Note have not been repaid, any payments made may, at the option of Holder, be applied, first, to repay such advances and interest thereon, with the balance, if any, applied as set forth in the preceding sentence. Section 4. Maturity Date. Anything in this Note to the contrary notwithstanding, the entire unpaid balance of the principal amount hereof and all interest accrued thereon, to and including the Maturity Date (as defined below) (including interest accruing at the Default Rate), and all Late Fees (as defined below) shall, unless sooner paid, and except to the extent that payment thereof is sooner accelerated, be and become due and payable on September 1, 2008 (the "MATURITY DATE"). Notwithstanding any other provision contained herein, if repayment of the Loan, whether at maturity or upon acceleration or otherwise, is funded from the proceeds of any refinancing of the Loan, then Borrower shall pay to Lender an exit fee equal to one half of one percent (0.5%) of the outstanding principal balance of this Note on the date of such prepayment (which balance shall be calculated exclusive of any voluntary partial prepayments) unless Lender has received a contractually agreed upon sum for the arrangement thereof or has elected not to provide such refinancing (the "Exit Fee"). Section 5. Prepayment. Commencing the first (1st) anniversary of the Loan, prepayment of the Loan in full shall be permitted without penalty, upon not less than thirty (30) and not greater than forty (40) days prior written notice to Lender specifying the date on which prepayment is to be made. Any such prepayment shall be credited, first, toward any Late Fees due hereunder, second, toward payment of any accrued and unpaid interest due hereunder at the Default Rate, third, toward payment of any accrued and unpaid interest due hereunder at the Note Rate, and, fourth, toward payment of principal; provided, however, that if any advances made by Holder under the terms of any instruments securing this Note have not been repaid, any payments made may, at the option of Holder, be applied, first, to repay such advances, and interest thereon, with the balance, if any, applied as set forth in the preceding sentence. Notwithstanding any other provision contained herein, if prepayment of the Loan is funded from the proceeds of any refinancing of the Loan, then prepayment shall be subject to the Exit Fee. Section 6. Method of Payment. Each payment of the Loan Obligations (as defined in the Loan Agreement) shall be paid directly to Holder in lawful tender of the United States of America. Each such payment shall be paid by 1:00 p.m. Horsham, Pennsylvania, time on the date such payment is due, except if such date is not a Business Day (as defined in the Loan Agreement) such payment shall then be due on the first Business Day after such date. Any payment received after 1:00 p.m. Horsham, Pennsylvania, time shall be deemed to have been received on the immediately following Business Day. 4 Section 7. Security. The debt evidenced by this Note is to be secured by, among other things, (a) a Deed of Trust and Security Agreement (the "MORTGAGE") of even date herewith by and between Borrower and Lender, and intended to be recorded in the Real Estate Records of Anderson County, Tennessee, covering certain real property which is described in Exhibit "A" to the Deed of Trust, and (b) Guaranty Agreement of even date herewith (the "GUARANTY AGREEMENT"), given by Advocat Inc., a Delaware corporation (the "GUARANTOR"), for the benefit of Holder, and (c) a Cross-Collateralization and Cross-Default Agreement of even date herewith by and between Borrower, the Related Borrowers (as defined in the Loan Agreement), Guarantor and Lender, and intended to be recorded in the Real Estate Records of Anderson County, Tennessee. Section 8. Default. 8.1 Events of Default. Anything in this Note to the contrary notwithstanding, on the occurrence of any of the following events (each of which is referred to herein, together with each of the Events of Default defined and described in the Loan Agreement and the Mortgage as an "EVENT OF DEFAULT"), Holder may, in the exercise of its sole and absolute discretion, accelerate the debt evidenced by this Note, in which event the entire outstanding principal balance and all interest and fees accrued thereon shall immediately be and become due and payable without further notice: 8.1.1 Failure to Pay or Perform. If (a) Borrower fails in making any payment to Holder of any or all sums due hereunder within ten (10) days after such payment becomes due or on the Maturity Date or (b) there exists an uncured default under any other document or instrument evidencing or securing the Loan (collectively, the "LOAN DOCUMENTS") which has been executed by Borrower and/or Guarantor or Manager, and such default is not cured within the grace or cure period, if any, provided in any of such Loan Documents. 8.1.2 Bankruptcy. (a) If Borrower, Guarantor or Manager (i) applies for or consents to the appointment of a receiver, trustee or liquidator of Borrower, Guarantor or Manager, as the case may be, or of all or a substantial part of its assets, (ii) files a voluntary petition in bankruptcy, or admits in writing its inability to pay its debts as they come due, (iii) makes an assignment for the benefit of creditors, (iv) files a petition or an answer seeking a reorganization or an arrangement with creditors or seeking to take advantage of any insolvency law, (v) performs any other act of bankruptcy, or (vi) files an answer admitting the material allegations of a petition filed against Borrower, Guarantor or Manager in any bankruptcy, reorganization or insolvency proceeding; or (b) if (i) an order, judgment or decree is entered by any court of competent jurisdiction adjudicating Borrower or Guarantor or Manager to be bankrupt or insolvent, or approving a receiver, trustee or liquidator of Borrower or Guarantor or Manager or of all or a substantial part of its assets, or (ii) there otherwise commences with respect to Borrower or Guarantor or Manager or any of its assets any proceeding under any bankruptcy, 5 reorganization, arrangement, insolvency, readjustment, receivership or like law or statute, and if such order, judgment, decree or proceeding continues unstayed for any period of sixty (60) consecutive days after the expiration of any stay thereof. 8.1.3 Judgments. If any judgment for the payment of money in excess of $25,000.00 hereafter awarded against Borrower or a judgment in excess of $100,000 hereafter awarded against Guarantor or Manager, by any court of competent jurisdiction remains unsatisfied or otherwise in force and effect for a period of thirty (30) days after the date of such award, unless such judgment is either (i) fully covered by collectible insurance and such insurer has within such period acknowledged such coverage in writing, or (ii) although not fully covered by insurance, enforcement of such judgment has been effectively stayed, such judgment is being contested or appealed by appropriate proceedings and Borrower, Guarantor or Manager, as the case may be, has established reserves adequate for payment in the event such Person is ultimately unsuccessful in such contest or appeal and evidence thereof is provided to Lender. 8.1.4 Cross Defaults. If an event of default occurs under any of the Related Loans (as such term is defined in the Loan Agreement), which is not cured within the grace or cure period, if any, therein provided. 8.2 No Impairment of Rights. Nothing in this Section shall be deemed in any way to alter or impair any right which Holder has under this Note or the Mortgage, or any other document or instrument evidencing or securing the Loan (collectively, the "LOAN DOCUMENTS") or at law or in equity, to accelerate such debt on the occurrence of any other Event of Default provided herein or therein, whether or not relating to this Note. 8.3 Late Fees. Without limiting the generality of the foregoing provisions of this Section, if any payment of interest or principal payable under this Note is not made within ten (10) calendar days after the date on which such payment becomes due and payable (including applicable grace periods), Borrower shall thereupon automatically become obligated immediately to pay to Holder a late payment charge, for each month during which a payment delinquency exists, equal to the lesser of five percent (5%) of the amount of such payment or the maximum amount permitted by applicable law ("LATE FEES") to defray the expenses incurred by Holder in handling and processing such delinquent payment and to compensate Holder for the loss of use of such delinquent payment. 8.4 Intentionally Deleted. Section 9. Costs of Enforcement. Borrower shall pay to Holder on demand the amount of any and all expenses incurred by Holder (a) in enforcing its rights hereunder or under the Mortgage and/or the Loan Documents, (b) as the result of the occurrence of an Event of Default by Borrower in performing its obligations under this Note, including but not limited to the expense of collecting any amount owed hereunder, and of any and all attorneys' fees incurred by Holder in connection with such default, whether suit be brought or not, and (c) in protecting the security for the Loan and Borrower's obligations under the Loan Documents. Such expenses shall be added to the 6 principal amount hereof, shall be secured by the Mortgage and shall accrue interest at the Default Rate. Section 10. Borrower's Waiver of Certain Rights. Borrower and any endorser, guarantor or surety hereby waives the exercise of any and all exemption rights which it holds at law or in equity with respect to the debt evidenced by this Note, and of any and all rights which it holds at law or in equity to require any valuation, appraisal or marshalling, or to have or receive any presentment, protest, demand and notice of dishonor, protest, demand and nonpayment as a condition to Holder's exercise of any of its rights under this Note or the Loan Documents. Section 11. Extensions. The Maturity Date and/or any other date by which any payment is required to be made hereunder may be extended by Holder from time to time in the exercise of its sole discretion, without in any way altering or impairing Borrower's or Guarantor's liability hereunder. Section 12. General. 12.1 Applicable Law. This Note shall be given effect and construed by application of the laws of the State of Tennessee (without regard to the principles thereof governing conflicts of laws), and any action or proceeding arising hereunder, and each of Holder and Borrower submits (and waives all rights to object) to non-exclusive personal jurisdiction in the State of Tennessee, for the enforcement of any and all obligations under the Loan Documents except that if any such action or proceeding arises under the Constitution, laws or treaties of the United States of America, or if there is a diversity of citizenship between the parties thereto, so that it is to be brought in a United States District Court, it shall be brought in the United States District Court for the Middle District of Tennessee or any successor federal court having original jurisdiction. 12.2 Headings. The headings of the Sections, subsections, paragraphs and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents. 12.3 Construction. As used herein, (a) the term "PERSON" means a natural person, a trustee, a corporation, a limited liability company, a partnership and any other form of legal entity, and (b) all references made (i) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well, and (iii) to any Section, subsection, paragraph or subparagraph shall, unless therein expressly indicated to the contrary, be deemed to have been made to such Section, subsection, paragraph or subparagraph of this Note. 12.4 Severability. No determination by any court, governmental body or otherwise that any provision of this Note or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (a) any other such provision or (b) such provision in any circumstance not controlled by such determination. Each such provision shall 7 be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with, applicable law. 12.5 No Waiver. Holder shall not be deemed to have waived the exercise of any right which it holds hereunder unless such waiver is made expressly and in writing. No delay or omission by Holder in exercising any such right (and no allowance by Holder to Borrower of an opportunity to cure a default in performing its obligations hereunder) shall be deemed a waiver of its future exercise. No such waiver made as to any instance involving the exercise of any such right shall be deemed a waiver as to any other such instance, or any other such right. Further, acceptance by Holder of all or any portion of any sum payable under, or partial performance of any covenant of, this Note, the Mortgage or any of the other Loan Documents, whether before, on, or after the due date of such payment or performance, shall not be a waiver of Holder's right either to require prompt and full payment and performance when due of all other sums payable or obligations due thereunder or hereunder or to exercise any of Holder's rights and remedies hereunder or thereunder. 12.6 Waiver of Jury Trial; Service of Process; Court Costs. BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH BORROWER AND HOLDER MAY BE PARTIES ARISING OUT OF, IN CONNECTION WITH, OR IN ANY WAY PERTAINING TO, THIS NOTE AND/OR ANY OF THE OTHER LOAN DOCUMENTS. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS NOTE. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY BORROWER, UPON CONSULTATION WITH COUNSEL OF BORROWER'S CHOICE, AND BORROWER HEREBY REPRESENTS THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. BORROWER FURTHER REPRESENTS AND WARRANTS THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. BORROWER HEREBY IRREVOCABLY DESIGNATES NATIONAL REGISTERED AGENTS, INC., AND HIS/HER SUCCESSORS IN OFFICE, AS THE TRUE AND LAWFUL ATTORNEY OF BORROWER FOR THE PURPOSE OF RECEIVING SERVICE OF ALL LEGAL NOTICES AND PROCESS ISSUED BY ANY COURT IN THE STATE OF TENNESSEE AS WELL AS SERVICE OF ALL PLEADINGS AND OTHER DOCUMENTS RELATED TO ANY LEGAL PROCEEDING OR ACTION ARISING OUT OF THIS NOTE. BORROWER AGREES THAT SERVICE UPON SAID NATIONAL REGISTERED AGENTS, INC. SHALL BE VALID REGARDLESS OF BORROWER'S WHEREABOUTS AT THE TIME OF SUCH SERVICE AND REGARDLESS OF WHETHER BORROWER RECEIVES A COPY OF SUCH SERVICE, PROVIDED THAT HOLDER SHALL HAVE MAILED A COPY TO BORROWER IN ACCORDANCE WITH THE NOTICE PROVISIONS HEREIN. BORROWER AGREES TO PAY ALL COURT COSTS AND REASONABLE ATTORNEY'S 8 FEES INCURRED BY HOLDER IN CONNECTION WITH ENFORCING ANY PROVISION OF THIS NOTE. NOTWITHSTANDING THE FOREGOING, HOLDER AGREES TO USE REASONABLE EFFORTS TO PROVIDE BORROWER WITH NOTICE OF THE FILING OF ANY LAWSUIT BY HOLDER AGAINST BORROWER. 12.7 Offset. Upon the occurrence of an Event of Default, Holder may set-off against any principal and interest owing hereunder, any and all credits, money, stocks, bonds or other security or property of any nature whatsoever on deposit with, or held by, or in the possession of, Holder, to the credit of or for the account of Borrower, without notice to or consent of Borrower or Guarantor. 12.8 Non-Exclusivity of Rights and Remedies. None of the rights and remedies herein conferred upon or reserved to Holder is intended to be exclusive of any other right or remedy contained herein or in any of the other Loan Documents and each and every such right and remedy shall be cumulative and concurrent, and may be enforced separately, successively or together, and may be exercised from time to time as often as may be deemed necessary or desirable by Holder. 12.9 Incorporation by Reference. All of the agreements, conditions, covenants and provisions contained in each of the Loan Documents are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully set forth herein. Borrower covenants and agrees to keep and perform, or cause to be kept and performed, all such agreements, conditions, covenants and provisions strictly in accordance with their terms. 12.10 Joint and Several Liability. If Borrower consists of more than one person and/or entity, each such person and/or entity agrees that its liability hereunder is joint and several. 12.11 Business Purpose. Borrower represents and warrants that the Loan evidenced by this Note is being obtained solely for the purpose of acquiring or carrying on a business, professional or commercial activity and is not for personal, agricultural, family or household purposes. 12.12 Interest Limitation. Notwithstanding anything to the contrary contained herein or in the Mortgage or in any other of the Loan Documents, the effective rate of interest on the obligation evidenced by this Note shall not exceed the lawful maximum rate of interest permitted to be paid. Without limiting the generality of the foregoing, in the event that the interest charged hereunder results in an effective rate of interest higher than that lawfully permitted to be paid, then such charges shall be reduced by the sum sufficient to result in an effective rate of interest permitted and any amount which would exceed the highest lawful rate already received and held by Holder shall be applied to a reduction of principal and not to the payment of interest. Borrower agrees that for the purpose of determining highest rate permitted by law, any non-principal payment (including, without limitation, Late Fees and other fees) shall be deemed, to the extent permitted by law, to be an expense, fee or premium rather than interest. 9 12.13 Modification. This Note may be modified, amended, discharged or waived only by an agreement in writing signed by the party against whom enforcement of such modification, amendment, discharge or waiver is sought. 12.14 Time of the Essence. Time is strictly of the essence of this Note. 12.15 Negotiable Instrument. Borrower agrees that this Note shall be deemed a negotiable instrument, even though this Note may not otherwise qualify, under applicable law, absent this paragraph, as a negotiable instrument. 12.16 Interest Rate After Judgment. If judgment is entered against Borrower on this Note, the amount of the judgment entered (which may include principal, interest, fees, Late Fees and costs) shall bear interest at the Default Rate, to be determined on the date of the entry of the judgment. 12.17 Relationship. Borrower and Holder intend that the relationship between them shall be solely that of creditor and debtor. Nothing contained in this Note or in any of the other Loan Documents shall be deemed or construed to create a partnership, tenancy-in-common, joint tenancy, joint venture or co-ownership by or between Borrower and Holder. 12.18 Waiver of Automatic Stay. BORROWER HEREBY AGREES THAT, IN CONSIDERATION OF LENDER'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN, IN THE EVENT THAT BORROWER SHALL (A) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER OF TITLE 11 OF THE UNITED STATES CODE, AS AMENDED (THE "BANKRUPTCY CODE"), OR SIMILAR LAW OR STATUTE; (B) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE; (C) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (D) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR; OR (E) BE THE SUBJECT OF AN ORDER, JUDGMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED AGAINST ANY BORROWER FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS, THEN, TO THE EXTENT PERMITTED BY APPLICABLE LAW AND SUBJECT TO COURT APPROVAL, HOLDER SHALL THEREUPON BE ENTITLED, AND BORROWER HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO, RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE (INCLUDING, 10 WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE, ON OR AGAINST THE EXERCISE OF THE RIGHTS AND REMEDIES OTHERWISE AVAILABLE TO HOLDER AS PROVIDED IN THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND BORROWER HEREBY IRREVOCABLY WAIVES ITS RIGHTS TO OBJECT TO SUCH RELIEF. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 11 IN WITNESS WHEREOF, Borrower has executed and sealed this Note or caused it to be executed and sealed on its behalf by its duly authorized representatives, the day and year first above written, and the obligations under this Note shall be binding upon Borrower's successors and assigns. BORROWER: DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company By: Diversicare Leasing Corp., a Tennessee corporation, its sole member /s/ Glynn Riddle, Jr. ---------------------------------------- By: Glynn Riddle, Jr. Its: Chief Financial Officer ACKNOWLEDGED BY GUARANTOR THIS 31st DAY OF AUGUST, 2005: ADVOCAT INC., a Delaware corporation /s/ Glynn Riddle, Jr. - ------------------------------------- By: Glynn Riddle, Jr. Its: Chief Financial Officer 12 EX-10.2 3 g98061exv10w2.txt EX-10.2 LOAN AGREEMENT 08/31/05 EXHIBIT 10.2 LOAN AGREEMENT THIS LOAN AGREEMENT (this "Agreement") is made as of August 31, 2005, by and between DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company (together with its successors and assigns, "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation (together with its successors and assigns, "Lender"). RECITALS: A. Borrower has requested that Lender make a loan to Borrower in the principal sum of $8,000,000.00. B. Lender has agreed to make such loan on the terms and conditions hereinafter set forth. AGREEMENT NOW, THEREFORE, it is hereby agreed as follows: ARTICLE I DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS. 1.1 As used in this Agreement, the following terms shall have the following meanings unless the context hereof shall otherwise indicate: "ACCOUNTS" has the meaning given to that term in the Mortgage. "ACTUAL MANAGEMENT FEES" means actual management fees paid or incurred in connection with operation of the Facility. "AFFILIATE" means, with respect to any Person, (a) each Person that controls, is controlled by or is under common control with such Person, (b) each Person that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, any of the Stock of such Person, and (c) each of such Person's officers, directors, members, joint venturers and partners. "A/R LENDER" means AmSouth Bank, an Alabama state banking corporation, its successors and assigns. "A/R LOAN" means that certain indebtedness and obligations of Guarantor, Borrower and their Affiliates, to the A/R Lender evidenced by and described in that certain Master Amendment to Loan Documents and Agreement dated as of November 8, 2000, effective as of October 1, 2000, and the documents and instruments executed in connection therewith, together with any amendments thereto, and any modifications, renewals and extensions thereof, which indebtedness and obligations are secured, in part, by a first priority lien in the Accounts of the Facility. "ASSIGNMENT OF LEASES AND RENTS" means that certain Assignment of Leases and Rents of even date herewith by and between Borrower and Lender. "ASSIGNMENT OF LICENSES" means that certain Assignment of Licenses, Permits and Contracts of even date herewith by Borrower to and for the benefit of Lender. "ASSUMED MANAGEMENT FEES" means assumed management fees of five percent (5%) of net patient revenues of the Facility (after Medicaid and Medicare contractual adjustments). "BUSINESS DAY" means a day, other than Saturday or Sunday and legal holidays, when Lender is open for business. "CLOSING DATE" means the date on which all or any part of the Loan is disbursed by Lender to or for the benefit of Borrower. "COMMITMENT LETTER" means the commitment letter issued by Lender to Borrower dated August 24, 2005. "CROSS-COLLATERALIZATION AGREEMENT" means, the Cross-Collateralization, Cross-Default and Mortgage Modification Agreement of even date herewith by and between Borrower, Lender and the Related Borrowers. "DEBT SERVICE COVERAGE RATIO" means a ratio in which the first number is the sum of "net pre-tax income" of Borrower from usual operations of the Facility as set forth in the financial statements provided to Lender (without deduction for Actual Management Fees or management expenses paid or incurred in connection with the operation of the Facility), calculated based upon the preceding twelve (12) months (or such lesser period of time as shall have elapsed following the closing of the Loan), plus Loan interest expense or Facility lease expense to the extent deducted in determining net income and non-cash expenses or allowances for depreciation and amortization of the Facility for such period, less either Assumed Management Fees or Actual Management Fees (based upon the covenant to which such definition relates) for such period and the second number is the sum of the principal amounts due (even if not paid) on the Loan (but which shall not include that portion associated with any balloon payment of the Loan) for the applicable period plus the interest due on the Loan for the applicable period. In calculating "net pre-tax income," Extraordinary Income and Extraordinary Expenses shall be excluded. "DEBT SERVICE RESERVE FUND AGREEMENT" means that certain Debt Service Reserve Fund Escrow and Security Agreement of even date herewith between Lender and Borrower. "DEFAULT" means the occurrence or existence of any event which, but for the giving of notice or expiration of time or both, would constitute an Event of Default. 2 "DEFAULT RATE" has the meaning given to that term in the Note. "ENVIRONMENTAL PERMIT" means any permit, license, or other authorization issued under any Hazardous Materials Law with respect to any activities or businesses conducted on or in relation to the Land and/or the Improvements. "EQUIPMENT" has the meaning given to that term in the Mortgage. "EVENT OF DEFAULT" means any "Event of Default" as defined in Article VII hereof. "EXTRAORDINARY INCOME AND EXTRAORDINARY EXPENSES" means material items of a character significantly different from the typical or customary business activities of Borrower which would not be expected to recur frequently and which would not be considered as recurring factors in any evaluation of the ordinary operating processes of Borrower's business, and which would be treated as extraordinary income or extraordinary expenses under GAAP. "EXHIBIT" means an Exhibit to this Agreement, unless the context refers to another document, and each such Exhibit shall be deemed a part of this Agreement to the same extent as if it were set forth in its entirety wherever reference is made thereto. "FACILITY" means the nursing home facility known as "Briarcliff Health Care Center" presently an 120-bed licensed skilled nursing facility located on the Land, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute nursing and/or assisted living facility), now or hereafter operated on the Land. "GAAP" means, as in effect from time to time, generally accepted accounting principles consistently applied as promulgated by the Financial Accounting Standards Board. "GOVERNMENTAL AUTHORITY" means any nation or government, any state or other political subdivision thereof, and any Person exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to such government. "GUARANTOR" means Advocat Inc., a Delaware corporation. "GUARANTY AGREEMENT" means that certain Guaranty of even date herewith from Guarantor to and for the benefit of Lender. "HAZARDOUS MATERIALS" means petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials; radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or could become friable; underground storage tanks, whether empty or containing any substance; any substance the presence of which on the Land and/or the Improvements is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material or substance now or in the future defined as a "hazardous substance," "hazardous 3 material," "hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "pollutant" within the meaning of any Hazardous Materials Law. "HAZARDOUS MATERIALS LAWS" means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Borrower or to the Land and/or the Improvements. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, and their state analogs. "IMPROVEMENTS" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Land, including but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and storm sashes, and cleaning apparatuses which are or shall be attached to the Land or said buildings, structures or improvements. "INDEBTEDNESS" means any (a) obligations for borrowed money, (b) obligations, payment for which is being deferred by more than ninety (90) days, representing the deferred purchase price of property other than accounts payable arising in connection with the purchase of inventory customary in the trade and in the ordinary course of Borrower's business, (c) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from the Accounts and/or property now or hereafter owned or acquired, and (d) the amount of any other obligation (including obligations under financing leases) which would be shown as a liability on a balance sheet prepared in accordance with GAAP. "INTERCREDITOR AGREEMENT" means that certain Intercreditor Agreement dated December 27, 1996, by and among First American National Bank (predecessor to A/R Lender), Lender, Guarantor, Manager, and certain subsidiaries of Guarantor, as amended and modified. "INVENTORY" has the meaning given to that term in the Mortgage. "LAND" means the land described in Exhibit "A" attached hereto and made a part hereof. "LEASES" has the meaning given to that term in the Mortgage. "LIEN" means any voluntary or involuntary mortgage, security deed, deed of trust, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, including those contemplated by or permitted in this Agreement and the other Loan Documents. 4 "LOAN" means the Loan in the principal sum of $8,000,000.00 made by Lender to Borrower as of the date hereof. "LOAN DOCUMENTS" means, collectively, the Commitment Letter, this Agreement, the Note, the Mortgage, the Assignment of Leases and Rents, the Assignment of Licenses, the Guaranty Agreement, the Debt Service Reserve Fund Agreement, the Subordination Agreement, the Cross-Collateralization Agreement, together with any and all other documents executed by Borrower or others, evidencing, securing or otherwise relating to the Loan. "LOAN OBLIGATIONS" means the aggregate of all principal and interest owing from time to time under the Note and all expenses, charges and other amounts from time to time owing under the Note, this Agreement or the other Loan Documents and all covenants, agreements and other obligations from time to time owing to, or for the benefit of, Lender pursuant to the Loan Documents. "MANAGED CARE PLANS" means any health maintenance organization, preferred provider organization, individual practice association, competitive medical plan, or similar arrangement, entity, organization, or Person. "MANAGEMENT AGREEMENT" means that certain Management Agreement of even date herewith between Manager and Borrower, obligating Manager to operate and manage the Facility. "MANAGER" means Diversicare Management Services, Co., a Tennessee corporation, and any successor manager of the Facility approved by Lender in writing. "MATURITY DATE" means September 1, 2008. "MEDICAID" means that certain program of medical assistance, funded jointly by the federal government and the States, for impoverished individuals who are aged, blind and/or disabled, and/or members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. Sections 1396 et seq.) and the regulations promulgated thereunder. "MEDICARE" means that certain federal program providing health insurance for eligible elderly and other individuals, under which physicians, hospitals, skilled nursing homes, home health care and other providers are reimbursed for certain covered services they provide to the beneficiaries of such program, which program is more fully described in Title XVIII of the Social Security Act (42 U.S.C. Sections 1395 et seq.) and the regulations promulgated thereunder. "MORTGAGE" means that certain Deed of Trust and Security Agreement of even date herewith from Borrower in favor of or for the benefit of Lender, encumbering the real estate located in Anderson County, Tennessee, which is more particularly described in Exhibit "A" hereto, and upon which the Facility is located. "MORTGAGED PROPERTY" has the meaning given to that term in the Mortgage. 5 "NOTE" means the Promissory Note of even date herewith in the principal amount of the Loan payable by Borrower to the order of Lender. "O&M PROGRAM" means a written program of operations and maintenance established or approved in writing by Lender relating to any Hazardous Materials in, on or under the Land and/or the Improvements. "OFAC LIST" means the list of specially designated nationals and blocked Persons subject to financial sanctions that is maintained by the U.S. Treasury Department, Office of Foreign Assets Control and any other similar list maintained by the U.S. Treasury Department, Office of Foreign Assets Control pursuant to any Requirements of Law, including, without limitation, trade embargo, economic sanctions, or other prohibitions imposed by Executive Order of the President of the United States. The OFAC List currently is accessible through the internet website www.treas.gov/ofac/t11sdn.pdf. "PERMITS" means all licenses, permits and certificates used or necessary in connection with the construction, ownership, operation, use or occupancy of the Mortgaged Property and/or the Facility, including, without limitation, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need and all such other permits, licenses and rights, obtained from any governmental, quasi-governmental or private person or entity whatsoever concerning ownership, operation, use or occupancy. "PERMITTED ENCUMBRANCES" has the meaning given to that term in Section 5.2 hereof. "PERSON" means any individual, partnership, limited partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other form of legal entity of whatever nature. "PROCEEDS" has the meaning given to that term in the Mortgage. "REIMBURSEMENT CONTRACTS" means all third-party reimbursement contracts relating to the Facility which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare and Medicaid, Managed Care Plans and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements, now or hereafter existing. "RELATED BORROWERS" means those borrowers more particularly described in Exhibit "G" attached hereto. "RELATED LOANS" means the loans more specifically described on Exhibit "G" attached hereto made by Lender to the Related Borrowers. "RENTS" has the meaning given to that term in the Mortgage. "REQUIREMENTS OF LAW" means (a) the organizational documents of an entity, and (b) any law, regulation, ordinance, code, decree, treaty, ruling or determination of an 6 arbitrator, court or other Governmental Authority, or any Executive Order issued by the President of the United States, in each case applicable to or binding upon such Person or to which such Person, any of its property or the conduct of its business is subject including, without limitation, laws, ordinances and regulations pertaining to the zoning, occupancy and subdivision of real property. "SINGLE PURPOSE ENTITY" means a Person which complies with the requirements of Section 5.4. "STOCK" means all shares, options, warrants, general or limited partnership interests, membership interests, participations or other equivalents (regardless of how designated) in a corporation, limited liability company, partnership or any equivalent entity, whether voting or nonvoting, including, without limitation, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended). "SUBORDINATION AGREEMENT" means that certain Subordination of Management Agreement of even date herewith by and among Borrower, Manager, and Lender. 1.2 Singular terms shall include the plural forms and vice versa, as applicable, of the terms defined. 1.3 Each term contained in this Agreement and defined in the Uniform Commercial Code (the "UCC") in effect from time to time in the state in which the Land is located shall have the meaning given to such term in the UCC, unless the context otherwise indicates, and shall include, without limitation, the meaning set forth in this Agreement. 1.4 All accounting terms used in this Agreement shall be construed in accordance with GAAP, except as otherwise specified. 1.5 All references to other documents or instruments shall be deemed to refer to such documents or instruments as they may hereafter be extended, renewed, modified, or amended and all replacements and substitutions therefor. 1.6 All references herein to "Medicaid" and "Medicare" shall be deemed to include any successor program thereto. ARTICLE II TERMS OF THE LOAN 2.1 THE LOAN. Borrower has agreed to borrow the Loan from Lender, and Lender has agreed to make the Loan to Borrower, subject to Borrower's compliance with and observance of the terms, conditions, covenants, and provisions of this Agreement and the other Loan Documents, and Borrower has made the covenants, representations, and warranties herein and therein as a material inducement to Lender to make the Loan. On the Closing Date, $2,377,000.00 of the Loan shall be disbursed to Lender and applied to the outstanding debts of 7 Diversicare Assisted Living Services NCI, LLC and/or Diversicare Assisted Living Services NC II, LLC. 2.2 SECURITY FOR THE LOAN. The Loan will be evidenced, secured and guaranteed by the Loan Documents. 2.3 LIMITATION ON INTEREST. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of acceleration of the maturity of any indebtedness governed hereby or otherwise, shall the interest contracted for, charged or received by Lender exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to Lender shall be reduced to the maximum amount permitted under applicable law; and, if from any circumstance the Lender shall ever receive anything of value deemed interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive interest shall be applied to the reduction of the principal of the Loan and not to the payment of interest, or, if such excessive interest exceeds the unpaid balance of principal of the Loan, such excess shall be refunded to Borrower. All interest paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period until payment in full of the principal of the Loan (including the period of any renewal or extension thereof) so that interest thereon for such full period shall not exceed the maximum amount permitted by applicable law. This paragraph shall control all agreements between the Borrower and Lender. ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, and to make the Loan to Borrower, Borrower represents and warrants to Lender as follows: 3.1 EXISTENCE, POWER AND QUALIFICATION. Borrower is a duly organized and validly existing Delaware limited liability company, has the power to own its properties and to carry on its business as is now being conducted, and is duly qualified to do business and is in good standing in every jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes its qualification necessary. 3.2 POWER AND AUTHORITY. Borrower has full power and authority to borrow the indebtedness evidenced by the Note and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary limited liability company action on the part of Borrower. All consents, approvals authorizations, orders or filings of or with any court or governmental agency or body, if any, required for the execution, delivery and performance of the Loan Documents by Borrower have been obtained or made. 3.3 SINGLE PURPOSE ENTITY. Borrower is a Single Purpose Entity. 3.4 PENDING MATTERS. 8 (a) Operations; Financial Condition. Except as shown on Schedule 3.4, no action or investigation is pending or, to the best of Borrower's knowledge, threatened against Borrower before or by any court or administrative agency which might result in any material adverse change in the financial condition, operations or prospects of Borrower or any lower reimbursement rate under the Reimbursement Contracts. Borrower is not in violation of any agreement, the violation of which might reasonably be expected to have a material adverse effect on its business or assets, and Borrower is not in violation of any order, judgment, or decree of any court, or any statute or governmental regulation to which Borrower is subject. (b) Land and Improvements. There are no proceedings pending, or, to the best of Borrower's knowledge, threatened, to acquire through the exercise of any power of condemnation, eminent domain or similar proceeding any part of the Land, the Improvements or any interest therein, or to enjoin or similarly prevent or restrict the use of the Land or the operation of the Facility in any manner. None of the Improvements is subject to any unrepaired casualty or other damage. 3.5 FINANCIAL STATEMENTS ACCURATE. All financial statements heretofore or hereafter provided by Borrower are and will be true and complete in all material respects as of their respective dates and fairly present the financial condition of Borrower, and there are no material liabilities, direct or indirect, fixed or contingent, as of the respective dates of such statements which are not reflected therein or in the notes thereto or in a written certificate delivered with such statements. The financial statements of Borrower have been prepared in accordance with GAAP. There has been no material adverse change in the financial condition, operations, or prospects of Borrower since the dates of such statements except as fully disclosed in writing with the delivery of such statements. All financial statements of the operations of the Facility heretofore or hereafter provided to Lender are and will be true and complete in all material respects as of their respective dates. 3.6 COMPLIANCE WITH FACILITY LAWS. The Facility is duly licensed as an 120-bed skilled nursing facility under the applicable laws of the state where the Land is located and is currently operated as a skilled nursing facility. Borrower is the lawful owner of all Permits for the Facility, including, without limitation, the Certificate of Need and/or the Nursing Home License issued by the Tennessee Department of Health, Health Care Facilities, if applicable, which (a) are in full force and effect, (b) constitute all of the permits, licenses and certificates required for the use, operation and occupancy thereof, (c) have not been pledged as collateral for any other loan or Indebtedness, (d) are held free from any restriction or any encumbrance which would materially adversely affect the use or operation of the Facility and (e) are not provisional, probationary or restricted in any way. Borrower and Manager as well as the operation of the Facility are in compliance in all material respects with the applicable provisions of all laws, rules, regulations and published interpretations to which the Facility is subject. No waivers of any laws, rules, regulations, or requirements (including, but not limited to, minimum foot requirements per bed) are required for the Facility to operate at the foregoing licensed bed capacity. All Reimbursement Contracts are in full force and effect with respect to the Facility, and Borrower and Manager are in good standing with all the respective agencies governing such applicable Facility licenses, program certification and Reimbursement Contracts. Borrower and Manager are current in the payment of all so-called provider specific taxes or other assessments 9 with respect to such Reimbursement Contracts. Borrower will maintain the Certificate of Need, if applicable, and/or any required Permits in full force and effect. In the event Lender acquires the Facility through foreclosure or otherwise, neither Lender nor a subsequent manager, a subsequent lessee or any subsequent purchaser (through foreclosure or otherwise) must obtain a Certificate of Need prior to applying for and receiving a license to operate the Facility and certification to receive Medicare and Medicaid payments (and its successor programs) for patients having coverage thereunder provided that no service or bed complement is changed. 3.7 MAINTAIN BED CAPACITY. Neither Borrower nor Manager has granted to any third party the right to reduce the number of licensed beds in the Facility or to apply for approval to transfer the right to any or all of the licensed Facility beds to any other location. 3.8 MEDICARE AND MEDICAID COMPLIANCE. The Facility is in compliance with all requirements for participation in Medicare and Medicaid, including without limitation, the Medicare and Medicaid Patient Protection Act of 1987. The Facility is in conformance in all material respects with all insurance, reimbursement and cost reporting requirements and has a current provider agreement which is in full force and effect under Medicare and Medicaid. 3.9 THIRD PARTY PAYORS. There is no threatened or pending revocation, suspension, termination, probation, restriction, limitation, or nonrenewal affecting Borrower, Manager or the Facility or any participation or provider agreement with any third-party payor, including Medicare, Medicaid, Blue Cross and/or Blue Shield, and any other private commercial insurance managed care and employee assistance program (such programs, the "Third-Party Payors' Programs") to which Borrower or Manager presently is subject. All Medicare (if any), Medicaid (if any) and private insurance cost reports and financial reports submitted by Borrower or Manager are and will be materially accurate and complete and have not been and will not be misleading in any material respects. No cost reports for the Facility remain "open" or unsettled except as otherwise disclosed. 3.10 GOVERNMENTAL PROCEEDINGS AND NOTICES. Neither Borrower nor Guarantor nor Manager nor the Facility is currently the subject of any proceeding by any governmental agency, and no notice of any violation has been received from any federal, state or local government or quasi-governmental body or agency or any administrative or investigative body that would, directly or indirectly, or with the passage of time: (a) have a material adverse impact on Borrower's or Manager's ability to accept and/or retain residents at the Facility or result in the imposition of a fine, a sanction, a lower rate certification or a lower reimbursement rate for services rendered to eligible residents against or in respect of the Facility; (b) modify, limit or annul or result in the transfer, suspension, revocation or imposition of probationary use of any of the Permits; or (c) affect Borrower's continued participation in the Medicare or Medicaid programs or any other Third-Party Payors' Programs, or any successor programs thereto, at current rate certifications. 10 3.11 PHYSICAL PLANT STANDARDS. To the best of Borrower's knowledge, the Facility and the use thereof comply in all material respects with all applicable local, state and federal building codes, fire codes, health care, nursing/assisted living/senior housing facility (as applicable) and other similar regulatory requirements (the "Physical Plant Standards"), and except as set forth on Schedule 3.11 attached hereto, no waivers of Physical Plant Standards exist at the Facility. 3.12 PLEDGE OF RECEIVABLES. With the exception of the A/R Loan, Borrower has not pledged its Accounts as collateral security for any loan or Indebtedness other than, if applicable, the Loan. 3.13 PAYMENT OF TAXES AND PROPERTY IMPOSITIONS. Borrower has filed all federal, state, and local tax returns which it is required to file and has paid, or made adequate provision for the payment of, all taxes and assessments which are shown pursuant to such returns or are required to be shown thereon, including, without limitation, provider taxes which are due and owing as of the date hereof. All such returns are complete and accurate in all respects. Borrower has paid or made adequate provision for the payment of all applicable water and sewer charges, ground rents (if applicable) and Taxes (as defined in the Mortgage) with respect to the Land and/or the Improvements which are due and owing as of the date hereof. 3.14 TITLE TO MORTGAGED PROPERTY. Borrower has good and marketable title to all of the Mortgaged Property, subject to no lien, mortgage, pledge, encroachment, zoning violation, or encumbrance, except Permitted Encumbrances which do not materially interfere with the security intended to be provided by the Mortgage or the current use or operation of the Land and the Improvements or the current ability of the Facility to generate net operating income sufficient to service the Loan. All Improvements situated on the Land are situated wholly within the boundaries of the Land. 3.15 PRIORITY OF MORTGAGE. The Mortgage constitutes a valid first lien against the real and personal property described therein, prior to all other liens or encumbrances, including those which may hereafter accrue, excepting only Permitted Encumbrances which do not and will not materially and adversely affect (a) the ability of Borrower to pay in full the principal of and interest on the Note when due, (b) the security (and its value) intended to be provided by the Mortgage or (c) the current use of the Land and the Improvements. 3.16 LOCATION OF CHIEF EXECUTIVE OFFICES. The location of Borrower's chief executive office(s) are set forth on Exhibit "B" hereto. Borrower has no place(s) of business other than the locations of the Facility(ies) listed on Exhibit "B". 3.17 DISCLOSURE. All information furnished or to be furnished by Borrower to Lender in connection with the Loan or any of the Loan Documents is, or will be at the time the same is furnished, accurate and correct in all material respects and complete insofar as completeness may be necessary to provide Lender with true and accurate knowledge of the subject matter. 11 3.18 TRADE NAMES. Neither Borrower nor the Facility, which operates under the trade name "Briarcliff Health Care Center", has changed its name, been known by any other name, or been a party to a merger, reorganization or similar transaction within the last three (3) years. 3.19 ERISA. As of the date hereof and throughout the term of this Agreement, (a) Borrower is not an "employee benefit plan," as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), subject to Title I of ERISA, and none of the assets of Borrower constitute "plan assets" (within the meaning of Department of Labor Regulation Section 2510.3-101) of one or more such plans, and (b) Borrower is not a "governmental plan" within the meaning of Section 3(32) of ERISA, and transactions by or with Borrower are not be subject to state statutes regulating investments of, and fiduciary obligations with respect to, governmental plans. The execution and delivery of the Loan Documents and the borrowing of indebtedness hereunder do not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"). 3.20 OWNERSHIP. The ownership interests of the Persons comprising Borrower and each of the respective interests in Borrower are correctly and accurately set forth on Exhibit "C" hereto. 3.21 COMPLIANCE WITH APPLICABLE LAWS. The Facility and its operations and the Land and Improvements comply in all material respects with all covenants and restrictions of record and applicable laws, ordinances, rules and regulations, including, without limitation, the Americans with Disabilities Act and the regulations thereunder, and all laws, ordinances, rules and regulations relating to zoning, setback requirements and building codes and there are no waivers of any building codes currently in existence for the Facility. 3.22 SOLVENCY. Borrower is solvent for purposes of 11 U.S.C. Section 548, and the borrowing of the Loan will not render Borrower insolvent for purposes of 11 U.S.C. Section 548. 3.23 MANAGEMENT AGREEMENT. The Management Agreement is in full force and effect, and there are no defaults (either monetarily or non-monetarily) by Manager or Borrower thereunder. 3.24 OTHER INDEBTEDNESS. With the exception of the A/R Loan, Borrower has no outstanding Indebtedness, secured or unsecured, direct or contingent (including any guaranties), other than indebtedness which represents trade payables or accrued expenses incurred in the ordinary course of business of owning and operating the Mortgaged Property; no other debt incurred by Borrower after the date hereof will be secured (senior, subordinate or pari passu) by the Mortgaged Property. 3.25 OTHER OBLIGATIONS. Borrower has no material financial obligation under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which Borrower is a party or by which Borrower or the Mortgaged Property is otherwise bound, other 12 than obligations incurred in the ordinary course of the operation of the Mortgaged Property and other than obligations under the Mortgage, the other Loan Documents and the A/R Loan. 3.26 FRAUDULENT CONVEYANCES. Borrower (a) has not entered into this Agreement or any of the other Loan Documents with the actual intent to hinder, delay, or defraud any creditor and (b) has received reasonably equivalent value in exchange for its obligations under the Loan Documents. Giving effect to the transactions contemplated by the Loan Documents to the best of Borrower's knowledge, the fair saleable value of Borrower's assets exceeds and will, immediately following the execution and delivery of the Loan Documents, be greater than Borrower's probable liabilities, including the maximum amount of its contingent liabilities or its debts as such debts become absolute and mature. Borrower's assets do not and, immediately following the execution and delivery of the Loan Documents will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Borrower does not intend to, and does not believe that it will, incur debts and liabilities (including, without limitation, contingent liabilities and other commitments) beyond its ability to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of Borrower). 3.27 NO CHANGE IN FACTS OR CIRCUMSTANCES. All information in any application for the Loan submitted to Lender (the "Loan Application") and in all financial statements, rent rolls, reports, certificates and other documents submitted in connection with the Loan Application are complete and accurate in all material respects. There has been no material adverse change in any fact or circumstance that would make any such information incomplete or inaccurate. 3.28 NO ILLEGAL ACTIVITY AS SOURCE OF FUNDS. No portion of the Mortgaged Property has been or will be purchased, improved, equipped or furnished with proceeds of any illegal activity. 3.29 COMPLIANCE WITH ANTI-TERRORISM, EMBARGO, SANCTIONS AND ANTI-MONEY LAUNDERING LAWS. Borrower, and to the best of Borrower's knowledge, after having made diligent inquiry, (a) each Person owning an interest in Borrower, (b) each Guarantor, (c) Manager, and (d) each tenant at the Property: (i) is not currently identified on OFAC List, and (ii) is not a Person with whom a citizen of the United States is prohibited to engage in transactions by any trade embargo, economic sanction, or other prohibition of United States law, regulation, or Executive Order of the President of the United States. Borrower has implemented procedures, and will consistently apply those procedures throughout the term of the Loan, to ensure the foregoing representations and warranties remain true and correct during the term of the Loan. 3.30 FRAUD AND ABUSE. (a) ANTI-KICKBACK LAW. After consultation with counsel concerning the federal anti-kickback law (42 U.S.C.A. SEC. 1320a-7b(b)), neither Borrower nor its agent have offered or given any remuneration or thing of value to any person to encourage referral to the facility nor has Borrower or its agent solicited or received any remuneration or thing of value in 13 exchange for Borrower's agreement to make referrals or to purchase goods or services for the Facility. (b) RELATIONSHIPS. No physician or other healthcare practitioner has an ownership interest in, or financial relationship with (other than for rendering services to patient residents), the Borrower, Manager or the Facility. (c) REQUIRED ADJUSTMENTS. With the exception of those cost reports shown on Schedule 3.30, all cost report periods for all Facility payors have been closed and settled, and all required adjustments have been fully paid and/or implemented. 3.31 COMPLIANCE PROGRAM. Borrower has adopted and is adhering to a compliance program meeting the guidelines published by the Office of the Inspector General on March 16, 2000, at 65 Fed. Reg. 14289. Borrower's designated compliance officer is Bob Rice. ARTICLE IV AFFIRMATIVE COVENANTS OF BORROWER Borrower agrees with and covenants unto Lender that until the Loan Obligations have been paid in full, Borrower shall: 4.1 PAYMENT OF LOAN/PERFORMANCE OF LOAN OBLIGATIONS. Duly and punctually pay or cause to be paid the principal and interest of the Note in accordance with its terms and duly and punctually pay and perform or cause to be paid or performed all Loan Obligations hereunder and under the other Loan Documents. 4.2 MAINTENANCE OF EXISTENCE. Maintain its existence as a Delaware limited liability company in good standing under the laws of the jurisdiction of its organization or formation, and, in each jurisdiction in which the character of the property owned by it or in which the transaction of its business makes qualification necessary, maintain good standing and qualification to do business. 4.3 MAINTENANCE OF SINGLE PURPOSE STATUS. Maintain its existence as a Single Purpose Entity. 4.4 ACCRUAL AND PAYMENT OF TAXES. During each fiscal year, make accurate provision for the payment in full of all current tax liabilities of all kinds including, without limitation, federal and state income taxes, franchise taxes, payroll taxes, provider taxes (to the extent necessary to participate in and receive maximum funding pursuant to Reimbursement Contracts), Taxes (as defined in the Mortgage), all required withholding of income taxes of employees, all required old age and unemployment contributions, and all required payments to employee benefit plans, and pay the same when they become due. 4.5 INSURANCE. Maintain, at its expense, the following insurance coverages and policies with respect to the Mortgaged Property and the Facility, which coverages and policies must be acceptable to Lender's insurance consultant in its reasonable discretion: 14 (a) Comprehensive "all risk" insurance, including coverage for windstorms and hail, in an amount equal to 100% of the full replacement cost of the Facility, which replacement cost shall be determined by the "Insurable Value" or "Cost Approach to Value" reflected in the most recent Lender approved appraisal for the Facility, without deduction for depreciation. Such insurance shall also include (i) agreed insurance amount endorsement waiving all co-insurance provisions, and (ii) an "Ordinance or Law Coverage" endorsement if the Facility or the use thereof shall constitute a legal non-conforming structure or use. (b) Commercial general liability insurance against claims for sexual harassment abuse of residents and/or patients, personal injury, bodily injury, death or property damage, in or about the Facility to be on a so-called "occurrence" basis for at least $1,000,000.00 per occurrence and $3,000,000.00 in the aggregate with a $5,000,000.00 umbrella coverage. (c) Professional liability insurance against claims for personal injury, bodily injury or death, in or about the Facility to be on a so-called "occurrence" basis for at least $1,000,000.00 per occurrence and $3,000,000.00 in the aggregate. (d) Business interruption income insurance for the Facility in an amount equal to 100% of the net income plus carrying costs and extraordinary expenses of the Facility for a period of twelve (12) months as projected based on Borrower's reasonable estimate thereof as approved by Lender, containing a 90-day extended period of indemnity endorsement, provided that any covered loss thereunder shall be payable to Lender. (e) Flood Hazard insurance if any portion of the Improvements is located in a "flood zone area," as identified in the Federal Register by the Federal Emergency Management Agency as a 100-year flood zone or "special flood hazard area" and in which flood insurance is available. In lieu thereof, Lender will accept proof, satisfactory to it in its sole discretion, that the Improvements are not within the boundaries of a designated area. (f) Workers' compensation insurance, if applicable and required by state law, subject to applicable state statutory limits, and employer's liability insurance with a limit of $1,000,000.00 per accident and per disease per employee with respect to the Facility. (g) Comprehensive boiler and machinery insurance, including property damage coverage and time element coverage in an amount equal to 100% of the full replacement cost, without deduction for depreciation, of the Facility housing the machinery, if steam boilers, pipes, turbines, engines or any other pressure vessels are in operation with respect to the Facility. Such insurance coverage shall include a "joint loss" clause if such coverage is provided by an insurance carrier other than that which provides the comprehensive "all risk" insurance described above. (h) During the period of any construction and/or renovation of capital improvements with respect to the Facility or any new construction at the Facility, builder's risk insurance for any improvements under construction and/or renovation, including, without limitation, costs of demolition and increased cost of construction or renovation, in an amount 15 equal the amount of the general contract plus the value of any existing purchase money financing for improvements and materials stored on or off the Property, including "soft cost" coverage. (i) If the Facility is located in a seismically active area or an area prone to geologic instability and mine subsidence, Lender may require an inspection by a qualified structural or geological engineer satisfactory to Lender, and at Borrower's expense. The Facility must be structurally and geologically sound and capable of withstanding normal seismic activity or geological movement. Lender reserves the right to require earthquake insurance or Maximum Probable Loss insurance on a case by case basis in amounts determined by Lender. (j) Such other insurance coverages as may be deemed necessary at any time during the term of the Loan and as shall be provided within such time periods as Lender may determine, in each case, in its commercially reasonable discretion. All insurance policies shall have a term of not less than one year and shall be in the form and amount and with deductibles as, from time to time, shall be acceptable to Lender in its reasonable discretion. All such policies shall provide for loss payable solely to Lender and shall contain a standard "non-contributory mortgagee" endorsement or its equivalent relating, among other things, to recovery by Lender notwithstanding the negligent or willful acts or omissions of Borrower and notwithstanding (i) occupancy or use of the Facility for purposes more hazardous than those permitted by the terms of such policy, (ii) any foreclosure or other action taken by Lender pursuant to the Mortgage upon the occurrence of an Event of Default thereunder, or (iii) any change in title or ownership of the Facility. All insurance policies must be written by a licensed insurance carrier in the State in which the Facility is located and such insurance carrier must have a long-term senior debt rating of at least "A" by Standard and Poor's Rating Service; provided, that if the initial principal balance of the Loan is in excess of $25,000,000.00, such insurance carrier must have a long-term senior debt rating of at least "AA" by Standard & Poor's Rating Service. All liability insurance policies must name "GMAC Commercial Mortgage Corporation and its successors and/or assigns as their interests may appear" as additional insureds, and all property insurance policies must name "GMAC Commercial Mortgage Corporation and its successors and/or assigns" as the named mortgage holder entitled to all insurance proceeds. Lender shall have the right, without Borrower's consent, by notice to the insurance company, to change the additional insured and named mortgagee endorsements in connection with any sale of the Loan. Notwithstanding anything contained herein, Borrower shall be entitled to all insurance proceeds covered by and disbursed under the above-referenced comprehensive all risk insurance policy provided such proceeds do not exceed $25,000.00 per occurrence. All insurance policies for the above-required insurance must provide for thirty (30) days prior written notice of cancellation to Lender. Policies or binders, together with evidence of the above required insurance on ACORD Form 27 or its equivalent, must be submitted to Lender prior to setting the interest rate on the Loan. 16 With respect to insurance policies which require payment of premiums annually, not less than thirty (30) days prior to the expiration dates of the insurance policies obtained pursuant to this Agreement, Borrower shall pay such amount, except to the extent Lender is escrowing sums therefor pursuant to the Loan Documents. Not less than thirty (30) days prior to the expiration dates of the insurance policies obtained pursuant to this Agreement, originals or certified copies of renewals of such policies (or certificates evidencing such renewals) bearing notations evidencing the payment of premiums or accompanied by other evidence satisfactory to Lender of such payment, which premiums shall not be paid by Borrower through or by any financing arrangement, shall be delivered by Borrower to Lender at the address set forth in Section 8.7 hereof and in Exhibit "B" hereto. Borrower shall not carry separate insurance, concurrent in kind or form or contributing in the event of loss, with any insurance required under this Section 4.5. If the limits of any policy required hereunder are reduced or eliminated due to a covered loss, Borrower shall pay the additional premium, if any, in order to have the original limits of insurance reinstated, or Borrower shall purchase new insurance in the same type and amount that existed immediately prior to the loss. If Borrower fails to maintain and deliver to Lender the original policies or certificates of insurance required by this Agreement, Lender may, at its option, procure such insurance and Borrower shall pay or, as the case may be, reimburse Lender for, all premiums thereon promptly, upon demand by Lender, with interest thereon at the Default Rate from the date paid by Lender to the date of repayment and such sum shall constitute a part of the Loan Obligations. The insurance required by this Agreement may, at the option of Borrower, be effected by blanket and/or umbrella policies issued to Borrower or to an Affiliate of Borrower covering the Facility and the properties of such Affiliate; provided that, in each case, the policies otherwise comply with the provisions of this Agreement and allocate to the Facility, from time to time, the coverage specified by this Agreement, without possibility of reduction or coinsurance by reason of, or damage to, any other property (real or personal) named therein. If the insurance required by this Agreement shall be effected by any such blanket or umbrella policies, Borrower shall furnish to Lender original policies or certified copies thereof, with schedules attached thereto showing the amount of the insurance provided under such policies which is applicable to the Facility. Neither Lender nor its agents or employees shall be liable for any loss or damage insured by the insurance policies required to be maintained under this Agreement; it being understood that (a) Borrower shall look solely to its insurance company for the recovery of such loss or damage, (b) such insurance company shall have no rights of subrogation against Lender, its agents or employees, and (c) Borrower shall use its best efforts to procure from such insurance company a waiver of subrogation rights against Lender. If, however, such insurance policies do not provide for a waiver of subrogation rights against Lender (whether because such a waiver is unavailable or otherwise), then Borrower hereby agrees, to the extent permitted by law and to the extent not prohibited by such insurance policies, to waive its rights of recovery, if any, against Lender, its agents and employees, whether resulting from any damage to the Facility, any liability claim in connection with the Facility or otherwise. If any such insurance policy shall prohibit Borrower from waiving such claims, then Borrower must obtain from such insurance company a waiver of subrogation rights against Lender. 17 Borrower appoints Lender as Borrower's attorney-in-fact to cause the issuance of an endorsement of any insurance policy to bring Borrower into compliance herewith and, as limited above, at Lender's sole option, to make any claim for, receive payment for, and execute and endorse any documents, checks or other instruments in payment for loss, theft, or damage covered under any such insurance policy; provided, however, that in no event will Lender be liable for failure to collect any amounts payable under any insurance policy. 4.6 PROCEEDS OF INSURANCE OR CONDEMNATION. If, after damage to or destruction of or condemnation of the Mortgaged Property (or any part thereof), the net Proceeds of insurance or condemnation (after payment of Lender's reasonable costs and expenses in connection with the administration thereof) are: (a) less than Seventy-Five Thousand Dollars ($75,000.00), Lender shall deliver such proceeds to Borrower to be applied within thirty (30) days thereafter to the repair, restoration and replacement by Borrower of the Improvements, Equipment and Inventory damaged, destroyed or taken, or (b) Seventy-Five Thousand Dollars ($75,000.00) or more and Lender agrees, at its option, to make such net Proceeds available to Borrower, Lender shall make such net Proceeds available to Borrower on the following terms: (i) The aggregate amount of all such Proceeds shall not exceed the aggregate amount of all such Loan Obligations; (ii) At the time of such loss or damage and at all times thereafter while Lender is holding any portion of such Proceeds, there shall exist no Default or Event of Default; (iii) The Improvements, Equipment, and Inventory to which loss or damage has resulted shall be capable of being restored to its preexisting condition and utility in all material respects with a value equal to or greater than that which existed prior to such loss or damage and such restoration shall be capable of being completed prior to the earlier to occur of (i) the expiration of business interruption insurance as determined by an independent inspector or (ii) the Maturity Date; (iv) Within thirty (30) days from the date of such loss or damage Borrower shall have given Lender a written notice electing to have the Proceeds applied for such purpose; (v) Within sixty (60) days following the date of notice under the preceding subparagraph (iv) and prior to any Proceeds being disbursed to Borrower, Borrower shall have provided to Lender all of the following: (A) complete plans and specifications for restoration, repair and replacement of the Improvements, Equipment and Inventory damaged to the condition, utility and value required by (iii) above, 18 (B) if loss or damage exceeds One Hundred Thousand Dollars ($100,000), fixed-price or guaranteed maximum cost bonded construction contracts for completion of the repair and restoration work in accordance with such plans and specifications, (C) builder's risk insurance for the full cost of construction with Lender named under a standard mortgagee loss-payable clause (D) such additional funds as in Lender's reasonable opinion are necessary to complete such repair, restoration and replacement, and (E) copies of all permits and licenses necessary to complete the work in accordance with the plans and specifications; (vi) Lender may, at Borrower's expense, retain an independent inspector to review and approve plans and specifications and completed construction and to approve all requests for disbursement, which approvals shall be conditions precedent to release of Proceeds as work progresses; (vii) No portion of such Proceeds shall be made available by Lender for architectural reviews or for any other purposes which are not directly attributable to the cost of repairing, restoring or replacing the Improvements, Equipment and Inventory to which a loss or damage has occurred unless the same are covered by such insurance; (viii) Borrower shall diligently pursue such work and shall complete such work prior to the earlier to occur of the expiration of business interruption insurance or the Maturity Date; (ix) Each disbursement by Lender of such Proceeds and deposits shall be funded subject to conditions and in accordance with disbursement procedures which a commercial construction lender would typically establish in the exercise of sound banking practices and shall be made only upon receipt of disbursement requests on an AIA G702/703 form (or similar form approved by Lender) signed and certified by Borrower and, if required by Lender, its architect and general contractor with appropriate invoices and lien waivers as required by Lender; and (x) Lender shall have a first lien on and security interest in all building materials and completed repair and restoration work and in all fixtures and equipment acquired with such Proceeds, and Borrower shall execute and deliver such mortgages, deeds of trust, security agreements, financing statements and other instruments as Lender shall request to create, evidence, or perfect such lien and security interest. In the event and to the extent that such Proceeds are Seventy-Five Thousand Dollars ($75,000.00) or more and are not required to be used for the repair, restoration and replacement of the Improvements, Equipment and Inventory to which a loss or damage has occurred, or, if the conditions set forth herein for such application are otherwise not satisfied, then Lender shall be entitled without notice to or consent from Borrower to apply such Proceeds, or the balance thereof, at Lender's option either (a) to the full or partial payment or prepayment of the Loan 19 Obligations (without premium) in the manner aforesaid or (b) to the repair, restoration and/or replacement of all or any part of such Improvements, Equipment and Inventory to which a loss or damage has occurred. Any excess Proceeds after such application by Lender shall be paid to Borrower. 4.7 FINANCIAL AND OTHER INFORMATION. Provide Lender, and cause Guarantor and Manager to provide to Lender, at its address set forth in Section 8.7 and at GMAC Commercial Mortgage Corporation, 2200 Woodcrest Place, Suite 305, Birmingham, Alabama 35209, the following financial statements and information on a continuing basis during the term of the Loan: (a) Within one hundred twenty (120) days after the end of each fiscal year of the Guarantor, audited financial statements prepared in accordance with GAAP by a nationally recognized accounting firm or independent certified public accounting firm acceptable to the Lender, which statements shall include a balance sheet and a statement of income and expenses for the year then ended. In lieu of its obligations hereunder, Guarantor may submit to Lender, upon its filing thereof, a copy of its Form 10-K as filed with the United States Securities and Exchange Commission. (b) Within one hundred twenty (120) days after the end of each fiscal year of the Facility and Borrower (if different from the Facility) unaudited financial statements of the operations of the Facility, internally prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, and shall be certified as true and correct in all material respects by a financial officer of Borrower. Lender reserves the right, upon an Event of Default under the Loan Documents, to require that such statements be audited by a nationally recognized accounting firm or independent certified public accounting firm acceptable to Lender. (c) Within one hundred twenty (120) days after the end of each fiscal year of Manager, unaudited financial statements of Manager, internally prepared in accordance with GAAP, acceptable to Lender, which statements shall include a balance sheet and a statement of income and expenses for the year then ended, and shall be certified as true and correct by a financial officer of Manager. Lender reserves the right, upon an Event of Default under the Loan Documents to require that such statements be audited by a nationally recognized accounting firm or independent certified public accounting firm acceptable to Lender. (d) Within forty-five (45) days after the end of each fiscal quarter of the Facility, unaudited interim financial statements of the operations of the Facility, certified as true and correct in all material respects by a financial officer of the Borrower, prepared in accordance with GAAP, which statements shall include a balance sheet and statement of income and expenses for the quarter then ended. (e) Within forty-five (45) days after the end of each fiscal quarter of Borrower, unaudited interim financial statements of Borrower, certified as true and correct in all material respects by a financial officer of Borrower, prepared in accordance with GAAP, which 20 statements shall include a balance sheet and statement income and expenses for the quarter then ended. (f) Within forty-five (45) days after the end of each fiscal quarter of Guarantor, unaudited interim financial statements of Guarantor, certified as true and correct in all material respects by a financial officer of Guarantor prepared in accordance with GAAP, which statements shall include a balance sheet and a statement of income and expenses for the quarter then ended. (g) Within forty-five (45) days after the end of each fiscal quarter of Manager, unaudited interim financial statements of Manager, certified as true and correct in all material respects by a financial officer of Manager, prepared in accordance with generally accepted accounting principles consistently applied, which statements shall include a balance sheet and a statement of income and expenses for the quarter then ended. (h) Within forty-five (45) days after the end after each fiscal quarter of Borrower, a statement of the number of bed days available and the actual patient days incurred for such quarter, together with quarterly census information of the Facility as of the end of such quarter in sufficient detail to show patient-mix (i.e., private, Medicare, Medicaid, and V.A.) on a daily average basis for such year through the end of such quarter, certified by the chief financial officer of Borrower or Manager to be true and correct. Such statements of the Facility shall be accompanied by the Summary of Financial Statements and Census Data attached hereto as Exhibit "D". (i) If requested by Lender, within thirty (30) days after the filing deadline, as may be extended from time to time, copies of all federal, state and local tax returns of Borrower and Guarantor, together with all supporting documentation and required schedules. (j) If and to the extent applicable, within twenty (20) days after filing or receipt, all Medicaid cost reports and any amendments thereto filed with respect to the Facility and all responses, audit reports, or other inquiries with respect to such cost reports. (k) If and to the extent applicable, within ten (10) days after receipt, copies of all licensure and certification survey reports and statements of deficiencies (with plans of correction attached thereto). (l) If and to the extent applicable, within ten (10) days after receipt, a copy of the "Medicaid Rate Calculation Worksheet" (or the equivalent thereof) from the applicable agency. (m) If and to the extent applicable, within ten (10) days of receipt, a statement of the number of resident days for which the Facility has received the Medicare default rate for any applicable period. For purposes herein, "default rate" shall have the meaning ascribed to it in that certain applicable Medicare rate notification letter prepared in connection with any review or survey of the Facility. 21 (n) Within three (3) days after receipt, any and all notices (regardless of form) from any and all licensing and/or certifying agencies, including but not limited to, that the Facility's license is being downgraded to a substandard category, revoked or suspended, or that action is pending or being considered to downgrade to a substandard category, revoke or suspend the Facility's license or certification. (o) If requested by Lender, evidence of payment by Borrower or Manager of any applicable provider bed taxes or similar taxes, which taxes Borrower or Manager agrees to pay. (p) Within one hundred twenty (120) days after the end of each of Borrower's fiscal years, and more frequently, if requested by Lender, an aged accounts receivable report for the Facility in sufficient detail to show amounts due from each class of patient-mix, if applicable (i.e., private, Medicare, Medicaid and V.A.), by the account age classifications of 30 days, 60 days, 90 days, 120 days, and over 120 days. Lender reserves the right to require that the annual and/or quarterly financial statements of Borrower, Guarantor and Manager be audited and prepared by a nationally recognized accounting firm or independent certified public accounting firm acceptable to Lender, at their respective sole cost and expense, if (i) an Event of Default exists, (ii) if required by internal policy or by any investor in any securities backed in whole or in part by the Loan or any rating agency rating such securities, or (iii) if Lender has reasonable grounds to believe that the unaudited financial statements do not accurately represent the financial condition of Borrower, Guarantor or Manager, as the case may be. Lender further reserves the right to require such other financial information of Borrower, Guarantor, Manager and/or the Facility, at such other times (including monthly or more frequently, but not more frequently than reasonable) as it shall deem necessary. All financial statements must be in the form and detail as Lender shall from time to time request. 4.8 COMPLIANCE CERTIFICATE. At the time of furnishing the quarterly operating statements required under Section 4.7 herein, furnish to Lender a compliance certificate in the form attached hereto as Exhibit "E" executed by a financial officer of Borrower. 4.9 BOOKS AND RECORDS. Keep and maintain at all times at the Facility or Manager's offices, and upon Lender's request make available at the Facility, complete and accurate books of account and records (including copies of supporting bills and invoices) adequate to reflect correctly the results of the operation of the Facility, and copies of all written contracts, leases (if any), and other instruments which affect the Mortgaged Property, which books, records, contracts, leases (if any) and other instruments shall be subject to examination and inspection at any reasonable time by Lender (upon reasonable advance notice, which for such purposes only may be given orally, except in the case of an emergency or following an Event of Default, in which case no advance notice shall be required); provided, however, that if an Event of Default has occurred and is continuing, Borrower shall deliver to Lender upon written demand all books, records, contracts, leases (if any) and other instruments relating to the Facility or its operation and Borrower authorizes Lender to obtain a credit report on Borrower at any time. 22 4.10 PAYMENT OF INDEBTEDNESS. Duly and punctually pay or cause to be paid all other Indebtedness now owing or hereafter incurred by Borrower in accordance with the terms of such Indebtedness, except such Indebtedness owing to those other than Lender which is being contested in good faith and with respect to which any execution against properties of Borrower has been effectively stayed and for which reserves and collateral for the payment and security thereof have been established in sufficient amounts as determined by Lender in its sole commercially reasonable discretion. 4.11 RECORDS OF ACCOUNTS. Maintain all records, including records pertaining to the Accounts of Borrower, at the principal place of business of Borrower as set forth in this Agreement. 4.12 CONDUCT OF BUSINESS. Conduct, or cause Manager to conduct, the operation of the Facility at all times in a manner consistent with the level of operation of the Facility as of the date hereof, including without limitation, the following: (a) to maintain the standard of care for the residents of the Facility at all times at a level necessary to ensure quality care for the residents of the Facility in accordance with customary and prudent industry standards; (b) to operate the Facility in a prudent manner and in compliance with applicable laws and regulations relating thereto and cause all Permits, Reimbursement Contracts (if any), and any other agreements necessary for the use and operation of the Facility or, if applicable, as may be necessary for participation in the Medicaid, Medicare, or other applicable reimbursement programs (if any) to remain in effect without reduction in the number of licensed beds authorized for use in the Medicaid, Medicare, or other applicable reimbursement programs; (c) to maintain sufficient Inventory and Equipment of types and quantities at the Facility to enable Borrower to perform operations of the Facility adequately; (d) to keep all Improvements and Equipment located on or used or useful in connection with the Facility in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needed and proper repairs, renewals, replacements, additions, and improvements thereto to keep the same in good operating condition; (e) to maintain sufficient cash in the operating accounts of the Facility in order to satisfy the working capital needs of the Facility; and (f) to keep all required Permits current and in full force and effect. 4.13 PERIODIC SURVEYS. Furnish or cause Manager to furnish to Lender, within three (3) days of receipt, a copy of any Medicare, Medicaid, or other licensing agency survey or report and any statement of deficiencies and/or any other report or notices (regardless of form) indicating that any action is pending or being considered to downgrade the Facility to a substandard category, or revoke or suspend the Facility's license or certification, and within the time period required by the particular agency for furnishing a plan of correction also furnish or cause to be furnished to Lender a copy of the plan of correction generated from such survey or 23 report for the Facility, and correct or cause to be corrected any deficiency, the curing of which is a condition of continued licensure or for full participation in Medicaid, Medicare or other reimbursement program pursuant to any Reimbursement Contract for existing residents or for new residents to be admitted with Medicaid or Medicare coverage, by the date required for cure by such agency (plus extensions granted by such agency). 4.14 DEBT SERVICE COVERAGE REQUIREMENTS. (a) Maintain (commencing with the closing of the Loan) and within forty-five (45) days after the end of each fiscal quarter of Borrower, provide evidence to Lender of the achievement of, the following debt service coverage ratios until the Loan is paid in full: (i) a Debt Service Coverage for the Facility, after deduction of Actual Management Fees, of not less than 1.0 to 1.0; and (ii) a Debt Service Coverage for the Facility after deduction of Assumed Management Fees, of not less than 1.25 to 1.0. (b) If Borrower fails to achieve or provide evidence of achievement of the Debt Service Coverage for the Facility, Borrower may deposit with Lender, at Borrower's option within fifteen (15) days of such failure, additional cash or other liquid collateral in an amount which, when added to the first number of the debt service coverage calculation, would have resulted in the noncomplying debt service requirement having been satisfied. If after Borrower has deposited such additional cash or liquid collateral, Borrower again fails to achieve or provide evidence of the achievement of the Debt Service Coverage for the Facility requirements set forth above and such failure continues for two (2) consecutive quarters, Borrower may deposit with Lender, at Borrower's option within fifteen (15) days after written notice to Borrower of such failure, additional cash or other liquid collateral (with credit for amounts currently being held by Lender pursuant to the foregoing sentence), in an amount which, if the same had been applied on the first (1st) day of the first quarter for which such noncompliance of the debt service coverage requirement occurred to reduce the outstanding principal indebtedness of the Loan, would have resulted in the noncomplying debt service coverage requirement having been satisfied. Any additional cash or liquid collateral deposited by Borrower hereunder in order to achieve the required Debt Service Coverage for the Facility and cure any existing default with respect thereto will be held by Lender in a standard custodial account and shall constitute additional collateral for the Loan Obligations and an "Account" as defined in this Agreement, and, upon the occurrence of an Event of Default, may be applied by Lender, in such order and manner as Lender may elect, to the reduction of the Loan Obligations. Borrower shall not be entitled to any interest earned on such additional collateral. Provided that there is no outstanding Default or Event of Default, such additional collateral which has not been applied to the Loan Obligations will be released by Lender at such time as Borrower provides Lender with evidence that the required debt service coverage requirements outlined above have been achieved and maintained (without regard to any cash deposited pursuant to this Section 4.14) for two (2) consecutive fiscal quarters. 24 4.15 OCCUPANCY. Maintain or cause to be maintained at all times, a daily average annual occupancy for the Facility, as tested quarterly (on the basis of a calendar year), of eighty percent (80%) or more (based on the number of beds available at the Facility). 4.16 CAPITAL EXPENDITURES. Maintain, and/or cause Manager to maintain, the Facility in good condition and make minimum capital expenditures for the Facility in each fiscal year, in an amount equal to $300 per bed (or the appropriate prorated amount for any partial fiscal year), (which capital expenditures may include ordinary repairs and routine maintenance), commencing the first year of the Loan term and continuing throughout the Loan term, and, within forty-five (45) days after the end of each fiscal year, provide evidence thereof satisfactory to Lender. In the event that Borrower shall fail to meet such requirement or to provide such evidence, Borrower shall, upon Lender's written request, immediately establish and maintain a capital expenditures reserve fund with Lender equal to the difference between the required amount per unit and the amount per unit actually spent by Borrower. Borrower grants to Lender a lien on and a right of setoff against all moneys in the capital expenditures reserve fund, and Borrower shall not permit any other Lien to exist upon such fund. Moneys on deposit in such capital expenditures reserve fund will be disbursed to Borrower monthly upon Lender's receipt of satisfactory evidence that Borrower has caused to be made the required capital expenditures. Upon Borrower's or Manager's failure to adequately maintain the Facility in good condition, Lender may, but shall not be obligated to, make such capital expenditures and may apply the moneys in the capital expenditures reserve fund for such purpose. To the extent there are insufficient moneys in such capital expenditures reserve fund for such purposes, all funds advanced by Lender to make such capital expenditures shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue interest at the Default Rate until paid. Upon the occurrence of an Event of Default, Lender may apply any moneys in the capital expenditures reserve fund to the Loan Obligations, in such order and manner as Lender may elect. For any partial fiscal year during which the Loan is outstanding, the required expenditure amount shall be prorated by multiplying the required amount per unit amount by a fraction, the numerator of which is the number of days during such year for which all or part of the Loan is outstanding and the denominator of which is the number of days in such year. During the term of the Loan, Lender may, from time to time, engage a professional building inspector to conduct an inspection of the Facility. 4.17 MANAGEMENT AGREEMENT. Maintain the Management Agreement in full force and effect and timely perform all of Borrower's obligations thereunder and enforce performance of all obligations of Manager thereunder and not permit the termination, amendment or assignment of the Management Agreement unless the prior written consent of Lender is first obtained, which consent shall not be unreasonably withheld. Borrower will enter into and cause Manager to enter into the Subordination Agreement. Borrower will not enter into any other management agreement without Lender's prior written consent, which consent may be in the sole and absolute discretion of Lender. 4.18 UPDATED APPRAISALS. For so long as the Loan remains outstanding, if any Event of Default shall occur hereunder, or if, in Lender's judgment, a material depreciation in the value of the Land and/or the Improvements shall have occurred, then in any such event, Lender, may cause the Land and Improvements to be appraised by an appraiser selected by Lender, and in 25 accordance with Lender's appraisal guidelines and procedures then in effect, and Borrower agrees to cooperate in all respects with such appraisals and furnish to the appraisers all requested information regarding the Land and Improvements and the Facility. Borrower agrees to pay all reasonable costs incurred by Lender in connection with such appraisal which costs shall be secured by the Mortgage and shall accrue interest at the Default Rate until paid. 4.19 COMPLY WITH COVENANTS AND LAWS. Comply, in all material respects, with all applicable covenants and restrictions of record and all laws, ordinances, rules and regulations and keep the Facility and the Land and Improvements in compliance with all applicable laws, ordinances, rules and regulations, including, without limitation, the Americans with Disabilities Act and regulations promulgated thereunder, and laws, ordinances, rules and regulations relating to zoning, health, building codes, setback requirements, Medicaid and Medicare laws and keep the Permits for the Facility in full force and effect. 4.20 TAXES AND OTHER CHARGES. Subject to Borrower's right to contest the same as set forth in Section 9(c) of the Mortgage, pay all taxes, assessments, charges, claims for labor, supplies, rent, and other obligations which, if unpaid, might give rise to a Lien against real or personal property of the Borrower, except Liens to the extent permitted by this Agreement. 4.21 COMMITMENT LETTER. Provide all items and pay all amounts required by the Commitment Letter. If any term of the Commitment Letter shall conflict with the terms of this Agreement, this Agreement shall govern and control. As to any matter contained in the Commitment Letter, and as to which no mention is made in this Agreement or the other Loan Documents, the Commitment Letter shall continue to be in effect and shall survive the execution of this Agreement and all other Loan Documents. 4.22 CERTIFICATE. Upon Lender's written request, furnish Lender with a certificate stating that Borrower has complied with and is in compliance with all terms, covenants and conditions of the Loan Documents to which Borrower is a party and that there exists no Default or Event of Default or, if such is not the case, that one or more specified events have occurred, and that the representations and warranties contained herein are true and correct with the same effect as though made on the date of such certificate. 4.23 DEBT SERVICE RESERVE FUND. Pursuant to the Debt Service Reserve Fund Agreement, establish and maintain a debt service reserve fund with Lender equal to approximately three (3) months of debt service payments with respect to the Note as reasonably estimated by Lender, rounded upward to the nearest One Thousand Dollars ($1,000). 4.24 INTENTIONALLY DELETED. 4.25 INTENTIONALLY DELETED. 4.26 NOTICE OF FEES OR PENALTIES. Notify Lender in writing, within three (3) business days of Borrower's knowledge thereof, of the assessment by any state or, if applicable, any Medicare, Medicaid, health or licensing agency of any fines or penalties against Borrower, Manager, or the Facility. 26 4.27 LOAN CLOSING CERTIFICATION. Immediately notify Lender in writing upon Borrower's knowledge thereof, in the event any representation or warranty contained in that certain Loan Closing Certification of even date herewith, executed by Borrower for the benefit of Lender, becomes untrue or there shall have been any material adverse change in any such representation or warranty. 4.28 COMPLIANCE WITH ANTI-TERRORISM, EMBARGO, SANCTIONS AND ANTI-MONEY LAUNDERING LAWS. Borrower shall comply with all Requirements of Law relating to money laundering, anti-terrorism, trade embargos and economic sanctions, now or hereafter in effect. Upon Lender's request from time to time during the term of the Loan, Borrower shall certify in writing to Lender that Borrower's representations, warranties and obligations under Sections 3.28 and 3.29 and this Section 4.28 remain true and correct and have not been breached. Borrower shall immediately notify Lender in writing if any of such representations, warranties or covenants are no longer true or have been breached or if Borrower has a reasonable basis to believe that they may no longer be true or have been breached. In connection with such an event, Borrower shall comply with all Requirements of Law and directives of Governmental Authorities and, at Lender's request, provide to Lender copes of all notices, reports and other communications exchanged with, or received from, Governmental Authorities relating to such an event. Borrower shall also reimburse Lender any expense incurred by Lender in evaluating the effect of such an event on the Loan and Lender's interest in the collateral for the Loan, in obtaining any necessary license from Governmental Authorities as may be necessary for Lender to enforce its rights under the Loan Documents, and in complying with all Requirements of Law applicable to Lender as the result of the existence of such an event and for any penalties or fines imposed upon Lender as a result thereof. ARTICLE V NEGATIVE COVENANTS OF BORROWER Until the Loan Obligations have been paid in full, Borrower shall not: 5.1 ASSIGNMENT OF LICENSES AND PERMITS. Assign or transfer any of its interest in any Permits or Reimbursement Contracts (including rights to payment thereunder) pertaining to the Facility, or assign, transfer, or remove or permit any other Person to assign, transfer, or remove any records pertaining to the Facility including, without limitation, resident records, medical and clinical records (except for removal of such patient records as directed by the residents owning such records), without Lender's prior written consent, which consent may be granted or refused in Lender's sole discretion. 5.2 NO LIENS; EXCEPTIONS. Create, incur, assume or suffer to exist any Lien upon or with respect to the Facility, any of its properties, rights, income or other assets relating thereto, including, without limitation, the Mortgaged Property whether now owned or hereafter acquired, other than the following permitted Liens ("Permitted Encumbrances"): (a) Liens at any time existing in favor of Lender; (b) Liens which are listed in Exhibit "F" attached hereto; 27 (c) Inchoate Liens arising by operation of law for the purchase of labor, services, materials, equipment or supplies, provided payment shall not be delinquent and, if such Lien is a lien upon any of the Land or Improvements, such Lien must be fully disclosed to Lender and bonded off and removed from the Land and Improvements within thirty (30) days of its creation, in a manner satisfactory to Lender; (d) Liens incurred in the ordinary course of business in connection with workers' compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for money borrowed or for credit received with respect to property acquired) entered into in the ordinary course of business as presently conducted or to secure obligations for surety or appeal bonds; (e) Liens for current year's taxes, assessments or governmental charges or levies provided payment thereof shall not be delinquent; and (f) Liens related to the A/R Loan. (g) Liens securing purchase money loans not to exceed $300,000 in the aggregate at any one time outstanding. (h) Liens related to the Related Loans. 5.3 MERGER, CONSOLIDATION, ETC. Except as otherwise provided in the Mortgage, consummate any merger, consolidation or similar transaction, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions), all or substantially all of its assets (whether now or hereafter acquired), without the prior written consent of Lender, which consent may be granted or refused in Lender's sole discretion. 5.4 MAINTAIN SINGLE PURPOSE ENTITY STATUS. (a) Engage in any business or activity other than the ownership, operation and maintenance of the Mortgaged Property, and activities incidental thereto; (b) Acquire or own any material assets other than (i) the Mortgaged Property, and (ii) such incidental machinery, equipment, fixtures and other personal property as may be necessary for the operation of the Mortgaged Property; (c) Merge into or consolidate with any Person or dissolve, terminate or liquidate in whole or in part, transfer or otherwise dispose of all or substantially all of its assets (except as permitted in the Loan Documents) or change its legal structure, without in each case Lender's consent; (d) Without the prior written consent of Lender, amend, modify, terminate or fail to comply with the provisions of its Partnership Agreement, Articles or Certificate of Incorporation, Operating Agreement or similar organizational document, as same may be further amended or supplemented, if such amendment, modification, termination or failure to comply 28 would adversely affect its status as a Single Purpose Entity or its ability to perform its obligations hereunder, under the Note or any other document evidencing or securing the Loan; (e) Own any subsidiary or make any investment in, any Person without the consent of Lender; (f) Commingle its funds or assets with assets of, or pledge its assets with or for, any of its general partners, members, shareholders, Affiliates, Lessee, principals or any other Person; except for daily sweeps to a master concentration account with the A/R Lender from which necessary operating funds will be disbursed to a control account for the benefit of Borrower; (g) Incur any debt, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than the Loan trade payables or accrued expenses incurred in the ordinary course of business, payable within 90 days of the date incurred, based on historical amounts, and the obligations to the A/R Lender; (h) Fail to maintain its records, books of account and bank accounts separate and apart from those of its general partners, members, shareholders, principals and Affiliates, the Affiliates of any of its general partners, members, shareholders, principals, and any other Person; (i) Enter into any contract or agreement with any of its general partners, members, shareholders, principals or Affiliates (other than the Management Agreement), or the Affiliates of any of its general partners, members, shareholders, principals, except upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties; (j) Seek its dissolution or winding up in whole, or in part; (k) Maintain its assets in such a manner that it will be costly or difficult to segregate, ascertain or identify its individual assets from those of any of its general partners, members, shareholders, principals and Affiliates, the Affiliates of any of its general partners, members, shareholders, principals or any other Person; (l) Hold itself out to be responsible for the debts of another Person or pay another Person's liabilities out of its own funds other than the A/R Loan; (m) Make any loans or advances to any third party, including any of its general partners, members, shareholders, principals or Affiliates, or the Affiliates of any of its general partners, members, shareholders, principals; (n) Fail to have prepared and filed its own tax returns, or tax returns consolidated with the Guarantor; (o) Fail either to hold itself out to the public as a legal Person separate and distinct from any other Person or to conduct its business solely in its own name, in order not (i) to mislead others as to the identity with which such other party is transacting business, or (ii) to 29 suggest that it is responsible for the debts of any third party (including any of its members or Affiliates, or any general partner, member, principal or Affiliate thereof); or (p) Fail to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations. 5.5 CHANGE OF BUSINESS. Make any material change in the nature of its business as it is being conducted as of the date hereof. 5.6 CHANGES IN ACCOUNTING. Change its methods of accounting, unless such change is permitted by GAAP, and provided such change does not have the effect of curing or preventing what would otherwise be an Event of Default or Default had such change not taken place. 5.7 ERISA. (a) Agree to, enter into or consummate any transaction which would render it unable to confirm that (i) it is not an "employee benefit plan" as defined in Section 3(32) of ERISA, which is subject to Title I of ERISA, or a "governmental plan" within the meaning of Section 3(32) of ERISA; (ii) it is not subject to state statutes regulating investments and fiduciary obligations with respect to governmental plans; and (iii) less than twenty-five percent (25%) of each of its outstanding class of equity interests are held by "benefit plan investors" within the meaning of 29 C.F.R. Section 2510.3-101(f)(2); (b) Engage in a non-exempt prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code, as such sections relate to Borrower, or in any transaction that would cause any obligation or action taken or to be taken hereunder (or the exercise by Lender of any of its rights under the Loan Documents) to be a non-exempt prohibited transaction under ERISA. 5.8 TRANSACTIONS WITH AFFILIATES. Enter into any transaction (other than the Management Agreement) with a Person which is an Affiliate of Borrower other than in the ordinary course of its business and on fair and reasonable terms no less favorable to Borrower, than those they could obtain in a comparable arms-length transaction with a Person not an Affiliate. 5.9 TRANSFER OF OWNERSHIP INTERESTS. Except as otherwise allowable under the Mortgage, and except for the pledge of Borrower's membership interest as collateral security for the A/R Loan, permit a change in the percentage ownership interest of the Persons owning the Borrower, unless the written consent of Lender is first obtained, which consent may be granted or refused in Lender's sole discretion. 5.10 CHANGE OF USE. Alter or change the use of the Facility or enter into any management agreement for the Facility other than the Management Agreement or enter into any operating lease for the Facility, unless Borrower first notifies Lender and provides Lender a copy of the proposed lease agreement or management agreement, obtains Lender's written consent 30 thereto, which consent may be withheld in Lender's sole discretion, and obtains and provides Lender with a subordination agreement in form satisfactory to Lender, as determined by Lender in its sole discretion, from such manager or lessee subordinating to all rights of Lender. 5.11 PLACE OF BUSINESS. Change its chief executive office or its principal place of business without first giving Lender at least thirty (30) days prior written notice thereof and promptly providing Lender such information and amendatory financing statements as Lender may request in connection therewith. 5.12 ACQUISITIONS. Directly or indirectly, purchase, lease, manage, own, operate, or otherwise acquire any property or other assets (or any interest therein) which are not used in connection with the operation of the Facility. 5.13 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. Except as hereinafter provided or as otherwise consented to by Lender in writing, declare or pay any distributions to its shareholders, members or partners, as applicable, or purchase, redeem, retire, or otherwise acquire for value, any ownership interests in Borrower now or hereafter outstanding, return any capital to its shareholders, members or partners, as applicable, or make any distribution of assets to its shareholders, members, or partners, as applicable. Notwithstanding the foregoing, Lender acknowledges and agrees that transfers of cash pursuant to the cash management program of Borrower and its Affiliates shall not constitute or be deemed to be distributions for purposes of this Section 5.13. 5.14 DISPOSITION OF ASSETS/RELEASE. Dispose of, sell, transfer, alien or release any Collateral, Property, or Assets (as such terms are defined in the mortgages or deeds of trust governing the Related Loans) owned by the Borrower or a Related Borrower unless Lender has agreed, in its sole discretion to release a Related Loan or the Loan. ARTICLE VI ENVIRONMENTAL HAZARDS 6.1 PROHIBITED ACTIVITIES AND CONDITIONS. Except for matters covered by a written program of operations and maintenance approved in writing by Lender (an "O&M Program") or matters described in Section 6.2, Borrower shall not cause or permit to exist any of the following: (a) The presence, use, generation, release, treatment, processing, storage (including storage in above ground and underground storage tanks), handling, or disposal of any Hazardous Materials in, on or under the Land, any Improvements, or any other property of Borrower that is adjacent to the Land in violation of applicable Hazardous Materials Laws; (b) The transportation of any Hazardous Materials to, from, or across the Land; (c) Any occurrence or condition on the Land or in the Improvements or any other property of Borrower that is adjacent to the Land, which occurrence or condition is or may be in violation of Hazardous Materials Laws; 31 (d) Any violation of or noncompliance with the terms of any Environmental Permit with respect to the Land, the Improvements or any property of Borrower that is adjacent to the Land; or (e) Any Lien (whether or not such Lien has priority over the Lien created by the Mortgage) upon the Land or any Improvements imposed pursuant to any Hazardous Materials Laws. The matters described in clauses (a) through (e) above are referred to collectively in this Article VI as "Prohibited Activities and Conditions" and individually as a "Prohibited Activity and Condition." 6.2 EXCLUSIONS. Notwithstanding any other provision of Article VI to the contrary, "Prohibited Activities and Conditions" shall not include the safe and lawful use and storage of quantities of (a) pre-packaged supplies, medical waste, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable facilities, (b) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by occupants of the Facility, and (c) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the Land's parking areas, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Hazardous Materials Laws. 6.3 PREVENTIVE ACTION. Borrower shall take all appropriate steps (including the inclusion of appropriate provisions in any Leases approved by Lender which are executed after the date of this Agreement) to prevent its employees, agents, contractors, tenants and occupants of the Facility from causing or permitting any Prohibited Activities and Conditions. 6.4 O & M PROGRAM COMPLIANCE. If an O&M Program has been established with respect to Hazardous Materials, Borrower shall comply in a timely manner with, and cause all employees, agents and contractors of Borrower and any other Persons (excluding trespassers) present on the Land to comply with the O&M Program. All costs of performance of Borrower's obligations under any O&M Program shall be paid by Borrower, and Lender's out-of-pocket costs incurred in connection with the monitoring and review of the O&M Program and Borrower's performance shall be paid by Borrower upon demand by Lender. Any such out-of-pocket costs of Lender which Borrower fails to pay promptly shall become an additional part of the Loan Obligations. 6.5 BORROWER'S ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender that, except as previously disclosed by Borrower to Lender in writing: (a) Borrower has not at any time caused or permitted any Prohibited Activities and Conditions. (b) No Prohibited Activities and Conditions exist or have existed. 32 (c) The Land and the Improvements do not now contain any underground storage tanks, and, to the best of Borrower's knowledge after reasonable and diligent inquiry, the Land and the Improvements have not contained any underground storage tanks in the past. If there is an underground storage tank located on the Land or the Improvements which has been previously disclosed by Borrower to Lender in writing, that tank complies with all requirements of Hazardous Materials Laws. (d) Borrower has complied with all Hazardous Materials Laws, including all requirements for notification regarding releases of Hazardous Materials, relating to the Land. Without limiting the generality of the foregoing, Borrower has obtained all Environmental Permits required for the operation of the Land and the Improvements in accordance with Hazardous Materials Laws now in effect and all such Environmental Permits are in full force and effect. During Borrower's ownership of the Land, and, to the best of Borrower's knowledge after reasonable and diligent inquiry, no event has occurred with respect to the Land and/or Improvements that constitutes or, with the passing of time or the giving of notice, would constitute, noncompliance with the terms of any Environmental Permit. (e) There are no actions, suits, claims or proceedings pending or, to the best of Borrower's knowledge after reasonable and diligent inquiry, threatened that involves the Land and/or the Improvements and allege, arise out of, or relate to any Prohibited Activity and Condition. (f) Borrower has not received any written complaint, order, notice of violation or other communication from any Governmental Authority with regard to air emissions, water discharges, noise emissions or Hazardous Materials, or any other environmental, health or safety matters affecting the Land, the Improvements or any other property of Borrower that is adjacent to the Land. The representations and warranties in this Article VI shall be continuing representations and warranties that shall be deemed to be made by Borrower throughout the term of the Loan evidenced by the Note and until all of the Loan Obligations have been paid in full. 6.6 NOTICE OF CERTAIN EVENTS. Borrower shall promptly notify Lender in writing of any and all of the following that may occur: (a) Borrower's discovery of any Prohibited Activity and Condition. (b) Borrower's receipt of or knowledge of any complaint, order, notice of violation or other communication from any Governmental Authority or other Person with regard to present or future alleged Prohibited Activities and Conditions or any other environmental, health or safety matters affecting the Land, the Improvements or any other property of Borrower that is adjacent to the Land. (c) Any representation or warranty in this Article VI which becomes untrue at any time after the date of this Agreement. Any such notice given by Borrower shall not relieve Borrower of, or result in a waiver of, any obligation under this Agreement, the Note, or any of the other Loan Documents. 33 6.7 COSTS OF INSPECTION. Borrower shall pay promptly the costs of any environmental inspections, tests or audits ("Environmental Inspections") required by Lender in connection with any foreclosure or deed in lieu of foreclosure or, if required by Lender, as a condition of Lender's consent to any "Transfer" (as defined in the Mortgage), or required by Lender following a commercially reasonable determination by Lender that Prohibited Activities and Conditions may exist. Any such costs incurred by Lender (including the fees and out-of-pocket costs of attorneys and technical consultants whether incurred in connection with any judicial or administrative process or otherwise) which Borrower fails to pay promptly shall become an additional part of the Loan Obligations. The results of all Environmental Inspections made by Lender shall at all times remain the property of Lender, and Lender shall have no obligation to disclose or otherwise make available to Borrower or any other party such results or any other information obtained by Lender in connection with its Environmental Inspections. Lender hereby reserves the right, and Borrower hereby expressly authorizes Lender, to make available to any party, including any prospective bidder at a foreclosure sale of the Mortgaged Property, the results of any Environmental Inspections made by Lender with respect to the Mortgaged Property. Borrower consents to Lender notifying any party (either as part of a notice of sale or otherwise) of the results of any of Lender's Environmental Inspections. Borrower acknowledges that Lender cannot control or otherwise assure the truthfulness or accuracy of the results of any of its Environmental Inspections and that the release of such results to prospective bidders at a foreclosure sale of the Mortgaged Property may have a material and adverse effect upon the amount which a party may bid at such sale. Borrower agrees that Lender shall have no liability whatsoever as a result of delivering the results of any of its Environmental Inspections to any third party, and Borrower hereby releases and forever discharges Lender from any and all claims, damages, or causes of action, arising out of, connected with or incidental to the results of, the such delivery of any of Lender's Environmental Inspections. 6.8 REMEDIAL WORK. If any investigation, site monitoring, containment, clean-up, restoration or other remedial work ("Remedial Work") is necessary to bring Borrower into compliance with any Hazardous Materials Law or order of any Governmental Authority that has or acquires jurisdiction over the Land, the Improvements or the use, operation or improvement of the Land under any Hazardous Materials Law, Borrower shall, by the earlier of (a) the applicable deadline required by Hazardous Materials Law or (b) thirty (30) days after notice from Lender demanding such action, begin performing the Remedial Work, and thereafter diligently prosecute it to completion, and shall in any event complete such work by the time required by applicable Hazardous Materials Law. If Borrower fails to begin on a timely basis or diligently prosecute any required Remedial Work, Lender may, at its option, cause the Remedial Work to be completed, in which case Borrower shall reimburse Lender on demand for the cost of doing so. Any reimbursement due from Borrower to Lender shall become part of the Loan Obligations. 6.9 COOPERATION WITH GOVERNMENTAL AUTHORITIES. Borrower shall cooperate with any inquiry by any Governmental Authority and shall comply with any governmental or judicial order which arises from any alleged Prohibited Activity and Condition. 6.10 INDEMNITY. 34 (a) Borrower shall hold harmless, defend and indemnify (i) Lender, (ii) any prior owner or holder of the Note, (iii) any Person who is or will have been involved in the servicing of the Note, (iv) the officers, directors, partners, agents, shareholders, employees and trustees of any of the foregoing, and (v) the heirs, legal representatives, successors and assigns of each of the foregoing (together, the "Indemnitees") from and against all proceedings, claims, damages, losses, expenses, penalties and costs (whether initiated or sought by any Governmental Authority or private parties), including fees and out of pocket expenses of attorneys and expert witnesses, investigatory fees, and remediation costs, whether incurred in connection with any judicial or administrative process or otherwise, arising directly or indirectly from any of the following except to the extent the same relate solely to Hazardous Materials first introduced to the Property or any part thereof by anyone other than Borrower or an Affiliate of Borrower following foreclosure of the Mortgage (or the delivery and acceptance of a deed in lieu of foreclosure). (i) Any breach of any representation or warranty of Borrower in this Article VI; (ii) Any failure by Borrower to perform any of its obligations under this Article VI; (iii) The existence or alleged existence of any Prohibited Activity and Condition; (iv) The presence or alleged presence of Hazardous Materials in, on, around or under the Land, the Improvements or any property of Borrower that is adjacent to the Land; or (v) The actual or alleged violation of any Hazardous Materials Law. (b) Counsel selected by Borrower to defend Indemnitees shall be subject to the approval of those Indemnitees. Notwithstanding anything contained herein, any Indemnitee may elect to defend any claim or legal or administrative proceeding at Borrower's expense, if such Indemnitee has reason to believe that its interests are not being adequately represented or diverge from other interests being represented by such counsel (but Borrower shall be obligated to bear the expense of at most only one such separate counsel). Nothing contained herein shall prevent an Indemnitee from employing separate counsel in any such action at any time and participating in the defense thereof at its own expense. (c) Borrower shall not, without the prior written consent of those Indemnitees who are named as parties to a claim or legal or administrative proceeding (a "Claim") settle or compromise the Claim if the settlement (i) results in the entry of any judgment that does not include as an unconditional term the delivery by the claimant or plaintiff to Lender of a written release of those Indemnitees, satisfactory in form and substance to Lender; or (ii) may materially and adversely affect any Indemnitee, as determined by such Indemnitee in its sole discretion. 35 (d) The liability of Borrower to indemnify the Indemnitees shall not be limited or impaired by any of the following, or by any failure of Borrower or any guarantor to receive notice of or consideration for any of the following: (i) Any amendment or modification of any Loan Document; (ii) Any extensions of time for performance required by any of the Loan Documents; (iii) The accuracy or inaccuracy of any representations and warranties made by Borrower under this Agreement or any other Loan Document; (iv) The release of Borrower or any other Person, by Lender or by operation of law, from performance of any obligation under any of the Loan Documents; (v) The release or substitution in whole or in part of any security for the Loan Obligations; or (vi) Lender's failure to properly perfect any lien or security interest given as security for the Loan Obligations; or (vii) Any provision in any of the Loan Documents limiting Lender's recourse to property securing the Loan or limiting the personal liability of Borrower or any party for payment of all or any part of the Loan. (e) Borrower shall, at its own cost and expense, do all of the following: (i) Pay or satisfy any judgment or decree that may be entered against any Indemnitee or Indemnitees in any legal or administrative proceeding incident to any matters against which Indemnitees are entitled to be indemnified under this Article VI; (ii) Reimburse Indemnitees for any expenses paid or incurred in connection with any matters against which Indemnitees are entitled to be indemnified under this Article VI; and (iii) Reimburse Indemnitees for any and all expenses, including fees and costs of attorneys and expert witnesses, paid or incurred in connection with the enforcement by Indemnitees of their rights under this Article VI, or in monitoring and participating in any legal or administrative proceeding. (f) In any circumstances in which the indemnity under this Article VI applies, Lender may employ its own legal counsel and consultants to prosecute, defend or negotiate any claim or legal or administrative proceeding and Lender, with the prior written consent of Borrower (which shall not be unreasonably withheld, delayed or conditioned) may settle or compromise any action or legal or administrative proceeding. Borrower shall reimburse Lender upon demand for all costs and expenses incurred by Lender, including all costs of settlements 36 entered into in good faith, and the fees and out of pocket expenses of such attorneys and consultants. (g) The provisions of this Article VI shall be in addition to any and all other obligations and liabilities that Borrower may have under the applicable law or under the other Loan Documents, and each Indemnitee shall be entitled to indemnification under this Article VI without regard to whether Lender or that Indemnitee has exercised any rights against the Land and/or the Improvements or any other security, pursued any rights against any guarantor, or pursued any other rights available under the Loan Documents or applicable law. If Borrower consists of more than one Person or entity, the obligation of those Persons or entities to indemnify the Indemnitees under this Article VI shall be joint and several. The obligations of Borrower to indemnify the Indemnitees under this Article VI shall survive any repayment or discharge of the Loan Obligations, any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, and any release of record of the lien of the Mortgage. ARTICLE VII EVENTS OF DEFAULT AND REMEDIES 7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an "Event of Default" hereunder: (a) The failure by Borrower to pay any installment of principal, interest, or other payments required under the Note, the Mortgage or any other Loan Document within ten (10) days after the same becomes due; (b) Any failure by Borrower to provide and maintain in full force and effect the insurance coverage required by Section 4.5(a) - (j), inclusive, of this Agreement; (c) The violation by Borrower of any covenant set forth in Article V hereof; (d) The failure by Borrower to deliver or cause to be delivered the financial statements and information set forth in Section 4.7 of this Agreement within the times required, and such failure is not cured within thirty (30) days following Lender's written notice to Borrower thereof; (e) The failure by Borrower or Guarantor to establish and maintain the capital expenditures reserve fund in accordance with Section 4.16 of this Agreement; (f) The failure of Borrower properly and timely to perform or observe any covenant or condition set forth in this Agreement (other than those specified in this Section 7.1) or any of the other Loan Documents which failure is not cured within any applicable cure period as set forth herein or in such other Loan Document, or, if no cure period is specified therefor, is not cured within thirty (30) days after notice to Borrower of such Default; provided, however, that if such Default cannot be cured within such thirty (30) day period, such cure period shall be extended for an additional sixty (60) days, as long as Borrower is diligently and in good faith prosecuting said cure to completion; 37 (g) The filing by Borrower, Guarantor or Manager of a voluntary petition, or the adjudication of any of the aforesaid Persons, or the filing by any of the aforesaid Persons of any petition or answer seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief for itself under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, or if any of the aforesaid Persons should seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator for itself or of all or any substantial part of its property or of any or all of the rents, revenues, issues, earnings, profits or income thereof, or the mailing of any general assignment for the benefit of creditors or the admission in writing by any of the aforesaid Persons of its inability to pay its debts generally as they become due; (h) The entry by a court of competent jurisdiction of an order, judgment, or decree approving a petition filed against Borrower, Guarantor or Manager which petition seeks any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency, or other relief for debtors, which order, judgment or decree remains unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive) from the date of entry thereof, or the appointment of any trustee, receiver or liquidator of any of the aforesaid Persons or of all or any substantial part of its properties or of any or all of the rents, revenues, issues, earnings, profits or income thereof which appointment shall remain unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive); (i) Unless otherwise permitted hereunder or under any other Loan Documents, the sale, transfer, lease, assignment, or other disposition, voluntarily or involuntarily, of the Mortgaged Property, or any part thereof, except for Permitted Encumbrances as described in Section 5.2 above, or any further encumbrance of the Mortgaged Property (except for Permitted Encumbrances), unless the prior written consent of Lender is obtained; (j) Any certificate, statement, representation, warranty or audit heretofore or hereafter furnished by or on behalf of Borrower, Guarantor or Manager or any of their respective officers, directors or trustees pursuant to or in connection with this Agreement (including, without limitation, representations and warranties contained herein or in any Loan Documents) or as an inducement to Lender to make the Loan to Borrower, (i) proves to have been false in any material respect at the time when the facts therein set forth were stated or certified, or (ii) proves to have omitted any substantial contingent or unliquidated liability or claim against Borrower, Guarantor or Manager or (iii) on the date of execution of this Agreement there shall have been any materially adverse change in any of the acts previously disclosed by any such certificate, statement, representation, warranty or audit, which change shall not have been disclosed to Lender in writing at or prior to the time of such execution; (k) The occurrence of a default (after expiration of applicable notice and cure periods) under or with respect to any of the Related Loans; 38 (l) The failure of Borrower to correct or to cause Manager to correct, within the time deadlines set by any applicable Medicare, Medicaid or licensing agency, any deficiency which would result in the following actions by such agency with respect to the Facility; (i) a termination of any Reimbursement Contract or any Permit; or (ii) a ban on new admissions generally or, if applicable, on admission of patients otherwise qualifying for Medicare or Medicaid coverage; (m) The assessment against Borrower, Manager, or the Facility of any fines or penalties by any state or any Medicare, Medicaid, health or licensing agency having jurisdiction over such Persons or the Facility in excess of $50,000.00; (n) A final judgment is rendered by a court of law or equity against Borrower in excess of $25,000.00, or Manager or Guarantor in excess of $100,000.00, and the same remains undischarged for a period of thirty (30) days, unless such judgment is either (i) fully covered by collectible insurance and such insurer has within such period acknowledged such coverage in writing, or (ii) although not fully covered by insurance, enforcement of such judgment has been effectively stayed, such judgment is being contested or appealed by appropriate proceedings and Borrower, Guarantor or Manager as the case may be, has established reserves adequate for payment in the event such Person is ultimately unsuccessful in such contest or appeal and evidence thereof is provided to Lender; or (o) The occurrence of any material adverse change in the financial condition or prospects of Borrower or Guarantor or Manager, or the existence of any other condition which, in Lender's reasonable determination, constitutes a material impairment of any such Person's ability to operate the Facility or of such Person's ability to perform their respective obligations under the Loan Documents, which is not remedied within thirty (30) days after written notice. Notwithstanding anything in this Section, all requirements of notice shall be deemed eliminated if Lender is prevented from declaring an Event of Default by bankruptcy or other applicable law. The cure period, if any, shall then run from the occurrence of the event or condition of Default rather than from the date of notice. 7.2 REMEDIES. Upon the occurrence of any one or more of the foregoing Events of Default, Lender may, at its option: (a) Declare the entire unpaid principal of the Loan Obligations to be, and the same shall thereupon become, immediately due and payable, without presentment, protest or further demand or notice of any kind, all of which are hereby expressly waived; and/or (b) Proceed to protect and enforce its rights by action at law (including, without limitation, bringing suit to reduce any claim to judgment), suit in equity and other appropriate proceedings including, without limitation, for specific performance of any covenant or condition contained in this Agreement; and/or 39 (c) Exercise any and all rights and remedies afforded by the laws of the United States, the states in which any of the Mortgaged Property is located or any other appropriate jurisdiction as may be available for the collection of debts and enforcement of covenants and conditions such as those contained in this Agreement and the Loan Documents; and/or (d) Exercise the rights and remedies of setoff and/or banker's lien against the interest of Borrower in and to every account and other property of Borrower which is in the possession of Lender or any Person who then owns a participating interest in the Loan, to the extent of the full amount of the Loan; and/or (e) Exercise its rights and remedies pursuant to any other Loan Documents. ARTICLE VIII MISCELLANEOUS 8.1 WAIVER. No remedy conferred upon, or reserved to, Lender in this Agreement or any of the other Loan Documents is intended to be exclusive of any other remedy or remedies, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity. Exercise of or omission to exercise any right of Lender shall not affect any subsequent right of Lender to exercise the same. No course of dealing between Borrower and Lender or any delay on Lender's part in exercising any rights shall operate as a waiver of any of Lender's rights. No waiver of any Default under this Agreement or any of the other Loan Documents shall extend to or shall affect any subsequent or other, then existing, Default or shall impair any rights, remedies or powers of Lender. 8.2 COSTS AND EXPENSES. Borrower will bear all taxes, fees and expenses (including actual attorneys' fees and expenses of counsel for Lender) in connection with the Loan, the Note, the preparation of this Agreement and the other Loan Documents (including any amendments hereafter made), and in connection with any modifications thereto and the recording of any of the Loan Documents. If, at any time, a Default occurs or Lender becomes a party to any suit or proceeding in order to protect its interests or priority in any collateral for any of the Loan Obligations or its rights under this Agreement or any of the Loan Documents, or if Lender is made a party to any suit or proceeding by virtue of the Loan, this Agreement or any Mortgaged Property and as a result of any of the foregoing, Lender employs counsel to advise or provide other representation with respect to this Agreement, or to collect the balance of the Loan Obligations, or to take any action in or with respect to any suit or proceeding relating to this Agreement, any of the other Loan Documents, any Mortgaged Property, Borrower, Guarantor or Manager, or to protect, collect, or liquidate any of the security for the Loan Obligations, or attempt to enforce any security interest or lien granted to Lender by any of the Loan Documents, then in any such events, all of the actual attorney's fees arising from such services, including attorneys' fees for preparation of litigation and in any appellate or bankruptcy proceedings, and any expenses, costs and charges relating thereto shall constitute additional obligations of Borrower to Lender payable on demand of Lender. Without limiting the foregoing, Borrower has undertaken the obligation for payment of, and shall pay, all recording and filing fees, revenue 40 or documentary stamps or taxes, intangibles taxes, and other taxes, expenses and charges payable in connection with this Agreement, any of the Loan Documents, the Loan Obligations, or the filing of any financing statements or other instruments required to effectuate the purposes of this Agreement, and should Borrower fail to do so, Borrower agrees to reimburse Lender for the amounts paid by Lender, together with penalties or interest, if any, incurred by Lender as a result of underpayment or nonpayment. Such amounts shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall bear interest at the Default Rate (as defined in the Note) from the date advanced until repaid. 8.3 PERFORMANCE OF LENDER. At its option, upon Borrower's failure to do so, Lender may make any payment or do any act on Borrower's behalf that Borrower or others are required to do to remain in compliance with this Agreement or any of the other Loan Documents, and Borrower agrees to reimburse Lender, on demand, for any payment made or expense incurred by Lender pursuant to the foregoing authorization, including, without limitation, attorneys' fees, and until so repaid any sums advanced by Lender shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall bear interest at the Default Rate (as defined in the Note) from the date advanced until repaid. 8.4 INDEMNIFICATION. Except to the extent caused solely by the gross negligence of willful misconduct or illegal activity of the Indemnified Parties, Borrower shall, at its sole cost and expense, protect, defend, indemnify and hold harmless the Indemnified Parties from and against any and all claims, suits, liabilities (including, without limitation, strict liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses, diminutions in value, fines, penalties, charges, fees, expenses, judgments, awards, amounts paid in settlement, punitive damages, foreseeable and unforeseeable consequential damages, of whatever kind or nature (including but not limited to reasonable attorneys' fees and other costs of defense) imposed upon or incurred by or asserted against Lender by reason of (a) ownership of the Note, the Mortgage, the Mortgaged Property or any interest therein or receipt of any Rents, (b) any amendment to, or restructuring of, the Loan Obligations and/or any of the Loan Documents, (c) any and all lawful action that may be taken by Lender in connection with the enforcement of the provisions of the Mortgage or the Note or any of the other Loan Documents, whether or not suit is filed in connection with same, or in connection with Borrower, Guarantor, Manager and/or any partner, joint venturer, member or shareholder thereof becoming a party to a voluntary or involuntary federal or state bankruptcy, insolvency or similar proceeding, (d) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Land, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways, (e) any use, nonuse or condition in, on or about the Land, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways, (f) any failure on the part of Borrower, Guarantor or Manager to perform or comply with any of the terms of this Agreement or any of the other Loan Documents, (g) any claims by any broker, Person or entity claiming to have participated in arranging the making of the Loan evidenced by the Note, (h) any failure of the Land and/or Improvements to be in compliance with any applicable laws, (i) performance of any labor or services or the furnishing of any materials or other property with respect to the Land, the Improvements or any part thereof, (j) the failure of any Person to file timely with the Internal Revenue Service an accurate Form 1099-b, statement for recipients of proceeds from real estate, 41 broker and barter exchange transactions, which may be required in connection with the Mortgage, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the transaction in connection with which the Loan is made, (k) any misrepresentation made to Lender in this Agreement or in any of the other Loan Documents, (l) any tax on the making and/or recording of the Mortgage, the Note or any of the other Loan Documents; (m) the violation of any requirements of the Employee Retirement Income Security Act of 1974, as amended, (n) any fines or penalties assessed or any corrective costs incurred by Lender if the Facility or any part of the Land and/or Improvements is determined to be in violation of any covenants, restrictions of record, or any applicable laws, ordinances, rules or regulations, or (o) the enforcement by any of the Indemnified Parties of the provisions of this Section 8.4. Any amounts payable to Lender by reason of the application of this Section 8.4, shall become immediately due and payable, and shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue interest at the Default Rate (as defined in the Note). The obligations and liabilities of Borrower under this Section 8.4 shall survive any termination, satisfaction, assignment, entry of a judgment of foreclosure or exercise of a power of sale or delivery of a deed in lieu of foreclosure of the Mortgage. For purposes of this Section 8.4, the term "Indemnified Parties" means Lender and any Person who is or will have been involved in the origination of the Loan, any Person who is or will have been involved in the servicing of the Loan, any Person in whose name the encumbrance created by the Mortgage is or will have been recorded, any Person who may hold or acquire or will have held a full or partial interest in the Loan (including, without limitation, any investor in any securities backed in whole or in part by the Loan) as well as the respective directors, officers, shareholder, partners, members, employees, agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries, participants, successors and assigns of any and all of the foregoing (including, without limitation, any other Person who holds or acquires or will have held a participation or other full or partial interest in the Loan or the Mortgaged Property, whether during the term of the Mortgage or as a part of or following a foreclosure of the Loan and including, without limitation, any successors by merger, consolidation or acquisition of all or a substantial portion of Lender's assets and business). 8.5 HEADINGS. The headings of the Sections of this Agreement are for convenience of reference only, are not to be considered a part hereof, and shall not limit or otherwise affect any of the terms hereof. 8.6 SURVIVAL OF COVENANTS. All covenants, agreements, representations and warranties made herein and in certificates or reports delivered pursuant hereto shall be deemed to have been material and relied on by Lender, notwithstanding any investigation made by or on behalf of Lender, and shall survive the execution and delivery to Lender of the Note and this Agreement. 8.7 NOTICES, ETC. Any notice or other communication required or permitted to be given by this Agreement or the other Loan Documents or by applicable law shall be in writing and shall be deemed received (a) on the date delivered, if sent by hand delivery (to the person or department if one is specified below) with receipt acknowledged by the recipient thereof, (b) three (3) Business Days following the date deposited in U.S. mail, certified or registered, with 42 return receipt requested, or (c) one (1) Business Day following the date deposited with Federal Express or other national overnight carrier, and in each case addressed as follows: If to Borrower: Diversicare Briarcliff, LLC c/o Advocat Inc 1621 Galleria Blvd. Brentwood, TN 37027-2926 Attn: Glynn Riddle If to Lender: GMAC Commercial Mortgage Corporation 200 Witmer Road Horsham, Pennsylvania 19044-0809 Attn: Servicing Department and GMAC Commercial Mortgage Corporation 2200 Woodcrest Place, Suite 305 Birmingham, AL 35209 Attn: Laura McDonald with a copy to: Shannon B. Lisenby, Esquire Bradley Arant Rose & White LLP One Federal Place 1819 Fifth Avenue North Birmingham, AL 35203-2119 Either party may change its address to another single address by notice given as herein provided, except any change of address notice must be actually received in order to be effective. 8.8 BENEFITS. All of the terms and provisions of this Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. No Person other than Borrower or Lender shall be entitled to rely upon this Agreement or be entitled to the benefits of this Agreement. 8.9 PARTICIPATION. Borrower acknowledges that Lender may, at its option, sell participation interests in the Loan or to other participating banks or Lender may (but shall not be obligated to) assign its interest in the Loan to its affiliates, or to other assignees (the "Assignee") to be included as a pool of properties to be financed in a proposed Real Estate Mortgage Investment Conduit (REMIC). Borrower agrees with each present and future participant in the Loan or Assignee of the Loan that if an Event of Default should occur, each present and future 43 participant or Assignee shall have all of the rights and remedies of Lender with respect to any deposit due from Borrower. The execution by a participant of a participation agreement with Lender, and the execution by Borrower of this Agreement, regardless of the order of execution, shall evidence an agreement between Borrower and said participant in accordance with the terms of this Section. If the Loan is assigned to the Assignee, the Assignee will engage an underwriter (the "Underwriter"), who will be responsible for the due diligence, documentation, preparation and execution of certain documents required in connection with the offering of interests in the REMIC. Borrower agrees that Lender may, at its sole option and without notice to or consent of Borrower, assign its interest in the Loan to the Assignee for inclusion in the REMIC and, in such event, Borrower agrees to provide the Assignee with such information as may be reasonably required by the Underwriter in connection therewith or by an investor in any securities backed in whole or in part by the Loan or any rating agency rating such securities. Borrower irrevocably waives any and all right it may have under applicable law to prohibit such disclosure, including, but not limited to, any right of privacy, and consents to the disclosure of such information to the Underwriter, to potential investors in the REMIC, and to such rating agencies. 8.10 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and the instruments referred to herein supersede and incorporate all representations, promises and statements, oral or written, made by Lender in connection with the Loan. This Agreement may not be varied, altered, or amended except by a written instrument executed by an authorized officer of Lender. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, but such counterparts shall together constitute one and the same instrument. 8.11 LOAN AGREEMENT GOVERNS. The Loan is governed by the terms and provisions set forth in this Loan Agreement and the other Loan Documents and in the event of any irreconcilable conflict between the terms of the other Loan Documents and the terms of this Loan Agreement, the terms of this Loan Agreement shall control; provided, however, that in the event that there is any apparent conflict between any particular term or provision which appears in both this Loan Agreement and the other Loan Documents and it is possible and reasonable for the terms of both this Loan Agreement and the Loan Documents to be performed or complied with, then, notwithstanding the foregoing, both the terms of this Loan Agreement and the other Loan Documents shall be performed and complied with. 8.12 CONTROLLING LAW. THE PARTIES HERETO AGREE THAT THE VALIDITY, INTERPRETATION, ENFORCEMENT AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TENNESSEE AND THE PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE PERSONAL JURISDICTION IN THE STATE OF TENNESSEE FOR THE ENFORCEMENT OF ANY AND ALL OBLIGATIONS UNDER THE LOAN DOCUMENTS EXCEPT THAT IF ANY SUCH ACTION OR PROCEEDING ARISES UNDER THE CONSTITUTION, LAWS OR TREATIES OF THE UNITED STATES OF AMERICA, OR IF THERE IS A DIVERSITY OF CITIZENSHIP BETWEEN THE PARTIES THERETO, SO THAT IT IS TO BE BROUGHT IN A UNITED STATES DISTRICT COURT, IT SHALL BE BROUGHT IN THE UNITED STATES 44 DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION. 8.13 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE ANY RIGHT THAT EITHER OR BOTH MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE LOAN, OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF EITHER PARTY'S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR OTHERWISE OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. BORROWER AGREES THAT LENDER MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF BORROWER IRREVOCABLY TO WAIVE ITS RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT TO LENDER TO MAKE THE LOAN, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 45 IN WITNESS WHEREOF, Borrower and Lender have caused this Agreement to be properly executed by their respective duly authorized representatives as of the date first above written. BORROWER: DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company By: Diversicare Leasing Corp., a Tennessee corporation, its sole member /s/ Glynn Riddle, Jr. ---------------------------------------- By: Glynn Riddle, Jr. Its: Chief Financial Officer LENDER: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation /s/ Laura Y. McDonald ---------------------------------------- By: Laura Y McDonald Its: Senior Vice President 46 EX-10.3 4 g98061exv10w3.txt EX-10.3 PURCHASE AND SALE AGREEMENT EXHIBIT 10.3 - -------------------------------------------------------------------------------- PURCHASE AND SALE AGREEMENT (Oakridge, Tennessee) - -------------------------------------------------------------------------------- This Purchase and Sale Agreement (the "Agreement") is made this 5th day of July, 2005, by and between OSBORNE & WILSON DEVELOPMENT CORP., INC., an Arkansas corporation authorized to do business in the State of Tennessee (hereinafter "Seller"), and DIVERSICARE LEASING CORP., a Tennessee corporation (hereinafter "Buyer "). W I T N E S S E T H : WHEREAS, Seller is the owner of a 120 bed nursing care facility with an address of 100 Elmhurst Drive, Oakridge, Tennessee 37830, and the furnishings and equipment therein owned by Seller; and WHEREAS, Seller is currently leasing the nursing care facility to Buyer, under a Lease Agreement (With Option to Purchase) dated on or effective as of July 7,1989, between Seller, as the lessor therein, and Diversicare Corporation of America ("DCA"), as the original lessee therein, as amended by Addendum to Lease Agreement dated April 30, 1992, and Second Addendum to Lease Agreement dated September 10, 1993 (the "Lease"), which was assigned by DCA to and assumed by Buyer pursuant to an Assignment and Assumption of Lease dated May 10, 1994; and WHEREAS, Buyer is the current licensed operator of the nursing care facility and is operating the same; and WHEREAS, Seller and Buyer have agreed that Seller shall sell and Buyer shall purchase the nursing care facility upon terms and conditions herein contained herein and at the closing the Lease shall terminate. NOW THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the Seller and Buyer covenant and agree with each other as follows: 1. SALE. Seller agrees to sell to Buyer and Buyer agrees to purchase from Seller upon the terms and conditions contained herein the following (the "Facility"): (i) All of Seller's right, title, and interest in and to the real property with a street address of 100 Elmhurst Drive, Oakridge, Tennessee 37830, and more particularly described in EXHIBIT A attached hereto ("Land"), together with the improvements thereon consisting of a 120 bed nursing care facility ("Building"), landscaping, fencing, paving and surfacing thereon (collectively the "Real Property"); (ii) All of Seller's right, title and interest in and to all equipment (whether movable or attached to the Facility), personal property, furniture, fixtures, office equipment, diagnostic equipment apparatus, medical equipment, inventory, rugs, carpeting and drapes located therein that are owned by Seller and used in the operation and maintenance of the nursing home facility ("Personal Properly"'). (iii) To the extent they exist in Seller's name, all equipment leases, maintenance contracts, service contracts, suppliers contracts, leases, subleases, sublicenses, concessions and any other contracts listed on the attached EXHIBIT B ("Contracts"), and Buyer shall assume all obligations thereunder owing. (iv) To the extent they exist in Seller's name and are assignable, all licenses, approvals, certificates of need, determinations of need, franchises, accreditation's, waiver beds, certificates, certifications, consents, permits and other authorizations benefiting, relating to or affecting the operation of the Facility or the operation of programs in connection with the Facility issued by or entered into with any third party payor program or accreditation body or any governmental unit or political subdivision (whether federal, state, county, district, municipal, city or otherwise, whether now or hereafter in existence) or any agency authority, body, board, commission, court, instrumentality, legislature or office thereof or created thereby, and all renewals, replacements and substitutions therefore ("Permits"). (v) All of Seller's right, title and interest in and to the name "Briarcliff Health Care Center" and any usage or derivative thereof. 2. PURCHASE PRICE. Buyer agrees to pay for the purchase of the Facility and Seller agrees to accept for the sale of the Facility the sum of Six Million Six Hundred Thousand Dollars ($6,600,000.00), based upon $55,000 for each of the 120 nursing beds, plus the rental that would have been owed and paid to Seller under the Lease from the date of closing until December 31, 2005 had the Lease not been canceled at closing ("Purchase Price"). 3. DEPOSIT. Within seven (7) days after the identification and approval of the Title Company pursuant to Paragraph 5 hereof, Buyer will deliver a check in the amount of Fifty Thousand Dollars ($50,000.00) as earnest money deposit (the "Deposit") to the offices of the Title Company which shall act as escrow agent ("Escrow Agent") for the purposes of holding the Deposit under this Agreement. The Deposit shall be held by the Escrow Agent and applied against the Purchase Price at Closing unless paid to Seller or refunded to Buyer as otherwise provided for in this Agreement. 4. WARRANTY OF TITLE. (a) Seller warrants and represents that it owns the fee simple and merchantable title to the Real Property, subject only to the Permitted Exceptions (as defined herein), and the Personal Property. (b) Seller warrants and represents to Buyer that it shall convey to Buyer at Closing title to the Facility as follows: (i) Title to Real Property shall be conveyed in fee simple by Warranty Deed, shall be good and marketable and free and clear of all liens, encumbrances or other matters affecting title, other than the Permitted Exceptions (as defined herein), and an Owner's title insurance policy for the full amount of the Purchase Price will be issued to Buyer at the Closing, which policy shall show and insure that legal title will be vested in Buyer subject only to the Permitted Exceptions. (ii) Title to the Personal Property shall be conveyed by Bill of Sale free and clear of all liens, security interests and other encumbrances except as otherwise specified herein. (iii) Seller's rights in the Contracts shall be transferred by an assignment with Buyer assuming Seller's obligations thereunder. (iv) All of Seller's rights in the Permits, if any, shall be transferred by an assignment or other appropriate document. 5. TITLE COMMITMENT AND SURVEY. (a) Within twenty (20) days of the execution hereof, Seller, at Seller's expense, shall cause a nationally recognized title insurance company reasonably acceptable to Buyer (the "Title Company") to issue and deliver to Seller and Buyer a current commitment for title insurance ("Title Commitment") dated on or after the effective date of this Contract, binding the title company to issue an owner's policy of title insurance ("Owner's Title Policy") to Buyer at Closing in the amount of the Purchase Price, and setting forth all matters affecting title to the Property, together with copies of any recorded documents referenced in or constituting exceptions under the Title Commitment. The Title Commitment shall provide that the title policy, when issued, will have all standard printed exceptions removed and will provide for such coverages and endorsements as may be reasonably required by Buyer. Seller shall deliver at Closing all affidavits, certificates or other documentation required by the Title Company to issued the title policy as herein contemplated. Buyer, at Buyer's expense, shall have the benefit of a simultaneous issue mortgagee title policy for any lender of Buyer placing a deed of trust on the Facility in connection with its purchase by Buyer. At Closing, Seller shall pay the cost of the Owner's Title Policy up to the amount of the Purchase Price. Buyer shall be responsible and pay for the cost of any mortgagee policy for Buyer's lender and the costs of any endorsements or affirmative coverages required by Buyer or its lender. (b) Within thirty (30) days after the execution hereof, Seller, shall cause to be prepared and delivered to Buyer and the Title Company a current as-built survey ("Survey") of the Real Property and improvements certified as to a date after the effective date of this Contract prepared by a registered professional surveyor acceptable to Seller, Buyer and the Title Company ("Surveyor"). The Survey shall be prepared in conformity with the Minimum Standard Detail Requirements for an ALTA/ACSM Land Title Survey for improved real property as adopted by ALTA, ACSM and NSPS in 1999 and including such Items of Table A thereof as Buyer may request. The Survey shall be certified to the Title Company, Seller, Buyer and Buyer's lender and shall include a Surveyor's certificate in form and substance reasonably satisfactory to Seller, Buyer, the Title Company and Buyer's lender. The Survey shall reflect the property boundary lines, the location and existence of all improvements thereon, any easements and any boundary line encroachments. The metes and bounds description of the Land reflected in the Survey as approved by Buyer pursuant to Section 3(c) below shall be substituted for the description of the Land set forth in EXHIBIT A hereto and shall be included in the deed to be delivered at Closing. The Survey shall be sufficient in form and content to remove the standard printed survey exceptions from the Owner's Title Policy to be issued to Buyer at Closing. Seller shall pay for the cost and expense of the Survey up to the amount of $4,620; Buyer shall pay and be responsible for the cost and expense of the Survey, if any, in excess of such amount. (c) Buyer shall provide Seller with written notice of any objections to matters set forth in the Title Commitment and/or Survey within fifteen (15) days after receipt of the Title Commitment and Survey, whichever is last. All matters set forth in the Title Commitment and Survey not objected to by Buyer shall be deemed approved and shall constitute a permitted exception ("Permitted Exceptions"). (d) Seller shall within five (5) days after receipt of such notice from Buyer, notify Buyer in writing either (i) that Seller is unable to correct such unacceptable matters, or (ii) that Seller, at its sole cost and expense, shall undertake promptly to eliminate or modify all such unacceptable matters to the reasonable satisfaction of Buyer. In the event Seller elects (ii) above, Seller agrees to use its best effort to satisfy promptly any such objections at its sole cost and expense prior to the Closing Date. If required, Seller shall be entitled to a reasonable adjournment of the Closing (not to exceed thirty (30) days) for the purpose of satisfying such objections. In the event Seller is unable, with the exercise of due diligence, through the payment of money or legal proceedings, to satisfy said objections within thirty (30) days after said notice from Buyer, Buyer may, at its option, either (i) accept title subject to the objections raised by Buyer, with an adjustment in the Purchase Price acceptable to both Buyer and Seller, in which event said objections shall be deemed to be waived for all purposes or (ii) terminate this Agreement, whereupon this Agreement shall be no further force and effect, the Deposit shall be refunded to Buyer, and neither party shall have any further liability hereunder. (e) Seller shall discharge (or otherwise cause to be deleted) all monetary liens and mechanic's and materialmen's liens against the Property at or prior to Closing. 6. CLOSING. (a) The closing and settlement ("Closing") shall take place on or before August 31, 2005 ("Closing Date") at the offices of the Title Company or at such other place as the parties agree. (b) At Closing, Seller shall deliver the executed documents required of it hereunder for the conveyance and Closing. (c) At Closing, Buyer shall pay the Purchase Price and deliver the executed documents required of it hereunder for the purchase and Closing. 7. CONDITION PRECEDENT. This entire Agreement and the obligations of Buyer to purchase the Facility shall be contingent upon the occurrence of all of the following events (collectively, the "Contingencies"): (i) Buyer shall approve the condition of title of the Facility; and (ii) Buyer shall have received prior to closing from the applicable governmental authorities approval of the transfer of the Facility, if required, and the issuance of the appropriate licenses and permits for the occupation and operation by Buyer of the Facility as a nursing care facility (collectively the "Approvals"). 8. ADMINISTRATION/MANAGEMENT. Seller shall have no obligation for the management or operation of the Facility up to the Closing nor liable for any costs thereof or liabilities arising therefrom. At and after Closing, Buyer shall be responsible for the operation of the Facility without any liability to Seller. 9. RESPONSIBILITIES AND INDEMNIFICATION AS TO LIABILITIES. (a) Buyer, upon Closing, shall indemnify and hold harmless Seller and its officers, directors, members, shareholders, employees, agents and controlling persons against any and all claims, demands, suits, damage, liability, loss and expense, including, without limitation, reasonable attorneys' fees (collectively "Losses"), which Seller may sustain or suffer or to which Seller may become subject as a result of: (i) events which occurred prior or subsequent to Closing arising out of the conduct of Buyer, its agents, employee or guests and for which Buyer is liable, (ii) any misrepresentation, breach of warranty, or non fulfillment of any agreement on the part of Buyer under this Agreement or any other agreement used in the Closing, (iii) any, breach or non fulfillment by of any term. covenant or provision of the Contracts arising out of conduct of Buyer occurring prior to the Closing Date for which Buyer is liable, and (iv) any misrepresentation in or omission from any certificate or other instrument furnished or to be furnished by Buyer to Seller hereunder. This indemnification shall be in addition to any indemnification owed by Buyer to Seller under the Lease. (b) Seller, upon Closing, shall indemnify and hold harmless Buyer and its officers, directors, members, shareholders, employees, agents and controlling persons against any Losses which Buyer may sustain or suffer or to which Buyer may become subject as a result of (i) events which occurred prior to Closing arising out of the conduct of Seller for which Seller is liable, (ii) any misrepresentation, breach of warranty, or non fulfillment of any agreement on the part of Seller under this Agreement or any other agreement used in the Closing, (iii) any, breach or non fulfillment by of any term, covenant or provision of the Contracts arising out of conduct of Seller occurring prior to the Closing Date for which Seller is liable, and (iv) any misrepresentation in or omission from any certificate or other instrument furnished or to be furnished by Seller to Buyer hereunder. This indemnification shall be in addition to any indemnification owed by Seller to Buyer under the Lease. (c) The indemnity provisions of the Lease shall survive Closing. 10. SELLER'S REPRESENTATIONS AND WARRANTIES. (a) Seller represents and warrants and covenants to Buyer as of the execution of this Agreement and as of the Closing that: (i) Seller is a duly organized and validly existing corporation and is in good standing under the laws of the State of Tennessee. (ii) Seller is the owner of the Facility and has the requisite power and authority to own the Facility, and further has the power and authority to sell and dispose of the Facility upon the terms and conditions herein contained. (iii) The execution, delivery, and performance of this Agreement by Seller and the consummation of the transactions contemplated hereby will not violate the Articles of Incorporation or By-Laws of Seller, nor any indenture, mortgage, deed of trust or other instrument or agreement or any order, judgment or decree to which Seller is subject that will not be satisfied at or prior to closing. (iv) The shareholders and directors of Seller, have been notified of the proposed execution of this Agreement and all members of each group have consented to the transactions contemplated hereby as required in Seller's By-Laws. (v) The information and data set forth herein and on all exhibits attached hereto are accurate and complete as of the date hereof. (vi) Seller has not received notice of violation of any applicable law, ordinance, regulation, order or requirement relating to the Facility or the operation of the Facility that has not been remedied and to the knowledge of Seller there are no such claims or proceedings pending or threatened. (vii) The Facility is, to Seller's knowledge, structurally sound and the mechanical, electrical, heating, air conditioning, drainage, sewer, water and plumbing systems are in proper working order. (viii) From the date of this Agreement to the Closing, Seller shall not sell, transfer or encumber the Facility nor engage in any conduct which would damage the Facility or the operation thereof. (ix) Seller is not to the best of its knowledge subject of any pending or threatened investigation, regulatory action, or litigation with respect to the Facility. (x) Seller shall cooperate as necessary to bring about the consummation of the transactions contemplated by this Agreement. (xi) Without the prior written approval of Buyer, Seller shall not, from the date hereof until the Closing Date: (i) make any material physical changes or material physical alterations to or upon the Facility or any part thereof, except as the result of an emergency or governmental order; (ii) enter into or extend any agreements affecting all or any part of the Facility that will survive the Closing Date (other than in the ordinary course of business); (iii) assign, transfer, convey, hypothecate, pledge, create a security interest in or lien upon the Facility, unless same shall be removed prior to Settlement, or (iv) grant any easement or right-of-way across the Facility that would (aa) materially-adversely affect the title to the Facility as it exists on the date hereof; except to cure title objections raised by Buyer, or (bb) restrict limit or prohibit in any materially-adverse respect Buyer's use of the Facility. (xii) Seller shall cause the lessee under the Lease to maintain the Facility in its present order and condition (ordinary wear and tear and damage by casualty excepted) until the Closing Date. (xiii) Seller shall cause the lessee under the Lease to maintain property damage insurance policies relating to the Facility, or any part thereof, in full force and effect until the Closing Date. (xiv) Seller shall provide Buyer, to the extent not previously received, with a copy of any written governmental notice received by Seller after the date hereof and prior to the Closing Date related to any violations of any federal, state or municipal laws, ordinances, orders, regulations and requirements affecting the Facility. (xv) The Facility is duly licensed Nursing Home Facility with 120 Medicaid certified residential care beds pursuant to applicable Tennessee law. Seller has not been subject to nor received notice of any inquiries, surveys, audits or investigative demands by any Governmental Authority which would result in a material change, suspension or revocation of the licenses and permits to operate the Facility. (xvi) To the best of Seller's knowledge, the Facility is qualified for participation in the Medicare and Medicaid programs, has a current and valid provider contract with the Medicare and Medicaid programs, and any deficiencies or noncompliance issues, if any, when taken in the aggregate, would not result in a suspension or termination of the Facility's participation in the Medicare or Medicaid Programs. (xvii) To the best of Seller's knowledge, (aa)the Facility is in substantial compliance with the conditions of participation in such program, (bb) Seller has not received notice from the Medicare and Medicaid programs of any pending or threatened investigations or surveys resulting from the Seller's noncompliance with such programs, and Seller has no knowledge that such investigations or surveys are pending, threatened or imminent other than annual or routine surveys, that are expected and due as per standard policy of the State of Tennessee; (cc) the Facility has not been, within the five-year period preceding the Closing Date (the "Accountability Period), cited for a deficiency involving "substandard Quality of care" as defined in 42 C.F.R. Section 488.301; (dd) during the Accountability Period, the Facility has not been cited for a deficiency involving "substandard quality' of care as defined in 42 C.F.R. Section 488.301 in three (3) consecutive standard survey periods; (ee) the Seller has not received notice from the Medicaid program of a pending or threatened investigations resulting from the Seller's noncompliance or surveys in respect to the Seller and no such investigations or surveys are known to be pending, threatened or imminent. Seller will promptly deliver to Buyer any surveys attributable to the Facility that it receives after the date of this Agreement not already in the possession of Buyer. (xviii) To the best of Seller's knowledge, Seller is in compliance with all applicable permits, laws, rules, regulations, ordinances, orders and requirements of all Governmental Authorities having jurisdiction over the Facility and the operations of the Facility, and any deficiencies, if any, will not in the aggregate result in a receivership or a suspension or termination of the applicable licenses and permits of the Facility or any other monetary or non-monetary sanctions and Seller has timely filed all reports, data and other information required to be filed with such Governmental Authorities. (xix) Seller has no contracts with regard to the Facility that has not been disclosed hereunder. (xx) Seller owns and holds good and marketable fee simple title to the Facility, free and clear of all mortgage liens, restrictions, agreements, claims and encumbrances, except for those to be paid off and discharged by Seller on or prior to the Closing Date. (xxi) Seller has not received notice of a violation of any applicable ordinance or other law, order, regulation or requirement including fire code violations, and has not received notice of condemnation lien, assessment or the like relating to any part of the Facility or the operation thereof and. to the best of Seller's knowledge, there is not presently contemplated or proposed any condemnation or similar action or zoning action or proceeding with respect to any portion of the Facility or the operation thereof. (xxii) All of the property is zoned for a nursing home facility and related purposes and the Facility and its operations are in compliance with all applicable zoning ordinances, building codes, codes and licensure requirements (including, without limitation, parking requirements), and the consummation of the transactions contemplated herein will not result in a violation of any applicable zoning ordinance or the termination of any applicable zoning variance now existing. (xxiii) All taxes, penalties, interest and any other statutory additions which have become due by Seller pursuant to tax returns required to be filed by Seller (collectively, the "Returns"), and any assessments received by Seller (collectively "Payable Tax Items") have been paid. There are no tax liens on the Facility and there are no pending questions or issues known to Seller relating to or claims or assessments for taxes payable by Seller. Seller has paid, or caused to be paid, all real and personal property taxes with respect to the Facility. (xxiv) There are no brokerage or finder's fees or commissions or similar charges which will be payable in connection with the actions contemplated hereby as a result of any agreements or arrangements entered into by Seller or Buyer. If any person claims representation of either party herein, then any such fees, commissions or similar charges are claimed or payable as the result of any person claiming representation of either the Seller or the Buyer, then such shall sole responsibility of the party engaging the services of such person and such party shall , save the other party harmless against any and all such claims. (xxv) At Closing, Seller shall execute and deliver to the closing agent the closing documents required of it herein to complete the transaction contemplated hereunder. (b) The foregoing Representations and Warranties and Covenants of Seller shall survive Closing. 11. BUYER'S REPRESENTATIONS AND WARRANTIES. (a) Buyer represents and warrants and covenants to Seller as of the execution of this Agreement and as of the Closing that: (i) Buyer is a duly organized and validly existing corporation in good standing under the laws of the State of Tennessee. (ii) Buyer is the owner of the leasehold estate of the Facility under the Lease with Seller, that it is purchasing the Facility pursuant to the purchase option contained in the Lease, and that the Lease will be terminated at Closing. (iii) The execution, delivery, and performance of this Agreement by Buyer and the consummation of the transactions contemplated hereby have been duly and effectively authorized by the stockholders and directors of Buyer, and will not violate the Articles of Incorporation or By-Laws of Buyer, nor any indenture, mortgage, deed of trust or other instrument or agreement or any order, judgment or decree to which Buyer is subject that will not be satisfied at or prior to closing. (iv) Buyer will continue to operate the Facility and comply with its obligations under the terms of the Lease until Closing. (v) The Facility is structurally sound and all mechanical, electrical, heating, air conditioning, drainage, sewer, water and plumbing systems are in proper working order. (vi) Buyer is not the subject of any investigation, and Buyer is not a party to any regulatory action, or pending or, to the best of its knowledge, threatened (in writing) litigation with respect to the Facility whether such may or may not encumber the Facility or impair the operation of the Facility including, without limitation, any action which would impair the License or participation in the Federal Medicare Program, the Tennessee Medicaid Assistance Program or other governmental reimbursement programs or private reimbursement programs. There are no claims, proceedings or actions, whether threatened (in writing) or pending, known to Buyer related to the Facility. (vii) Buyer shall cooperate as necessary to bring about the consummation of the transactions contemplated by this Agreement. (viii) Unless otherwise agreed to by Buyer and Seller, The Lease shall terminate as of the Closing Date. (ix) Buyer has paid, or caused to be paid, all real and personal property taxes assessed or imposed on or with respect to the Facility since the commencement of the Lease. (x) Buyer is not aware of any encroachments onto the Facility by any third party nor any claims of ownership by a third party adverse to that of Seller. (xi) At Closing, Buyer shall execute and deliver to the closing agent the closing documents required of it herein to complete the transaction contemplated and pay to the closing agent all monies due Seller hereunder. (b) The foregoing Representations and Warranties and Covenants of Buyer shall survive Closing. 12. PRORATION OF EXPENSES. Buyer is currently the operator of the Facility pursuant to the Lease and has been obligated to pay the day-to-day costs of operation since the inception of the Lease. Therefore, any costs of operation, property taxes, etc. shall be born by Buyer. 13. ENVIRONMENTAL MATTERS AND HAZARDOUS MATERIALS. (a) For purposes of this Section 13, "Hazardous Materials" means any "chemical substances", "hazardous or toxic wastes" and "oil", as such terms now are respectively defined under the Federal Comprehensive Environmental Response. Conservation and Liability Act of 1980. 42 U.S.C. Section 9601 et. seq., the Hazardous Sites Cleanup Act, Act of October 18,1988, P.L. 756. No.108, the Federal Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., the Federal Water Pollution Control Act 33, U.S.C. Section 1321, et seq., the Federal Clean Water Act, 33 U.S.C. Section 1321, et. seq., the Federal Clean Water Act, 33 U.S.C. Section 1251, et seq., the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et sec:, and the regulations promulgated under all of the foregoing. as all of the foregoing may have been amended, or similar laws, rules, regulations, orders and decrees now enacted, including, without limitation, asbestos, asbestos containing materials, oil or other petroleum products, polychlorinated biphenyl and other toxic waste and substances. (b) Seller represents and warrants to Buyer concerning the Facility that Seller has not: (i) been, is or will be involved in any operations at the Facility which operations could lead to (aa) the imposition of liability under any law on any subsequent owner of the Facility or (bb) the creation of a lien on the Facility under any law; (ii) caused, suffered or permitted to occur any condition which may cause a release, threat of release or discharge of any Hazardous Materials at, upon, under or within the Facility; (iii) received notification from any federal, state or other governmental authority, of any potential known, or threatened release of any Hazardous Materials on or from the Facility and which may result in a lien on the Facility or the application of any penalty, fine, charge or expense against the Facility by any such governmental authority or by any other person or entity in connection with the assessment containment or removal of any release or threatened release, of any Hazardous Materials from the Facility or any adjacent property or any such site or vessel. (c) Buyer represents and warrants to Seller concerning the Facility that Buyer has not: (i) been, is or will be involved in any operations at the Facility which operations could lead to (aa) the imposition of liability under any law on any subsequent owner of the Facility or (bb) the creation of a lien on the Facility under any law; (ii) caused, suffered or permitted to occur any condition which may cause a release, threat of release or discharge of any Hazardous Materials at, upon, under or within the Facility; (iii) received notification from any federal, state or other governmental authority, of any potential known, or threatened release of any Hazardous Materials on or from the Facility and which may result in a lien on the Facility or the application of any penalty, fine, charge or expense against the Facility by any such governmental authority or by any other person or entity in connection with the assessment containment or removal of any release or threatened release, of any Hazardous Materials from the Facility or any adjacent property or any such site or vessel. (d) Neither Seller nor Buyer has knowledge of any release, threat of release, deposit storage, disposal, burial, discharge, Spillage, uncontrolled seepage or filtration of any Hazardous Materials at, upon, under or within the Facility (other than minor, incidental spillage of fuel or oil during the construction of the Facility or possibly cleaning supplies used at the Facility during the operation thereof). (e) Neither Seller nor Buyer has permitted any tenant or occupant of the Facility to engage in any activity that could impose liability under any law on such tenant, occupant, Seller, Buyer, or any other owner of the Facility. (f) Buyer, at its expense, may obtain a Phase I environmental audit of the Facility. Buyer shall provide a copy of any Phase I environmental audit it obtains. 14. CONDITIONS OF CLOSING. The Closing shall be contingent upon the following conditions occurring on or before the Closing Date: (a) This Agreement is duly executed by both Seller and Buyer; (b) Approval of the condition of title by Buyer; (c) The Phase I environmental audit for the Facility, if obtained by Buyer, is acceptable to Buyer in its sole discretion, pursuant to Section 15; (d) Seller and Buyer all executing and delivering the closing documents required herein; (e) Delivery of such documentation as may be required to evidence required approval of the shareholders or directors of Seller and Buyer of this transaction; (f) The consummation of financing required of Buyer hereunder upon terms and conditions which are satisfactory to Buyer, in its sole and absolute discretion; (g) The approval of the Tennessee State Department of Health (or such other state agency or department), to the extent required, of the transactions herein contemplated; (h) Delivery by Seller and Buyer of all other usual and customary instruments, certifications and other documents with respect to the sale and purchase of the Facility; and (i) Cancellation of the Lease between Seller and Buyer. Any of the Conditions of Closing may be waived in writing if signed by Buyer and Seller. If any condition set forth above is not timely satisfied or waived on or before the last date for Closing hereunder for a reason other than a default by Buyer in the performance of its obligations under this Agreement, then Buyer may and shall have the right (i) to terminate this Agreement by giving written notice to Seller on or before the date for Closing hereunder, or (ii) waive such condition and proceed to close the purchase of the Facility in accordance with the terms of this Agreement, or (iii) elect to extend the Closing Date for up to thirty (30) days to give the parties additional time to satisfy such conditions, failing which Buyer may elect either of the options provided in clauses (i) or (ii), above. In the event Buyer elects to terminate this Agreement, the Deposit shall be refunded to Buyer immediately upon request therefore, and the parties shall be relieved of any further obligations hereunder. 15. CLOSING EVENTS AND DOCUMENTS. (a) At Closing, Seller shall deliver to the Title Company for further delivery to Buyer the following closing documents ("Seller's Closing Documents"): (i) A fully executed Special Warranty Deed in the form attached hereto as Exhibit C (the "Deed") conveying the Facility, in fee simple, to Buyer; (ii) A fully executed Bill of Sale in the form attached hereto as Exhibit D conveying the personal property to be delivered to Buyer pursuant to this Agreement, if any; (iii) An Assignment and Assumption of Contracts assigning to Buyer all of Seller's interest in the Contracts, if any; (iv) A certificate executed by a duly authorized officer of Seller certifying that as of Closing all of the representations and warranties made by Seller contained in this Agreement are true and correct as though such representations and warranties had been made as of the Closing Date and that each covenant and agreement of Seller to be performed prior to or as of Closing pursuant to this Agreement has been performed; (v) An Assignment of Permits assigning to Buyer all of Seller's interest in the Permits, if any; (vi) A standard form title company owner's affidavit as reasonably required by the Title Company for the elimination of any standard exceptions listed as exceptions on the Owner's Title Policy; (vii) A certificate of non-foreign status (FIRPTA Certificate) of Seller; (viii) The Owner's Title Policy; (ix) The final Survey; and (x) The cancellation of the Lease duly executed by Seller. (b) At Closing, Buyer pay and deliver to the Title Company for further delivery to Seller the following ("Buyer's Closing Documents"): (i) The balance of the Purchase Price after credit for the Deposit and any adjustments provided for herein by wire transfer of immediately available Federal funds; (ii) The cancellation of the Lease duly executed by Buyer; and (iii) An assumption agreement with respect to all Contracts to be assigned to and assumed by Buyer hereunder. (c) At Closing, Seller and Buyer shall each deliver to the Title Company, as closing agent, and to the other party, evidence reasonably sufficient to satisfy the Title Company that: (i) Such party is duly organized; (ii) As of the date of Settlement such party is validly existing, qualified to do business and in good standing in the state of its formation and, if different, in the State of Tennessee; and (iii) The execution, delivery and performance of this Agreement has been duly authorized and approved by all shareholders of Seller and Buyer. (d) The delivery of the documents and the payment of the sums to be delivered and paid at Closing shall be accomplished through the Title Company or other agreed upon closing agent (the "Closing Agent"). (e) All transfer and recordation taxes (whether in the nature of revenue stamps or otherwise) imposed by any state, county, or other governmental entity in connection with the recording of the deed evidencing the sale and purchase of the Facility shall be shared equally by Buyer and Seller; all transfer and recordation taxes (whether in the nature of revenue stamps or otherwise) imposed by the state, county or other governmental entity in connection with the recording of any mortgage, deed of trust or other financing documents granted by Buyer to its lender shall be paid by Buyer. (f) Buyer shall pay all recording fees charged to record the deed(s) delivered by Seller to Buyer and any mortgage, deed of trust or other financing documents granted by Buyer to its lender. (g) Buyer shall pay all other costs and fees incurred by it in connection with this transaction, including its legal fees. (h) Seller shall pay all other costs and fees incurred by it in connection with this transaction, including its legal fees. (i) Seller shall pay the charges of the Title Company for the Owner's Title Policy insurance premium and title examination costs incurred in connection herewith. Buyer shall pay for any additional charges incurred with regard to any mortgagee policy, special endorsements, etc., as provided in Paragraph 5(a) above. (j) Real estate taxes, assessments (general or special, public or private), personal property taxes pertaining to the Facility shall be paid by Buyer. (k) The cost of the Survey of the Real Property shall be paid by Seller and Buyer as set forth in Paragraph 5(b), above. (l) Buyer and Seller shall each pay one-half (1/2) of the fees of the Closing Agent for closing this transaction. 16. TESTS AND STUDIES. Buyer shall have the right prior to Closing to make or cause to be made. at Buyer's sole cost and expense, such engineering tests, investigations, Phase I studies, surveys, examinations, appraisals, or other studies of the Facility as Buyer may desire to make. 17. FAILURE OF CLOSING. (a) If the Closing does not occur by reason of Seller's failure or refusal to complete the Closing without proper cause, and Buyer has not pursued the remedies under clauses (i) and (ii) of Paragraph 14, then Buyer may, within thirty (30) days after the date the Closing is finally scheduled, elect in writing as its sole remedy, to either: (i) Cancel this Agreement and receive a refund of the Deposit paid hereunder and Seller shall promptly pay to Buyer an amount equal to Buyer's reasonable attorney's fees, accounting fees and other fees and out of pocket expenses, including but not limited to, the costs of those tests and studies performed by or for Buyer, that were incurred by Buyer from the date of this Agreement in connection with this proposed transaction; or (ii) Obtain specific performance of this Agreement. (b) If the Closing does not occur by reason of the Buyer's failure or refusal to complete the Closing without proper cause, then Seller's sole remedy shall be Buyer's forfeiture of the Deposit paid hereunder and Buyer shall promptly pay to Seller an amount equal to Seller's reasonable attorney's fees, accounting fees and other fees and out of pocket expenses, including but not limited to, the costs of surveys, title examination, tests and studies performed by or for Seller, that were incurred by Seller from the date of this Agreement in connection with this proposed transaction. (c) In no case shall any of the partners, officers or directors of either Buyer or Seller have any personal liability whatsoever arising under or in connection with the Agreement. 18. NOTICES OF VIOLATIONS. All notices of violations of local ordinances or requirements issued by legal authority or prosecutions in any court on account of such violations affecting the Facility shall be defended and complied with by Buyer prior to the time of settlement so the Facility will be conveyed free of any such violations. 19. RISK OF LOSS. Until Closing, the risk of loss or damage to the Facility by fire or other casualty shall continue in Seller, subject to the requirements of the Lease. 20. CONDEMNATION. If at or prior to the time of settlement, any portion of the Facility shall be condemned or taken pursuant to any governmental or other power of eminent domain, any written notice of taking or condemnation is issued, or any proceedings are instituted by any governmental authority having the power of eminent domain, then Buyer shall have the right to: (i) terminate this Agreement by giving Seller written notice to that effect within ten (10) day's after receiving written notice from Seller advising of the condemnation or taking, whereupon the Deposit shall be refunded to Buyer and Seller and Buyer shall be relieved of further liability under this Agreement, at law or in equity; or (ii) proceed to settlement with a reduction in the Purchase Price equal to the amount of all condemnation awards paid to Seller. together with an absolute assignment of all of Seller's right, title and interest as an owner in any unpaid condemnation awards to be made with respect to the Facility, or (iii) proceed to settlement without a reduction in the Purchase Price, in which case Buyer shall receive at settlement all condemnation awards paid to Seller subsequent to the date of this Agreement for any part of the Facility together with an absolute assignment of all of Sellers' right and interest as an owner any unpaid condemnation awards to be made with respect to the Facility. If Seller has knowledge of any pending or threatened condemnation proceedings or action or any notices thereof affecting the Facility, Seller will promptly advise Buyer in writing of the matters and facts relating thereto. 21. COMPLETE AGREEMENT/MODIFICATION. (a) This Agreement sets forth all of the promises. covenants. agreements. conditions and understandings between the parties hereto and supersedes all prior and contemporaneous agreements and understandings. inducements or conditions, express or implied, oral or written, except as herein contained. (b) This Agreement may not be modified other than by an agreement in writing signed by both Seller and Buyer. (c) This Agreement does not modify any of the terms and conditions set forth in the Lease, nor modify any obligations or liabilities of the parties thereunder. 22. ASSIGNMENT. This Agreement is assignable by Buyer to any affiliate or subsidiary of Buyer, or any entity created by Buyer for the purpose of acquiring the Facility; provided that (i) the assignee must execute an assumption agreement assuming all of the liabilities, obligations and duties of Buyer hereunder and (ii) Buyer shall not be released from any liability hereunder. 23. FURTHER ASSURANCES. From and after the execution hereof, at the other's request, each party will duly execute and deliver such documents as may be reasonably necessary-to implement the occurrence of the conditions of Closing herein set forth and any refusal of either party to execute such documents shall be deemed a breach of this Agreement by that party. 24. NO WAIVER. No indulgences extended by any party hereto to any other party shall be construed as a waiver of any breach on the part of such other party, nor shall any waiver of one breach be construed as a waiver of any rights or remedies with respect to any subsequent breach. 25. NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed duly given if personally delivered, or if mailed by registered mail or certified mail, return receipt requested, first class, postage prepaid; or delivered to an nationally recognized overnight carrier service for next business day delivery, if addressed to the parties as follows: If to Seller, as follows: M. N. Osborne, President Osborne & Wilson Development, Inc. Street Address: 222 Washington St., NW, Camden, AR 71701 Mail Address: P. O. Box 1014, Camden, AR 71711 Telephone: (870) 836-8172 Facsimile: (870) 836-5535 With a Copy to (which shall not constitute notice): Paul E. Lindsey, Esquire HARRELL, LINDSEY & CARR, P.A. Street Address: 201 Jackson St., Camden, AR 71701 Mail Address: P. O. Box K, Camden, AR 71711 Telephone: (870) 836-7725 Facsimile: (870) 836-4643 If to Buyer, as follows: William R. Council III, President Diversicare Leasing Corp. Street Address: Suite 130, 277 Mallory Station Road, Franklin, TN 37067 Mail Address: Suite 130, 277 Mallory Station Road, Franklin, TN 37067 Telephone: (615) 771-7575 Facsimile: (615) 771-7942 With a Copy to (which shall not constitute notice): John Popham, Esquire HARWELL, HOWARD, HYNE, GABBERT & MANNER, P.C. Street Address: 315 Deaderick Street, Suite 1800, Nashville, TN 37238 Mail Address: 315 Deaderick Street, Suite 1800, Nashville, TN 37238 Telephone: (615) 256-0500 Facsimile: (615) 251-1059 26. SURVIVAL. The terms and provisions of this Agreement shall survive settlement and the execution and delivery of the deed and shall not be merged therein, specifically including, though not limited to, the representations, warranties and indemnities contained herein by both parties. 27. PARTIAL INVALIDITY. If any term, covenant or condition of this Agreement or its application of such term or provision to persons or circumstances other than those to which it is held invalid or unenforceable shall not be affected. and each term shall be valid and enforceable to the fullest extent permitted by law. 28. INTERPRETATION. The paragraph headings used in this Agreement are for reference and convenience only and shall not enter into the interpretation of this Agreement. If any date upon which action is required under this Agreement shall be a Saturday, Sunday or legal holiday, the date for such action shall be extended to the first regular business day after such date which is not a Saturday, Sunday or legal holiday. 29. BINDING EFFECT. All of the covenants. conditions and obligations contained in this Agreement shall be binding upon and inure to the benefit of the respective heirs, legal representatives, successors and assigns of Seller and Buyer. 30. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. 31. NOTICE OF BREACH. Notwithstanding anything contained herein to the contrary, neither Seller nor Purchaser may claim termination of this Agreement or pursue any other remedy referred to in this Agreement on account of a breach of a condition, covenant or warranty by the other, without first giving such other party written notice of such breach and not less than ten (10) days within which to cure such breach. The Closing will be postponed to the last day of the next calendar month if necessary to afford such opportunity to cure. 32. BUSINESS DAYS. All references to "days" in this Agreement shall be construed to mean calendar days unless otherwise expressed. All references to "business days" shall be construed to mean any day other than a Saturday, Sunday, or any federal or State of Tennessee holiday. In computing any period of time described herein, if the date on which any notice, performance or act to be given, made or performed under this Agreement falls on a Saturday, Sunday or a federal or State of Tennessee holiday, the date when such notice, performance or act must be given, made or performed shall be automatically extended to the next succeeding business day. 33. ATTORNEYS' FEES. In the event it becomes necessary to enforce this Agreement through an attorney, or by the institution of litigation, the prevailing party, in addition to all other damages or remedies which may be awarded, shall be entitled to receive all costs incurred by it in undertaking such action, including court costs, out of pocket expenditures and reasonable attorneys fees. The term "prevailing party" means the party obtaining substantially the relief sought, whether by compromise, settlement, or judgment. 34. EFFECT OF TERMINATION. The Lease shall remain in full force and effect and Buyer shall continue to lease the Facility from Seller, and Seller shall continue to lease the Facility to Buyer, in accordance with all of the terms and conditions thereof, including the payment of rent, until Closing. In the event that this Agreement is sooner terminated by either party for any of the reasons set forth herein, then the Lease, and all of its terms and conditions, and the respective rights, privileges, duties and obligations of the Lessor and Lessee thereunder, including the payment of Rent, shall remain in full force and effect, and Buyer shall continue to lease the Facility from Seller, and Seller shall continue to lease the Facility to Buyer, pursuant to the Lease for the remainder of the term thereof unless otherwise sooner terminated for reasons provided therein. IN WITNESS WHEREOF. the parties hereto have executed this Agreement to be effective this 5th day of July, 2005. SELLER: OSBORNE & WILSON DEVELOPMENT CORP., INC. By: /s/ M.N. Osborne --------------------------------------- Name: M. N. Osborne Title: President BUYER: DIVERSICARE LEASING CORP. By: /s/ William R. Council III --------------------------------------- Name: William R. Council III Title: President EXHIBITS EXHIBIT A Real Property Legal Description EXHIBIT B Contracts to be Assigned to Buyer EXHIBIT C Copy of Special Warranty Deed EXHIBIT D Copy of Bill of Sale EX-31.1 5 g98061exv31w1.txt EX-31.1 SECTION 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) and 15d-15(e)) 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 have a significant role in the registrant's internal controls over financial reporting. November 9, 2005 /s/ William R. Council, III ------------------------------ William R. Council, III Chief Executive Officer EX-31.2 6 g98061exv31w2.txt EX-31.2 SECTION 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) and 15d-15(e)) 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 have a significant role in the registrant's internal controls over financial reporting. November 9, 2005 /s/ L. Glynn Riddle, Jr. ------------------------------ L. Glynn Riddle, Jr. Chief Financial Officer EX-32 7 g98061exv32.txt EX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO EXHIBIT 32 CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q OF ADVOCAT INC. FOR THE QUARTER ENDED SEPTEMBER 30, 2005 The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 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. (the "Company") for the period ending September 30, 2005 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 Company. This Certification is executed as of November 9, 2005. /s/ William R. Council, III --------------------------------- William R. Council, III Chief Executive Officer /s/ L. Glynn Riddle, Jr. --------------------------------- L. Glynn Riddle, Jr. Chief Financial Officer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----


Delaware		62-1559667

(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)


	September 30,			December 31,
	2005			2004
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	5,429		$	5,829
Restricted cash		625			773
Receivables, less allowance for doubtful accounts of $2,035 and $1,712, respectively		16,530			16,073
Current portion of note receivable		489			481
Prepaid expenses and other current assets		4,419			2,832
Discontinued operations		—			12

Total current assets		27,492			26,000


PROPERTY AND EQUIPMENT, at cost		84,789			74,308
Less accumulated depreciation		(41,145	)		(37,473	)

Property and equipment, net		43,644			36,835


OTHER ASSETS:
Note receivable, net of current portion		5,076			5,214
Deferred lease and other costs, net		522			1,252
Other assets		3,432			3,091

Total other assets		9,030			9,557

	$	80,166		$	72,392


	September 30,			December 31,
	2005			2004
	(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt	$	13,384		$	8,741
Current portion of settlement promissory notes		1,272			1,374
Short-term debt		33,662			35,838
Trade accounts payable		4,580			4,905
Accrued expenses:
Payroll and employee benefits		7,329			6,826
Interest		959			790
Current portion of self-insurance reserves		9,121			10,002
Other current liabilities		3,411			3,013

Total current liabilities		73,718			71,489


NONCURRENT LIABILITIES:
Settlement promissory notes, less current portion		355			1,071
Self-insurance reserves, less current portion		26,420			32,695
Other noncurrent liabilities		4,727			4,559

Total noncurrent liabilities		31,502			38,325


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		4,669			4,432


SHAREHOLDERS’ DEFICIT:
Series A preferred stock, authorized 400,000 shares, $.10 par value, none issued and outstanding		—			—
Common stock, authorized 20,000,000 shares, $.01 par value, 5,725,000 shares issued and outstanding		57			57
Paid-in capital		16,022			16,022
Accumulated deficit		(45,802	)		(57,933	)

Total shareholders’ deficit		(29,723	)		(41,854	)

	$	80,166		$	72,392


	Three Months Ended September 30,
	2005			2004
REVENUES:
Patient revenues, net	$	51,261		$	48,620
Resident revenues		3,229			3,115

Net revenues		54,490			51,735

EXPENSES:
Operating		42,799			40,283
Lease		3,972			3,827
Professional liability		984			2,500
General and administrative		3,391			3,396
Depreciation and amortization		1,273			1,171

Total expenses		52,419			51,177

OPERATING INCOME		2,071			558

OTHER INCOME (EXPENSE):
Foreign currency transaction gain		258			303
Interest income		132			111
Interest expense		(868	)		(758	)

		(478	)		(344	)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		1,593			214
PROVISION (BENEFIT) FOR INCOME TAXES		(170	)		32


NET INCOME FROM CONTINUING OPERATIONS		1,763			182


INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Operating loss, net of taxes of $0 and $0, respectively		—			(473	)
Gain on sale, net of taxes of $0 and $30, respectively		8			77

Net income (loss) from discontinued operations		8			(396	)

NET INCOME (LOSS)		1,771			(214	)
PREFERRED STOCK DIVIDENDS, ACCRUED BUT NOT PAID		81			75


NET INCOME (LOSS) FOR COMMON STOCK	$	1,690		$	(289	)


NET INCOME (LOSS) PER COMMON SHARE:
Per common share – basic
Income from continuing operations	$	0.29		$	0.02
Income (loss) from discontinued operations		0.00			(0.07	)

	$	0.29		$	(0.05	)

Per common share – diluted
Income from continuing operations	$	0.27		$	0.02
Income (loss) from discontinued operations		0.00			(0.07	)

	$	0.27		$	(0.05	)

WEIGHTED AVERAGE SHARES:
Basic		5,725			5,695

Diluted		6,498			5,695


	Nine Months Ended September 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12,369		$	6,946
Income (loss) from discontinued operations		141			(1,354	)

Net income from continuing operations		12,228			8,300
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		3,719			3,540
Provision for doubtful accounts		1,212			1,170
Benefit from reduction in accrual for self-insured professional liability, net of provision		(5,291	)		(2,760	)
Payment of professional liability costs		(3,198	)		(2,145	)
Amortization of deferred balances		265			272
Provision for leases in excess of cash payments		168			417
Foreign currency transaction gain		(136	)		(496	)
Non-cash interest expense		122			114
Non-cash interest income		(323	)		(125	)

Net cash provided by operating activities before changes in other assets and liabilities		8,766			8,287
Changes in other assets and liabilities affecting operating activities:
Receivables, net		(1,848	)		(167	)
Prepaid expenses and other assets		(1,928	)		(1,056	)
Trade accounts payable and accrued expenses		1,137			(2,539	)

Net cash provided by continuing operations		6,127			4,525
Net cash provided (used) by discontinued operations		(59	)		738

Net cash provided by operating activities		6,068			5,263


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(3,775	)		(2,422	)
Purchase of skilled nursing facility		(6,753	)		—
Proceeds from sale of discontinued operations		391			5,170
Decrease in restricted cash deposits		148			452
Note receivable collection		589			—
Proceeds from sale of lessor’s property		780			—
Other deferred balances		(33	)		—

Net cash provided by (used in) investing activities		(8,653	)		3,200


CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations		(9,233	)		(6,224	)
Proceeds of debt issuance		11,700			—
Net repayment of lines of credit		—			(1,072	)
Proceeds from exercise of stock options		—			69
Financing costs		(282	)		(8	)

Net cash provided by (used in) financing activities		2,185			(7,235	)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Part I. FINANCIAL INFORMATION
	ITEM 1 — FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 6. EXHIBITS
SIGNATURES
EX-10.1 PROMISSORY NOTE 08/31/05
EX-10.2 LOAN AGREEMENT 08/31/05
EX-10.3 PURCHASE AND SALE AGREEMENT
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO


	September 30,		December 31,
	2005		2004
Policy Year End March 9,
2006	$	7,268,000	$	—
2005		13,512,000		12,068,000
2004		7,410,000		15,626,000
2003		4,076,000		10,041,000
2002		945,000		3,292,000
Other		1,199,000		1,873,000

	$	34,410,000	$	42,900,000


			Less than		1 to 3		4 to 5		After
Contractual Obligations	Total		1 year		Years		Years		5 Years
Long-term debt	$	13,384	$	168	$	13,216	$	—	$	—
Settlement promissory notes	$	1,627	$	1,272	$	355	$	—	$	—
Other settlement obligations	$	583	$	393	$	190	$	—	$	—
Short-term debt	$	33,662	$	33,662	$	—	$	—	$	—
Series B Preferred Stock	$	4,669	$	—	$	4,669	$	—	$	—
Operating leases	$	233,114	$	13,938	$	28,270	$	30,165	$	160,741
Required capital expenditures under operating leases	$	14,435	$	822	$	1,644	$	1,644	$	10,325
Total	$	301,474	$	50,255	$	48,344	$	31,809	$	171,066