-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AXEaIed62IclBkrJF0ac20xDFppIF1zWM1e6YUW1lswZRWFoGHbwSKWexzKkAqqT z8Qj9Cu5PQgTJOj9Tb6pUQ== 0000950144-97-003379.txt : 19970401 0000950144-97-003379.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950144-97-003379 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVOCAT INC CENTRAL INDEX KEY: 0000919956 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 621559667 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-12996 FILM NUMBER: 97568963 BUSINESS ADDRESS: STREET 1: 277 MALLORY STATION RD STREET 2: STE 130 CITY: FRANKLIN STATE: TN ZIP: 37067 BUSINESS PHONE: 6157717575 MAIL ADDRESS: STREET 1: 227 MALLORY STATION ROAD STREET 2: SUITE 130 CITY: FRANKLIN STATE: TN ZIP: 37064 10-K405 1 ADVOCAT, INC. FORM 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 NO [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______ TO _____. COMMISSION FILE NUMBER 1-12996 ADVOCAT INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 62-1559667 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 277 MALLORY STATION ROAD, SUITE 130, FRANKLIN, TN 37067 ------------------------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615)771-7575 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- -------------------- COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE. INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO THE FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- ---- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] THE AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES ON MARCH 17, 1997 (BASED ON THE CLOSING PRICE OF SUCH SHARES ON THE NEW YORK STOCK EXCHANGE) WAS $36,982,666. FOR PURPOSES OF THE FOREGOING CALCULATION ONLY, ALL DIRECTORS, EXECUTIVE OFFICERS, AND PERSONS KNOWN TO THE REGISTRANT TO BE HOLDERS OF 5% OR MORE OF THE REGISTRANT'S COMMON STOCK HAVE BEEN DEEMED AFFILIATES OF THE REGISTRANT. ON MARCH 17, 1997, 5,313,858 SHARES OF THE REGISTRANT'S $0.01 PAR VALUE COMMON STOCK WERE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE: THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE INTO PART III, ITEMS 10, 11, 12, AND 13 OF THIS FORM 10-K: THE REGISTRANT'S DEFINITIVE PROXY MATERIALS FOR ITS 1997 ANNUAL MEETING OF STOCKHOLDERS. 2 PART I ITEM 1. BUSINESS FORWARD-LOOKING STATEMENTS. Certain statements made by or on behalf of Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company"), including those contained in this Report on Form 10-K 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, ability to execute on the Company's acquisition program, both in finding suitable acquisitions and financing therefor, changing economic and market conditions, and others. Actual results may differ materially from that expressed or implied in such forward-looking statements. The Company hereby makes reference to items set forth under the heading "Risk Factors" in the Company's Registration Statement on Form S-1, as amended (Registration No. 33-76150). Such cautionary statements identify important factors that could cause the Company's actual results to materially differ from those projected in forward-looking statements. INTRODUCTORY SUMMARY. The Company commenced operations with an initial public offering of 4,750,000 shares of common stock by its selling shareholders on May 10, 1994 (the "Offering"). The Company is a provider of long-term care services, operating nursing homes and retirement centers in the United States and Canada. Advocat was organized in January 1994 by Counsel Corporation, a publicly-owned Ontario corporation (together with its subsidiaries, "Counsel"), to combine into one entity the long-term care business of Counsel and Diversicare Inc., a publicly-owned Delaware corporation (together with its subsidiaries, "Diversicare"), of which Counsel was the approximate 70% owner at the time of the Offering. The combined long-term care business of Counsel and Diversicare (the "Selling Shareholders") is hereafter referred to as the "Long-Term Care Business." See "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" and Note 1 of the Company's Consolidated Financial Statements. The Company's principal executive offices are located at 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067. The Company's telephone number at that address is (615) 771-7575, and its facsimile number is (615) 771-7409. MATERIAL CORPORATE DEVELOPMENTS. Line of Credit On December 31, 1996, the Company entered into two new lines of credit including a $10,000,000 working capital line and a $40,000,000 acquisition line. The Company immediately drew sufficient 2 3 funds under both lines to repay its then-existing working capital indebtedness and to refinance its mortgage indebtedness with respect to four nursing facilities. The working capital line of credit provides for working capital loans and letters of credit aggregating up to the lesser of $10,000,000 or the borrowing base, as defined. The Company's obligations under the working capital line are secured by certain accounts receivable and substantially all other Company assets. Advances under the working capital line bear interest payable monthly at either the London Interbank Offered Rate ("LIBOR") plus 2.5% or the lending bank's Index rate with the choice of rate being at the Company's option. The working capital line terminates and all outstanding borrowings are due in December 1999. As of December 31, 1996, the Company had drawn $2,436,000, had $4,300,000 of letters of credit outstanding, and had $3,264,000 remaining borrowing capability under the working capital line. The acquisition line of credit of $40,000,000, less outstanding borrowings, is available to fund approved acquisitions through October 1999. The Company's obligations under the acquisition line are secured by the assets acquired with the draws under the acquisition line. Advances under the acquisition line bear interest, payable monthly, at LIBOR plus a defined spread with respect to each facility based upon its loan-to-value ratio and debt service coverage. Individual advances made under the acquisition line are due three years from the date of initial funding. As of December 31, 1996, the Company had drawn $11,100,000 under the acquisition line, which amount was secured by four nursing homes, and had $28,900,000 available for future acquisitions. The Company's line of credit agreements contain various financial covenants, the most restrictive of which relate to net worth, cash flow, debt to equity ratio requirements, and restrictions on the payment of dividends to shareholders. Acquisitions In 1996, the Company purchased four facilities totaling 350 beds. The aggregate purchase price of $8,802,000 was financed with cash of $693,000, debt issued in the amount of $6,487,000, and assumed liabilities of $1,622,000. These facilities are expected to contribute approximately $10.0 million in annualized revenues. The acquired facilities include a 74-unit continuum of care center in Brantford, Ontario; a 60-bed nursing homes in St. Petersburg, Florida; a 130-bed nursing home in Little Rock, Arkansas; and an 86-bed nursing home in Hartford, Alabama. Additionally, in 1996 the Company opened a newly constructed facility with 60 beds pursuant to a previous lease commitment and also added a ten-bed rehabilitation unit to a facility in Alabama and 32 beds among three Arkansas facilities. BUSINESS. Advocat's operational history can be traced to February 1980 through common senior management involved in different organizational structures. As of December 31, 1996, Advocat operates 87 facilities composed of 65 nursing homes containing 7,399 licensed beds and 22 assisted living centers (also referred to as retirement centers) containing 2,509 units. The Company owns seven nursing homes, acts as lessee with respect to 38 of the nursing homes that 3 4 it operates, and acts as manager with respect to the remaining 20 nursing homes. The Company owns one assisted living center, acts as lessee with respect to seven of the assisted living centers that it operates, and acts as manager of the remaining 14 assisted living centers. Geographically, 53 of the Company's nursing homes are located in the United States and 12 are located in Canada, while 19 of the Company's 22 assisted living centers are located in Canada. In comparison, at December 31, 1995, the Company operated 84 facilities composed of 64 nursing homes containing 7,324 licensed beds and 20 assisted living centers containing 2,335 units. The Company's leased and managed homes provide a range of health care services to their residents. In addition to the nursing and social services usually provided in long-term care facilities, the Company offers a variety of rehabilitative, nutritional, respiratory, and other specialized ancillary services. The Company operates facilities in Alabama, Arkansas, Florida, Kentucky, Ohio, South Carolina, Tennessee, Texas, West Virginia, and the Canadian provinces of Ontario and British Columbia. The Company, in its role as owner, lessee, or manager, is responsible for the day-to-day operation of all operated facilities. These responsibilities include recruiting, hiring, and training all nursing and other personnel, and providing resident care, nutrition services, marketing, quality improvement, accounting, and data processing services for each facility. The lease agreements pertaining to the Company's 45 leased facilities are, in all cases, "triple net" leases, requiring the Company to maintain the premises, pay taxes and pay for all utilities. The leases typically provide for an initial term of ten years with one ten-year renewal option. The average remaining term of the Company's lease agreements, including renewal options, is approximately 14 years. As compensation for providing management services, the Company earns a management fee, which in 1996 averaged approximately 5% of the facilities' net patient revenues. Of the Company's 34 management contracts, 13 have more than five years remaining on their current terms, 10 have between three and five years remaining on their current terms, and 11 are month-to-month arrangements or have a current term expiring within two years, with an average current maturity of approximately six years. INDUSTRY The long-term care industry encompasses a continuum of accommodations and health care services that are provided primarily to the elderly. For those among the elderly requiring limited services, independent living facilities offer assistance with acts of daily living on an "as required" basis. As a resident's need for assistance increases, the benefits of a retirement center, where nutritional, housekeeping, and modest nursing or medical needs can be offered, is preferable. For those elderly in need of specialized support, rehabilitative, nutritional, respiratory, or other treatments, nursing home care is often required. The Company, through its assisted living centers and nursing homes (some of each of which include independent living units), is actively involved in this continuum of care and has, through its history of operating such facilities, developed the expertise required to serve the varied needs of its elderly residents. Management believes there will continue to be significant growth opportunities in the market for providing health care services to long-term care patients in non-hospital settings, including both 4 5 nursing homes and assisted living centers. Factors contributing to this growth potential include the following: - Increase in the elderly population (the "Age Wave") - Cost containment pressures from government and private pay sources that seek to shift medical care from more expensive providers (such as hospitals) to those that are less expensive (such as nursing homes) - Industry consolidation - Limitations on the supply of long-term care facilities However, management also recognizes that the industry is in transition. Fundamental changes are afoot that have not yet reached their final destination. The same cost containment pressures that seek to decrease hospital utilization also seek to shift medical care to even more inexpensive alternatives than long-term care (often, to home health care) where such is a viable choice. Advances in medical technology keep people alive and healthier longer, which helps to explain the seeming paradox that in light of an increasing elderly population, nursing home occupancy declined 1% nationally from 1994 to 1995. But the care that nursing homes must provide to their patients is much more intense than it was ten years ago as patients have become generally more sick and infirm. In response to these changes, the Company anticipates diversifying into a variety of non-institutional services. NURSING HOME AND ASSISTED LIVING CENTER SERVICES General. As of December 31, 1996, the Company owns, leases, or manages 65 nursing homes with 7,399 licensed beds and 22 assisted living centers with 2,509 units. These 87 facilities further stratify as follows (# of facilities/# of beds or units):
U.S. Canada Leased Owned Managed -------- ------ ------ ------- ------- Nursing Homes 53/5,724 12/1,675 38/4,295 7/706 20/2,398 Assisted Living Centers 3/ 149 19/2,360 7/ 531 1/128 14/1,850 -------- -------- -------- ----- -------- 56/5,873 31/4,035 45/4,826 8/834 34/4,248 ======== ======== ======== ===== ========
For the year ended December 31, 1996, the Company's net patient revenues were $161.9 million, or 97.4% of total net revenues. For the year ended December 31, 1996, the Company's net revenues from the provision of management services were $4.1 million, or 2.5% of the total net revenues. These revenues included $0.5 million of consulting fees relative to the development of three nursing facilities. Net of these consulting fees, the $3.6 million in management fee revenues represented approximately 5% of the $72.1 million net revenues earned by the owners or operators of the facilities under management. See Note 14 of the Company's Consolidated Financial Statements for more information on the Company's geographic operations. 5 6 Nursing Home Services. The Company's nursing homes provide basic health care services, including room and board, nutrition services, recreational therapy, social services, housekeeping and laundry services, and nursing services. In addition, the nursing homes dispense medications and otherwise follow care plans prescribed by the patients' physicians. The Company's nursing homes are licensed by state licensing agencies and are extensively regulated at the federal, state, provincial, and local level. In an effort to attract patients with more complex health care needs, the Company also provides for the delivery of ancillary medical services at its leased and managed nursing homes. These specialty services include rehabilitation therapy services, such as speech pathology, audiology, and occupational, hospital-based respiratory, and physical therapies, which are provided through licensed therapists and registered nurses, and the provision of medical supplies, nutritional support, infusion therapies, and related clinical services. The Company has historically contracted with third parties for a fee to assist such parties in the provision of various ancillary services to the Company's patients. The provision of ancillary services has increased dramatically since 1994 as the Company's population of Medicare patients has increased. Additionally, in 1996, the Company expanded its orthotics program. The Company has an ancillary service supply business through which it provides medical supplies and enteral nutritional support services directly to patients. The Company is seeking to expand its sales of supplies directly to the public and independent long-term care operators. The Company expects to continue exploring opportunities to increase its ancillary services. Assisted Living Center Services. Services and facilities at assisted living centers include central dining facilities, recreational areas, social programs, housekeeping, laundry and maintenance service, emergency call systems, special features for handicapped persons, and transportation to shopping and special events. Assisted living centers are generally not required to be licensed and are subject only to minor regulations (although this environment is becoming more regulated in the United States). Although the assisted living centers provide fewer nursing and medical services than are provided at the Company's nursing homes, the Company believes that the availability of health care services is one of the significant reasons why residents move to an assisted living center. On average, the Company provides 30 to 60 minutes of nursing care per resident per day in its assisted living centers. OPERATING AND GROWTH STRATEGY The Company's operating strategy focuses on increasing the revenues and profitability of the nursing homes and assisted living centers that it operates through (i) increasing occupancy levels and improving the payor mix, (ii) containing costs, and (iii) expanding the provision of ancillary services. The Company's primary growth strategy focuses on selective acquisitions of long-term care facility operations through either lease or purchase generally in smaller rural markets in the southeast United States. The Company also intends to pursue additional management contracts, primarily in Canada, where it is one of the largest operators of nursing homes and retirement centers. Increase Revenue and Profitability at Existing Facilities. The Company's strategy includes increasing facility revenues and profitability levels through increasing occupancy levels and improving payor mix (i.e., increasing the percentage of revenues from private pay and Medicare sources), containing costs, and expanding ancillary services. The Company directs its marketing efforts locally 6 7 in order to promote higher occupancy levels and improved payor mix at its nursing homes and retirement centers. The Company currently provides nursing and related medical services and certain other specialized services at all of its U.S. nursing homes. Since 1994, the Company has emphasized Medicare occupancy; during 1995, the Company completed its goal of certifying all U.S. facilities for participation in the Medicare program. The one facility among those acquired in 1996 that lacked Medicare certification is expected to receive certification in 1997. The Company establishes detailed operating budgets at its facilities. The administrator of each facility is responsible for adherence to these budgets, with supervisory oversight at the regional level, as well as further review by members of the executive management. The Company is implementing new information systems that management believes will enhance its ability to collect and review critical operational data on a daily basis. Prism Relationship. In late 1996, the Company formed a relationship with Prism Health Group, Inc. ("Prism"). Prism is a diversified health care company that specializes in the provision of comprehensive post-acute health care services. Prism will provide comprehensive rehabilitation programs (physical, speech and occupational therapies) in all of the Company's United States nursing facilities (concentrating in one vendor that which had previously been dispersed among several). Through joint studies and development projects, the Company and Prism will seek ways to expand their services to alternative markets. It is anticipated that these efforts will include services to elderly clients in assisted living, home care, speciality unit care, or outpatient rehabilitation settings and could include such services as traditional rehabilitation, fitness programs, medical alert services, equipment rental, adult day care, home care, or specialized recreational programs. An overall goal of the partnership is to develop an identity as the senior services provider within the communities in which the Company has an existing presence. Growth through Selective Acquisitions of Long-Term Care Facilities. The Company's senior management will continue to focus on leasing or acquiring through purchase additional nursing and retirement centers, concentrating on rural markets in the southeast United States. Management believes that such markets are often under-served by long-term care facilities and offer lower labor costs. The Company's goal is to use its expertise in operating homes to increase the occupancy rates and lower the costs of these acquired facilities. In addition, where market conditions permit, the Company intends to expand the operations of acquired facilities by offering more services, in an effort to increase the profitability of the facilities. The ability to acquire long-term care facility operations through either lease or purchase can be affected by several factors, foremost of which include the pricing expectations of sellers and the ability to finance acquisitions, including the availability of adequate operating capital. Additional Management Agreements. Management believes that the Company, which is one of the largest operators of nursing homes and assisted living centers in Canada, can attract additional management contract opportunities. Further, it is management's belief that the Company has an excellent reputation for quality care and is recognized, or can be promoted, as having established financial and operational control systems, extensive reimbursement expertise, and access to 7 8 purchasing economies. In addition to utilizing corporate and regional staff to market its services, the Company has an executive who focuses on increasing the number of beds under management and identifying potential acquisition candidates. The Company has the ability to provide an array of services ranging from total operational management for passive investors in nursing homes and retirement centers to the provision of unbundled consulting services. MARKETING The Company's corporate sales and marketing efforts are designed to acquire additional leased facilities and additional management contracts through exhibiting at state and provincial long-term care conventions and through relationships with bankers, receivers, business brokers, and industry consultants. At a local level, the Company's sales and marketing efforts are designed to promote higher occupancy levels and optimal payor mix. Management believes that the nursing and retirement center industry is fundamentally a local industry in which both patients and referral sources are based in the immediate geographic area in which the facility is located. The Company's marketing plan emphasizes the role and performance of the administrator and social service director of each nursing home and the administrator of each retirement center, all of whom are responsible for contacting various referral sources such as doctors, hospitals, hospital discharge planners, churches, and various community organizations. Administrators are evaluated based on their ability to meet specific goals and performance standards that are tied to compensation incentives. The Company's regional managers and corporate staff assist local marketing personnel and administrators in establishing relationships and follow-up procedures with such referral sources. In addition to soliciting admissions from these sources, management emphasizes involvement in community affairs in order to promote a public awareness of the Company's nursing homes and retirement centers and their services. The Company also promotes effective customer relations and seeks feedback through family and employee surveys. The Company has an internally-developed marketing program that focuses on the identification and provision of services needed by the community. The program assists each facility administrator in analysis of local demographics and competition with a view toward complementary service development. The Company believes that the referral radius in the long-term care industry generally lies within a five to 15-mile radius of each facility depending on population density and that local marketing efforts are consequently more beneficial than broad-based advertising techniques. DESCRIPTION OF MANAGEMENT SERVICES AND AGREEMENTS Of the Company's 87 facilities, 34 are operated as managed facilities, where the Company's responsibilities include recruiting, hiring, and training all nursing and other personnel, and providing quality assurance, resident care, nutrition services, marketing, accounting, and data processing services. Services performed at the corporate level include group contract purchasing, employee training and development, quality assurance oversight, human resource management, assistance in obtaining third-party reimbursement, financial and accounting functions, policy and procedure development, system design and development, and marketing support. The Company's financial 8 9 reporting system monitors certain key data for each managed facility, such as payroll, admissions and discharges, cash collections, net patient care revenues, rental revenues, staffing trend analysis, and measurement of operational data on a per patient basis. The Company receives a base management fee for the management of long-term care facilities ranging generally from 3.5% to 6.0% of the net revenues of each facility. Other than certain corporate and regional overhead costs, the services provided at the facility are the facility owner's expense. The facility owner also is obligated to pay for all required capital expenditures. The Company generally is not required to advance funds to the owner. However, with respect to one management agreement covering two facilities, the Company advanced approximately $1.5 million. Additionally, the Company guarantees the cash flow of a second limited partnership that the Company manages. Also, pursuant to one of the Company's Canadian management contracts, the Company has guaranteed approximately $0.5 million of the owner's debt relating to the facility. The total debt of this facility is approximately $2.7 million. In the event the Company is called upon to honor its guarantee, the Company would receive a 51% ownership interest in the facility. See Notes 6, 12, and 15 of the Company's Consolidated Financial Statements for more information on these advances and guarantees. Of the Company's 34 management contracts, five are contracts to manage facilities during Canadian receivership or insolvency proceedings. Although these contracts are generally month-to-month, it has been the Company's experience that the average duration of a receivership or insolvency management appointment is approximately six to twenty-four months. The number of such management appointments fluctuates as troubled facilities are added or are removed due to the disposition of the property by the reciever or owner. These five management contracts are for a base fee with no profit participation, no subordination to debt, no purchase options and no guarantees of debt. Based upon the initial term and any renewal terms over which the Company holds the option, the remaining 29 contracts expire in the following years:
NUMBER OF FACILITIES ---------------------------- YEAR U.S. CANADA ---- ---- ------ 1997................................................. 0 3 1998................................................. 1 2 1999................................................. 0 3 2000................................................. 0 1 2001................................................. 6 0 2002 and thereafter .............................. 4 9 -- -- Total......................................... 11 18 == ==
The Company's management fee is subordinated to debt payments at 19 facilities. The Company has a right of first refusal or option to purchase at six facilities, participates in profits over its base management fee at 17 facilities, and is obligated to provide cash flow support at eight facilities. The 9 10 Company currently anticipates that, except for the receivership or insolvency contracts, the majority of management contracts coming due for renewal in the next five years will be renewed. However, there can be no assurance that any of such contracts will be renewed. The following table summarizes the Company's net revenues derived from management services and the net revenues of the managed facilities during the years indicated (in thousands):
PRO FORMA ADVOCAT ADVOCAT --------------------- -------- YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 --------- -------- -------- Net Management Fee Revenues(1) $ 3,652 $ 3,618 $ 3,583 ========= ======== ======== Net Revenues of Managed Facilities $ 72,076 $ 75,359 $ 71,723 ========= ======== ======== Management Fees as a Percentage of Net Facility Revenues 5.1% 4.8% 5.0% ========= ======== ======== (1) 1996 amount is net of $0.5 million in consulting fees.
DESCRIPTION OF LEASE AGREEMENTS The Company leases 45 nursing homes and assisted living centers, of which 31 are leased from Omega (a real estate investment trust), 11 are leased from Counsel and three are leased from others. All of the Company's leases are "triple-net," requiring the Company to maintain the premises, pay taxes, and pay for all utilities. The Company typically grants its lessor a security interest in the Company's personal property located at each leased facility. The leases generally require the Company to maintain a minimum net worth, expend specified sums per bed for capital expenditures, maintain certain current ratios and coverage ratios, and prohibit the Company from operating any additional facilities within a certain radius of each leased facility. In addition, the Company is generally required to maintain comprehensive insurance covering the facilities it leases as well as personal and real property damage insurance and professional malpractice insurance. The failure to pay rent within a specified time period constitutes a default under each lease agreement, which default, if uncured, permits the facility's lessor to terminate the lease. In all cases where mortgage indebtedness exists with respect to a leased facility, the Company's interest in the premises is subordinated to that of the lessor's mortgage lenders. One operating lease requires the Company to pay additional lease payments in an amount equal to 60% of pre-tax facility profits, as defined. Omega Leases. The Company has a master lease with Omega covering 21 facilities (the "Master Lease"), which provides for an initial term of ten years through August 2002 and allows the Company one ten-year renewal option. The Master Lease provides for annual increases in the rent based upon inflation or a percentage of the increase in the net revenues of the facilities, whichever results in the greater increase in rent, up to a maximum increase equal to 5% of the prior year's rent. The Company 10 11 entered into new agreements with Omega in 1994 with respect to ten facilities. These agreements provide for an initial term of approximately ten years and provide the Company two five-year renewal options. The rent with respect to these facilities is generally at specified levels over the first three years with subsequent increases under a formula similar to that of the Master Lease subject to a maximum increase of 3.9% of the prior year's rent. The Company is in the process of closing one of the facilities covered by the 1994 agreements. The facility had been scheduled for renovation; however, Omega and the Company have agreed that the cost of required renovations is not economically attractive. In general, residents will be moved to other facilities that the Company operates and leases from Omega. Counsel Leases. The Company leases five facilities from Counsel with an initial term of five years through April 1999 and one five-year renewal option. The Company leases three additional facilities from Counsel with an initial term of ten years through April 2004 and one ten-year renewal option. With respect to these eight facilities, the Company has the right of first refusal and a purchase option at the end of the respective lease terms. Additionally, the rent is at a level amount throughout the initial terms. The Company leases three additional facilities from Counsel with a lease term through August 2002. These facilities are subject to a participating mortgage from Counsel in favor of Omega. At the end of the lease term, the Company has the right to purchase these facilities. In addition, the Company can require Counsel to transfer these facilities to Omega, at which time the Company has the right to lease these facilities from Omega in accordance with the terms of the Master Lease. Rent increases with respect to these facilities are calculated under the same terms as applicable in the Omega Master Lease. See Note 12 of the Company's Consolidated Financial Statements for more information on the Company's lease agreements. DISPUTE WITH COUNSEL In February 1996, Counsel made certain claims with respect to the leases and management contracts to which it and the Company are a party. The Company's Board of Directors created a special committee of Directors not affiliated with management of the Company or Counsel to review such claims. During the year, the special committee reviewed various documentation and met with representatives from both the Company and Counsel. As a result of the work of the special committee, Counsel voluntarily withdrew one of the two claims made against the Company. In November 1996, Mr. Silber and Mr. Sonshine, both key executives of Counsel, resigned from the Board of Directors of the Company, and subsequently, the special committee concluded its review of these matters. In February 1997, the remaining claim by Counsel was submitted to the American Arbitration Association under the alternative resolution dispute provisions of the original management contract. 11 12 FACILITIES The following table summarizes certain information regarding the nursing homes and assisted living centers leased, owned, or managed by the Company as of December 31, 1996: NURSING HOMES:
AVERAGE OCCUPANCY RATES (1) LICENSED FOR THE YEAR ENDED NURSING LEASED (L) DECEMBER 31, HOME OWNED (0) ----------------------- FACILITY NAME LOCATION BEDS MANAGED (M) 1996 1995 1994 ------------- -------- ---- ----------- ---- ---- ---- ALABAMA Dauphin Health Care Facility...............................Mobile 151 95.9 Westside Health Care Center................................Huntsville 129 L 94.4 95.0 98.1 Lynwood Nursing Home.......................................Mobile 127 L 92.8 96.4 97.7 Canterbury Health Care Facility ...........................Pheonix City 137 L 97.1 97.0 97.9 Windsor House .............................................Huntsville 117 O(2) 94.0 97.7 95.9 Northside Health Care......................................Gadsden 105 L 97.5 97.0 97.4 Hartford Health Care.......................................Hartford 86 O(3) 99.7 -- -- ----- ---- ---- ---- Total -- Alabama ................................. 852 95.5% 96.3% 97.3% ----- ---- ---- ---- ARKANSAS Ouachita Convalescent Center...............................Camden 142 L 85.0 83.4 80.8 Pinedale Nursing Home......................................Newport 130 O(3) 88.2 -- -- Grant County Nursing Home..................................Sheridan 121 L 91.5 93.9 92.6 Walnut Ridge Convalescent Center...........................Walnut Ridge 119 L 91.5 96.0 95.2 Rich Mountain Manor........................................Mena 115 L 89.8 89.8 94.1 Ash Flat Convalescent Center...............................Ash Flat 105 L 87.5 88.4 85.3 Faulkner Nursing Home......................................Conway 105 L 75.9 74.5 67.3 Garland Convalescent Center................................Hot Springs 105 L 74.8 78.9 70.8 Stillmeadow Convalescent Center............................Malvern 104 L 73.6 83.2 91.9 Eureka Springs Convalescent Center.........................Eureka Springs 100 L 65.8 54.6 58.8 Des Arc Convalescent Center................................Des Arc 98 L 61.6 66.1 66.0 Pocohontas Convalescent Center.............................Pocahontas 97 L 95.8 98.3 98.4 Garland Pines Convalescent Center..........................Hot Springs 70 L 83.1 87.0 77.1 ----- ---- ---- ---- Total -- Arkansas ................................ 1,411 81.9% 82.9% 81.7% ----- ---- ---- ----
12 13
NURSING HOMES (CONTINUED): AVERAGE OCCUPANCY RATES (1) LICENSED FOR THE YEAR ENDED NURSING LEASED(L) DECEMBER 31, HOME OWNED(O) --------------------- FACILITY NAME LOCATION BEDS MANAGED(M) 1996 1995 1994 ------------- -------- ---- ---------- ---- ---- ---- FLORIDA Cedar Hills Nursing Center..........................Jacksonville 180 M 93.1% 96.3% 97.0% Leesburg Nursing Center.............................Leesburg 120 L(4) 85.7 91.5 94.0 Southern Pines Nursing Center.......................New Port Richey 120 M 96.0 93.8 96.9 DeSoto Manor Nursing Home...........................Arcadia 118 L(4) 90.0 90.5 89.4 Hardee Manor Care Center............................Wauchula 79 L(4) 96.2 97.3 97.5 Golfcrest Nursing Home............................. Hollywood 67 M 91.1 93.7 97.2 Good Samaritan Nursing Home.........................St Petersburg 6O O(5) 75.0 71.2 81.6 Golfview Nursing Home...............................St Petersburg 56 M 83.0 86.1 81.2 --- ---- ---- ---- Total -- Florida .......................... 800 90.0% 91.6% 93.2% --- ---- ---- ---- KENTUCKY Sunrise Health Care Center..........................Ashland 147 L(6)(7) 66.3 84.7 92.5(8) Wurtland Health Care Center.........................Wurtland 126 L 93.1 94.9 93.3 Carter Health Care Center...........................Grayson 120 L 97.0 96.5 97.3 Boyd Nursing & Rehabilitation Center................Ashland 60 L(6) 71.0 (9) -- Elliott Nursing & Rehabilitation Center.............Sandy Hook 60 L(6) (9) -- -- South Shore Health Care Center......................South Shore 60 L 94.9 94.7 95.4 West Liberty Health Care Center.....................West Liberty 48 L 94.2 96.8 93.5(8) --- ---- ---- ---- Total -- Kentucky ......................... 621 84.8% 93.0% 94.3% --- ---- ---- ----- OHIO Best Care...........................................Wheelersburg 151 L 92.8 94.0 96.7 --- ---- ---- ---- Total -- Ohio ............................. 151 92.8% 94.0% 96.7% --- ---- ---- ----
13 14
NURSING HOMES (CONTINUED): AVERAGE OCCUPANCY RATES (1) LICENSED FOR THE YEAR ENDED NURSING LEASED(L) DECEMBER 31, HOME OWNED(O) ------------------------- FACILITY NAME LOCATION BEDS MANAGED(M) 1996 1995 1994 ------------- -------- ---- ---------- ---- ---- ---- TENNESSEE Martin Health Care.........................................Martin 150 L(4) 75.4% 85.1% 84.9% Laurel Manor Health Care Facility..........................New Tazewell 134 L 98.4 97.0 97.2 Cambridge Medical Center...................................Smyrna 125 L 85.3 95.9 92.9 Briarcliff Health Care Center..............................Oak Ridge 120 L(4) 94.1 92.5 91.3 Manor House of Dover.......................................Dover 88 L 98.4 99.0 99.0 ----- ---- ---- ---- Total -- Tennessee................................ 617 89.3% 93.3% 92.3% ----- ---- ---- ---- TEXAS South Park Manor...........................................Corpus Christi 189 L(4) 66.1 66.5 66.5 Aransas Pass Convalescent Center...........................Aransas Pass 170 L(4) 61.8 62.6 61.7 Afton Oaks Nursing Center..................................Houston 169 O(10) 87.4 88.5 -- Hillside Lodge.............................................Beeville 120 L(4) 54.6 62.4 68.4 Chisolm Trail..............................................Lockhart 100 M(11) 80.6 74.8 71.5 Yorktown Manor.............................................Yorktown 92 M(11) 71.5 82.3 93.3 Lampasas Manor.............................................Lampasas 68 M(11) 84.9 92.6 87.2 Refugio Manor..............................................Refugio 64 M(11) 94.1 92.6 91.4 Goliad Manor...............................................Goliad 60 M(11) 83.2 79.4 90.4 Hillcrest Manor............................................Luling 60 M(11) 89.9 94.9 84.3 ----- ---- ---- ---- Total -- Texas.................................... 1,092 74.3% 74.4% 74.8% ----- ---- ---- ---- WEST VIRGINIA Boone Health Care Center...................................Danville 120 L(6) 78.8 75.8 89.4 Laurel Nursing & Rehabilitation Center.....................Big Otter 60 L(6) (9) -- -- ----- ---- ---- ---- Total -- West Virginia..................................... 180 78.8% 75.8% 89.4% ----- ---- ---- ----
14 15
NURSING HOMES (CONTINUED): AVERAGE OCCUPANCY RATES(1) LICENSED FOR THE YEAR ENDED NURSING LEASED(L) DECEMBER 31, HOME OWNED(O) ------------------------ FACILITY NAME LOCATION BEDS MANAGED(M)1996 1995 1994 ------------- -------- ---- ---------- ---- ---- ---- ONTARIO, CANADA Chelsey Park Oxford..................................London, Ontario 247 M 99.6% 99.6% 99.7% Chelsey Park.........................................Mississauga, Ontario 237 M 98.0 98.3 99.2 Rockcliffe Nursing Home..............................Scarborough, Ontario 204 M 99.4 99.5 98.8 Cheltenham Nursing Home..............................Willowdale, Ontario 170 M 99.3 99.3 98.8 Altamont Nursing Home................................West Hill, Ontario 159 M 98.5 97.1 99.0 Tullamore Nursing Home...............................Brampton, Ontario 159 M 99.0 98.9 99.8 Chelsey Park........................................ Streetsville, Ontario 118 M 99.8 99.7 99.9 Tilbury Manor........................................Tilbury, Ontario 85 O(12) 94.0 83.0 80.0 Oxford Regional Nursing Home.........................Ingersoll, Ontario 80 M 99.9 99.9 99.9 St. Demetrius........................................Weston, Ontario 80 M 86.1 N/A N/A Knollcrest...........................................Milverton, Ontario 77 M 95.4 95.7 -- Brucefield Manor.....................................Brampton, Ontario 59 O 85.8 -- -- --- ---- ---- ---- Total -- Canada............................. 1,675 98.0%(14) 97.9%(14) 99.0%(14) ----- ==== ==== ==== Total -- 65 Nursing Homes............................ 7,399 87.9%(14) 89.6%(14) 89.6%(14) ===== ==== ==== ====
15 16
AVERAGE ASSISTED LIVING CENTERS: OCCUPANCY RATES (1) ASSISTED FOR THE YEAR ENDED LIVING LEASED(L) DECEMBER 31, CENTER OWNED(O) ------------------------ FACILITY NAME LOCATION UNITS MANAGED(M) 1996 1995 1994 ------------- -------- --------- ---------- ---- ---- ---- CANADA Chelsey Park Retirement Center.......................London, Ontario 295 M 94.3% 99.3% 102.0% Belmont Manor........................................Kitchener, Ontario 279 M 93.9 -- -- The Grenadier........................................Toronto, Ontario 231 M(15) 80.7 73.3 -- Hawthorn Park Condominiums...........................Kelowna, BC 186 M N/A N/A N/A Courtyard Gardens....................................Richmond, BC 139 M(15) 105.5 106.0 105.0 Hawthorn Park Retirement Community...................Kelowna, BC 135 L(4) 107.7 111.6 110.3 Greenview Lodge......................................Toronto, Ontario 126 M(16) N/A N/A N/A Metcalfe Gardens.....................................St. Thomas, Ontario 102 L(4) 88.9 91.9 85.4 Bruce Retirement Villa...............................Windsor, Ontario 96 M(17) 58.6 -- -- Cavendish Manor......................................Niagara Falls, Ontario 93 O(18) 82.7 80.9 60.8 The Richmond.........................................Belleville, Ontario 88 M 88.2 80.6 -- Erie Glen Manor......................................Leamington, Ontario 85 L(4) 94.9 103.3 100.2 Maple City Residence.................................Chatham, Ontario 83 L(4) 81.5 81.2 83.8 Park Street Place....................................Dresden, Ontario 70 M(17) 66.0 -- -- The Birchwood........................................Chilliwack, BC 67 M 105.7 106.6 106.9 Goderich Place.......................................Goderich, Ontario 66 M(17) 80.5 -- -- Waverly Mansion......................................London, Ontario 60 M(17) 69.1 -- -- Hudson Manor.........................................Tilbury, Ontario 53 L(4) 79.0 83.8 83.3 Willoughby Manor.....................................Niagara Falls, Ontario 51 M(17) (9) N/A N/A St. Demetrius (19)...................................Weston, Ontario 40 M (9) N/A N/A Brucefield Manor (19)................................Brantford, Ontario 15 O 62.6 -- -- UNITED STATES Greenville Care......................................Greenville, SC 56 M 53.6 -- -- Canterbury Health Care Facility (19).................Phenix City, AL 35 L 37.3 66.5 83.9 Windsor House (19)...................................Huntsville, AL 17 O(2) 85.7 47.4 32.8 Sunrise Health Care Center (19)......................Ashland, KY 13 L(6) 61.2 55.7 (20) Garland Village Apartments...........................Hot Springs, AR 12 L 105.3 91.4 76.7 Pine Manor Apartments................................Camden, AR 12 L 100.9 91.9 100.0 West Liberty Health Care Center (19).................West Liberty, KY 4 L 84.4 76.9 (20) ----- ----- ---- ----- Total Units -- 22 Assisted Living Centers 2,509 92.4%(14) 95.8%(14) 96.9%(14) ----- ----- ---- ----- Total Beds -- 87 Facilities................. 9,908 88.6%(14) 90.4%(14) 90.8%(14) ===== ===== ==== =====
16 17 (1) The average occupancy is equal to the actual patient or resident days during which the Company operated the facility for the year divided by the beds or units available for occupancy during the year. If no percentage is presented, the Company did not operate the facility during the year. Available occupancy of retirement centers is based on one person per unit. (2) Facility purchased November 1, 1994; previously leased. (3) Facility purchased June 30, 1996. (4) The Company holds an option to purchase these facilities. (5) Facility purchased February 20, 1996; previously managed. (6) The Company manages this facility for net profits under an interim agreement pending completion of a formal lease. (7) Facility in process of being closed; most patients expected to be absorbed by other Company facilities. (8) Occupancy rate includes contribution of retirement center units. (9) Facility opened during the year; occupancy statistics are not deemed relevant for presentation during the fill-up phase. (10) Facility purchased November 30, 1995. (11) The Company manages these facilities on behalf of TDLP, a limited partnership of which the Company is the general partner. Because of continuing potential financial obligations of the Company to the limited partnership, the operations of these facilities are included in the operations of the Company in accordance with generally accepted accounting principles. See Note 6 of the Company's Consolidated Financial Statements for a more detailed explanation. (12) Facility purchased December 1, 1994; previously managed. (13) Facility purchased November 28, 1996. (14) Average occupancy for the group excludes facilities under development or facilities managed during receivership or insolvency proceedings. (15) The Company holds a minority joint venture interest in this facility. (16) The Company provides limited consulting services for a fee. (17) Managed during receivership or insolvency proceedings. (18) Facility purchased December 31, 1995; previously managed. (19) These facilities are not included in the total number of retirement centers since they are part of a nursing/retirement facility complex. Retirement units are included in the count of retirement units. (20) Occupancy rate included under nursing home listing. 17 18 ORGANIZATION The Company's long-term care facilities are currently organized into nine regions, six in the United States and three in Canada, each of which is supervised by a regional vice president or manager. The regional vice president or manager is supported by nursing and human resource personnel, a regional controller, assistant regional managers, and clerical personnel, all of whom are employed by the Company. The day-to-day operations of each leased and managed nursing home are supervised by an on-site licensed administrator. The administrator of each nursing home is supported by other professional personnel, including a medical director, who assists in the medical management of the facility, and a director of nursing, who supervises a staff of registered nurses, licensed practical nurses, and nurses aides. Other personnel include dietary staff, activities and social service staff, housekeeping, laundry and maintenance staff, and a business office staff. Each retirement center leased by the Company is supervised by an on-site administrator, who is supported by a director of resident care, a director of food services, a director of maintenance, an activities coordinator, dietary staff and housekeeping, laundry and maintenance staff. With respect to the managed facilities, the majority of the administrators are employed by the Company, and the Company is reimbursed for their salaries and benefits by the respective facilities. All other personnel at managed facilities are employed and paid by the owner of the nursing home or retirement center, not by the Company. All personnel at the leased or owned facilities, including the administrators, are employed by the Company. The Company has in place a Continuous Quality Improvement ("CQI") program, which is focused on training direct care givers. The Company conducts monthly audits to monitor adherence to the standards of care established by the CQI program at each facility leased or managed by the Company. The facility administrator, with assistance from regional nursing personnel, is primarily responsible for adherence to the Company's quality improvement standards. In that regard, the annual operational objectives established by each facility administrator include specific objectives with respect to quality of care. Performance of these objectives is evaluated quarterly by the regional vice president or manager, and each facility administrator's incentive compensation is based, in part, on the achievement of the specified quality objectives. Issues regarding quality of care and resident care outcomes are addressed monthly by senior management. The Company also has established a quality improvement committee consisting of nursing representatives from each region. This committee periodically reviews the Company's quality improvement programs and, if so directed, conducts facility audits as required by the Company's executive committee. The Company and its predecessor have operated a medical advisory committee in Ontario for more than 12 years and has developed similar committees in some of the other jurisdictions in which it operates. It is the Company's view that these committees provide a vehicle for ensuring greater physician involvement in the operations of each facility with resulting improved focus on CQI and resident care plans. In addition, the Company has provided membership for all of its medical directors in the American Medical Directors Association. All of the nursing homes operated by the Company in Ontario have been accredited by the Canadian Council on Health Facilities Accreditation. The Company is also in the process of seeking accreditation of each of its U.S. nursing homes by the Joint Commission on the Accreditation of Healthcare Organizations. The CQI program used at all locations was designed to meet accreditation standards and to exceed state and federal government regulations. 18 19 COMPETITION The nursing home and retirement center business is highly competitive. The Company faces direct competition for additional facilities and management agreements and the facilities operated by the Company face competition for employees, patients, and residents. The Company plans to expand its business through the acquisition of additional leased or owned long-term care facilities and through additional management contracts. The Company competes with a variety of other companies to acquire such facilities and to provide contract management services. Some of the Company's present and potential competitors for acquisitions and management agreements are significantly larger and have or may obtain greater financial and marketing resources. Competing companies may offer newer or different services that may be more attractive to facility owners, patients, and residents than the services offered by the Company. The Company also faces competition from local owner-operators of nursing homes and retirement centers who are potential clients for the Company's management services. The nursing homes and retirement centers that the Company operates compete with other facilities in their respective markets, including rehabilitation hospitals, other "skilled" or "intermediate" nursing homes and personal care residential facilities. In the few urban markets in which the Company operates, some of the long-term care providers with which the Company's operated facilities compete are significantly larger and have or may obtain greater financial and marketing resources than the Company's operated facilities. Some of these providers are not-for-profit organizations with access to sources of funds not available to the facilities operated by the Company. Construction of new long-term care facilities near the Company's existing operated facilities could adversely affect the Company's business. Management believes that the most important competitive factors in the long-term care business are: a facility's local reputation with referral sources, such as acute care hospitals, physicians, religious groups, other community organizations, managed care organizations, and a patient's family and friends; physical plant condition; the ability to identify and meet particular care needs in the community; the availability of qualified personnel to provide the requisite care; and the rates charged for services. There is limited, if any, price competition with respect to Medicaid and Medicare patients, since revenues for services to such patients are strictly controlled and are based on fixed rates and cost reimbursement principles. Although the degree of success with which the Company's operated facilities compete varies from location to location, management believes that its operated facilities generally compete effectively with respect to these factors. REIMBURSEMENT OF NURSING HOMES The nursing homes operated by the Company derive revenues under Medicaid, Medicare, the Ontario Government Operating Subsidy program, and private pay sources. The retirement centers derive virtually all of their revenues from private pay sources. The Company employs specialists in reimbursement at the regional and corporate level to monitor both Medicaid and Medicare regulatory developments, to comply with all reporting requirements, and to maximize payments to its operated nursing homes. It is generally recognized that all government funded programs have been and will continue to be under cost containment pressures. The extent to which these pressures will affect the Company's future operations is unclear. 19 20 Medicaid. Medicaid is a state administered reimbursement program that covers both "skilled" and "intermediate" long-term care. Although Medicaid programs vary from state to state, typically they provide for payment to long-term care facilities of certain expenses, up to established ceilings, at rates based upon cost reimbursement principles. Reimbursement rates typically are determined by the state from "cost reports" filed annually by each facility, on a prospective or retrospective basis. In a prospective system, a rate is calculated from historical data and updated using an inflation index. The resulting prospective rate is final, but in some cases may be adjusted pursuant to an audit. In this type of payment system, facility cost increases during the rate year do not affect revenues in that year. In a retrospective system, final rates are based on reimbursable costs for that year. An interim rate is calculated from previously filed cost reports, and may include an inflation factor to account for the time lag between the final cost report settlement and the rate period. Consequently, facility cost increases during any year may affect revenues in that year. All of the states in which the Company currently operates have converted or are scheduled to convert from either a retrospective or a prospective system, which generally recognizes only two or three levels of care, to a case mix prospective pricing system, pursuant to which payment to a facility for patient services directly considers the individual patient's condition and need for services. Medicare. Medicare is a federally-funded and administered health insurance program that provides coverage for beneficiaries who require skilled nursing and certain medical services such as physical, speech, and occupational therapy, pharmaceuticals and medical supplies. Medicare benefits are not available for patients requiring intermediate and custodial levels of care or for retirement center unit rentals. Each nursing home facility receives interim payments during the year, which are adjusted based on the submission of a cost report at the end of each year to reflect actual allowable direct and indirect costs of services plus a return on equity. In addition, the Company directly bills Medicare under Part B benefits for nutritional support and certain other services and supplies. Medicare payments for these services are based on a fixed-fee schedule determined by Medicare. Ontario Government Operating Subsidy Program. The Ontario Government Operating Subsidy program ("OGOS") regulates both the total charges allowed to be levied by a licensed nursing home and the maximum amount that the OGOS program will pay on behalf of nursing home residents. The maximum amounts that can be charged to residents for ward, semi-private and private accommodation are established each year by the Ontario Ministry of Health. Regardless of actual accommodation, at least 40% of the beds in each home must be filled at the ward rate. Generally, amounts received from residents should be sufficient to cover the accommodation costs of a nursing home, including food, laundry, housekeeping, property costs and administration. In addition, the Ontario government totally subsidizes each individual, and funds each nursing home for the approximate care requirements of its residents. This funding is based upon an annual assessment of the levels of care required in each home, from which "caps" are determined and funding provided on a retrospective basis. The Ontario government funds from 35% to 70% of a resident's charges, depending on the individual resident's income and type of accommodation. The Company receives payment directly from OGOS by virtue of its ownership of two nursing homes in Canada. Additionally, the Company earns management fees from Canadian nursing homes, which derive significant portions of their revenues from OGOS. 20 21 Private Payors. The Company classifies payments from individuals who pay directly for services without government assistance as private pay revenue. The private pay classification also includes revenues from commercial insurers, HMOs, and other charge-based payment sources. Veterans Administration payments are included in private pay and are made pursuant to renewable contracts negotiated with these payors. 21 22 The following table sets forth net patient revenues by payor source for the Company for the periods presented:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- (DOLLARS IN THOUSANDS) 1996 1995 1994 (1) ----------------- ---------------- ------------- Medicaid..................... $ 91,089 56.2% $ 79,821 58.6% $61,389 61.8% Medicare..................... 41,566 25.7 28,963 21.3 14,107 14.2 Private Pay (2).............. 29,274 18.1 27,336 20.1 23,830 24.0 -------- ----- -------- ----- ------- ----- Total................. $161,929 100.0% $136,120 100.0% $99,326 100.0% ======== ===== ======== ===== ======= =====
---------------------- (1) Pro forma Advocat (2) Includes assisted living center revenues, which are 100% private pay. The mix of Medicaid, Medicare and private pay for nursing homes in 1996 was 59.3%, 27.1%, and 13.6%, respectively. Patient and residential service is generally provided and charged in daily service units, commonly referred to as patient days. The following table sets forth patient days by payor source for the Company for the periods presented:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1996 1995 1994 (1) -------------------- ---------------------- --------------- Medicaid..................... 1,253,342 69.1% 1,160,593 69.1% 945,635 67.4% Medicare..................... 120,458 6.6 102,777 6.1 34,262 4.0 Private Pay (2).............. 440,130 24.3 417,141 24.8 401,923 28.6 --------- ----- -------- ---- --------- ----- Total................. 1,813,930 100.0% 1,680,511 100.0% 1,404,249 100.0% ========= ===== ========= ===== ========= ===== ----------------------
(1) Pro forma Advocat (2) Includes assisted living center days, which are 100.0% private pay. The mix of Medicaid, Medicare and private pay for nursing homes in 1996 was 78.0%, 7.5%, and 14.5%, respectively. The above tables include net patient revenues and the patient days of the six facilities comprising Texas Diversicare Limited Partnership. See Note 6 of the Company's Consolidated Financial Statements. Consistent with the nursing home industry in general, changes in the mix of a facility's patient population among Medicaid, Medicare, and private pay can significantly affect the profitability of the facility's operations. 22 23 For information about revenue, operating income, and identifiable assets attributable to the Company's United States and Canadian operations, see Note 14 of the Company's Consolidated Financial Statements. REGULATION All of the nursing homes and assisted living centers operated by the Company are subject to certain federal statutes and regulations and to statutory and regulatory licensing requirements by state, provincial, and local authorities. State, provincial, and local agencies survey all facilities on a regular basis to determine whether such facilities are in compliance with governmental operating and health standards and conditions for participation in government sponsored third-party payor programs. Such facilities are also subject to various local building codes and other ordinances, including fire safety codes. All of the facilities located in the United States, to the extent required, are licensed under applicable law, and the nursing homes are certified or approved as providers under one or more of the Medicaid, Medicare, or Veterans Administration programs. Both initial and continuing qualification for participation in such programs depend upon many factors, including accommodations, equipment, services, patient care, safety, personnel, physical environment, and adequate policies, procedures and controls. Furthermore, licensing, certification, and other applicable standards vary from jurisdiction to jurisdiction and are revised periodically. Management believes that the facilities operated by the Company are in substantial compliance with the various Medicaid and Medicare regulatory requirements applicable to them. However, in the ordinary course of its business, the Company receives notices of deficiencies for failure to comply with various regulatory requirements. The Company reviews such notices and takes appropriate corrective action. In most cases, the Company and the reviewing agency will agree upon the measures to be taken to bring the facility into compliance with regulatory requirements. In some cases or upon repeat violations, the reviewing agency may take various adverse actions against a facility including the imposition of fines, temporary suspension of admission of new patients to the facility, suspension or decertification from participation in the Medicaid or Medicare programs and, in extreme circumstances, revocation of a facility's license. These actions may adversely affect the facility's ability to continue to operate, the ability of the Company to provide certain services, and eligibility to participate in the Medicaid, Medicare, or Veterans Administration programs. Certain of the Company's facilities have received notices in the past from state agencies that, as a result of certain alleged deficiencies, the agency was taking steps to decertify the facility from participation in Medicare and Medicaid programs. In all cases, such deficiencies were remedied before any facilities were decertified. On July 1, 1995, new federal nursing home survey and certification regulations went into effect for facilities participating in the Medicare and Medicaid programs. These regulations significantly change the process of surveying and certifying compliance of Medicare and Medicaid facilities, moving from a "perfect compliance" standard to one of "substantial compliance". The new regulations also give regulators more flexibility in designing remedies for non-compliance; however, any non-compliance resulting in immediate jeopardy of a patient's life or health will always require either termination of the provider or appointment of a temporary manager to remove the immediate jeopardy. The new regulations curtail a provider's appeal rights to some extent. 23 24 As a provider of services under the Medicare and Medicaid programs in the United States, the Company is subject to Medicare and Medicaid fraud and abuse laws. These laws prohibit any bribe, kickback, rebate, or remuneration of any kind in return for the referral of Medicare or Medicaid patients. In addition, several states in which the Company operates have laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers, if such arrangements are designed to induce or encourage the referral of patients to a particular provider. Violations of these federal or state laws may result in civil and criminal penalties and exclusion from participation in the Medicaid and Medicare programs. Such laws are broad, vague, and subject to somewhat varying interpretations by the courts and regulatory agencies. To provide guidance to health care providers on ways to engage in legitimate business practices and avoid scrutiny under the statute, the Office of Inspector General ("OIG") of the Department of Health and Human Services ("DHHS") has issued "fraud alerts" identifying features of transactions and practices in various industries (e.g., clinical laboratories) that, if present, may indicate violations of the law. In June, 1995, the OIG issued a special fraud alert dealing with fraud and abuse in the home health industry, followed by an August 4, 1995, special fraud alert on provision of medical supplies to nursing facilities. It is anticipated that the OIG will continue to issue such fraud alerts, and the OIG is currently focusing on investigating fraud in areas of home health and nursing home care. On July 29, 1991, pursuant to the "Medicare and Medicaid Patient and Program Protection Act of 1987," the OIG issued "safe harbor" regulations, specifying certain business practices which are exempt from sanctions under the fraud and abuse laws. The practices covered by the regulations include certain investments, rental of space and equipment, personal services and management contracts, sales of physician practices, referral services, warranties, discounts, payments to employees, group purchasing organizations and waivers of beneficiary deductibles and co-payments. Additional safe harbor regulations were proposed by DHHS on July 9, 1993. These additional safe harbors, if adopted, would cover investment interests in rural areas, investments in ambulatory surgery facilities, investments in group practices composed exclusively of active investors, practitioner recruitment, obstetrical malpractice insurance subsidies, referral agreements for specialty services, and cooperative hospital service organizations. On January 25, 1996, a final rule regarding safe harbors for managed care was promulgated by the OIG. There have been several court decisions which have interpreted the scope of the fraud and abuse rules. One of the principal holdings of these cases has been that even if only one purpose of the payments made was to induce future referrals of business (as opposed to the sole or primary purpose for such payments) an illegal kickback may exist. These cases adopted a broad interpretation of the fraud and abuse rules which may be viewed as precedents in future prosecutions. A recent administrative case concluded that the anti-kickback statute may be violated when there is a knowing and willful intent to exercise influence over the judgement of a referral source in an effort to cause referrals. Although the fraud and abuse rules currently apply only to the referral of patients whose care is reimbursed under Medicare, Medicaid, and governmental programs, Federal legislation has been introduced at various times to broaden this statute to cover all payors. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), signed into law by President Clinton on August 21, 1996, contains provisions allowing providers to seek advisory opinions, starting in February of 1997, from the United States Department of Health and Human Services ("HHS"), in consultation with the United States Attorney General, regarding whether specific arrangements will be deemed violative of the Medicare-Medicaid anti-kickback statutes. Failure to seek an advisory opinion, however cannot be used as evidence that a party intended to violate the fraud and abuse provisions of Medicare and Medicaid law. All advisory opinions will be publicly available, but will not be binding on HHS except as to the party specifically requesting the advisory opinion. While it is anticipated that publication of advisory opinions will help to clarify various aspects of federal law, the Clinton administration has formulated legislation that would effectively terminate the availability of advisory opinions, on the ground that the process is unduly cumbersome to the government. Further, HIPAA directs the Inspector General of HHS and the Attorney General to implement programs coordinating federal, state and local anti-fraud and abuse law enforcement and establishing a Medicare Integrity Program under which there will be increased scrutiny of health care providers for fraud and abuse. 24 25 Physician Self-Referral Legislation. Physician ownership of or investment in healthcare entities to which they refer patients has come under increasing scrutiny at both state and federal levels. Congress passed legislation (commonly referred to as "Stark II") which prohibits physicians from referring, on or after January 1, 1995, Medicare or Medicaid patients for certain designated health services to entities in which they have an ownership or investment interest or with which they have a compensation arrangement, subject to certain narrowly defined exceptions. These designated health services include clinical laboratory services, physician and occupational therapy services, radiology and radiation therapy services and supplies, equipment, supplies and services related to parenteral and enteral nutrients, durable medical equipment and supplies, prosthetics, orthotics and prosthetic devices, home health services and supplies, outpatient prescription drugs, and inpatient and outpatient hospital services. To the extent that these services are provided by the nursing homes operated by the Company, physicians who have a financial relationship with the Company will be subject to the provisions of Stark II. A number of states have passed similar legislation that extends a Stark II type of prohibition to also apply to the referral of private pay patients. Several other states are considering similar legislation. The American Medical Association has also adopted ethical guidelines, which provide that under certain circumstances, it is unethical for physicians to refer patients to facilities in which they have an ownership interest. Managed Care. There is a general trend in the health care industry toward managed care. The Company is unable to predict what effect the trend could have on its operations. Reporting Requirement. As of January 1, 1995, all Medicare providers are required to report to DHHS regarding ownership or investment arrangements involving referring physicians. Congress has further directed the General Accounting Office to study and report to Congress on the effect on the Medicare program, if any, of transactions involving physician ownership of healthcare providers, or compensation from any entity providing items or services, to which the physician makes referrals and for which payment may be made under the Medicare program, and to include such recommendations as may be appropriate to strengthen current law preventing Medicare program abuse. While the Company intends to attempt to comply with the current requirements of applicable federal and state law, no assurances can be given that a federal or state agency charged with enforcement of the federal and anti-kickback statute, physician self-referral statute, or similar state or federal laws might not assert a contrary position. Furthermore, neither the Company nor the industry is able to predict what effect laws and regulations currently under consideration may have on its operations or on relationships which the Company has established, or may establish, with physicians or other healthcare providers. Privately owned nursing homes in Ontario are licensed by the Ministry of Health under the Ontario Nursing Homes Act. The legislation, together with program manuals, establish the minimum standards that are required to be provided to the patients of the home, including staffing, space, nutrition, and activities. The licenses also limit the number of patients allowed to reside in any particular nursing home. Patients can only be admitted and be subsidized if they require at least 1-1/2 hours per day of care, as determined by a physician. Retirement centers in Canada are generally regulated at the municipal government level in the areas of fire safety and public health and at the provincial level in the areas of employee safety, pay equity, and, in Ontario, rent control. 25 26 SUPPLIES AND EQUIPMENT The Company purchases drugs, solutions and other materials and leases certain equipment required in connection with the Company's business from many suppliers. The Company has not experienced, and management does not anticipate that the Company will experience, any significant difficulty in purchasing supplies or leasing equipment from current suppliers. In the event that such suppliers are unable or fail to sell supplies or lease equipment to the Company, management believes that other suppliers are available to adequately meet the Company's needs at comparable prices. National purchasing contracts are in place for all major supplies, such as food, linens, and medical supplies. These contracts assist in maintaining quality, consistency and efficient pricing. INSURANCE With respect to U.S. operations, the Company currently maintains general and professional liability insurance with both per claim coverage of $1.0 million and aggregate coverage limits of up to $2.0 million for its long-term care services. With respect to a majority of its facilities, the Company is self-insured for the first $25,000 per occurrence and $500,000 in the aggregate with respect to such claims. In addition, the Company maintains a $50.0 million aggregate umbrella liability policy for claims in excess of the above limit for these facilities. The Company manages six nursing homes in Texas and four nursing homes in Florida. Each of the owners of the managed facilities is responsible for and maintains individual policies for professional liability and umbrella liability insurance. The Company is named as additional insured on the policies maintained by the owners of the facilities managed by the Company. With respect to Canadian operations, the Company currently maintains general and professional liability insurance with per claim coverage limits of up to $1.5 million U.S. ($2.0 million Canadian). In addition, the Company maintains a $2.2 million U.S. ($3.0 million Canadian) per claim umbrella liability policy for claims in excess of such limit for these facilities except for one retirement facility in British Columbia. Canadian general and professional liability insurance coverages are less than in the United States due primarily to the lower incidence of liability litigation in Canada. The facilities managed by the Company in Canada maintain similar coverages to those outlined above. The Company is named as additional insured on the policies maintained by the Canadian managed facilities. All of the liability policies are on an occurrence basis and are renewable annually. The Company utilizes risk management experts in the evaluation of its insurance programs, and management believes its current insurance coverage level is consistent with industry standards and is appropriate for the risk environment. There can be no assurance that any such insurance will be sufficient to cover any judgements, settlements or costs relating to any pending or future legal proceedings (including any related judgements, settlements or costs) or that any such insurance will be available to the Company in the future on satisfactory terms, if at all. If the insurance carried by the Company is not sufficient to cover any judgements, settlements or costs relating to pending or future legal proceedings, the Company's business and financial condition could be materially adversely affected. 26 27 Canadian employees are covered for worker's compensation and supplemental health care as a result of the Company's participation in mandated insurance programs administered by the individual provinces in which the Company operates. The Company has substantially self-insured the health care risk of certain of its U.S. employees who have elected coverage under the Company's sponsored plan. This plan is also made available to certain U.S. managed employees. Worker's compensation coverage is effected in the United States through retrospective, self-insurance, and high-deductible insurance programs. Substantially all the risks of worker's compensation claims under the high-deductible or self-insurance programs are assumed by the Company, and, as such, the costs incurred are comparable to those of a Company insured under a policy containing provisions for retroactive premium adjustments to reflect past claims experience. The self-insured or high-deductible programs provide coverage in all states in which the Company operates with the exception of Texas. Texas does not require mandatory worker's compensation coverage for employer related injuries, and the Company has elected to be a non-subscriber under the worker's compensation laws in Texas. The Company, at its sole discretion, reviews each injury incident and provides medical care and wage replacement appropriate to each situation. The Company has established reserves that management believes are adequate to cover the risks of its worker's compensation claims. The cost of paying for health care and worker's compensation claims can fluctuate depending on the type and number of claims at any given period. There can be no assurance that the amount the Company will be required to pay for these types of claims will not increase. EMPLOYEES As of February 15, 1997, the Company employed a total of approximately 4,720 individuals. Management believes that the Company's employee relations are good. Approximately 150 of the Company's U.S. employees are represented by a labor union and approximately 350 of the Company's Canadian employees are represented by various unions. With the exception of some administrators of managed facilities (whose salaries are reimbursed by the owners of the managed facilities), the staff of the managed nursing homes and retirement centers are not employees of the Company. The Company's managed facilities employ approximately 2,720 individuals, approximately 1,610 of whom are Canadians represented by various unions. A major component of the Company's CQI program includes an innovative employee empowerment selection, retention, and recognition program. Administrators and managers of the Company include employee retention and turnover goals in the annual facility, region, and personal objectives. Although the Company believes it is able to employ sufficient nurses and therapists to provide its services, a shortage of health care professional personnel in any of the geographic areas in which the Company operates could affect the ability of the Company to recruit and retain qualified employees and could increase its operating costs. The Company competes with other health care providers for both professional and non-professional employees and with non-health care providers for nonprofessional employees. 27 28 ITEM 2. PROPERTIES The Company owns eight and leases 45 long-term care facilities. See "Item 1 - Description of Lease Agreements" and "- Facilities." The Company leases approximately 15,000 square feet of office space in Franklin, Tennessee, that houses the executive offices of the Company and its regional office supporting the Alabama and Tennessee operations. In addition, the Company leases its regional office for Canadian operations with approximately 10,800 square feet of office space in Mississauga, Ontario, and its regional offices, each with approximately 3,000 square feet of office space in Clearwater, Florida; Little Rock, Arkansas; Corpus Christi, Texas; and Ashland, Kentucky. Lease periods on these facilities range up to eight years. Management believes that the Company's leased properties are adequate for its present needs and that suitable additional or replacement space will be available as required. ITEM 3. LEGAL PROCEEDINGS The provision of health care services entails an inherent risk of liability. In recent years, participants in the health care industry have become subject to an increasing number of lawsuits alleging malpractice, product liability, or related legal theories, many of which involve large claims and significant defense costs. It is expected that the Company from time to time will be subject to such suits as a result of the nature of its business. Although the Company is not a party to or subject to any material pending legal proceedings and carries liability insurance that Management believes meets industry standards, there can be no assurance that any pending or future legal proceedings (including any related judgments, settlements or costs) will not have a material adverse effect on the Company's business, reputation, or financial condition. See "Item 1 - Insurance." The Company is, however, party to a dispute with Counsel, which dispute has been submitted to arbitration. See "Item 1 - Dispute with Counsel.'' ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There have been no matters submitted to a vote of security holders during the fourth quarter (October 1, 1996 through December 31, 1996) of the fiscal year covered by this Annual Report on Form 10-K. 28 29 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Common Stock of the Company is listed on the New York Stock Exchange under the symbol "AVC." The following table sets forth the high and low prices of the common stock as reported by the New York Stock Exchange for each quarter in 1995 and 1996:
Period High Low ------ ---- --- 1995 1st Quarter $13 7/8 $11 1/8 1995 2nd Quarter 12 5/8 10 1995 3rd Quarter 13 1/4 10 1/2 1995 4th Quarter 12 1/4 9 1/2 1996 1st Quarter 13 8 1/2 1996 2nd Quarter 11 7/8 8 7/8 1996 3rd Quarter 10 3/8 7 7/8 1996 4th Quarter 8 1/4 5 7/8
The Company's Common Stock has been traded since May 10, 1994. On March 17, 1996, the closing price for the Common Stock was $9.25, as reported by the New York Stock Exchange. On March 17, 1996, there were 198 holders of record of the common stock. Most of the Company's shareholders have their holdings in the street name of their broker/dealer. The total number of shareholders is believed to be approximately 1,700 individuals and entities. The Company has not paid cash dividends on its Common Stock and anticipates that, for the foreseeable future, any earnings will be retained for use in its business and no cash dividends will be paid. The Company is currently prohibited from issuing dividends under certain debt instruments. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial data of Advocat and the Long-Term Care Business, as described below. The selected financial data of Advocat as of December 31, 1996, 1995, and 1994 and for the years ended December 31, 1996 and 1995 have been derived from the audited financial statements of Advocat. The selected unaudited pro forma financial data of Advocat for 1994 and 1993 have been derived from the pro forma financial data of the Company. The selected financial data of the Long-Term Care Business as of December 31, 1993 and 1992, and for each of the two years in the period ended December 31, 1993, have been derived from the audited combined financial statements of the Long-Term Care Business. 29 30
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- LONG-TERM CARE ADVOCAT ADVOCAT PRO FORMA(1) BUSINESS ---------------- --------------------- ------------------- 1996 1995 1994 1993 1993 1992 ---- ---- ---- ---- ---- ---- STATEMENT OF INCOME DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REVENUES: Patient revenues ............ $161,929 $136,120 $ 99,326 $ 88,320 $ 88,320 $ 82,410 Management fee revenues ..... 4,152 3,618 3,583 3,234 3,234 3,084 Interest income ............. 156 227 177 216 216 272 -------- -------- -------- -------- -------- -------- Net revenues ......... 166,237 139,965 103,086 91,770 91,770 85,766 -------- -------- -------- -------- -------- -------- EXPENSES: Operating ................... 131,966 109,458 77,567 68,772 69,007 64,895 Lease ....................... 14,441 13,518 10,827 10,379 8,174 3,899 General and administrative .. 8,578 7,806 6,409 5,968 5,432 5,089 Depreciation and amortization 2,285 1,516 1,230 1,005 2,512 3,744 Interest .................... 1,591 777 484 493 3,261 5,992 -------- -------- -------- -------- -------- -------- Total expenses ....... 158,861 133,075 96,517 86,617 88,386 83,619 -------- -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES .... $ 7,376 $ 6,890 $ 6,569 $ 5,153 $ 3,384 $ 2,147 ======== ======== ======== ======== ======== ======== NET INCOME .................... $ 4,721 $ 4,410 $ 4,204 $ 3,298 $ 2,098 $ 1,331 ======== ======== ======== ======== ======== ======== EARNINGS PER SHARE ............ $ .89 $ .83 $ .80 $ .63 ======== ======== ======== ======== Average number of common and common equivalent shares outstanding ............... 5,315 5,333 5,258 5,250 ======== ======== ======== ========
DECEMBER 31, ---------------------------------------------------------- LONG-TERM CARE ADVOCAT BUSINESS --------------------------- ---------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ BALANCE SHEET DATA: (IN THOUSANDS) Working capital ................................. $13,540 $ 6,726 $ 8,120 $ 993 $ 157 ======= ======= ======= ======= ======= Total assets .................................. $72,386 $57,096 $43,593 $52,186 $49,200 ======= ======= ======= ======= ======= Long-term debt, excluding current portion ............................. $23,254 $11,063 $ 7,567 $28,160 $29,537 ======= ======= ======= ======= ======= Shareholder's equity/Investment by Counsel and Diversicare................... $27,348 $22,437 $17,669 $ 7,363 $ 7,048 ======= ======= ======= ======= =======
(1) See unaudited pro forma consolidated income statements and related notes. 30 31 PRO FORMA SELECTED FINANCIAL DATA (UNAUDITED) The following unaudited pro forma consolidated income statements of Advocat for the years ended December 31, 1994 and 1993, have been prepared to reflect: (i) transfer by the Selling Shareholders to Advocat of the outstanding stock of their wholly-owned subsidiaries possessing the Long-Term Care Business in exchange for common stock of Advocat and the related tax and accounting effects; (ii) conversion of the 11 facilities owned by Counsel or an affiliate to operating leases with Advocat as lessee; (iii) terms of the revised operating lease for one facility, entered into in February 1994; (iv) exercise of the underwriters' over-allotment option of 500,000 shares of which one-half of the proceeds remained with Advocat and the other half was used by Advocat to retire the notes payable to the Selling Shareholders; and (v) certain expenses expected to be incurred by Advocat as a result of the Offering that were not incurred by the Long-Term Care Business. These statements have been prepared as if such transactions occurred on January 1 of each year. The unaudited pro forma consolidated financial information set forth below may not be indicative of the future results of operations and what the actual results of operations would have been had the transactions been consummated on such dates. 31 32 UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LONG-TERM CARE BUSINESS ADVOCAT ------------- ---------------------------------------------- FOUR MONTHS EIGHT MONTHS TWELVE MONTHS ENDED ENDED ENDED APRIL 30, Pro Forma DECEMBER 31, DECEMBER 31, 1994 ADJUSTMENTS 1994 1994 ------------ ----------- ------------ ------------- REVENUES: Patient revenues ................. $30,719 $ -0- $ 68,607 $ 99,326 Management fee revenues .......... 1,100 -0- 2,483 3,583 Interest income .................. 11 -0- 166 177 -------- -------- -------- -------- Net revenues ............ 31,830 -0- 71,256 103,086 -------- -------- -------- -------- EXPENSES: Operating ........................ 23,933 (39)(a) 53,673 77,567 Lease ............................ 2,826 700 (a)(b) 7,301 10,827 General and administrative ....... 1,981 155 (c) 4,273 6,409 Depreciation and amortization .... 904 (507)(b) 833 1,230 Interest ......................... 1,023 (881)(b) 342 484 -------- -------- -------- -------- Total expenses ............. 30,667 (572) 66,422 96,517 -------- -------- -------- -------- Income before income taxes ...... 1,163 572 4,834 6,569 Provision for income taxes ...... 442 183 (d) 1,740 2,365 -------- -------- -------- -------- PRO FORMA NET INCOME ................. $ 721 $ 389 $ 3,094 $ 4,204 ======== ======== ======== ======== PRO FORMA EARNINGS PER SHARE ......... $ .80 ======== Average number of common and common .. equivalent shares outstanding (e). 5,258 ========
- ------------------ (a) Reflects the reduced operating expense of $39 and additional lease expense of $12 in accordance with the terms of the revised lease for one facility, entered into in February 1994, as if the terms of the revised lease had been effective January 1, 1994. (b) Reflects the effects of the conversion of certain owned facilities to leasehold interests, including additional lease expense and reduced interest, depreciation, and amortization expenses. (c) Reflects the estimated additional corporate, administrative and public financial reporting expenses which would have been incurred by Advocat if it had operated as a separate public entity effective January 1, 1994. (d) Reflects adjustments to the income tax provision due to additional pro forma income before taxes. (e) Based on the total number of shares sold to the public in the initial public offering of Advocat stock on May 10, 1994, and the exercise of the over-allotment option, as well as the impact of common stock equivalent shares computed using the treasury stock method. 32 33 UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ADVOCAT LONG-TERM ----------------------------- CARE BUSINESS ADJUSTMENTS PRO FORMA ------------- ----------- --------- REVENUES: Patient revenues ............ $ 88,320 $ -0- $ 88,320 Management fee revenues ..... 3,234 -0- 3,234 Interest income ............. 216 -0- 216 ------ ----- ------ Net revenues .......... 91,770 -0- 91,770 ------ ----- ------ EXPENSES: Operating ................... 69,007 (235)(a) 68,772 Lease ....................... 8,174 2,205 (a)(b) 10,379 General and administrative .. 5,432 536 (c) 5,968 Depreciation and amortization 2,512 (1,507)(b) 1,005 Interest .................... 3,261 (2,768)(b) 493 ------ ------- ------ Total expenses ........ 88,386 (1,769) 86,617 ------ ------- ------ Income before income taxes 3,384 1,769 5,153 Provision for income taxes 1,286 569 (d) 1,855 ------ ----- ----- PRO FORMA NET INCOME ............ $ 2,098 $ 1,200 $ 3,298 ====== ===== ===== PRO FORMA EARNINGS PER SHARE........................... $ .63 ===== Average number of common and common equivalent shares outstanding (e).................. 5,250 =====
(a) Reflects the reduced operating expense of $235 and lease expense of $143 in accordance with the terms of the revised lease for one facility, entered into in February 1994, as if the terms of the revised lease had been effective January 1, 1993. (b) Reflects the effects of the conversion of certain owned facilities to leasehold interest, including additional lease expense and reduced interest, depreciation, and amortization expenses. (c) Reflects the estimated additional corporate, administrative and public financial reporting expenses which would have been incurred by Advocat if it had operated as a separate public entity effective January 1, 1993. (d) Reflects adjustments to the income tax provision at the statutory rate due to additional pro forma income before taxes. (e) Based on the total number of shares sold to the public in the initial public offering of Advocat stock on May 10, 1994, and the exercise of the over-allotment option. 33 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") commenced operations with an initial public offering of 4,750,000 shares of common stock by its selling shareholders on May 10, 1994 (the "Offering"). The Company is a long-term care provider which operates nursing homes and retirement centers in the United States and Canada. Advocat was organized in January 1994 by Counsel Corporation, a publicly-owned Ontario corporation (together with its subsidiaries, "Counsel"), to combine into one entity the long-term care businesses of Counsel and Diversicare Inc., a publicly-owned Delaware corporation (together with its subsidiaries, "Diversicare"), of which Counsel was the approximate 70% owner at the time of the Offering. The combined long-term care business of Counsel and Diversicare is hereafter referred to as the "Long-Term Care Business." Advocat's operational history can be traced to February 1980 through common senior management involved in different organizational structures. As of December 31, 1996, Advocat operates 87 facilities composed of 65 nursing homes containing 7,399 licensed beds and 22 retirement centers containing 2,509 units. The Company owns seven nursing homes, acts as lessee with respect to 38 of the nursing homes that it operates, and acts as manager with respect to the remaining 20 nursing homes. The Company owns one retirement center, acts as lessee with respect to seven of the retirement centers that it operates, and acts as manager of the remaining 14 retirement centers. Geographically, 53 of the Company's nursing homes are located in the United States and 12 are located in Canada, while 19 of the Company's 22 retirement centers are located in Canada. In comparison, at December 31, 1995, the Company operated 84 facilities composed of 64 nursing homes containing 7,324 licensed beds and 20 retirement centers containing 2,335 units. The Company's leased and managed homes provide a range of health care services to their residents. In addition to the nursing and social services usually provided in long-term care facilities, the Company offers a variety of rehabilitative, nutritional, respiratory, and other specialized ancillary services. The Company operates in nine southeastern states and two provinces of Canada. Basis of Financial Statements. The Company's patient revenues consist of the fees charged to the residents of the Company's leased and owned nursing homes and retirement centers. Management fee revenues consist of the fees charged to the owners of the facilities managed by the Company. The management fee revenues are based on the respective contractual terms, which generally range from 3.5% to 6.0% of net revenues of the managed facilities. As a result, the level of management fees is affected positively or negatively by the increase or decrease in the level of occupancy or rates per patient day of the managed facilities. The Company's operating expenses include the costs incurred in the nursing homes and retirement centers leased and owned by the Company. The Company's general and administrative expenses consist of the costs of the corporate office and regional support functions. The Company's financial statements reflect the depreciation, amortization, and interest expenses of the nursing homes and retirement centers leased and owned by the Company. Effective with the Offering, the Company began leasing 11 nursing homes and retirement centers previously owned by the Long-Term Care Business. The pro forma Advocat adjustments and financial information reflect the elimination of the depreciation, amortization, and interest expenses and the addition of lease expense with respect to these 11 facilities, as well as other pro forma adjustments. 34 35 RESULTS OF OPERATIONS The following tables present the Advocat statements of income for the years ended December 31, 1996 and 1995, and the unaudited pro forma statement of income for the year ended December 31, 1994, and set forth this data as a percentage of revenues for the same periods.
YEAR ENDED DECEMBER 31, --------------------------------- PRO FORMA ADVOCAT ADVOCAT ------------------ --------- (IN THOUSANDS) 1996 1995 1994 ---- ---- ---- Revenues: Patient revenues............................ $161,929 $136,120 $ 99,326 Management fee revenues..................... 4,152 3,618 3,583 Interest income............................. 156 227 177 -------- -------- -------- Net revenues.............................. $166,237 $139,965 $103,086 -------- -------- -------- Expenses: Operating................................... 131,966 109,458 77,567 Lease....................................... 14,441 13,518 10,827 General and administrative.................. 8,578 7,806 6,409 Depreciation and amortization............... 2,285 1,516 1,230 Interest.................................... 1,591 777 484 -------- -------- -------- Total expenses............................ 158,861 133,075 96,517 -------- -------- -------- Income before income taxes.................. 7,376 6,890 6,569 Provision for income taxes.................. 2,655 2,480 2,365 -------- -------- -------- Net income................................ $ 4,721 $ 4,410 $ 4,204 ======== ======== ========
PERCENTAGE OF NET REVENUES
YEAR ENDED DECEMBER 31, --------------------------------- PRO FORMA ADVOCAT ADVOCAT ------------------ --------- 1996 1995 1994 ---- ---- ---- REVENUES: Patient revenues......................... 97.4% 97.2% 96.3% Management fee revenues.................. 2.5 2.6 3.5 Interest income.......................... 0.1 0.2 0.2 ----- ----- ----- Net revenues........................ 100.0% 100.0% 100.0% ----- ----- ----- EXPENSES: Operating................................ 79.4 78.2 75.2 Lease.................................... 8.7 9.7 10.5 General and administrative............... 5.1 5.6 6.2 Depreciation and amortization............ 1.4 1.1 1.2 Interest................................. 1.0 0.5 0.5 ----- ----- ----- Total expenses...................... 95.6 95.1 93.6 ----- ----- ----- Income before income taxes................... 4.4 4.9 6.4 Provision for income taxes................... 1.6 1.8 2.3 ----- ----- ----- Net income.......................... 2.8% 3.1% 4.1% ===== ===== =====
35 36 NEW HOMES In keeping with its goal to add attractive long-term care operations, the Company has completed several acquisitions since the Offering. The following table summarizes the facilities and beds added:
FACILITIES ADDED ------------------ BEDS PURCHASE LEASE ADDED -------- ----- ----- 1996 4 1 410 1995 2 2 325 1994 1 7 874
These facilities are hereafter referred to collectively or in part as the "New Homes." The acquisition of the New Homes has added significantly to the Company's volume of business in both 1995 and 1996. Accordingly, the comparison of the Company's results of operations between years is materially impacted by these acquisitions. In an effort to highlight this impact, the contribution to selected components of operations by the facilities that had been operated by the Company for less than one year are attributed in the following discussion to the New Homes. ADVOCAT 1996 COMPARED WITH ADVOCAT 1995 Revenues. Net revenues increased to $166.2 million in 1996 from $140.0 million in 1995, an increase of $26.2 million, or 18.8%. Patient revenues increased to $161.9 million in 1996 from $136.1 million in 1995, an increase of $25.8 million, or 19.0%. Of this increase, $14.7 million is attributable to the New Homes. Ancillary service revenues, prior to contractual allowances, increased to $57.7 million in 1996 from $39.2 million in 1995, an increase of $18.5 million or 47.2%. Of this increase, $4.3 million is attributable to the New Homes. The overall increase in ancillary revenues is reflective of the Company's emphasis since the Offering on expanding ancillary services at existing nursing home operations. The rate of growth in the provision of ancillary services decreased throughout the year reaching 15.9% in the fourth quarter of 1996. The increase in patient revenues is also impacted by normal inflationary increases and a 1.9% decrease in patient days (approximately 31,000 days as adjusted for leap year) among the homes operating for at least one year. Management fee revenues increased by $534,000, or 14.8%, to $4.2 million. The increase is primarily due to $500,000 in consulting fees earned with respect to the development of three of the New Homes. The Company does not anticipate similar revenues in 1997. The increase in ancillary revenues and the continuing increase in Medicare census have resulted in continued improvement in the quality mix of the Company's revenues. As a percent of net patient revenues, Medicare increased to 25.7% in 1996 from 21.3% in 1995 while Medicaid decreased to 56.3% in 1996 from 58.6% in 1995. Operating Expense. Operating expense increased to $132.0 million in 1996 from $109.5 million in 1995, an increase of $22.5 million, or 20.6%. Of this increase, $12.1 million is attributable to the New Homes. As a percent of net patient revenues, operating expense increased to 81.5% in 1996 from 80.4% in 1995. This increase is primarily attributable to the New Homes and the increase in the provision of ancillary services. As a percent of net patient revenues, operating expense of the New Homes was 82.3%. This higher percentage results because the New Homes derive a higher percentage of revenues from the provision of services to Medicaid patients than do the Company's other locations. As ancillary services have increased, the supply costs 36 37 related to the provision of such services have increased correspondingly. In addition, the Company's operating margin has declined due to reduced average census, efforts by states to curtail the growth in Medicaid programs, difficulty in achieving expense reductions as occupancy levels declined in certain homes, and an increase in the provision for bad debts of approximately $800,000. Management has directed additional resources in an effort to improve receivables management. Among homes in operation for at least one year, the Company has experienced increased general insurance costs of approximately $836,000, which increases are expected to continue into 1997. Wages increased to $59.2 million in 1996 from $51.5 million in 1995, an increase of $7.7 million, or 15.1%. Of this increase, $5.8 million is attributable to the New Homes. A portion of the remaining increase in wages is offset by reduced costs associated with less utilization of temporary nursing services and reduced contracted housekeeping and laundry services. The Company's wage increases are generally in line with inflation. While the Company's operating expense as a percentage of net revenues has increased year to year, there has been consistent improvement from the fourth quarter of 1995 (80.3%) through the fourth quarter of 1996 (78.7%). This is reflective of benefits realized from expense control programs implemented by management. Additionally, the Company has experienced an improvement in occupancy beginning in the latter part of the second quarter of 1996 and continuing into 1997. The improvements are encouraging, but neither their continuance nor their positive impact to the Company's operations can be assured. Lease Expense. Lease expense increased to $14.4 million in 1996 from $13.5 million in 1995, an increase of $923,000, or 6.8%. Of this increase, $665,000 is attributable to the New Homes, and the remainder is primarily attributable to inflationary adjustments required under the terms of a majority of the Company's operating leases. General and Administrative Expense. General and administrative expense increased to $8.6 million in 1996 from $7.8 million in 1995, an increase of $772,000, or 9.9%. The increase in excess of inflation is primarily attributable to the expense of new positions added to service the Company's expanded operations. As a percent of total net revenues, general and administrative expense declined from 5.6% in 1995 to 5.1% in 1996 reflective of spreading the Company's overhead costs over a wider base of operations. Depreciation and Amortization. Depreciation and amortization expenses increased to $2.3 million in 1996 from $1.5 million in 1995, an increase of $769,000, or 50.7%. Approximately $555,000 of the increase is associated with the New Homes. Interest Expense. Interest expense increased to $1.6 million in 1996 from $777,000 in 1995, an increase of $814,000, or 104.9%. Approximately $749,000 of the increase is attributable to indebtedness related to the New Homes with the remainder of the increase primarily attributable to increased borrowings under the Company's working capital line of credit. Income Before Income Taxes; Net Income; Earnings Per Share. As a result of the above, income before income taxes was $7.4 million in 1996 as compared with $6.9 million in 1995, an increase of $486,000, or 7.1%. The effective combined federal, state and provincial income tax rate was 36.0% in both 1996 and 1995. Net income was $4.7 million in 1996 as compared with $4.4 million in 1995, an increase of $311,000, and earnings per share was $.89 as compared with $.83. 37 38 ADVOCAT 1995 COMPARED WITH PRO FORMA ADVOCAT 1994 Revenues. Net revenues increased to $140.0 million in 1995 from $103.1 million in 1994, an increase of $36.9 million, or 35.8%. Patient revenues increased to $136.1 million in 1995 from $99.3 million in 1994, an increase of $36.8 million, or 37.0%. Of this increase, $23.7 million is attributable to the New Homes. Ancillary service revenues, prior to contractual allowances, increased to $39.2 million in 1995 from $19.0 million in 1994, an increase of $20.2 million or 106.6%. Of this increase, $7.5 million is attributable to the New Homes. The overall increase in ancillary revenues is reflective of the Company's emphasis since the Offering on expanding ancillary services in existing nursing home operations. The remaining increase in patient revenues is attributable to normal inflationary increases and was offset by a decrease in patient days of 1.9% (approximately 27,000 days) among the homes operating for at least one year and a retroactive rate adjustment to adjust revenues to a lower than expected rate increase in Alabama. Management fee revenues remained flat at $3.6 million in 1995 despite the net reduction of five facilities managed by the Company over the last year. (Included in the net reduction was one facility the Company purchased, one facility transferred from managed to leased and four facilities that were sold by their owners.) The increase in ancillary revenues and the certification of additional beds for participation under Medicare resulted in improvements in the quality mix of the Company's revenues. As a percent of net patient revenues, Medicare increased to 21.3% in 1995 from 14.2% in 1994 while Medicaid decreased to 58.6% in 1995 from 61.8% in 1994. Operating Expense. Operating expense increased to $109.5 million in 1995 from $77.6 million in 1994, an increase of $31.9 million, or 41.8%. Of this increase, $20.2 million is attributable to the New Homes. As a percent of net patient revenues, operating expense increased to 80.4% in 1995 from 78.1% in 1994. This increase is primarily attributable to the New Homes and the increase in the provision of ancillary services. As a percent of net patient revenues, operating expense of the New Homes was 85.0%; this higher percentage results because the New Homes derive a higher percentage of revenues from the provision of services to Medicaid patients than do the Company's other locations. As ancillary services have increased, the supply costs related to the provision of such services have increased correspondingly. Additionally, the Company's operating margin declined due to higher costs associated with the start up of the Company's first Alzheimer's unit, the impact of four under-performing homes, increased bad debt provision, increased insurance costs, and growth in the medical supply distribution business, which generates a lower operating margin than long-term care. Wages increased to $51.5 million in 1995 from $39.0 million in 1994, an increase of $12.5 million, or 32.1%. Of this increase, $9.3 million is attributable to the New Homes. A portion of the increase in wages at facilities in operation for at least one year is attributable to the replacement in 1995 of contracted services with in-house facility personnel. Bringing the affected costs back in-house actually achieved a small net reduction in operating expense. Among facilities operated for at least one year, the Company incurred a significant increase in same facility general insurance costs to $2.2 million in 1995 from $1.3 million in 1994, an increase of $0.9 million, or 75.6%. The Company's general insurance costs increased primarily due to negative liability claims experience over recent years. In November 1995, the Company changed insurance carriers. A claims management firm was incorporated into the Company's new insurance program in an effort to minimize and reduce claims. The increase in general insurance costs was partially offset by a decrease in worker's compensation expenses to $1.4 million in 1995 from $1.9 million in 1994, a decrease of $0.5 million, or 26.3%. In 1995, the Company began to realize decreased claims experience benefits from the Company's worker's compensation self-insurance programs. Lease Expense. Lease expense increased to $13.5 million in 1995 from $10.8 million in 1994, an increase of $2.7 million or 24.9%. Of this increase, $2.4 million is attributable to the New Homes. The remaining increase is primarily attributable to inflationary increases included in the terms of a majority of the Company's operating leases. 38 39 General and Administrative Expenses. General and administrative expenses increased to $7.8 million in 1995 from $6.4 million in 1994, an increase of $1.4 million or 21.8%. Of this increase, $483,000 is attributable to support services associated with the New Homes. As a percent of total net revenues, general and administrative expenses declined from 6.2% in 1994 to 5.6% in 1995 reflective of the Company's overhead costs supporting a larger base of operations. Depreciation and Amortization. Depreciation and amortization expenses increased to $1.5 million in 1995 from $1.2 million in 1994, an increase of $286,000, or 23.3%. Approximately $103,000 of the increase is attributable to the New Homes. Interest Expense. Interest expense increased to $777,000 in 1995 from $484,000 in 1994, an increase of $293,000 or 60.4%. The increase is primarily attributable to interest expense incurred on draws made under the Company's working capital line of credit. Income Before Income Taxes; Net Income. As a result of the above, income before income taxes increased to $6.9 million in 1995 from $6.6 million in 1994, an increase of $322,000 or 4.9%. The effective combined federal, state and provincial income tax rate was 36% in both 1995 and 1994. Net income increased to $4.4 million in 1995 from $4.2 million in 1994, an increase of $206,000. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the Company's working capital was $13.5 million and the current ratio was 1.8, compared with $6.7 million and a current ratio of 1.4 at December 31, 1995. The Company's working capital position was favorably impacted in 1996 by the refinancing of current debt to long-term maturities and increases in accounts receivable partially offset by increases in current liabilities. Net cash provided by operating activities totaled $5.4 million, $2.3 million, $64,000, and $458,000 in 1996, 1995, and the 1994 periods, respectively. These amounts primarily represent the cash flows from net income plus changes in non-cash components of operations offset by working capital changes, particularly, increases in accounts receivable. Net cash used in investing activities totaled $10.0 million, $9.8 million, $4.1 million, and $309,000 in 1996, 1995, and the 1994 periods, respectively. The Company and the Long-Term Care Business have used between $1.7 million and $3.0 million for capital expenditures in each of the last three calendar years. Substantially all such expenditures were for facility improvements and equipment, which were financed principally through working capital. For the year ended December 31, 1997, the Company anticipates that capital expenditures for improvements and equipment for its existing facility operations will be approximately $3.6 million including $1.6 million for non-routine projects. In 1996, the Company purchased four facilities for net cash consideration of $7.2 million plus $1.6 million in assumed liabilities. In 1995, the Company purchased two facilities for net cash consideration of $5.2 million plus assumption of a seller note of $1.1 million. In 1994, the Company purchased two facilities and entered into an agreement to lease 10 facilities for a net consideration of $2.8 million. Net cash provided by (used in) financing activities totaled $5.5 million, $5.4 million, $7.2 million, and ($155,000) in 1996, 1995, and the 1994 periods, respectively. The net cash provided from financing activities in 1996 and 1995 primarily represents net proceeds from the issuance and repayment of debt offset by advances to a partnership that the Company manages and for which the Company is the general partner. The net cash provided from financing activities in 1994 primarily represents cash proceeds from the issuance of stock sold in the Offering and debt proceeds related to the purchase of two nursing homes. The net cash used in financing activities primarily represents repayment of long-term debt and changes in the investments by the Selling Shareholders. 39 40 At December 31, 1996, the Company had total debt outstanding of $24.0 million of which $10.4 million was principally mortgage debt bearing interest at rates currently ranging from 7.0% to 11.0%. The Company's remaining debt was drawn under its credit lines. On December 31, 1996, the Company entered into two new lines of credit including a $10.0 million working capital line and a $40.0 million acquisition line. The Company immediately drew sufficient funds under both lines to repay its then-existing working capital indebtedness and to refinance its mortgage indebtedness with respect to four nursing facilities. The working capital line of credit provides for working capital loans and letters of credit aggregating up to the lesser of $10.0 million or the borrowing base, as defined. The Company's obligations under the working capital line are secured by certain accounts receivable and substantially all other Company assets. Advances under the working capital line bear interest payable monthly at either the London Interbank Offered Rate ("LIBOR") plus 2.50% or the lending bank's Index rate with the choice of rate being at the Company's option (8.03% at December 31, 1996). The working capital line terminates and all outstanding borrowings are due in December 1999. As of December 31, 1996, the Company had drawn $2.4 million, had $4.3 million of letters of credit outstanding, and had $3.3 million remaining borrowing capability under the working capital line. The acquisition line of credit of $40.0 million, less outstanding borrowings, is available to fund approved acquisitions through October 1999. The Company's obligations under the acquisition line are secured by the assets acquired with the draws under the acquisition line. Advances under the acquisition line bear interest, payable monthly, at LIBOR plus a defined spread with respect to each facility based upon its loan-to-value ratio and debt service coverage (8.14% to 8.89% at December 31, 1996). Individual advances made under the acquisition line are due three years from the date of initial funding. As of December 31, 1996, the Company had drawn $11.1 million under the acquisition line, which amount was secured by four nursing homes, and had $28.9 million available for future acquisitions. Based upon the operations of the Company, management believes that available cash and funds generated from operations, as well as amounts available through its banking relationships, will be sufficient for the Company to satisfy its capital expenditures, working capital, and debt requirements for the next twelve months. The Company intends to satisfy the capital requirements for its acquisition activities primarily through its acquisition line of credit complemented as appropriate by various other possible means including borrowings from commercial lenders, seller-financed debt, issuance of additional debt, financing obtained from sale and leaseback transactions and internally generated cash from operations. On a longer-term basis, management believes the Company will be able to satisfy the principal repayment requirements on its indebtedness with a combination of funds generated from operations and from refinancings with the existing or new commercial lenders or by accessing capital markets. RECEIVABLES The Company's operations could be adversely affected if it experiences significant delays in reimbursement of its labor and other costs from Medicare 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 expense). 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, increasing medical review of bills for services or negotiating reduced contract rates, any delay in the processing of bills by the Company, as well as any significant increase in the Company's proportion of Medicare and Medicaid patients, could adversely affect the Company's liquidity and results of operations. Net accounts receivable attributable to the provision of patient and resident services at December 31, 1996 and 1995, totaled $25.5 million and $20.2 million, respectively, representing approximately 54 and 51 days, respectively, in accounts receivable. The increase in patient accounts receivable is due primarily to the addition of the New Homes and to the expansion of Medicare services. In the Company's experience, collection of Medicaid receivables in the initial months of operating a facility and the collection of Medicare receivables is inherently slower than that for either 40 41 private pay or recurring Medicaid receivables. Accounts receivable from the provision of management services was $713,000 and $696,000, respectively, at December 31, 1996 and 1995, representing approximately 66 and 69 days in accounts receivable, respectively. The Company continually evaluates the adequacy of its bad debt reserves based on patient mix trends, agings of older balances, payment terms and delays with regard to third-party payors, collateral and deposit resources, as well as other factors. The Company has implemented additional procedures to strengthen its collection efforts and reduce the incidence of uncollectible accounts. FOREIGN CURRENCY TRANSLATION The Company has obtained its financing primarily in U.S. dollars; however, it incurs revenues and expenses in Canadian dollars with respect to Canadian management activities and operations of the Company's six Canadian retirement centers (one of which is owned) and two owned Canadian nursing homes. Therefore, if the currency exchange rate fluctuates, the Company may experience currency translation gains and losses with respect to the operations of these activities and the capital resources dedicated to their support. While such currency exchange rate fluctuations have not been material to the Company in the past, there can be no assurance that the Company will not be adversely affected by shifts in the currency exchange rates in the future. INFLATION Management does not believe that the Company's operations have been materially affected by inflation. The Company expects salary and wage increases for its skilled staff to continue to be higher than average salary and wage increases, as is common in the health care industry. To date, these increases as well as normal inflationary increases in other operating expenses have been adequately covered by revenue increases. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," effective for financial statement periods ending after December 15, 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share. A companion statement SFAS No. 129, establishes standards with respect to disclosure of information about an entity's capital structure. The Company is required to adopt the provisions of these statements in 1997 and does not expect the adoption thereof to have a material effect on the Company's results of operations. FORWARD-LOOKING STATEMENTS 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, and actual results may differ materially from that expressed or implied in such forward-looking statements. The Company hereby makes reference to items set forth under the heading "Risk Factors" in the Company's Registration Statement on Form S-1, as amended (Registration No. 33-76150). Such cautionary statements identify important factors that could cause the Company's actual results to materially differ from those projected in forward-looking statements. 41 42 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Audited financial statements are contained on pages F-1 through F-31 of this Annual Report on Form 10-K and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 42 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning Directors and Executive Officers of the Company is incorporated herein by reference to the Company's definitive proxy materials for the Company's 1997 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION Information concerning Executive Compensation is incorporated herein by reference to the Company's definitive proxy materials for the Company's 1997 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference to the Company's definitive proxy materials for the Company's 1997 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning Certain Relationships and Related Transactions is incorporated herein by reference to the Company's definitive proxy materials for the Company's 1997 Annual Meeting of Stockholders. 43 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. Financial statements and schedules of the Company and its subsidiaries required to be included in Part II, Item 8 are listed below. Form 10-K FINANCIAL STATEMENTS Pages ----- Reports of Independent Public Accountants F-1 and F-2 Consolidated Balance Sheets, December 31, 1996 and 1995 F-3 Consolidated Statements of Income for the Years Ended December 31, 1996 and 1995, the Eight Months Ended December 31, 1994, and the Four Months Ended April 30, 1994 F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996 and 1995, the Eight Months Ended December 31, 1994, and the Four Months Ended April 30, 1994 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995, the Eight Months Ended December 31, 1994, and the Four Months Ended April 30, 1994 F-6 to F-8 Notes to Consolidated Financial Statements, December 31, 1996, 1995, and 1994 F-9 to F-31 FINANCIAL STATEMENT SCHEDULE Reports of Independent Public Accountants S-1 and S-2 Schedule II - Valuation and Qualifying Accounts S-3
EXHIBITS The exhibits filed as part of this Report on Form 10-K are listed in the Exhibit Index immediately following the financial statement pages. REPORTS ON FORM 8-K None. 44 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. /s/ CHARLES W. BIRKETT, M.D., - ------------------------------------------------- Charles W. Birkett, M.D., Chairman of the Board March 31, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ CHARLES W. BIRKETT, M.D., /s/ EDWARD G. NELSON - ------------------------------------------------- ------------------------------------------------- Charles W. Birkett, M.D. Edward G. Nelson Chairman of the Board Director (Principal Executive Officer) March 31, 1997 March 31, 1997 /s/ MARY MARGARET HAMLETT /s/ WILLIAM C. O'NEIL - ------------------------------------------------- ------------------------------------------------- Mary Margaret Hamlett William C. O'Neil Director Director Executive Vice President, Chief March 31, 1997 Financial Officer, and Secretary (Principal Financial and Accounting Officer) March 31, 1997 /s/ PAUL RICHARDSON /s/ J. BRANSFORD WALLACE - ------------------------------------------------- ------------------------------------------------- Paul Richardson J. Bransford Wallace Director Director March 31, 1997 March 31, 1997
45 46 ADVOCAT INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 TOGETHER WITH REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS 47 INDEX TO FINANCIAL STATEMENTS Reports of Independent Public Accountants F-1 Consolidated Balance Sheets F-3 Consolidated Statements of Income F-4 Consolidated Statements of Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-9
48 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Advocat Inc.: We have audited the accompanying consolidated balance sheets of ADVOCAT INC. (a Delaware Corporation) and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1996 and 1995 and for the eight months ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advocat Inc. and subsidiaries as of December 31, 1996 and 1995 and the results of their operations and cash flows for the years ended December 31, 1996 and 1995 and for the eight months ended December 31, 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Nashville, Tennessee February 17, 1997 F - 1 49 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Counsel Corporation and Diversicare Inc.: We have audited the accompanying combined statement of income of THE LONG-TERM CARE BUSINESS OF COUNSEL CORPORATION AND DIVERSICARE INC. (the "Long-Term Care Business", see Note 1) and the related combined statement of changes in investment by Counsel Corporation and Diversicare Inc. and cash flows for the four months ended April 30, 1994. These financial statements are the responsibility of the Long-Term Care Business's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the results of operations of the Long-Term Care Business of Counsel Corporation and Diversicare Inc. and their cash flows for the four months ended April 30, 1994 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Nashville, Tennessee February 10, 1995 F - 2 50 ADVOCAT INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995 - ----------------------------------------------- ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 1,942,000 $ 1,076,000 Receivables, less allowance for doubtful accounts of $2,524,000 and $2,082,000, respectively 24,946,000 19,699,000 Income taxes receivable - 304,000 Inventories 667,000 508,000 Prepaid expenses and other assets 1,470,000 1,516,000 Deferred income taxes 1,941,000 974,000 ----------- ----------- Total current assets 30,966,000 24,077,000 ----------- ----------- PROPERTY AND EQUIPMENT, AT COST 41,445,000 29,677,000 Less accumulated depreciation and amortization (9,714,000) (7,659,000) ----------- ----------- Net property and equipment 31,731,000 22,018,000 ----------- ----------- OTHER ASSETS: Deferred tax benefit 6,480,000 8,224,000 Deferred financing and other costs, net 1,021,000 855,000 Other assets 2,188,000 1,922,000 ----------- ----------- Total other assets 9,689,000 11,001,000 ----------- ----------- $72,386,000 $57,096,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------- CURRENT LIABILITIES: Current portion of long-term debt $ 713,000 $ 3,926,000 Trade accounts payable 7,715,000 6,881,000 Income taxes payable 906,000 - Accrued expenses: Payroll and employee benefits 4,670,000 3,754,000 Interest 36,000 17,000 Worker's compensation 1,678,000 1,225,000 Other 1,708,000 1,548,000 ----------- ----------- Total current liabilities 17,426,000 17,351,000 ----------- ----------- NONCURRENT LIABILITIES: Long-term debt, less current portion 23,254,000 11,063,000 Deferred gains with respect to leases, net 3,956,000 4,502,000 Other 402,000 1,743,000 ----------- ----------- Total noncurrent liabilities 27,612,000 17,308,000 ----------- ----------- COMMITMENTS, CONTINGENCIES, AND GUARANTEE SHAREHOLDERS' EQUITY: Preferred stock, authorized 1,000,000 shares, $.10 par value, none issued and outstanding - - Common stock, authorized 20,000,000 shares, $.01 par value, 5,316,000 and 5,288,000 shares issued and outstanding, respectively 53,000 53,000 Paid-in capital 15,083,000 14,875,000 Retained earnings 12,212,000 7,509,000 ----------- ----------- Total shareholders' equity 27,348,000 22,437,000 ----------- ----------- $72,386,000 $57,096,000 =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. F - 3 51 ADVOCAT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
| LONG-TERM | CARE BUSINESS ADVOCAT | (SEE NOTE 1) ----------------------------------------- | ------------- EIGHT MONTHS | FOUR MONTHS ENDED | ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, | APRIL 30, 1996 1995 1994 | 1994 ------------ ----------- ----------- | ---------- | REVENUES: | Patient revenues $161,929,000 $136,120,000 $68,607,000 | $30,719,000 Management fees 4,152,000 3,618,000 2,483,000 | 1,100,000 Interest 156,000 227,000 166,000 | 11,000 ------------ ------------ ----------- | ----------- NET REVENUES 166,237,000 139,965,000 71,256,000 | 31,830,000 ------------ ------------ ----------- | ----------- EXPENSES: | Operating 131,966,000 109,458,000 53,673,000 | 23,933,000 Lease 14,441,000 13,518,000 7,301,000 | 2,826,000 General and administrative 8,578,000 7,806,000 4,273,000 | 1,981,000 Depreciation and amortization 2,285,000 1,516,000 833,000 | 904,000 Interest 1,591,000 777,000 342,000 | 1,023,000 ------------ ------------ ----------- | ----------- TOTAL EXPENSES 158,861,000 133,075,000 66,422,000 | 30,667,000 ------------ ------------ ----------- | ----------- INCOME BEFORE INCOME TAXES 7,376,000 6,890,000 4,834,000 | 1,163,000 PROVISION FOR INCOME TAXES 2,655,000 2,480,000 1,740,000 | 442,000 ------------ ------------ ----------- | ----------- NET INCOME $ 4,721,000 $ 4,410,000 $ 3,094,000 | $ 721,000 ============ ============ =========== | =========== EARNINGS PER SHARE $ .89 $ .83 $ .59 | ============ ============ =========== | AVERAGE NUMBER OF COMMON AND | COMMON EQUIVALENT SHARES | OUTSTANDING 5,315,000 5,333,000 5,266,000 | ============ ============ =========== | UNAUDITED PRO FORMA NET | INCOME (SEE NOTE 1) $ 4,204,000 | =========== | UNAUDITED PRO FORMA EARNINGS PER SHARE (SEE NOTE 1) $ .80 =========== AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 5,258,000 ===========
The accompanying notes are an integral part of these consolidated financial statements. F - 4 52 ADVOCAT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
INVESTMENT BY COUNSEL COMMON STOCK AND ------------------ PAID-IN DIVERSICARE RETAINED SHARES AMOUNT CAPITAL (SEE NOTE 10) EARNINGS TOTAL -------- -------- --------- ------------- ----------- ----------- LONG-TERM CARE BUSINESS (SEE NOTE 1): BALANCE, DECEMBER 31, 1993 $7,363,000 $ 7,363,000 Net income 721,000 721,000 Current income tax provision 615,000 615,000 Other changes, net (875,000) (875,000) ---------- ----------- BALANCE, APRIL 30, 1994 7,824,000 7,824,000 - ------------------------------------------------------------------------------------------------------------------------------- ADVOCAT: Issuance of common stock to Counsel and Diversicare 4,750,000 $47,000 $10,155,000 (7,824,000) $ - 2,378,000 Issuance of common stock to the public 500,000 5,000 4,412,000 - - 4,417,000 Net income - - - - 3,094,000 3,094,000 Translation loss - - - - (44,000) (44,000) --------- ------- ----------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1994 5,250,000 52,000 14,567,000 - 3,050,000 17,669,000 Issuance of common stock 38,000 1,000 308,000 - - 309,000 Net income - - - - 4,410,000 4,410,000 Translation gain - - - - 49,000 49,000 --------- ------- ----------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1995 5,288,000 53,000 14,875,000 - 7,509,000 22,437,000 Issuance of common stock 28,000 - 208,000 - - 208,000 Net income - - - - 4,721,000 4,721,000 Translation loss - - - - (18,000) (18,000) --------- ------- ----------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1996 5,316,000 $53,000 $15,083,000 $ - $12,212,000 $27,348,000 ========= ======= =========== ========= =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F - 5 53 ADVOCAT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
| LONG-TERM CARE | BUSINESS ADVOCAT | (SEE NOTE 1) ---------------------------------------- | -------------- EIGHT MONTHS | FOUR MONTHS ENDED | ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, | APRIL 30, 1996 1995 1994 | 1994 ------------ ----------- ----------- | ---------- | OPERATING ACTIVITIES: | Net income $ 4,721,000 $ 4,410,000 $ 3,094,000 | $ 721,000 Items not involving cash: | Depreciation and amortization 2,285,000 1,062,000 541,000 | 739,000 Provision for doubtful accounts 1,745,000 967,000 628,000 | 130,000 Deferred income taxes 778,000 1,165,000 637,000 | (173,000) Current income taxes - - - | 615,000 Equity earnings in joint venture (39,000) (37,000) - | - Amortization of deferred credits (1,111,000) (644,000) (393,000) | (213,000) Changes in other non-cash items, net of | acquisitions: | Restricted cash - 1,552,000 (900,000) | - Accounts receivable (6,037,000) (8,085,000) (3,735,000) | (1,400,000) Inventories (159,000) (68,000) (41,000) | (122,000) Prepaid expenses and other assets 48,000 (1,057,000) 147,000 | (267,000) Trade accounts payable and accrued | expenses 3,257,000 3,019,000 76,000 | 477,000 Other assets (133,000) 49,000 10,000 | (49,000) ----------- ----------- ----------- | ---------- Net cash provided by operating | activities 5,355,000 2,333,000 64,000 | 458,000 ----------- ----------- ----------- | ---------- INVESTING ACTIVITIES: | Purchases of property and equipment, net (2,409,000) (2,988,000) (1,361,000) | (334,000) Acquisitions, net of cash acquired (7,180,000) (5,153,000) (2,818,000) | - Issuance of mortgage receivable (236,000) (792,000) - | - Investment in joint venture (2,000) (264,000) - | - Distribution from joint venture 29,000 31,000 - | - Pre-opening and other costs (258,000) (734,000) - | - Proceeds from TDLP transaction 97,000 87,000 52,000 | 25,000 ----------- ----------- ----------- | ---------- Net cash used in investing activities (9,959,000) (9,813,000) (4,127,000) | (309,000) ----------- ----------- ----------- | ----------
(continued) F - 6 54 ADVOCAT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
| LONG-TERM CARE | BUSINESS ADVOCAT | (SEE NOTE 1) ---------------------------------------- | --------------- EIGHT MONTHS | FOUR MONTHS ENDED | ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, | APRIL 30, 1996 1995 1994 | 1994 ------------ ----------- ----------- | --------------- | FINANCING ACTIVITIES: | Proceeds from issuance of debt $ 18,688,000 $ 4,309,000 $ 3,223,000 | $ - Repayment of debt obligations (11,703,000) (491,000) (312,000) | (236,000) Repayment of shareholder notes payable - - (2,307,000) | - Financing costs (386,000) (90,000) (102,000) | - Net proceeds from bank line of credit 4,531,000 2,035,000 - | - Repayment of bank line of credit (4,130,000) - - | - Advances from lessor 1,529,000 612,000 - | - Advances to lessor (2,052,000) (589,000) - | - Proceeds from sale of common stock 208,000 309,000 4,417,000 | - Proceeds from issuance of common | stock to Counsel and Diversicare - - 2,378,000 | - Advances from (to) TDLP (1,215,000) (675,000) (99,000) | 72,000 Net return of investment from Counsel | and Diversicare - - - | 9,000 ------------ ----------- ----------- | ---------- Net cash provided by (used in) | financing activities 5,470,000 5,420,000 7,198,000 | (155,000) ------------ ----------- ----------- | ---------- NET INCREASE (DECREASE) IN CASH AND | CASH EQUIVALENTS 866,000 (2,060,000) 3,135,000 | (6,000) CASH AND CASH EQUIVALENTS, BEGINNING | OF PERIOD 1,076,000 3,136,000 1,000 | 1,194,000 ------------ ----------- ----------- | ---------- CASH AND CASH EQUIVALENTS, END OF | PERIOD $ 1,942,000 $ 1,076,000 $ 3,136,000 | $1,188,000 ============ =========== =========== | ========== SUPPLEMENTAL INFORMATION: | Cash payments of interest $ 1,572,000 $ 765,000 $ 337,000 | $1,033,000 ============ =========== =========== | ========== Cash payments of income taxes $ 665,000 $ 2,089,000 $ 780,000 | ============ =========== =========== |
(continued) F - 7 55 ADVOCAT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) NON-CASH TRANSACTIONS: The Company assumed debt of $1,592,000 and $1,075,000 in connection with the acquisition of facilities in 1996 and 1995, respectively. Foreign currency translation (gain) loss adjustments totaled $18,000, ($49,000), $44,000, and $410,000 for 1996, 1995 and the periods in 1994, respectively. The Company and the Long-Term Care Business received benefit plan deposits and recorded benefit plan liabilities of $172,000, $164,000, $54,000, and $42,000 for 1996, 1995, and the periods in 1994, respectively. Counsel and Diversicare did not require the Long-Term Care Business operation to pay income taxes as if the Long-Term Care Business were a separate entity. If the Long-Term Care Business had been a separate entity, the current income taxes that would have been paid to Counsel or Diversicare totaled $615,000 for the four months ended April 30, 1994. The accompanying notes are an integral part of these consolidated financial statements. F - 8 56 ADVOCAT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. ORGANIZATION AND BACKGROUND Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") commenced operations with an initial public offering of 4,750,000 shares of common stock by its selling shareholders on May 10, 1994 (the "Offering"). The Company is a long-term care provider operating nursing homes and retirement centers in the United States and Canada. Advocat was organized in January 1994 by Counsel Corporation, a publicly-owned Ontario corporation (together with its subsidiaries, "Counsel"), to combine into one entity the long-term care business of Counsel and Diversicare Inc., a publicly-owned Delaware corporation (together with its subsidiaries, "Diversicare"), of which Counsel was the approximate 70% owner at the time of the Offering. The combined long-term care business of Counsel and Diversicare is hereafter referred to as the "Long-Term Care Business." Pursuant to agreements among the parties (the "Transfer Agreements"), immediately prior to the Offering, Counsel and Diversicare (the "Selling Shareholders") transferred their Long-Term Care Business to Advocat in exchange for 4,750,000 shares of Advocat common stock and promissory notes receivable from Advocat totaling $2,209,000. Advocat assumed the trade liabilities and payables of the Long-Term Care Business relating to the assets transferred. Advocat is entitled to indemnification from the Selling Shareholders in the event of material breaches of representations and warranties contained in the agreements. All of the 4,750,000 shares of common stock of Advocat owned by the Selling Shareholders were included in the Offering. The net proceeds from the sale of these shares were received by the Selling Shareholders. In addition, the underwriters exercised an over-allotment option to sell 500,000 additional shares. The net proceeds from the over-allotment shares went to Advocat, and one-half of the proceeds were used by Advocat to repay in full the promissory notes to the Selling Shareholders. For accounting purposes, the transaction was effective May 1, 1994. Substantially all employees of the Long-Term Care Business became employees of Advocat with the completion of the Offering. F - 9 57 Pursuant to the Transfer Agreements, the Company received the outstanding capital stock of Diversicare's nursing home and retirement center management subsidiary and the outstanding capital stock of a Counsel subsidiary that held the general partnership interest in a nursing home partnership managed by Diversicare and leasehold interests in all of the nursing homes and retirement centers then owned or leased by Counsel. Eleven of the facilities owned by Counsel are now leased by Advocat from Counsel. In accordance with generally accepted accounting principles, the net assets of the Long-Term Care Business transferred by the Selling Shareholders to Advocat were recorded in the financial statements of Advocat on the basis of the Selling Shareholders' historical cost. Unaudited pro forma information for the year ended December 31, 1994, reflecting the pro forma effect on the Company's and the Long-Term Care Business's statements of income as if the conversion of the eleven facilities owned by Counsel to operating leases had been effective January 1, 1994, is as follows (in thousands, except per share amounts): Pro forma net revenues $103,086 ======== Pro forma net income $ 4,204 ======== Pro forma earnings per share $ .80 ======== Average number of common and common equivalent shares outstanding 5,258 ========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The financial statements include the operations and accounts of Advocat and its subsidiaries in the periods beginning May 1, 1994, and those of the Long-Term Care Business in the period through April 30, 1994. Investments in 20% to 50% owned entities are accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. F - 10 58 REVENUE PATIENT REVENUES - The fees charged to patients by the Company include fees from patients participating in federal- and state-funded cost reimbursement programs. These revenues are based on approved rates for each facility that are either based on current costs with retroactive settlements or prospective rates with no cost settlement. Amounts earned under federal and state programs are subject to review by the third-party payors. Final cost settlements, if any, are recorded when objectively determinable, generally within three years of the close of a reimbursement year depending upon the timing of appeals and third-party settlement reviews or audits. Contractual adjustments for revenues earned from federal and state programs amounted to $41,801,000, $30,815,000, $11,378,000, and $4,943,000, for 1996, 1995, and the periods in 1994, respectively. MANAGEMENT FEES - Under its management agreements, the Company has responsibility for the day-to-day operation and management of each of its managed facilities. The Company typically receives a base management fee ranging generally from 3.5% to 6% of net revenues of each managed facility. Other than certain corporate and regional overhead costs, the services provided at the facility are at the facility owner's expense. The facility owner also is obligated to pay for all required capital expenditures. The Company generally is not required to advance funds to the owner. Other than with respect to facilities managed during insolvency or receivership situations, the Company's management fees are generally subordinated to the debt payments of the facilities it manages. In addition, the Company is generally eligible to receive incentives over and above its base management fees based on the profits at these facilities. LEASE EXPENSE The Company operates 45 long-term care facilities under operating leases, including 31 owned by Omega Healthcare Investors, Inc. ("Omega"), 11 owned by Counsel and three owned by other parties. The Company's operating leases generally require the Company to pay stated rent, subject to increases based on changes in the Consumer Price Index or increases in the net revenues of the leased properties. The Company's leases are "triple-net," requiring the Company to maintain the premises, pay taxes, and pay for all utilities. The Company generally grants its lessor a security interest in the Company's personal property located at the leased facility. The leases generally require the Company to maintain a minimum tangible net worth and prohibit the Company from operating any additional facilities within a certain radius of each leased facility. The Company is generally required to maintain comprehensive insurance covering the facilities it leases as well as personal and real property damage insurance and professional malpractice insurance. The failure to pay rentals within a specified period constitutes a default, which default, if uncured, permits the lessor to terminate the lease. The Company's interest in the premises is subordinated to that of the lessor's lenders. F - 11 59 CLASSIFICATION OF EXPENSES The Company classifies all expenses (except interest, depreciation, amortization, and lease expenses) associated with its corporate and regional office support functions as general and administrative expenses. All other expenses (except interest, depreciation, amortization, and lease expenses) incurred by the Company at the facility level are classified as operating expenses. PROVISION FOR DOUBTFUL ACCOUNTS The Company includes provisions for doubtful accounts in operating expenses in the accompanying statements of income. The provisions for doubtful accounts were $1,745,000, $967,000, $628,000, and $130,000 for 1996, 1995, and the periods in 1994, respectively. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost with depreciation being provided over the shorter of the remaining lease term (where applicable) or the assets' estimated useful lives on the straight-line basis as follows: Buildings and leasehold improvements - 10 to 40 years Furniture and equipment - 2 to 15 years Vehicles - 5 years
Interest incurred during construction periods is capitalized as part of the building cost. Maintenance and repairs are charged against income as incurred, and major betterments and improvements are capitalized. Property and equipment obtained through purchase acquisitions are stated at their fair value determined on the respective dates of acquisition. The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." In accordance with SFAS No. 121, the Company evaluates the carrying value of its properties in light of each property's operational profitability. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on deposit with banks and all highly liquid investments with maturities of three months or less. F - 12 60 RESTRICTED CASH Restricted cash consisted of funds on deposit in 1994 that secured letters of credit that secured the Company's obligations under its worker's compensation self-insurance programs. INVENTORIES Inventory is recorded at the lower of cost or net realizable value, with cost being determined principally on the first-in, first-out basis. DEFERRED FINANCING AND OTHER COSTS Financing costs are amortized over the term of the related debt. Start-up costs incurred prior to the commencement of revenue recognition are deferred and charged against operations over five years on a straight-line basis. The Company is entitled to recover these costs from cost-reimbursement programs. Financing costs are recoverable over the term of the related indebtedness. Start-up costs are recovered over the five-year period following incurrence. INCOME TAXES The Company has adopted SFAS No. 109, "Accounting for Income Taxes," for the financial reporting of income taxes, which generally requires the Company to record deferred income taxes for the differences between book and tax bases in its assets and liabilities. The Long-Term Care Business, separate from Counsel and Diversicare, implemented SFAS No. 109 giving effect to the accounting treatment prescribed by SFAS No. 109 from its inception. For federal income tax purposes, the United States operations of the Long-Term Care Business have been included in the Counsel and Diversicare consolidated tax returns. For foreign income tax purposes, the Canadian operations of the Long-Term Care Business have been included in the Counsel tax returns. Income tax provisions in the accompanying financial statements have been computed assuming that the Long-Term Care Business was a stand-alone entity, with the corresponding changes in the deferred tax accounts and in the investment by Diversicare and Counsel account for current taxes. Cash was not actually paid for income taxes as shown in the accompanying combined statement of cash flows with respect to the Long-Term Care Business. Amounts representing the current portion of the Long-Term Care Business's income tax provision which would have been paid have been disclosed in the accompanying combined statement of cash flows. Actual income tax payments were made by Counsel and Diversicare. Income taxes have been provided for all items included in the statements of income, regardless of the period when such items will be deductible for tax purposes. The principal temporary differences between financial and tax reporting arise from depreciation and reserves not currently deductible, as well as the timing of recognition of gains on sales of assets. F - 13 61 COSTS ALLOCATED TO THE LONG-TERM CARE BUSINESS The Long-Term Care Business's staff and management provided certain operating, corporate, and management services to Counsel's other businesses during the four months ended April 30, 1994. The combined statement of income for this period reflects an allocation of operating and general and administrative costs to the other operations. Such allocations to the other operations have been reflected as a reduction of operating expenses and general and administrative expenses in the four months ended April 30, 1994, with a corresponding reduction in the Investment by Counsel and Diversicare. FOREIGN OPERATIONS AND TRANSLATION POLICIES The results of the Canadian operations have been translated at the respective average rates (for consolidated statements of income purposes) and respective year-end rates (for consolidated balance sheet purposes). DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents and benefit plan deposits approximate fair value because of the short-term nature of these accounts and because they are invested in accounts earning market rates of interest. The carrying amount of the Company's debt approximates fair value because the interest rates approximate the current rates available to the Company and its individual facilities. EARNINGS PER SHARE The computation of earnings per share is based on the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares include stock options and are determined using the treasury stock method. SFAS No. 128, "Earnings per Share," has been issued effective for financial statement periods ending after December 15, 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share. A companion statement, SFAS No. 129, establishes standards with respect to disclosure of information about an entity's capital structure. The Company is required to adopt the provisions of these statements in 1997 and does not expect adoption thereof to have a material effect on the Company's results of operations. F - 14 62 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain amounts in the 1994 and 1995 financial statements have been reclassified to conform with the 1996 presentation. 3. RECEIVABLES Accounts receivable, before allowances, consists of the following components:
DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- Medicare $10,828,000 $ 8,753,000 Medicaid 9,360,000 7,924,000 Other, primarily private insurance 6,569,000 4,408,000 Management fees - affiliates 262,000 360,000 Management fees 451,000 336,000 ----------- ----------- $27,470,000 $21,781,000 =========== ===========
The Company generally provides its resident services and manages health care facilities in the Southeastern region of the United States and two provinces in Canada. The Company provides credit for a substantial portion of its revenues and continually monitors the credit-worthiness and collectibility from its clients, including proper documentation of third-party coverage. The Company is subject to accounting losses from uncollectible receivables in excess of its reserves and from the realization of its long-term assets. The Company's management believes that all appropriate reserves or valuation allowances have been provided as of December 31, 1996. F - 15 63 4. ACQUISITIONS In 1996, the Company purchased four facilities totaling 350 beds. The aggregate purchase price of $8,802,000 was financed with cash of $693,000, debt issued in the amount of $6,487,000, and assumed liabilities of $1,622,000. In 1995, the Company purchased two facilities totaling 265 beds. The aggregate purchase price of $6,004,000 was financed with cash of $726,000 debt issued in the amount of $4,172,000, and assumed liabilities of $1,106,000. The pro forma effect on net income of these acquisitions is not material. 5. SALE/LEASEBACK OF FACILITIES Effective August 14, 1992, the Long-Term Care Business entered into an agreement with Omega whereby 21 of the Long-Term Care Business's facilities were sold to Omega and leased back to the Long-Term Care Business under a master lease agreement (the "Master Lease"). In addition, the Long-Term Care Business entered into a participating mortgage (the "Participating Mortgage") with Omega on three other facilities. Effective with the Offering, Advocat assumed the obligations under the Master Lease and entered into an agreement to lease from Counsel the facilities subject to the Participating Mortgage. The net gain on the sale/leaseback was deferred in accordance with sale/leaseback accounting. The Company is amortizing the deferred gain over 20 years, which is the initial lease term and the renewal period. The net deferred gain totaled $3,786,000 as of December 31, 1996. Amortization of the deferred gain totaled $246,000, $246,000, $164,000, and $82,000 for 1996, 1995, and the periods in 1994, respectively, and is included as a decrease to lease expense in the accompanying consolidated statements of income. 6. SALE OF TEXAS HOMES In 1991, the Long-Term Care Business sold six of its Texas nursing homes to Texas Diversicare Limited Partnership ("TDLP") for a sales price of approximately $13,137,000. The general partner of TDLP is Diversicare General Partner, which was a wholly-owned subsidiary of Counsel. Under the terms of the Transfer Agreements, the Company received the general partnership interest and succeeded the Long-Term Care Business in all aspects of its rights and responsibilities with respect to TDLP including management of the partnership facilities in exchange for 5% of net revenues. Total consideration for the sale in 1991 included a $7,500,000 wrap mortgage receivable from TDLP and $4,370,000 cash. Underlying the wrap mortgage receivable is a note payable to a bank by the Company of $3,839,000 as of December 31, 1996. The TDLP properties are collateral for this debt. F - 16 64 Under a repurchase agreement, the general partner of TDLP, a subsidiary of the Company, has agreed to purchase up to 10.0% of the partnership units per year, beginning in January 1997 (up to a maximum of 50.0% of the total partnership units) through January 2001. The purchase of the partnership units is upon demand from the limited partners and the 10.0% maximum per year is not cumulative. The repurchase price is the original cash sales price per unit less certain amounts based on the depreciation from 1991 to the December 31 prior to the date of repurchase. Pursuant to its repurchase obligation, the Company purchased 10.0% of the partnership units in January 1997 for approximately $650,000. Units acquired pursuant to the repurchase agreement do not have voting rights with respect to any matters coming before the limited partners of TDLP. As part of the TDLP transaction, the Company has guaranteed certain cash flow requirements of TDLP for a ten-year period through August 2001. As of December 31, 1996, the Company has provided working capital funding and requirements under the cash flow guarantee to TDLP totaling $2,739,000, which has reduced the advance liability discussed below. Because of the guaranteed financial requirements to the TDLP partners, the Company is accounting for this transaction under the leasing method of accounting under SFAS No. 66. Under this method, the Company has not recorded a sale of the assets. The cash received from TDLP was recorded as an advance liability, and the wrap mortgage receivable has not been reflected in the financial statements. The advance liability is adjusted throughout the year based on mortgage note payments and advances to or repayments from TDLP. The Company's consolidated statements of income will continue to reflect the operations of the facilities until the end of the repurchase obligation period so long as the Company's recorded net assets with respect to TDLP are less than the Company's interest in the wrap mortgage due from TDLP. The Company continually evaluates the funding contingencies noted above in relation to the balance in the advance liability account and future wrap mortgage receivable collections. The consolidated statements of income include the recognition of income and expenses from the TDLP homes since the sale. During 1996, 1995, and the periods in 1994, the consolidated statements of income include TDLP results of operations before taxes of $83,000, $260,000, $225,000, and $131,000, respectively, which have also been reflected as a reduction of the advance liability account. These amounts represent the amortization of the balance of the advance liability account in excess of the repurchase obligation amount. F - 17 65 7. PROPERTY AND EQUIPMENT Property and equipment, at cost, consists of the following:
DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- Land $ 1,949,000 $ 963,000 Buildings and leasehold improvements 28,154,000 20,187,000 Furniture, fixtures and equipment 11,342,000 8,527,000 ----------- ----------- $41,445,000 $29,677,000 =========== ===========
Substantially all of the Company's gross property and equipment is security for debt obligations. 8. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ---------------------- 1996 1995 ----------- --------- Acquisition line of credit payable to a commercial finance company; secured by four nursing homes; interest payable monthly at the London Interbank Offered Rate ("LIBOR") plus additional interest ranging from 2.55% to 3.25% as per formula at loan origination (8.14% to 8.89% at December 31, 1996); balloon maturity in December 1999 $11,100,000 $ - Working capital line of credit payable to a bank; secured by certain accounts receivable and substantially all other Company assets; interest payable monthly at either 2.5% above LIBOR or the bank's Index rate (8.03% at December 31, 1996); balloon maturity in December 1999 2,436,000 - Mortgage payable to bank; secured by the six TDLP nursing homes; interest and principal payable monthly; interest at 8.0%; matures in August 2001 3,839,000 4,364,000
F - 18 66
DECEMBER 31, --------------------- 1996 1995 ---------- --------- Mortgage payable to a bank; secured by one nursing home; interest and principal payable monthly; interest at the lending bank's base rate plus 0.75% (9.0% at December 31, 1996); balloon maturity in August 2001 $2,446,000 $ - Mortgages payable to two banks; secured by second interests in the nursing home referred to immediately above; interest and principal payable monthly; interest at the lead bank's base rate plus 0.75% (9.0% at December 31, 1996); balloon maturity in August 2001 167,000 - Mortgages payable to a Canadian bank; secured by two nursing homes and one retirement facility; interest and principal payable monthly; interest ranging from 6.98% to 10.0%; balloon maturities August through December 2006 3,905,000 1,347,000 Promissory note payable to Omega; unsecured; interest and principal payable quarterly; interest at 11.0%; matures in April 1998 74,000 106,000 Acquisition line of credit payable to a group of banks; secured by two nursing homes; interest payable monthly at either the lead bank's prime rate or 2.0% above LIBOR; refinanced in December 1996 - 6,062,000 Working capital line of credit payable to a group of banks; secured by certain accounts receivable and substantially all other Company assets; interest payable monthly at either the lead bank's prime rate or 2.0% above LIBOR; refinanced in December 1996 - 2,035,000
F - 19 67
DECEMBER 31, ------------------------- 1996 1995 ------------ ---------- Mortgage payable to a finance company; secured by one Canadian retirement home; interest at 9.25% payable monthly; refinanced in September 1996 - 1,075,000 ----------- ----------- 23,967,000 14,989,000 Less current portion (713,000) (3,926,000) ----------- ----------- $23,254,000 $11,063,000 =========== ===========
Principal payments for the Company on long-term debt for the next five years and thereafter beginning January 1, 1997, are as follows: 1997 $ 713,000 1998 745,000 1999 15,588,000 2000 822,000 2001 3,245,000 Thereafter 2,854,000 ----------- $23,967,000 ===========
On December 31, 1996, the Company entered into two new lines of credit including a $10,000,000 working capital line and a $40,000,000 acquisition line. The Company immediately drew sufficient funds under both lines to repay its then-existing working capital indebtedness and to refinance its mortgage indebtedness with respect to four nursing facilities. The working capital line of credit provides for working capital loans and letters of credit aggregating up to the lesser of $10,000,000 or the borrowing base, as defined. The Company's obligations under the working capital line are secured by certain accounts receivable and substantially all other Company assets. Advances under the working capital line bear interest payable monthly at either LIBOR plus 2.50% or the lending bank's Index rate with the choice of rate being at the Company's option. The working capital line terminates and all outstanding borrowings are due in December 1999. As of December 31, 1996, the Company had drawn $2,436,000, had $4,300,000 of letters of credit outstanding, and had $3,264,000 remaining borrowing capability under the working capital line. F - 20 68 The acquisition line of credit of $40,000,000, less outstanding borrowings, is available to fund approved acquisitions through October 1999. The Company's obligations under the acquisition line are secured by the assets acquired with the draws under the acquisition line. Advances under the acquisition line bear interest, payable monthly, at LIBOR plus a defined spread with respect to each facility based upon its loan-to-value ratio and debt service coverage. Individual advances made under the acquisition line are due three years from the date of initial funding. As of December 31, 1996, the Company had drawn $11,100,000 under the acquisition line, which amount was secured by four nursing homes, and had $28,900,000 available for future acquisitions. At December 31, 1996, the Company had additional letters of credit in the amount of $782,000 with a bank other than its line of credit lenders. The Company's loan agreements contain various financial covenants, the most restrictive of which relate to net worth, cash flow, debt to equity ratio requirements, and limits on the payment of dividends to shareholders. As of December 31, 1996, the Company was in compliance with the covenants. 9. SHAREHOLDERS' EQUITY AND STOCK PLANS SHAREHOLDERS' RIGHTS PLAN In 1995, the Company adopted a shareholders' rights plan (the "Rights Plan"). The Rights Plan is designed to protect the Company's shareholders from unfair or coercive takeover tactics. The rights under the Rights Plan were effective for all shareholders of record at the close of business March 20, 1995, and thereafter and exist for a term of ten years. The Rights Plan provides for one right with respect to each share of common stock. Each right entitles the holder to acquire, at a 50% discount from the then-current market, $100 worth of common stock of the Company or that of a non-approved acquiring company. The rights may be exercised only upon the occurrence of certain triggering events, including the acquisition of, or a tender offer for, 15% or more of the Company's common stock without the Company's prior approval. STOCK-BASED COMPENSATION PLANS In 1994, the Company adopted the 1994 Incentive and Nonqualified Stock Option Plan for Key Personnel (the "Key Personnel Plan"). Under the Key Personnel Plan, as amended in May 1996, 610,000 shares of common stock have been reserved for issuance upon exercise of options granted thereunder. In 1994, the Company adopted the 1994 Nonqualified Stock Option Plan for the Directors (the "Director Plan"). Under the Director Plan, as amended in May 1996, 190,000 shares of common stock have been reserved for issuance upon exercise of options granted thereunder. F - 21 69 Under both plans, the option exercise price equals the stock's market price on the grant date. The maximum term of any option granted pursuant to either the Key Personnel Plan or to the Director Plan is ten years. Options issued under either plan are one-third vested at the grant date with an additional one-third vesting on each of the next two anniversaries of the grant date. Shares subject to options granted under either plan that expire, terminate, or are canceled without having been exercised in full become available again for future grants. In 1994, the Company adopted the 1994 Employee Stock Purchase Plan and reserved 250,000 shares for issuance under the plan. Employees may purchase stock, subject to certain limitations, at 85% of the lower of the closing market price at the beginning or at the end of each plan year. The plan year begins July 1 and ends the following June 30. In July 1996 and 1995, 21,000 and 23,000 shares were issued pursuant to this plan, respectively. The fair value of shares sold under the plan was $9.50 and $8.63 in 1996 and 1995, respectively. The Company accounts for these plans under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
Year Ended December 31, ---------------------- 1996 1995 ---------- ---------- Net Income: As Reported $4,721,000 $4,410,000 ========== ========== Pro Forma $4,447,000 $4,302,000 ========== ========== Earnings Per Share: As Reported $ .89 $ .83 ========== ========== Pro Forma $ .84 $ .81
========== ========== Because the provisions of SFAS No. 123 have not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. F - 22 70 Summarized activity of the stock option plans is presented below:
SHARES ---------------------- WEIGHTED KEY EMPLOYEE DIRECTOR AVERAGE PLAN PLAN EXERCISE PRICE ------------ -------- -------------- Issued May 10, 1994 384,000 120,000 $ 9.50 Issued 25,000 8,000 10.93 Exercised - - - Expired or canceled - - - ------- ------- ------ Outstanding, December 31, 1994 409,000 128,000 9.59 Issued 15,000 23,000 12.10 Exercised (5,000) (10,000) 9.50 Expired or canceled (6,000) (6,000) 9.50 ------- ------- ------ Outstanding, December 31, 1995 413,000 135,000 9.76 Issued 112,000 5,000 9.64 Exercised (7,000) - 9.50 Expired or canceled (7,000) (24,000) 10.45 ------- ------- ------ Outstanding, December 31, 1996 511,000 116,000 $ 9.71 ======= ======= ====== Vested, December 31, 1996 432,000 111,000 $ 9.68 ======= ======= ======
The outstanding options have exercise prices ranging from $7.25 to $13.13 and have a weighted average remaining life of 8.0 years. The weighted average fair value of options granted was $4.10 and $5.33 in 1996 and 1995, respectively. The fair value of each option is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for the 1996 and 1995 grants: risk free interest rates ranging from 5.5% to 6.1% for 1996 and from 5.4% to 7.1% for 1995; no expected dividend yield for both years; expected lives of five years for both years; and, expected volatility of 38.5% for both years. PREFERRED STOCK The Company is authorized to issue up to 1,000,000 shares of preferred stock. The Company's Board of Directors is authorized to establish the terms and rights of each series, including the voting powers, designations, preferences, and other special rights, qualifications, limitations, or restrictions thereof. F - 23 71 10. INVESTMENT BY COUNSEL AND DIVERSICARE This investment represents the equity investments in the Long-Term Care Business by Counsel and Diversicare, the historical accumulated earnings of the Long-Term Care Business's operations, the effect of unpaid tax allocations and charges to Counsel and Diversicare, and advances of cash to and from Counsel, Diversicare, and the Long-Term Care Business for working capital requirements. Counsel and Diversicare did not charge the Long-Term Care Business interest expense for intercompany loans or investments. Generally, the equity varied day-to-day due to the differences between cash requirements and cash deposits on receipts from customers and third-party payors. The average investment balance was $7,594,000 for the four months ended April 30, 1994. Pursuant to the Transfer Agreements, all the Long-Term Care Business investment and intercompany balances with Counsel and Diversicare were settled. 11. INCOME TAXES The Long-Term Care Business's historical operations have been included in the federal and state income tax returns of Counsel and Diversicare. Allocations for income taxes have been included in the Long-Term Care Business's combined statement of income as if the Long-Term Care Business was a separate taxable entity. The Long-Term Care Business's current taxes payable or benefit is reflected as an addition or reduction of the intercompany balances with Counsel or Diversicare. The provision for income tax expense is composed of the following components:
LONG-TERM CARE ADVOCAT BUSINESS --------------------------------------------- ----------- EIGHT MONTHS FOUR MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, APRIL 30, 1996 1995 1994 1994 ---------- ---------- ---------- --------- Current payable: Federal $1,498,000 $ 976,000 $ 883,000 $ 550,000 State and province 379,000 339,000 220,000 65,000 ---------- ---------- ---------- --------- 1,877,000 1,315,000 1,103,000 615,000 ---------- ---------- ---------- --------- Deferred taxes: Federal 621,000 865,000 569,000 (155,000) State and province 157,000 300,000 68,000 (18,000) ---------- ---------- ---------- --------- 778,000 1,165,000 637,000 (173,000) ---------- ---------- ---------- --------- Provision for income taxes $2,655,000 $2,480,000 $1,740,000 $ 442,000 ========== ========== ========== =========
F - 24 72 A reconciliation of taxes computed at statutory income tax rates is as follows:
LONG-TERM CARE ADVOCAT BUSINESS ------------------------------------------------ ---------- EIGHT MONTHS FOUR MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, APRIL 30, 1996 1995 1994 1994 ---------- ---------- ---------- -------- Provision for federal income taxes at statutory rate $2,508,000 $2,343,000 $1,643,000 $395,000 State and province income taxes, net of benefit 295,000 276,000 193,000 47,000 Other (148,000) (139,000) (96,000) - ---------- ---------- ---------- -------- Provision for income taxes $2,655,000 $2,480,000 $1,740,000 $442,000 ========== ========== ========== ========
The net deferred tax assets and liabilities, at the respective income tax rates, as of December 31, 1996 and 1995, are as follows:
1996 1995 ----------- ----------- Current deferred asset: Allowance for doubtful accounts $ 881,000 $ 269,000 Accrued liabilities 1,060,000 705,000 ----------- ----------- 1,941,000 974,000 Current deferred liability - - ----------- ----------- Net current deferred asset $ 1,941,000 $ 974,000 =========== =========== Non-current deferred asset: Tax gain on sale transactions in excess of recognized financial reporting gain $ 1,743,000 $ 2,341,000 Tax goodwill and intangibles 11,084,000 12,080,000 Depreciation - 197,000 Other 153,000 83,000 ----------- ----------- 12,980,000 14,701,000 Less valuation allowance (5,909,000) (6,190,000) ----------- ----------- 7,071,000 8,511,000 Non-current deferred liability: Deferred costs (325,000) (287,000) Depreciation (266,000) - ----------- ----------- (591,000) (287,000) ----------- ----------- Net non-current deferred asset $ 6,480,000 $ 8,224,000 =========== ===========
F - 25 73 The Company has recorded a valuation allowance with respect to the deductibility of certain tax goodwill and intangibles. The valuation allowance for deferred tax assets decreased $281,000 in 1996 and increased by $17,000 in 1995. The changes are related to the amortization of tax goodwill. The Company expects that such valuation allowances will be determined annually based on any circumstances or events with the taxing authorities. 12. COMMITMENTS, CONTINGENCIES AND GUARANTEE LEASE COMMITMENTS The Company is committed under long-term operating leases with various expiration dates and varying renewal options. Minimum annual rentals (exclusive of taxes, insurance, and maintenance costs) under these leases for the next five years beginning January 1, 1997, are as follows: 1997 $15,162,000 1998 15,540,000 1999 15,962,000 2000 16,380,000 2001 16,794,000
Under lease agreements with Omega, Counsel, and others, the Company's lease payments are subject to periodic annual escalations as described in Note 2. Total lease expense was $14,441,000, $13,518,000, $7,301,000 and $2,826,000, for 1996, 1995, and the periods in 1994, respectively. One operating lease requires the Company to pay additional lease payments in an amount equal to 60.0% of pretax facility profits, as defined. OMEGA LEASES The Company's Master Lease with Omega covering 21 facilities provides for an initial term of ten years through August 2002 and allows the Company one ten-year renewal option. The Company issued a letter of credit in the amount of $3,800,000 in favor of Omega as security for its obligations under the Master Lease. Under the terms of the Master Lease, the Company must comply with certain covenants based on total shareholders' equity of the Company as defined. The Company was in compliance with these covenants as of December 31, 1996. First mortgage revenue bonds of $4,370,000 were assumed by Omega as of August 14, 1992. The Company remains secondarily liable for the debt service through maturity of these bonds. Omega has indemnified the Company for any losses suffered by the Company as a result of a default on the bonds. Omega has represented to the Company that the debt service on the bonds was current as of December 31, 1996. The Company is leasing the two facilities mortgaged by these bonds. F - 26 74 Effective December 1, 1994, the Company entered into a series of agreements with Omega and a third party. Under the agreements, the Company will ultimately lease a total of nine nursing facilities with a total of 805 beds. The Company has executed formal lease agreements with respect to five of the nine facilities. The remaining four facilities are currently being managed by the Company. Under the management agreements, the Company is responsible for the operating assets and liabilities of the facilities and receives a management fee equal to the net profits of the facilities. The Company is accounting for these properties as operating leases in anticipation of the completion of formal lease agreements. The initial lease period for the nine facilities will be ten years with two five-year renewal options at the Company's option. COUNSEL LEASES The Company leases five facilities from Counsel with an initial term of five years through April 1999 and one five-year renewal option. With respect to these facilities, the Company has a right of first refusal and a purchase option at the end of the lease term. The Company leases three additional facilities from Counsel with an initial term of ten years through April 2004 and one ten-year renewal option. With respect to these facilities, the Company has the right of first refusal and a purchase option at the end of the lease term. The Company leases three additional facilities from Counsel with a lease term through August 2002. At the end of the lease term, the Company has the right to purchase these facilities. In addition, the Company can require Counsel to transfer these facilities to Omega, at which time the Company has the right to lease these facilities from Omega in accordance with the terms of the Master Lease. CONTINGENCIES The Company has liability claims and disputes outstanding for patient liability issues. Professional liability insurance up to certain limits is carried by the Company and its subsidiaries for coverage of such claims. (See Note 13.) The ultimate results of the litigation are unknown at the present time, but management is of the opinion that there would be no material amounts in excess of liability coverages. The Company is self-insured for the first $250,000, on a per claim basis, for worker's compensation claims in a majority of its United States nursing facilities. The Company has provided reserves for the settlement of outstanding claims at amounts believed to be adequate as of December 31, 1996. The differences between actual settlements and reserves are included in expense in the year finalized. The Company has letters of credit totaling $782,000 securing its obligations with respect to the self-insurance program. In addition, the Company has certain nursing facilities in the United States that participate in state-sponsored worker's compensation programs. F - 27 75 The Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $75,000 per individual annually. The Company provides reserves based upon actuarial criteria for the settlement of outstanding claims at amounts believed to be adequate. The differences between actual settlements and reserves are included in expense in the year finalized. GUARANTEE As of December 31, 1996, the Company has guaranteed up to $511,000 ($700,000 Canadian) of a mortgage note payable of $2,668,000 ($3,656,000 Canadian). The mortgage note payable relates to a facility managed by the Company. The Company has a right of first refusal with respect to a sale of this facility. EMPLOYMENT AGREEMENTS The Company has employment agreements with certain members of management that provide for the payment to these members of amounts up to 2.5 times their annual base salary in the event of a termination without cause, a constructive discharge (as defined), or upon a change in control of the Company (as defined). The maximum contingent liability under these agreements is approximately $1,700,000. In addition, upon such an event, certain executives may elect to require the Company to purchase options granted to them for a purchase price equal to the difference between the fair market value of the Company's common stock at the date of termination and the stated option exercise price. The terms of such agreements are from one to three years and automatically renew for one year if not terminated by the employee or the Company. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company has established a Supplemental Executive Retirement Plan (the "SERP") to provide retirement benefits for officers and employees of the Company who have been designated for participation by the President of the Company. Participants in the SERP will be eligible to receive benefits thereunder after reaching normal retirement age which is defined in the SERP as either (i) age 65, (ii) age 60 and ten years of service, or (iii) age 55 and 15 years of service. Under the SERP, participants can defer up to 6% of his or her base pay. The Company makes matching contributions of 100% of the amount deferred by each participant. Benefits under the SERP become fully vested upon the participant reaching normal retirement age or the participant's disability or death. In addition, if there is a change in control of the Company as defined in the SERP, all participants shall be fully vested, and each participant shall be entitled to receive his or her benefits under the SERP upon termination of employment. The SERP trust funds are at risk of loss. Should the Company become insolvent, its creditors would be entitled to a claim to the funds superior to the claim of SERP participants. F - 28 76 13. PROFESSIONAL LIABILITY INSURANCE The Company maintains general and professional liability insurance with per claim coverage of $1,000,000 and aggregate coverage limits of up to $2,000,000 for its long-term care services. With respect to a majority of its United States facilities, the Company is self-insured for the first $25,000 per occurrence and $500,000 in the aggregate for such claims. In addition, the Company maintains a $50,000,000 aggregate umbrella liability policy for claims in excess of the above limit for its long-term care services. The six TDLP facilities maintain general and professional liability insurance with per claim coverage of $1,000,000 and aggregate coverage limits of up to $2,000,000. In addition, TDLP maintains a $10,000,000 aggregate umbrella liability policy for claims in excess of the above limit for these facilities. The seven Canadian facilities leased or owned by the Company maintain general and professional liability insurance with per claim coverage limits of up to $1,459,000 ($2,000,000 Canadian). In addition, the Company maintains a $2,189,000 ($3,000,000 Canadian) aggregate umbrella liability policy for claims in excess of the above limit for these facilities. The liability policies are on an occurrence basis and are renewable annually. F - 29 77 14. GEOGRAPHIC OPERATIONS Expenses incurred by the Company that are not directly traceable to either of the Company's geographic segments (United States and Canada) have been allocated to the applicable geographic region for which benefit the expense was incurred. Information by geographic segment is presented below (in thousands):
UNITED STATES CANADA TOTAL ------------- ------ ----- ADVOCAT: Year Ended December 31, 1996 - ---------------------------- Net revenues $153,797 $12,440 $166,237 Income before taxes 5,758 1,618 7,376 Identifiable assets 61,861 10,525 72,386 Year Ended December 31, 1995 - ---------------------------- Net revenues $128,781 $11,184 $139,965 Income before taxes 5,228 1,662 6,890 Identifiable assets 50,845 6,251 57,096 Eight Months Ended December 31, 1994 - ------------------------------------ Net revenues $ 65,053 $ 6,203 $ 71,256 Income before taxes 3,730 1,104 4,834 Identifiable assets 40,024 3,569 43,593 LONG-TERM CARE BUSINESS: Four Months Ended April 30, 1994 - -------------------------------- Net revenues $ 28,971 $ 2,859 $ 31,830 Income before taxes 1,060 103 1,163 Identifiable assets 34,672 17,040 51,712
F - 30 78 15. RELATED PARTIES From the Offering through November 1996, the Company had two Directors who are directors and key executives of Counsel. The Company provides management services for nine facilities owned by two Canadian limited partnerships. The president of the general partners of these partnerships is a director and key executive of Counsel, and Counsel leases seven of these facilities from one of the partnerships. Management fees from these facilities totaled $1,656,000, $1,684,000, $1,323,000 and $565,000, for 1996, 1995, and the periods in 1994, respectively. The Company has loaned one of the limited partnerships $1,028,000 and $792,000 as of December 31, 1996 and 1995, respectively. The Company advanced an additional $434,000 to the partnership in January 1997. The Company has received second, third and fourth mortgage security interests in the partnership assets. The notes receivable bear interest at 8.0% and will be repaid over the life of the management contract beginning in 1997. Lease expense related to the facilities leased from Counsel totaled $2,078,000, $2,052,000, and $1,351,000 for the years ended December 31, 1996 and 1995, and for the eight months ended December 31, 1994, respectively. 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
QUARTER ---------------------------------- 1996 FIRST SECOND THIRD FOURTH - ------------------ ------- ------- ------- ------- Net revenues $39,533 $39,776 $42,646 $44,282 ======= ======= ======= ======= Net income $ 900 $ 1,051 $ 1,271 $ 1,499 ======= ======= ======= ======= Earnings per share $ .17 $ .20 $ .24 $ .28 ======= ======= ======= ======= 1995 - ------------------ Net revenues $32,491 $33,509 $36,672 $37,293 ======= ======= ======= ======= Net income $ 1,040 $ 1,173 $ 1,380 $ 817 ======= ======= ======= ======= Earnings per share $ .20 $ .22 $ .26 $ .15 ======= ======= ======= =======
F - 31 79 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Advocat Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Advocat Inc., included in this Annual Report on Form 10-K and have issued our report thereon dated February 17, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedule listed in the index under Item 16(b) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements, and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Nashville, Tennessee February 17, 1997 S-1 80 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Counsel Corporation and Diversicare Inc.: We have audited, in accordance with generally accepted auditing standards, the combined financial statements of the LONG-TERM CARE BUSINESS OF COUNSEL CORPORATION AND DIVERSICARE INC. (the "Long-Term Care Business"), included in this Annual Report on Form 10-K and have issued our report thereon dated February 10, 1995. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedule listed in the index under Item 16(b) is the responsibility of the Long-Term Care Business' management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements, and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Nashville, Tennessee February 10, 1995 S-2 81 ADVOCAT INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Column A Column B Column C Column D Column E ----------- --------- -------------------------------------- ------------ -------- Additions Balance -------------------------------------- at Charged Balance Beginning to Charged at of Costs and to Other Deductions End of Description Period Expenses Accounts Other (1) Period ----------- --------- --------- --------- -------- ------------- --------- ADVOCAT INC: Year ended December 31, 1996: Allowance for doubtful accounts $ 2,082 $ 1,745 $ - $ - $ 1,303 $ 2,524 ========= ========= ========= ======== ============= ========= Year ended December 31, 1995: Allowance for doubtful accounts $ 1,776 $ 967 $ - $ - $ 661 $ 2,082 ========= ========= ========= ======== ============= ========= Eight months ended December 31, 1994: Allowance for doubtful accounts $ 1,241 $ 628 $ - $ - $ 93 $ 1,776 ========= ========= ========= ======== ============= ========= - ------------------------------------------------------------------------------------------------------------- LONG-TERM CARE BUSINESS: Four months ended April 30, 1994: Allowance for doubtful accounts $ 1,184 $ 130 $ - $ - $ 73 $ 1,241 ========= ========= ========= ======== ============= =========
(1) Amounts written off as uncollectible accounts, net of recoveries. S-3 82 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 2.1 -- Asset Purchase Agreement dated November 30, 1995, among Williams Nursing Homes Inc., d/b/a Afton Oaks Nursing Center, Lynn Mayers, Thomas E. Mayers, and Diversicare Leasing Corp. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated November 30, 1995). 2.2 -- Purchase Agreement between Diversicare Leasing Corporation and Americare Corporation dated February 20, 1996 (incorporated by reference to Exhibit 2.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 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 Form 8-A filed March 30, 1995). 4.1 -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1). 4.2 -- Rights Agreement dated March 13, 1995, between the Company and Third National Bank in Nashville (incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated March 13, 1995). . 4.3 -- Summary of Shareholder Rights Plan adopted March 13, 1995 (incorporated by reference to Exhibit B of Exhibit 1 to Form 8-A filed March 30, 1995). 4.4 -- Rights Agreement of Advocat Inc. dated March 23, 1995 (incorporated by reference to Exhibit 1 to Form 8-A filed March 30, 1995).
83
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.1 -- Asset Contribution Agreement among Counsel Corporation and Certain of its Direct and Indirect Subsidiaries dated May 10, 1994 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.2 -- Asset Contribution Agreement among Diversicare Inc. and Certain of its Direct and Indirect Subsidiaries dated May 10, 1994 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.3 -- 1994 Incentive and Non-Qualified Stock Plan for Key Personnel (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.4 -- 1994 Non-Qualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.5 -- Master Agreement and Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.6 -- 1994 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.7 -- Form of Employment Agreements dated May 10, 1994, between the Registrant and Dr. Birkett, Mr. Richardson and Ms. Hamlett (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.8 -- Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.9 -- Master Lease Agreement dated August 14, 1992, between Diversicare Corporation of America and Omega Healthcare Investors, Inc. (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement No. 33-76150 on Form S-1).
84
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.10 -- Consent, Assignment and Amendment Agreement between Diversicare Corporation of America, Counsel Nursing Properties, Inc., Advocat Inc., Diversicare Leasing Corporation and Omega Healthcare Investors, Inc. dated May 10, 1994 (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.11 -- Advocat Inc. Guaranty in favor of Omega Healthcare Investors, Inc. dated May 10, 1994 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.12 -- Consolidation, Modification and Renewal Note dated August 30, 1991, by Diversicare Nursing Centers, Inc. to the order of Sovran Bank/Tennessee (incorporated by reference to Exhibit 10.19 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.13 -- Wraparound Promissory Note dated August 30, 1991, by Texas Diversicare Limited Partnership and Diversicare Nursing Centers, Inc. (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.14 -- Management Agreement dated August 30, 1991, between Texas Diversicare Limited Partnership and Diversicare Corporation of America, as assigned effective October 1, 1991, to Diversicare Management, with consent of Texas Diversicare Limited Partnership, as amended (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.15 -- Amended and Restated Limited Partnership Agreement dated August 30, 1991, among Diversicare General Partner, Inc., J. Scott Jackson and each Limited Partner (incorporated by reference to Exhibit 10.22 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.16 -- Participation Agreement dated August 30, 1991, between Texas Diversicare Limited Partnership and Diversicare Corporation of America (incorporated by reference to Exhibit 10.23 to the Company's Registration Statement No. 33-76150 on Form S-1).
85
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.17 -- Agreement of Purchase and Sale entered into August 30, 1991, among Diversicare Corporation of America, Texas Diversicare Limited Partnership' and Diversicare Corporation of America (incorporated by reference to Exhibit 10.25 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.18 -- Partnership Services Agreement entered into August 30, 1991, among Texas Diversicare Limited Partnership, Diversicare Incorporated and Counsel Property Corporation (incorporated by reference to Exhibit 10.26 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.19 -- Guaranteed Return Loan Security Agreement entered into August 30, 1991, between Texas Diversicare Limited Partnership and Diversicare Incorporated (incorporated by reference to Exhibit 10.27 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.20 -- Credit and Security Agreement dated October 12, 1994, between NationsBank of Tennessee, N.A., the Company and the Company's subsidiaries (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.21 -- Promissory Note by Advocat Inc. to the order of Diversicare Inc. dated May 10, 1994 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.22 -- Promissory Note by Advocat Inc. to the order of Counsel Nursing Properties, Inc. dated May 10, 1994 (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.23 -- Demand Master Promissory Note by Advocat Inc. to the order of Diversicare Corporation of America dated May 10, 1994 (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.24 -- Lease Agreement between Counsel Healthcare Assets Inc. and Counsel Nursing Properties, Inc. dated May 10, 1994 (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
86
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.25 -- Lease Agreement between Counsel Healthcare Assets Inc. and Counsel Nursing Properties, Inc. dated May 10, 1994 (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.26 -- Management and Guaranteed Return Loan Agreement dated as of November 30, 1985, between Diversicare VI Limited Partnership and Diversicare Incorporated, an Ontario corporation, as amended, as assigned effective October 1, 1991, to Diversicare Management Services Co., with consent of Diversicare VI Limited Partnership (incorporated by reference to Exhibit 10.34 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.27 -- Management Agreement dated August 24, 1981, between Americare Corporation and Diversicare Corporation of America, as assigned to Diversicare Management Services Co., with consent of Americare Corporation (incorporated by reference to Exhibit 10.36 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.28 -- Management Agreement between Counsel Healthcare Assets, Inc., an Ontario corporation and Counsel Nursing Properties, Inc. dated April 30, 1994, as assigned effective May 10, 1994, to Diversicare Canada Management Services Co., Inc (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.29 -- Lease Agreement between Spring Hill Medical, Inc. and First American HealthCare, Inc. dated February 1, 1994 (incorporated by reference to Exhibit 10.38 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.30 -- Lease Agreement, as amended, between Bryson Hill Associates of Alabama, Inc. and Estates Nursing Homes, Inc. dated June 15, 1984, as assigned effective May 10, 1994, to Diversicare Leasing Corp. (incorporated by reference to Exhibit 10.39 to the Company's Registration Statement No. 33-76150 on Form S-1).
87
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.31 -- Lease Agreement between HealthCare Ventures and Wessex Care Corporation dated October 23, 1989, as assigned effective May 10, 1994, to Diversicare Leasing Corp. (incorporated by reference to Exhibit 10.40 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.32 -- Lease Agreement between Osborne & Wilson Development Corp., Inc. and Diversicare Corporation of America dated July 7, 1989, as assigned effective May 10, 1994, to Diversicare Leasing Corp. (incorporated by reference to Exhibit 10.41 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.33 -- Florida Lease Agreement between Counsel Nursing Properties, Inc. and Diversicare Leasing Corp. dated May 10, 1994 (incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.34 -- Lease Agreement between Counsel Nursing Properties, Inc. and Diversicare Leasing Corp. dated May 10, 1994 (incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.35 -- Underwriting Agreement dated May 10, 1994, by and among NatWest Securities Limited, J.C. Bradford & Co., Raymond James & Associates, Inc., Advocat Inc., Counsel Nursing Properties, Inc., Diversicare Inc. and Counsel Healthcare Assets Inc. regarding 4,750,000 shares of Common Stock of Advocat Inc. (incorporated by reference to Exhibit 1 to the Company's Registration Statement No. 33-76150 on Form S-1). 10.36 -- Letter Agreement dated November 23, 1994, among Advocat Inc., Omega Healthcare Investors, Inc., Sterling Health Care Centers, Inc. and E.B. Lowman, II (incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.37 -- Assignment and Assumption Agreement of Master Lease dated September 1, 1995, between Sterling Health Care Management, Inc., Diversicare Leasing Corp. and Sterling Acquisition Corp (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995).
88
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.38 -- Master Lease dated December 1, 1994, between Sterling Health Care Management, Inc. and Sterling Acquisition Corp (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.39 -- Assignment and Assumption Agreement of Master Sublease dated September 1, 1995, between Sterling Health Care Management, Inc., Diversicare Leasing Corp. and O S Leasing Company (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.40 -- Master Sublease dated December 1, 1994, between Sterling Health Care Management, Inc. and O S Leasing Company (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.41 -- Letter of Credit Agreement dated September 1, 1995, between Omega Health Care Investors, Inc., Sterling Acquisition Corp., Sterling Acquisition Corp II, O S Leasing Company and Diversicare Leasing Corp (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.42 -- Advocat Inc. Guaranty dated September 1, 1995, in favor of Omega Health Care Investors, Inc., Sterling Acquisition Corp., Sterling Acquisition Corp. II and O S Leasing Company (incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.43 -- Management Agreement between Diversicare Management Services Co. and Emerald-Cedar Hill, Inc. dated February 20, 1996 (incorporated by reference to Exhibit 10.43 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.44 -- Management Agreement between Diversicare Management Services Co. and Emerald-Golfcrest, Inc. dated February 20, 1996 (incorporated by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.45 -- Management Agreement between Diversicare Management Services Co. and Emerald-Golfview, Inc. dated February 20, 1996 (incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.46 -- Management Agreement between Diversicare Management Services Co. and Emerald-Southern Pines, Inc. dated February 20, 1996 (incorporated by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.47 -- Loan Agreement between Omega Healthcare Investors, Inc. and Diversicare Leasing Corp., d/b/a Good Samaritan Nursing Home, dated February 20, 1996 (incorporated by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.48 -- Short Term Note by Diversicare Leasing Corp. to Omega Healthcare Investors, Inc. dated February 20, 1996 (incorporated by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.49 -- Advocat Inc. Guaranty in favor of Omega Healthcare Investors, Inc. dated February 20, 1996 (incorporated by reference to Exhibit 10.49 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.50 -- First Amendment to Credit and Security Agreement dated November 28, 1995, between NationsBank of Tennessee, N.A., Advocat Inc. and the Subsidiaries (as defined) (incorporated by reference to Exhibit 10.50 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.51 -- Second Amendment to Credit and Security Agreement dated December 1, 1995, between NationsBank of Tennessee, N.A., Advocat Inc. and the Subsidiaries (as defined) (incorporated by reference to Exhibit 10.51 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
90
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.52 -- Third Amendment to Credit and Security Agreement dated December 1, 1995, between NationsBank of Tennessee, N.A., Advocat Inc. and the Subsidiaries (as defined) (incorporated by reference to Exhibit 10.52 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.53 -- Fourth Amendment to Credit and Security Agreement dated April 1, 1996, between NationsBank of Tennessee, N.A., Advocat Inc. and the Subsidiaries (as defined) (incorporated by reference to Exhibit 10.53 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996). 10.54 -- Fifth Amendment to Credit and Security Agreement dated May 1, 1996, between NationsBank of Tennessee, N.A., Advocat Inc. and the Subsidiaries (as defined) (incorporated by reference to Exhibit 10.54 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996). 10.55 -- Sixth Amendment to Credit and Security Agreement dated June 28, 1996, between NationsBank of Tennessee, N.A., Advocat Inc. and the Subsidiaries (as defined) (incorporated by reference to Exhibit 10.55 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996). 10.56 -- Seventh Amendment to Credit and Security Agreement dated September 1, 1996, between NationsBank of Tennessee, N.A., Advocat Inc. and the Subsidiaries (as defined) (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996). 10.57 -- Eighth Amendment to Credit and Security Agreement dated November 1, 1996, between NationsBank of Tennessee, N.A., Advocat Inc. and the Subsidiaries (as defined) (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996). 10.58 -- Master Credit and Security Agreement dated December 27, 1996, between First American National Bank, GMAC-CM Commercial Mortgage Corporation, Advocate Inc., Diversicare Management Services Co. and the Subsidiaries (as defined).
91
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.59 -- Project Loan Agreement (Good Samaritan) dated December 27, 1996, between GMAC-CM Commercial Mortgage Corporation, Advocate Inc., Diversicare Management Services Co. and the Subsidiaries (as defined). 10.60 -- Project Loan Agreement (Afton Oaks) dated December 27, 1996, between GMAC-CM Commercial Mortgage Corporation, Advocate Inc., Diversicare Management Services Co. and the Subsidiaries (as defined). 10.61 -- Project Loan Agreement (Pinedale) dated December 27, 1996, between GMAC-CM Commercial Mortgage Corporation, Advocate Inc., Diversicare Management Services Co. and the Subsidiaries (as defined). 10.62 -- Project Loan Agreement (Windsor House) dated December 27, 1996, between GMAC-CM Commercial Mortgage Corporation, Advocate Inc., Diversicare Management Services Co. and the Subsidiaries (as defined). 21 -- Subsidiaries of the Registrant. 23 -- Consent of Arthur Andersen LLP. 27 -- Financial Data Schedule (for SEC use only).
EX-10.58 2 MASTER CREDIT AND SECURITY AGREEMENT 1 EXHIBIT 10.58 MASTER CREDIT AND SECURITY AGREEMENT THIS MASTER CREDIT AND SECURITY AGREEMENT (the "Agreement") is made and entered into to be effective as of December 27, 1996, between First American National Bank, a national banking association, with its principal place of business at First American Center, Nashville, Tennessee, 37237 (hereinafter referred to as "First American"), in its capacity as the lender under the Working Capital Line and as Administrative Agent, GMAC-CM Commercial Mortgage Corporation, with offices for purposes of this Agreement at 2200 Woodcrest Place, Suite 305, Birmingham, Alabama, 35209 (hereinafter referred to as "GMAC-CM"), in its capacity as the lender under the Acquisition Line (First American and GMAC-CM are sometimes referred to individually herein as "Lender", and collectively herein as the "Lenders"), Advocat Inc., a Delaware corporation (hereinafter referred to as "Advocat"), Diversicare Management Services Co. (the "Borrower"), a Tennessee corporation and wholly-owned subsidiary of Advocat, Advocat Finance, Inc. ("AFI"), a Delaware corporation and wholly-owned subsidiary of the Borrower, Diversicare Leasing Corp. ("DLC"), a Tennessee corporation and wholly-owned subsidiary of AFI, Advocat Ancillary Services, Inc. ("AAS"), a Tennessee corporation and wholly-owned subsidiary of the Borrower, Diversicare Canada Management Services Co., Inc. ("DCMS"), a corporation organized under the laws of Canada and wholly-owned subsidiary of DLC, Diversicare General Partner, Inc. ("DGP"), a Texas corporation and wholly-owned subsidiary of DLC, First American Health Care, Inc. ("FAHC"), an Alabama corporation and wholly-owned subsidiary of DLC, Diversicare Leasing Corp. of Alabama ("DLCA"), an Alabama corporation and wholly-owned subsidiary of DLC, and Advocat Distribution Services, Inc. ("ADS"), a Tennessee corporation and wholly-owned subsidiary of the Borrower (DLC, AAS, DCMS, DGP, FAHC, ADS, DLCA and AFI, together with any other subsidiaries of Advocat (or any Subsidiary) formed or acquired after the date hereof, are sometimes hereinafter referred to collectively as the "Subsidiaries"), W I T N E S S E T H: WHEREAS, pursuant to the terms of (i) a Commitment Letter from First American dated October 9, 1996, addressed to Advocat, and (ii) a Commitment Letter from GMAC-CM dated October 14, 1996, addressed to Advocat, the Lenders agreed to loan to the Borrower, Advocat, and the Subsidiaries, in accordance with the terms of this Agreement, sums not to exceed $50,000,000, consisting of a $10,000,000 working capital line to be funded by First American (the "Working Capital Line"), and a $40,000,000 acquisition line to be funded by GMAC-CM (the "Acquisition Line"); and, WHEREAS, the Lenders, the Borrower, Advocat and the Subsidiaries desire to enter into this Agreement to set forth the terms and conditions of the $50,000,000 credit facility to the Borrower, NOW, THEREFORE, in consideration of the foregoing premises, and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, the Lenders, the Borrower, Advocat and the Subsidiaries hereby agree as follows: -1- 2 1. DEFINITIONS As used in this Agreement, terms not otherwise defined, shall have the meanings set forth in this Section 1: 1.1 Definitions. As used in this Agreement, the term: a. "$10,000,000 Note" means the $10,000,000 Revolving Line of Credit Note evidencing the Working Capital Line and described in Section 2.4 of this Agreement. b. "Accounts", "accounts" and "accounts receivable" shall include all rights to payment for goods sold or leased or for services rendered, all sums of money or other proceeds due or becoming due thereon, all instruments pertaining thereto, all guaranties and security therefor, and all goods giving rise thereto and the rights pertaining to such goods, including the right of stoppage in transit, and all related insurance, and including, without limitation, any rights of Advocat, the Borrower or the Subsidiaries arising from the operation of a Project for the payment of goods sold or leased or for services rendered, not evidenced by an Instrument, including, without limitation, (i) all accounts arising from the operations of the Project, and (ii) all rights to payment from Medicare or Medicaid programs or similar state or federal programs, boards, bureaus or agencies, and rights to payment from patients, residents, private insurers, and others arising from the operation of the Project, including rights to payment pursuant to Reimbursement Contracts. "accounts" shall include the proceeds from all of the foregoing (whether cash or noncash, moveable or immoveable, tangible or intangible) received from the sale, exchange, transfer, collection or other disposition or substitution thereof. c. "Acquisition Line" means the $40,000,000 Acquisition Line described in Section 2.1 of this Agreement. d. "Acquisition Note" means a note evidencing a Project Loan as described in Section 2.4 of this Agreement. e. "Adjusted Funded Debt" means the sum of (i) Funded Debt, plus (ii) the product of (A) 8 multiplied by (B) lease expenses for the immediately preceding 12-month period, less (iii) the face amount of any outstanding letters of credit providing credit enhancement for lease obligations. f. "Applicable Environmental Laws" means any applicable federal, state or local laws, rules or regulations pertaining to health or the environment, or petroleum products, or radon radiation, or oil or hazardous substances, including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended ("CERCLA"), as amended, the Resource Conservation and Recovery Act of 1976, as amended ("RCA") and the Federal Emergency Planning and Community Right-To-Know Act of 1986, as amended. The terms "hazardous substance" and "release" shall have the meanings specified in CERCLA, and the terms "solid waste," "disposal," "dispose," and "disposed" shall have the meanings specified in RCA, except that if such acts are amended to broaden the meanings thereof, the broader meaning shall apply herein prospectively from and after the date of such amendments; notwithstanding the forgoing, provided, to the extent that the laws of the State where a Project is located is broader than that specified in CERCLA, as CERCLA may be amended from time to time, or a meaning for "solid waste," "disposal," "dispose," and "disposed" which is broader than specified -2- 3 in RCA, as RCA may be amended from time to time, such broader meanings under said state law shall apply in all matters relating to the laws of such State. g. "Borrowing Notice" means the Borrowing Notice required to be delivered to First American under Section 2.7 of this Agreement in connection with draws under the Working Capital Line. h. "Business Day" means any day other than a Saturday, Sunday or other day in which financial institutions located in Nashville, Tennessee, are required or permitted to close. i. "Closing" means the date on which this Agreement is executed by all parties. j. "Collateral" means the collateral described or referred to in Section 4 of this Agreement. k. "Compliance Certificate" means the compliance certificate in the form attached hereto as Exhibit 1.1(k). l. "Credit Facility" means the Credit Facility as defined in Section 2.1 of this Agreement. m. "Current Maturities of Long Term Debt" means that portion of the Borrower's Total Liabilities scheduled to mature within the following twelve (12) month period. n. "Current Ratio" means the ratio of Advocat's current assets to current liabilities, as reflected on Advocat's balance sheet, and as calculated in accordance with GAAP. o. "Debt Service Ratio" means, with respect to each Project, a ratio in which the first number is the sum of pre-tax income from the nursing home operations for a Project as set forth in the quarterly statements for the Project provided to GMAC-CM (without deduction for actual management fees paid or incurred), calculated based upon the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Project Loan), plus interest expense and non-cash expenses or allowances for depreciation and amortization of the Project for said period, less either assumed management fees or actual management fees (as applicable based upon the covenant in the Project Loan Agreement to which such definition relates) and the second number is the sum of the current portion of the long-term debt incurred for the benefit of the Project (including the long-term debt attributable to the Project Loan for the Project but excluding the outstanding principal balance of the Project Loan due on the Maturity Date of such Project Loan), plus the interest expense for the Project (including interest on the Project Loan) for the applicable period. In calculating "pre-tax income", extraordinary income and extraordinary expenses (as defined in the Project Loan Agreement) shall be excluded. p. "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. q. "Default Rate" means the rate which is four percent (4%) per annum in excess of the applicable interest rate payable in connection with advances under the Working Capital Line and the Acquisition Line, as the case may be. -3- 4 r. "EBITDAR" means the sum of earnings before interest, taxes, depreciation, amortization and rent/lease expense (excluding the TDLP Homes) calculated for the immediately preceding twelve (12) month period. s. "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 a Project. t. "Equipment" means all beds, linen, televisions, carpeting, telephones, cash registers, computers, lamps, glassware, rehabilitation equipment, restaurant and kitchen equipment, and other fixtures and equipment located on, attached to or used or useful in connection with a Project and all renewals and replacements thereof and substitutions therefor; provided, however, that with respect to any items which are leased for the benefit of a Project and not owned by Advocat, the Borrower or a Subsidiary, the Equipment shall include the leasehold interest only, together with any options to purchase any of said items and any additional or greater rights with respect to such items which Advocat, the Borrower or a Subsidiary may hereafter acquire, but the foregoing shall not be construed to mean that such leasing shall be permitted hereunder and under the other Loan Documents. u. "Eurodollar Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. v. "Eurodollar Rate Reserve Percentage" means the reserve percentage applicable during any LIBOR Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such LIBOR Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirements, including, without limitation, any emergencies, supplemental or other marginal reserve requirements, for the Lenders with respect to liabilities or assets consisting of or including Eurodollar Liabilities having a term equal to such LIBOR Interest Period. w. "Event of Default" means the occurrence of any of the events described in Section 8 of this Agreement, and the expiration of any applicable notice and cure periods. x. "Fixed Charge Coverage Ratio" shall mean EBITDAR divided by Current Maturities of Long Term Debt plus interest expense plus lease expense, plus proforma current maturities of the Acquisition Line equal to five percent (5%) of the outstanding principal balance of the Acquisition Line. y. "Funded Debt" means all indebtedness for money borrowed, deferred purchase money obligations (other than accounts payable arising in the ordinary course of business with terms less than 270 days and which are not renewable or extendable at the option of the obligor), capitalized leases, conditional sales contracts and similar title retention debt instruments. This calculation shall include all Funded Debt of other entities or persons guaranteed by Advocat, the Borrower or the Subsidiaries, or supported by a letter of credit issued on behalf of Advocat, the Borrower or the Subsidiaries. Funded Debt shall also include the redemption amount with respect to any stock of Advocat, the Borrower or the Subsidiaries required to be redeemed within the twelve months following the date of determination. -4- 5 z. "GAAP" means, as in effect from time to time, generally-accepted accounting principles, consistently applied, as promulgated by the American Institute of Certified Public Accountants. aa. "General Intangibles" means all intangible personal property arising out of or connected with a Project or the business operations of the Borrower or the Subsidiaries, and all renewals and replacements thereof and substitutions therefor (other than Accounts, Rents, Instruments, Inventory, Money, Permits and Reimbursement Contracts). ab. "GMAC-CM Master Loan Commitment" means the commitment issued by GMAC-CM dated October ___, 1996, setting forth the general conditions to issuing a Project Loan Commitment. ac. "Guarantor" means, individually, Advocat and each of the Subsidiaries, together with any other Subsidiaries formed or acquired after the date hereof; "Guarantors" means, collectively, Advocat and the Subsidiaries, together with any other Subsidiaries formed or acquired after the date hereof. ad. "Guaranty Agreements" means the Guaranty and Suretyship Agreements of even date herewith executed by Advocat and the Subsidiaries in favor of the Lenders. ae. "Governmental Authority" means any board, commission, department or body of any municipal, county, state or federal governmental unit, or any subdivision of any of them, that has or acquires jurisdiction over a Project, the use, operation or improvement of a Project or the business operations of Advocat, the Borrower or a Subsidiary. af. "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 a Project is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material or substance now or in the future defined as a "hazardous substance," "hazardous material," "hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "pollutant" within the meaning of any Hazardous Materials Law. ag. "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 Advocat, the Borrower or a Subsidiary, or to a Project 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. ah. "Improvements" means all buildings, structures and improvements of every nature comprising a Project, 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 -5- 6 floor coverings, water heaters, awnings and storm sashes, and cleaning apparatus which are or shall be a part of a Project or said buildings, structures or improvements. ai. "Index Rate" means the rate announced by First American from time to time as the Index Rate, and is not necessarily the best or lowest rate offered by First American. aj. "Index Rate Loan" means any disbursement under the Working Capital Line, which bears interest at the Index Rate. ak. "Instruments" means all instruments, chattel paper, documents or other writings obtained from or in connection with the operation of a Project or the business operations of the Borrower or the Subsidiaries (including, without limitation, all ledger sheets, computer records and printouts, data bases, programs, books of account and files related thereto). al. "Intercreditor Agreement" means the Intercreditor Agreement of even date herewith between First American and GMAC-CM, as the same may be amended or modified from time to time. am. "Inventory" and "inventory" mean goods, merchandise, replacement parts and other personal property, now owned or hereafter acquired, which are held for sale or lease or are to be furnished under a contract of service or are raw materials, work in process, packaging, labels or materials to be used or consumed in the Borrower's business and any returned goods or credits for returned goods, and with respect to each Project, all inventories of food, beverages and other comestibles held for sale or use at or from a Project, and soap, paper supplies, medical supplies, drugs and all other such goods, wares and merchandise held for sale to or for consumption by guests or patients of a Project and all such other goods returned to or repossessed by the operator of a Project. an. "Leases" means the lease agreements described in Exhibit 1.1(an) attached hereto which evidence the nursing home and retirement facilities leased by the Borrower and/or the Subsidiaries. ao. "LIBOR Interest Period" means the one, two or three-month period, as selected by Borrower with respect to a LIBOR Loan. ap. "LIBOR Loan" means any advance under the Working Capital Line bearing interest at the LIBOR Rate. aq. "LIBOR Rate" means (i) with respect to a LIBOR Loan under the Working Capital Line, the floating interest rate per annum (rounded upward, if necessary, to the next 1/100th of one percent) at which dollar deposits approximately equal in the principal amount of the applicable LIBOR Loan with a maturity comparable to the applicable LIBOR Interest Period are offered to money center banks in immediately available funds in the London Interbank Market for eurodollars at approximately 12:00 noon, Nashville time, on the date of commencement of such LIBOR Interest Period, as determined by First American, pursuant to the TELERATE reporting system, or (ii) with respect to a Project Loan, the floating interest rate per annum at which dollar deposits approximately equal in the principal amount of the applicable Project Loan with a maturity of thirty (30) days are offered to money center banks in immediately available funds in the London Interbank Market on the date the Borrower (with GMAC-CM's approval) locks an interest rate for a particular Project Loan, as determined by GMAC-CM. -6- 7 ar. "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. as. "Loan Documents" means this Agreement, the $10,000,000 Note, the Guaranty Agreements, the Stock Pledge Agreements, all Project Loan Documents, and any and all other documents and instruments evidencing or securing the Credit Facility, or any portion thereof. at. "Loan Obligations" means the aggregate of all principal and interest owing from time to time under the Credit Facility and all expenses, charges and other amounts from time to time owing under 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, Lenders pursuant to the Loan Documents. au. "Management Contracts" means the management agreements described in Exhibit 1.1(au) attached hereto, which relate to the nursing home and retirement facilities managed by the Borrower and/or the Subsidiaries. av. "Margin" means the interest rate margin applicable to a Project Loan, as calculated in accordance with Section 2.6(b) of this Agreement. aw. "Maturity Date" means the maturity date as so defined in each individual Acquisition Note evidencing a Project Loan. ax. "Maximum Rate" means the maximum rate of interest permitted by applicable law from time to time. ay. "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 for members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. Section Section 1396 et seq.) and the regulations promulgated thereunder. az. "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. Section Section 1395 et seq.) and the regulations promulgated thereunder. ba. "Money" means all monies, cash, rights to deposit or savings accounts or other items of legal tender obtained from or for use in connection with the operation of a Project or the business operations of the Borrower or the Subsidiaries. bb. "Omega" means Omega Healthcare Investors, Inc. -7- 8 bc. "Omega Receivables" means accounts receivable generated by the facilities leased from Omega, whether now existing or hereafter arising. bd. "Omega Subordination Agreement" means the letter agreement dated _____________ between Omega and First American subordinating Omega's security interest in the first $3,000,000 of the Omega Receivables to the security interest in the Pledgor's accounts receivable granted to First American in this Agreement. be. "Permits" means all licenses, permits and certificates used or useful in connection with the ownership, operation, use or occupancy of a Project, 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. bf. "Permitted Encumbrances" means those liens and encumbrances against the Collateral described on Exhibit 1.1(bf) attached hereto. bg. "Proceeds" means all proceeds (including proceeds of insurance and condemnation) from the sale, exchange, transfer, collection, loss, damage, disposition, substitution or replacement of any of the Collateral. bh. "Project" means a nursing home, assisted living facility or retirement center acquired or refinanced by Borrower with proceeds of the Acquisition Line pursuant to a Project Loan Commitment. bi. "Project Loan" means any advance under the Acquisition Line to acquire or refinance a Project. bj. "Project Loan Agreement" means a Project Loan Agreement executed by Borrower in favor of GMAC-CM in connection with each Project Loan. bk. "Project Loan Commitment" means a commitment issued by GMAC-CM (at GMAC-CM's sole and absolute discretion) setting forth the specific conditions (in addition to the conditions set forth in this Agreement, which such specific conditions may contradict and therefore supersede certain conditions set forth in this Agreement) to funding a Project Loan. bl. "Project Loan Documents" means the documents and instruments evidencing, securing or executed in connection with a Project Loan, including, without limitation, the Project Loan Agreement, as described in Section 4.2 of this Agreement. bm. "Qualified Accounts Receivable" means those accounts of the Borrower, Advocat or the Subsidiaries, on a consolidated basis, that meet the following criteria: (i) the account arises from services provided or performed by the Borrower and/or the Subsidiaries under an enforceable contract, and such services have been provided or performed for the appropriate account debtors in accordance with such contract; -8- 9 (ii) the title of the Borrower and/or the Subsidiaries to the account is absolute and is not subject to any prior assignment, claim, lien or security interest; (iii) the amount shown on the books of the Borrower and/or the Subsidiaries, and on any invoice or statement delivered to First American is owing to the Borrower and/or the Subsidiaries, and no partial payment has been made thereon by anyone; (iv) the account is not subject to any claim of reduction, counterclaim, setoff, recoupment, or any claim for credits, allowances or adjustments by the account debtor because of unsatisfactory services, or for any other reason, except for customary discounts allowed for prompt payment; (v) the account is not an account that First American, in its reasonable discretion, has determined to be ineligible in whole or in part and has notified the Borrower and/or the Subsidiaries thereof; (vi) the account is due and payable not more than thirty (30) days from the date of the invoice therefor; (vii) the account is not more than one hundred twenty (120) days old, dating from the original invoice dates (not due dates) as set forth in the terms or the respective invoices; (viii) no account arises out of a contract with, or order from, an account debtor that, by its terms, forbids or makes the assignment of that account to First American void or unenforceable; (ix) the Borrower and/or the Subsidiaries have not received any note, trade acceptance, draft or other instrument with respect to or in payment of the account, and if any such instrument is received, the Borrower and/or the Subsidiaries will immediately notify First American and, at the latter's request, endorse or assign and deliver the same to First American; (x) neither the Borrower and/or the Subsidiaries nor First American has received any notice of the dissolution, termination of existence, insolvency, business failure, appointment of a receiver for any part of the property of, assignment for the benefit of creditors by, or the filing of a petition in bankruptcy or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the account debtor; (xi) the account debtor is not an affiliate of the Borrower and/or the Subsidiaries, or in any way related by common ownership to the Borrower and/or the Subsidiaries; and (xii) the account is not created through the operation of a facility leased from Omega (other than the Omega Receivables), or accounts arising from the operation of the TDLP Homes. bn. "Reimbursement Contracts" means all third party reimbursement contracts for a Project which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare, Medicaid and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements. -9- 10 bo. "Rents" means all rent and other payments of whatever nature from time to time payable pursuant to leases of a Project, or for retail space or other space at a Project (including, without limitation, rights to payment earned under leases for space in the Improvements for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians' offices, pharmacies and specialty shops). bp. "Stockholder's Equity" means, at any time, the sum of the par or stated value of all outstanding capital stock of the Borrower plus capital surplus plus retained earnings, as reflected on the Borrower's balance sheet, and determined in accordance with GAAP. bq. "Subsidiary Note" means the promissory note executed by DLC (or such other Subsidiary which owns a Project financed with the proceeds of the Acquisition Line) in favor of AFI, evidencing the intercompany loans contemplated by Section 2.3 of this Agreement. br. "Tangible Net Worth" means the total of Stockholder's Equity less intangible assets, calculated in accordance with GAAP. bs. "TDLP" means Texas Diversicare Limited Partnership. bt. "TDLP Homes" means the six (6) nursing homes located in Texas, owned by TDLP and managed by DMS. bu. "Total Liabilities" means all liabilities that, in accordance with GAAP, should be classified as liabilities on a balance sheet of the Borrower or the Guarantors. bv. "Windsor Project Commitment" means the Project Loan Commitment dated as of October 14, 1996, issued by GMAC-CM, addressed to Advocat setting forth the terms and conditions for the Project Loans for the Windsor House of Huntsville; Afton Oaks Nursing Center; Pinedale Nursing Center; and Good Samaritan Nursing Home. bw. "Working Capital Borrowing Base" means the borrowing base for the Working Capital Line and is calculated as follows: -10- 11
From To Working Capital Borrowing Base ---- -- ------------------------------ Closing 12 months from $3,500,000 plus 85% of Qualified Closing Accounts Receivable 12 months and 1 day 18 months from $2,500,000 plus 85% of Qualified from Closing Closing Accounts Receivable 18 months and 1 day 24 months from $2,000,000 plus 85% of Qualified from Closing Closing Accounts Receivable 24 months and 1 day 36 months from $1,000,000 plus 85% of Qualified from Closing Closing Accounts Receivable
bx. "Working Capital Line" means the $10,000,000 Working Capital Line described in Section 2.2(b) of this Agreement. 2. CREDIT FACILITY 2.1 Terms of Credit Facility. Subject to the terms and conditions of this Agreement, the Lenders will make available to the Borrower amounts not to exceed $50,000,000 (the "Credit Facility"). The Credit Facility shall consist of a $10,000,000 revolving line of credit facility for working capital to be funded by First American (the "Working Capital Line") and a $40,000,000 non-revolving line of credit facility for acquisitions and refinancings of Projects, to be funded by GMAC-CM (the "Acquisition Line"). The Borrower, Advocat and the Subsidiaries acknowledge that the parties have entered into this Agreement for administrative convenience, and in no event shall First American have any obligation to fund monies under the Acquisition Line, and in no event shall GMAC-CM have any obligation to fund monies under the Working Capital Line. a. Working Capital Line. The proceeds of the Working Capital Line shall be used solely to support letters of credit issued for the benefit of the Borrower, Advocat and the Subsidiaries and to provide working capital for the Borrower, Advocat and the Subsidiaries. Subject to the terms of this Agreement, so long as no Default exists hereunder, from the date hereof through _______________, 1999, Borrower may borrow, repay and reborrow, and First American will advance to Borrower credit in the form of letters of credit and/or working capital advances in aggregate amounts up to a maximum of $10,000,000, provided that the total amount outstanding under the Working Capital Line, including letters of credit and working capital advances, shall not, at any time, exceed the Working Capital Borrowing Base. After _______________, 1999, no further advances shall be permitted under the Working Capital Line. b. Acquisition Line. The proceeds of the Acquisition Line shall be used solely for financing to acquire and/or refinance Projects. Subject to the terms of this Agreement, as the same may be amended or modified by a specific Project Loan Agreement, so long as no Default exists hereunder, from the date hereof through October 22, 1999, Borrower may borrow, on a non-revolving basis, up to $40,000,000 in the aggregate outstanding at any time. Each request for a Project Loan shall be subject to the approval of GMAC-CM. The commitment of GMAC-CM for a Project Loan shall be evidenced -11- 12 by a Project Loan Commitment issued by GMAC-CM, in its sole and absolute discretion, and funding of each Project Loan shall be subject to the conditions outlined in each Project Loan Commitment. Notwithstanding the foregoing, in no event shall any Project Loan exceed eighty-five percent (85%) of the appraised value of the Project financed with the proceeds of such Project Loan. Requests for a Project Loan for a Project with a loan to value ratio in excess of eighty-five percent (85%) shall be considered on a case-by-case basis at the sole discretion of GMAC-CM. After October 22, 1999, no further advances shall be permitted under the Acquisition Line. GMAC-CM acknowledges that the Borrower anticipates advances under the Acquisition Line to refinance the Windsor House of Huntsville; Afton Oaks Nursing Center; Pinedale Nursing Center; and Good Samaritan Nursing Home. The specific conditions for the Project Loans for the four (4) above-described Projects are set forth in the Windsor Project Commitment. 2.2 Permitted Uses of the Credit Facility. a. Working Capital Line. The purpose of the Working Capital Line is to provide working capital for the Borrower, Advocat and the Subsidiaries and to support letters of credit issued for the benefit of the Borrower, Advocat and the Subsidiaries, all at the discretion of First American. It is anticipated that the following letters of credit will be issued under the Working Capital Line as of the Closing:
Amount Beneficiary ------ ----------- $3,800,000 Omega $ 500,000 TDLP
Funds advanced under the Working Capital Line shall not be used for any purpose other than as set forth in this Section 2.2(a). b. Acquisition Line. The purpose of the Acquisition Line is to provide financing for acquiring and refinancing Projects, as approved by GMAC-CM, and subject to the terms of this Agreement. 2.3 Funding of the Credit Facility. a. Disbursement of Credit Facility Proceeds. The Lenders, Advocat, the Borrower and the Subsidiaries agree that all funds advanced under the Working Capital Line and the Acquisition Line shall be disbursed for the benefit of the Borrower, in accordance with subsection (b) below. Borrower shall use all proceeds advanced under the Working Capital Line and the Acquisition Line to fund capital contributions to AFI. In the case of advances under the Working Capital Line, AFI shall distribute the proceeds to the Subsidiaries as needed for working capital purposes, such distribution to be in the form of intercompany loans between AFI and the Subsidiaries. In the case of Project Loans, AFI shall distribute the proceeds to DLC (or such other Subsidiary which is the owner of the Project financed by the Project Loan), such distribution to be in the form of an intercompany loan. The Borrower specifically covenants with the Lenders that all proceeds advanced under the Credit Facility to the Borrower shall be utilized solely for capital contributions to AFI in accordance with this Section 2.4 and for no other purpose. AFI -12- 13 specifically covenants with the Lenders that advances under the Working Capital Line and Acquisition Line contributed by the Borrower to AFI shall be used by AFI to fund intercompany loans to the Subsidiaries for working capital purposes (in the case of advances under the Working Capital Line) and for refinancing or acquiring Projects (in the case of Project Loans), in accordance with the provisions of this Section 2.3. Disbursement of proceeds advanced under the Credit Facility by the Borrower and/or AFI, in violation of this Section 2.3, shall be deemed to be a Default under the terms of this Agreement. b. Flow of Funds. With respect to advances under the Working Capital Line, funds shall be disbursed to the Borrower to be distributed by Borrower in accordance with subsection (a) above. With respect to Project Loans, proceeds of each Project Loan shall be disbursed for the benefit of Borrower directly to the title company providing the title insurance for the Project Loan, to be disbursed to pay (i) existing obligations of DLC (or other Subsidiary which owns the Project) being refinanced by the Project Loan, or (ii) acquisition costs and expenses incurred by DLC (or other acquiring Subsidiary), approved by GMAC-CM, and related to the acquisition of the Project being financed by the Project Loan. The Borrower and the Subsidiaries agree to execute such additional documents or instruments as the Lenders may deem necessary to authorize disbursement of Credit Facility proceeds in accordance with the provisions of this Section 2.3. 2.4 Notes. The Credit Facility shall be evidenced by (i) a Revolving Line of Credit Note in the principal amount of $10,000,000 (the "$10,000,000 Note"), and (ii) by such notes as Borrower and/or a Subsidiary shall execute to evidence advances under the Acquisition Line (an "Acquisition Note"). 2.5 Repayment Schedule. a. Working Capital Line. Interest accrued on so much of the outstanding principal balance as may be outstanding from time to time under the $10,000,000 Note shall be due and payable (i) monthly, on the first day of each consecutive month for LIBOR Loans, and (ii) quarterly, on the first day of each consecutive quarter for Index Loans. The first interest payment shall be due and payable on the first applicable interest payment date following the first advance under the Working Capital Line. The outstanding principal balance of the $10,000,000 Note, together with accrued but unpaid interest, shall mature and be due and payable on __________, 1999. First American's rights under this Agreement and the other Loan Documents shall extend until such time as all letters of credit issued, as well as all advances under the Working Capital Line, have been satisfied in full. b. Acquisition Line. Interest accrued on so much of the principal balance of each Project Loan as may be outstanding from time to time under any Acquisition Note shall be due and payable monthly on the first day of each consecutive month, the first such payment being due and payable the first day of the month following the funding of a Project Loan. Each Project Loan made prior to October 22, 1998, shall be due and payable in full (including payment of all outstanding interest and satisfaction of any other obligations of the Borrower in connection therewith) three (3) years from the date of funding such Project Loan. Each Project Loan funded on or after October 22, 1998, shall be due and payable in full (including payment of all outstanding interest and satisfaction of any other obligations of the Borrower in connection therewith) two (2) years from the date of funding such Project Loan. -13- 14 2.6 Interest Rate. a. Working Capital Line. Interest on so much of the principal balance of the Working Capital Line as may be outstanding from time to time shall accrue at a floating rate per annum equal to either (at Borrower's option), (i) the LIBOR Rate plus 250 basis points (2.50%), OR (ii) the Index Rate. b. Acquisition Line. Interest on so much of the principal balance as may be outstanding from time to time under an Acquisition Note, shall accrue at a floating rate equal to the 30-day LIBOR Rate, plus the corresponding Margin (as calculated in the table below). The Margin applicable to a particular Project Loan shall be determined from the following table upon establishment to the satisfaction of GMAC-CM of both the corresponding loan to value ratio and the corresponding Debt Service Ratio for the Project:
Loan to Value Ratio Debt Service Ratio Interest Rate ------------------- ------------------ ------------- Margin less than 75% greater than 1.40 LIBOR + 2.50% between 75% and 80% between 1.40 and 1.30 LIBOR + 2.75% between 80% and 85% between 1.30 and 1.20 LIBOR + 3.25% between 85% and 90% between 1.20 and 1.15 LIBOR + 3.75% greater than 90% less than 1.15 LIBOR + 4.00%
The Borrower acknowledges (i) the interest rate applicable to a Project Loan shall change as the LIBOR Rate is from time to time adjusted, and (ii) the corresponding Margin, notwithstanding post-ratelock fluctuations of a Project's loan to value ratio or debt service ratio, shall remain fixed for the term of the particular Project Loan. c. Maximum Rate. The interest rate payable on the Credit Facility is to be computed on a 360-day year base and shall be adjusted whenever there is a change in the applicable interest rate chosen by the Borrower. In no event shall the interest rate charged with respect to the Credit Facility exceed the Maximum Rate. d. Default Rate. Upon the occurrence of an Event of Default under the Loan Documents, at the option of each Lender with respect to the portion of the Credit Facility held by such Lender, the outstanding balance of the Credit Facility, including accrued interest, shall bear interest from the date of the Event of Default until paid, at the lessor of (i) the Default Rate or (ii) the Maximum Rate. 2.7 Requests for Advances. a. Working Capital Line. In the case of an Index Rate Loan, the Borrower shall give First American irrevocable notice (a "Borrowing Notice") not later than 1:00 p.m. Nashville time on the day of disbursement. In the case of a LIBOR Loan, the Borrower shall provide the Borrowing Notice not later than 1:00 p.m. Nashville time three (3) Business Days prior to any requested disbursement. Each -14- 15 Borrowing Notice shall be written and shall specify the date of such requested disbursement, the aggregate amount of such disbursement, and whether the disbursement shall be an Index Rate Loan or a LIBOR Loan, and if a LIBOR Loan, the applicable LIBOR Interest Period selected by Borrower. Each Borrowing Notice shall obligate the Borrower to accept the disbursement requested thereby. (i) The Borrower shall have the right at any time, on prior irrevocable written or telefaxed notice to First American to convert any Index Rate Loan into a LIBOR Loan, to convert a LIBOR Loan into an Index Rate Loan, or to continue a LIBOR Loan for a subsequent LIBOR Interest Period, subject in each case to the following: (1) Each conversion notice shall be irrevocable; (2) Each notice to convert to a LIBOR Loan or to continue a LIBOR Loan shall be received by First American not later than 1:00 p.m. Nashville time, three (3) days prior to the requested conversion date; (3) No LIBOR Loan shall be converted or prepaid at any time other than at the end of the Interest Period applicable thereto; (4) Each conversion shall be effected by applying the proceeds of the new LIBOR Loan or Index Rate Loan, as the case may be, to the disbursement (or portion thereof) being converted; Each notice pursuant to this subparagraph shall be irrevocable and shall refer to this Agreement and specify (i) the identity and principal amount of the particular disbursement that the Borrower requests to be converted or continued, (ii) if such notice requests conversion, the date of conversion (which shall be a Business Day), and (iii) if an Index Rate Loan is to be converted to a LIBOR Loan, or LIBOR Loan is to be continued, the LIBOR Interest Period with respect thereto. In the event that the Borrower shall not give notice to continue any LIBOR Loan for a subsequent LIBOR Interest Period, such Loan (unless repaid) shall automatically be converted into an Index Rate Loan. If the Borrower shall fail to specify in a Borrowing Notice the interest rate option selected, the Borrower will be deemed to have requested an Index Rate Loan. Notwithstanding anything to the contrary contained above, if an Event of Default shall have occurred and be continuing, no LIBOR Loan may be continued, and no Index Rate Loan may be converted into a LIBOR Loan. b. Acquisition Line. Borrower may request advances under the Acquisition Line by providing written notice to GMAC-CM of the Project to be acquired or refinanced and requesting GMAC-CM to advance a Project Loan in connection with the Project. All obligations of GMAC-CM to fund any requested Project Loan are specifically subject to (i) GMAC-CM's approval, in GMAC-CM's sole and absolute discretion of the requested Project Loan, (ii) compliance with the terms and conditions set forth in this Agreement and the GMAC-CM Master Loan Commitment, and (iii) the issuance of and the Borrower's compliance with the terms and conditions of a Project Loan Commitment for each particular Project to be acquired or refinanced on terms and conditions as determined by GMAC-CM. The issuance of a Project Loan Commitment for a particular Project, as requested by Borrower under the terms of this Agreement, shall be conditioned upon delivery to and approval by -15- 16 GMAC-CM of the items listed in Exhibit 2.7(b) attached hereto, with copies of the certificate of need and all other requisite licenses, permits, Medicaid and Medicare contracts and approvals in connection with the Project to be acquired or refinanced, all of which shall be in form and substance acceptable to GMAC-CM, and delivery to and approval by GMAC-CM of all other documents or information as GMAC-CM shall deem necessary in its sole and absolute discretion in connection with the underwriting of a particular Project Loan. Upon preliminary approval by GMAC-CM of a Project Loan, GMAC-CM will order an appraisal, environmental Phase I and engineering report (if required by GMAC-CM) for the Project. All third party reports will be paid for by the Borrower regardless of whether such Project Loan closes. Approval of all Project Loans shall be subject to receipt and satisfactory review of the third party reports by GMAC-CM. Third party reports ordered and prepared prior to GMAC-CM's approval of a particular Project Loan will not need to be reordered providing the third party that prepared such report is acceptable to GMAC-CM, such third party reissues its change letter to GMAC-CM, and the reports were prepared less than six (6) months prior to the closing of the applicable Project Loan. 2.8 Optional Prepayment. The Credit Facility may be prepaid at any time, in whole or in part, without prepayment penalty or premium, subject to (i) the limitation that advances bearing interest at the LIBOR Rate may only be prepaid at the conclusion of the applicable LIBOR Interest Period, and (ii) obligations related to outstanding letters of credit. 2.9 Letters of Credit. To the extent the Borrower desires to use proceeds available under the Working Capital Line to issue letters of credit for the benefit of Advocat, the Borrower or the Subsidiaries, the Borrower and/or Advocat or the Subsidiaries, as appropriate, agree to execute such letter of credit applications and other documents and instruments as First American deems necessary in connection with the issuance of such letters of credit. The expiration date for each letter of credit issued under the Working Capital Line shall not exceed the later of (i) 364 days from the date the letter of credit is issued, or (ii) ___________________, 1999. At Borrower's request, First American agrees to issue a letter of credit for a period of less than one (1) year. As reasonable compensation to First American for reserving the funds necessary to issue letters of credit to the Borrower, the Borrower shall pay to First American a letter of credit fee equal to one percent (1%) per annum of the face amount of each letter of credit issued hereunder. Such letter of credit fee shall be due and payable at the time the letter of credit is issued. 2.10 Commitment Fee. a. Working Capital Line. In consideration for First American reserving the funds necessary to fund the Working Capital Line over the period of permitted disbursements, Borrower agrees to pay to First American, in advance, on an annual basis, a commitment fee equal to $25,000. Such fee shall be due and payable at Closing and on each anniversary date of this Agreement. b. Acquisition Line. In consideration for GMAC-CM reserving the funds necessary to fund the Acquisition Line over the period of the permitted disbursements, the Borrower shall pay to GMAC-CM quarterly, within ten (10) days of the first day of each calendar quarter, a fee equal to the product of (i) $40,000,000 less the average outstanding balance of the Acquisition Line during the immediately preceding quarter, multiplied by (ii) one-sixteenth of one percent (0.0625%). At the closing of each Project Loan, the Borrower shall pay GMAC-CM a takedown fee equal to the amount of such -16- 17 Project Loan multiplied by one-half of one percent (0.50%). In addition, Borrower shall pay to GMAC-CM a monitoring fee within ten (10) days of the first day of each calendar quarter equal to the sum of all Project Loans outstanding at any time during the immediately preceding quarter, multiplied by one-sixty-fourth of one percent (0.01561%). 2.11 Alternate Rate of Interest. In the event that reasonable means do not exist for ascertaining the LIBOR Rate generally, each Lender shall, as soon as practicable thereafter, give written or telephonic notice of such determination to the Borrower, in which case, borrowings at the LIBOR Rate shall be suspended, and the interest rate applicable to LIBOR Loans and Project Loans shall be calculated based upon an alternative rate selected by each Lender, which, in the Lender's judgment, reasonably approximates the LIBOR Rate and which can be verified through published reports or readily accessible sources. Each determination by each Lender hereunder shall be conclusive absent manifest error. 2.12 Change in Circumstances. a. Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable laws or regulations or in the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to the Lenders under any LIBOR Loan or Project Loan made by the Lenders or any other fees or amounts payable hereunder (other than taxes imposed on the overall net income of the Lenders by the country in which the Lenders are located, or by the jurisdiction in which either First American or GMAC-CM has its principal office, or by any political subdivision or taxing authority therein), or shall impose, modify, or deem applicable any reserve requirement, special deposit, insurance charge (including FDIC insurance on eurodollar deposits) or similar requirements against assets of, deposits with or for the account of, or credit extended by, the Lenders or shall impose on the Lenders or the London Interbank Market any other condition affecting this Agreement or LIBOR Loans or Project Loans made by the Lenders, and the result of any of the foregoing shall be to increase the cost to the Lenders of making or maintaining its LIBOR Loans or Project Loans or to reduce the amount of any sum received or receivable by the Lenders for any of its LIBOR Loans or Project Loans hereunder (whether of principal, interest or otherwise) by an amount reasonably deemed by the Lenders to be material, then the Borrower will pay to the Lenders such additional amount or amounts as will reasonably compensate the Lenders for such additional costs. b. If either: (i) The introduction of, or any change in, or in the interpretation of, any United States or foreign law, rule or regulation; or (ii) Compliance with any directive, guidelines or request from any central bank or other United States or foreign governmental authority (whether or not having the force of law) promulgated or made after the date hereof (but excluding, however, any law, rule, regulation, interpretation, directive, guideline or request contemplated by or resulting from the report dated July, 1988, entitled "International Convergence of Capital Measurement and Capital Standards" issued by the Basic Committee on Banking Regulations and Supervisory Practices), affects or would affect the amount of capital required or expected to be maintained by the Lenders (or any lending office of the Lenders) or any corporation directly or indirectly owning or controlling the Lenders (or any lending office of the Lenders) -17- 18 based upon the existence of this Agreement, and either Lender shall have determined that such introduction, change or compliance has or would have the effect of reducing the rate of return on the Lenders' capital or on the capital of such owning or controlling corporation as a consequence of its obligations hereunder (including its commitment) to a level below that which the Lenders or such owning or controlling corporation could have achieved but for such introduction, change or compliance (after taking into account that such Lender's policies or the policies of such owning or controlling corporation, as the case may be, regarding capital adequacy) by an amount deemed by such Lender (in its sole discretion) to be material, then the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction attributable to making, funding and maintaining the Credit Facility. c. A certificate of the Lenders setting forth such amount or amounts as shall be necessary to compensate the Lenders (or its participating banks or other entities pursuant to this Agreement), as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Borrower and shall be conclusive absent manifest error; provided, however, that the Borrower shall be responsible for compliance herewith and the payment of increased costs only to the extent: (i) Any change in laws giving rise to increased costs occurs after the date of this Agreement, and such change or actions are generally applicable to financial institutions similarly situated to the Lenders; and (ii) Such costs arise or accrue after the day that is sixty (60) Business Days after the date on which either Lender provides the Borrower with written notice specifying the change or event giving rise to such increased costs. Subject to the foregoing, the Borrower shall pay the Lenders the amount shown as due on any such certificate within ten (10) days after its receipt of such certificate. d. The protection of this Section 2.12 shall be available to the Lenders regardless of any possible contention of invalidity or inapplicability of the law, regulation or condition that shall have been imposed. 2.13 Compliance with Applicable Usury Laws. All parties to the Loan Documents intend to comply with applicable usury law. All existing and future agreements evidencing or securing the Credit Facility are hereby limited and controlled by the provisions of this Section 2.13. In no event (including but not limited to prepayment, default, demand for payment, or acceleration of maturity) shall the interest taken, reserved, contracted for, charged or received in connection with the Credit Facility under the Loan Documents or otherwise, exceed the maximum nonusurious amount permitted by applicable law (the "Maximum Amount"). If, from any possible construction of any document, interest would otherwise be payable in excess of the Maximum Amount, then ipso facto, such document shall be reformed and the interest payable reduced to the Maximum Amount, without necessity of execution of any amendment or new document. If a Lender ever receives interest in an amount which apart from this provision would exceed the Maximum Amount, the excess shall, without penalty, be applied to the unpaid principal balance of the Loan Obligations in inverse order of maturity of installments and not to the payment of interest, or be refunded to the Borrower, at the election of the Lender in its sole discretion or as required by applicable law. The Lenders do not intend to charge or receive unearned interest on acceleration. All interest paid or agreed to be paid to the Lenders in connection with the Credit Facility, or any portion thereof, shall be -18- 19 spread throughout the full term (including any renewal or extension) of the Loan Obligations so that the amount of interest paid does not exceed the Maximum Amount. 3. CONDITIONS FOR ADVANCES 3.1 Conditions for Advances under the Working Capital Line. a. Working Capital Advances. The proceeds of the Working Capital Line are to be used only for the purposes set forth in Section 2.2(a) hereof. None of the proceeds of the Working Capital Line are to be utilized by Borrower for any purpose other than as set forth in Section 2.2(a). At such time as Borrower desires to obtain an advance under the Working Capital Line, the obligation of First American to fund monies under the Working Capital Line shall be specifically conditioned upon: (1) Borrower submitting to First American a completed Compliance Certificate, in substance acceptable to First American. (2) Such other documents or information as First American shall deem reasonably necessary in connection with the advance requested by the Borrower. b. Letter of Credit Advances. At such time as Borrower desires to obtain a letter of credit under the Working Capital Line, in addition to the requirements of Section 3.1(a), the obligation of First American to issue a letter of credit under the Working Capital Line shall be specifically conditioned upon: (1) Execution and delivery by Borrower, Advocat, the Subsidiaries, as deemed necessary by First American, of all letter of credit applications and other documentation deemed necessary by First American in order to evidence the letter of credit. (2) Payment to First American of the one percent (1%) letter of credit fee due in connection with the issuance of the letter of credit, in accordance with Section 2.9 hereof. 3.2 Conditions for Funding a Project Loan. The proceeds of the Acquisition Line are to be used solely to acquire and refinance Projects. The obligation of GMAC-CM to fund a Project Loan under the Acquisition Line shall be specifically conditioned upon satisfaction and delivery to GMAC-CM (in form and substance acceptable to GMAC-CM and at Borrower's expense) of the following conditions precedent: a. Submission to GMAC-CM of a completed Compliance Certificate, in substance acceptable to GMAC-CM, which shall restate and ratify all the representations and warranties contained in this Agreement as being true and correct as of the date of the funding of such Project Loan. b. Execution and delivery of the Project Loan Documents and delivery of all original stock certificates and other documents and instruments contemplated by the Project Loan Documents. c. Copies of all consents and other approvals from landlords, owners of nursing home facilities, and other entities, consenting to the assignments in connection with a Project Loan. -19- 20 d. Copies of all management contracts and lease agreements relating to the Projects managed and/or leased by the Borrower or the Subsidiaries. e. Appraisals of all entities and/or Projects to be acquired or refinanced with proceeds of Project Loans, which appraisals shall comply with industry customs and standards and meet with all requirements of GMAC-CM. f. All customary real property due diligence items as determined by GMAC-CM, including, among other things, evidence of Borrower's ownership interest in the Project, compliance with all applicable environmental laws, rules and regulations, an ALTA minimum standard survey, UCC, tax and judgment searches on the Project, the Borrower and the Guarantors and evidence of property and liability insurance. g. Evidence that all certificates of need, Medicare and Medicaid contracts and other licenses with respect to all entities and/or Projects being acquired with the proceeds of a Project Loan have been issued and/or are current and in good standing. h. All requirements of this Agreement shall be satisfied, and no Default shall exist with respect to any of the terms of this Agreement, or any other document executed or to be executed by any one or more of Advocat and/or the Subsidiaries in connection with the Credit Facility. To the extent deemed necessary by GMAC-CM, Borrower shall update all resolutions of the Borrower and the Guarantors with respect to each Project Loan. i. Such other documents or information as GMAC-CM shall deem necessary in connection with the evidencing, securing or funding of a Project Loan. j. In addition to all other conditions, in connection with each Project Loan, the Borrower shall satisfy all conditions precedent referenced in the GMAC-CM Master Loan Commitment and the Project Loan Commitment for the particular Project to be acquired or refinanced. Except as otherwise agreed to in writing by GMAC-CM, each of the foregoing conditions precedent must be satisfied and delivered to GMAC-CM, in form and substance acceptable to GMAC-CM, at or prior to the funding of each Project Loan. 4. COLLATERAL 4.1 Collateral. As security for the payment of the Credit Facility and all other obligations of the Borrower or the Guarantors to the Lenders under this Agreement and the other Loan Documents, whether now existing or hereafter incurred, matured or unmatured, direct or contingent, including all modifications, extensions and renewals thereof, the Borrower and the Guarantors (for purposes of this Section 4, the "Pledgors") hereby, jointly and severally, collaterally assign and grant to the Lenders a security interest in the following: a. Working Capital Line. As collateral security for the Working Capital Line, a first priority security interest in favor of First American in the following: -20- 21 (i) All of the right, title and interest of the Pledgors in and to the accounts receivable of the Pledgors, whether now existing or hereafter arising; (ii) All of the right, title and interest of the Pledgors in and to all equipment, furnishings, and furniture of the Pledgors, whether now owned or hereafter acquired, provided (1) such security interest shall not include equipment leased by the Pledgors, and (2) with respect to the equipment, furnishings and furniture located at Projects financed under the Acquisition Line, First American shall have a second priority security interest in such equipment, furnishings and furniture located at such Projects, subject only to the security interest in favor of GMAC-CM); (iii) All of the general intangibles and other personal property of the Pledgors, whether now existing or hereafter acquired or arising, provided, with respect to the general intangibles located at, or arising from the operation of, a Project financed under the Acquisition Line, First American shall have a second priority security interest in such general intangibles, subject only to the security interest in favor of GMAC-CM; (iv) All of the right, title and interest of the Pledgors in and to all inventory, whether now owned or hereafter acquired, provided, with respect to the inventory located at, or arising from the operation of, a Project financed under the Acquisition Line, First American shall have a second priority security interest in such inventory, subject only to the security interest in favor of GMAC-CM; and (v) All of the proceeds therefrom, including, without limitation, all proceeds of any policies of insurance on any of the foregoing, provided, with respect to the proceeds located at, or arising from the operation of, a Project financed under the Acquisition Line, First American shall have a second priority security interest in such proceeds, subject only to the security interest in favor of GMAC-CM. Notwithstanding the foregoing, First American shall have no security interest in any Collateral related to the Omega Facilities or the TDLP Homes, except that with regard to the accounts receivable pledged to First American hereunder, First American shall have a first priority security interest in the first $3,000,000 of Omega Receivables, in accordance with the Omega Subordination Agreement, a second priority security interest in the remainder of the Omega Receivables and in the accounts generated by the TDLP Homes, and a first priority security interest in all receivables other than the Omega Receivables. In addition to the other Collateral securing the Working Capital Line, as described herein, the Working Capital Line shall be secured by: (1) A second priority Lien on each Project, subject only to the Liens in favor of GMAC- CM, and the terms and conditions of the Intercreditor Agreement. (2) All of the Borrower's and the Subsidiaries' leasehold right, title and interest in and to the leases in place with respect to the facilities known as Briarcliff Health Care Center, Martin Health Care, South Park Manor, Aransas Pass Convalescent Center and Hillside Lodge. -21- 22 b. Acquisition Line. As collateral security for the Acquisition Line, a second priority security interest in favor of GMAC-CM in the following: (i) All of the right, title and interest of the Pledgors in and to the accounts receivable of the Pledgors generated by the Projects financed under the Acquisition Line, whether now existing or hereafter arising, subject only to the security interest in favor of First American; (ii) All of the proceeds therefrom, including, without limitation, all proceeds of any policies of insurance on any of the foregoing. In addition to the other Collateral securing the Acquisition Line and described herein, each Project Loan and all obligations in connection therewith shall be secured (and documented in form and substance acceptable to GMAC-CM), as follows: (1) A deed of trust/mortgage or other appropriate security instruments granting to GMAC- CM a first priority lien on the applicable Project real property and assets, including furniture, fixtures, Equipment, Inventory, General Intangibles, licenses, Permits, Medicaid contracts, Medicare contracts and all other personal property of the Project, whether now owned or hereafter acquired. (2) A collateral assignment in favor of GMAC-CM of all right, title and interest in and to management contracts related to the management of the Project financed by the Project Loan. (3) A collateral assignment by AFI to GMAC-CM of the Subsidiary Notes executed by DLC (or any other Subsidiary which owns a Project financed with the proceeds of the Acquisition Line) in favor of AFI, evidencing the intercompany loans from AFI to DLC (or such other Subsidiary), as contemplated by Section 2.3 of this Agreement. To effectuate such collateral assignment, AFI hereby assigns, grants and conveys to GMAC-CM, as collateral security for all obligations of the Borrower and the Guarantors in connection with funds advanced under the Acquisition Line, a security interest in all right, title and interest of AFI in and to all Subsidiary Notes, whether now existing, or hereafter executed and delivered, together with all proceeds arising therefrom. To perfect GMAC-CM's security interest in all Subsidiary Notes, at the time of the closing of each Project Loan, AFI agrees to endorse the corresponding Subsidiary Note to the order of GMAC-CM (with recourse) and to deliver the original Subsidiary Note to GMAC-CM. (4) Such other documents or instruments as GMAC-CM deems necessary to evidence or secure the Acquisition Line. (5) All of the proceeds from the foregoing, including, without limitation, all proceeds of any policies of insurance on any of the foregoing. 4.2 Guaranty and Suretyship Agreements. In addition to the foregoing, Borrower shall cause the Guarantors to execute and deliver Guaranty and Suretyship Agreements, in form and substance acceptable to the Lenders ("Guaranty Agreements"), pursuant to which the Guarantors, jointly and severally, shall guarantee to the Lenders the repayment in full of the Credit Facility. To the extent new -22- 23 Subsidiaries are formed or acquired after the date hereof, the Borrower shall cause such Subsidiaries to execute and deliver to the Lenders Guaranty Agreements, in form and substance acceptable to the Lenders guaranteeing all then outstanding and future obligations of Borrower and the Subsidiaries in connection with the Credit Facility. Execution of such Guaranty Agreements shall be deemed to be a condition to the Lenders' obligations to fund monies under the Credit Facility. GMAC-CM shall require individual Guaranty Agreements to be executed by Advocat and the Subsidiaries in connection with each individual Project Loan. 4.3 Stock Pledge Agreement (Guarantors' Stock). Advocat shall execute a Stock Pledge Agreement, in form and substance acceptable to the Lenders, pledging to the Lenders, as security for the Credit Facility, all of the outstanding stock of DLC and DMS. 4.4 Stock Pledge Agreement (Additional Subsidiaries). The Borrower and the Subsidiaries shall execute Stock Pledge Agreements, in form and substance acceptable to the Lenders, pledging to the Lenders, as security for the Credit Facility, all of the outstanding stock of the Subsidiaries of the Borrower and the Subsidiaries, if any (including any subsidiaries formed or acquired after the date hereof). 5. COVENANTS AND WARRANTIES 5.1 Borrower's Covenants and Warranties. Borrower hereby covenants, represents and warrants to the Lenders: a. Borrower's principal place of business and chief executive office is at 277 Mallory Station Road, Suite 130, Franklin, TN 37067. Borrower will not change its chief executive office or its principal place of business without first giving Lenders at least thirty (30) days' prior written notice thereof and promptly providing Lenders such information and amendatory financing statements as Lenders may request in writing. b. Borrower is and shall remain a corporation duly organized, validly existing and in good standing under the laws of the State of Tennessee, is authorized to transact in Tennessee all business that it is now transacting therein and is and shall remain duly qualified to do business in each state in which qualification is necessary. Neither the execution, the delivery nor the performance of this Agreement and all related documents by Borrower will constitute a material default under or violate or conflict with any law, government regulation, decree or judgment, Borrower's charter or bylaws, or any other agreement, contract, document, or instrument to which Borrower now is a party. Borrower has full power and authority to borrow the Credit Facility and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related documents on behalf of Borrower is duly authorized to bind Borrower. Each of the Loan Documents to which Borrower is a party constitutes a valid and legally binding obligation of Borrower, enforceable in accordance with its respective terms (except as such enforcement may be limited to bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity). -23- 24 c. There is no litigation, action, investigation or proceeding pending against Borrower or, to the best of the knowledge of Borrower, threatened (i) to acquire through the exercise of any power of condemnation, eminent domain, or similar proceeding any part of a Project, any Improvements or any interest therein, or to enjoin or similarly prevent or restrict the use or operation of a Project in any manner, or (ii) 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 any Reimbursement Contract, or (iii) that is not covered by insurance and seeks damages in excess of $100,000 (or seeks unspecified damages), except as set forth in Exhibit 5.1(c) attached hereto. Borrower is not subject to any outstanding court or administrative order which would materially impact the ability of the Borrower to perform its obligations hereunder. Borrower covenants to give the Lenders prompt written notice of any material litigation, arbitration, administrative proceeding or investigation that may hereafter be instituted or threatened against Borrower which may have a material impact on the Borrower's obligations under this Agreement, whether or not Borrower's liability under such proceeding would be covered by insurance. d. Borrower is not presently delinquent in the payment of any taxes imposed by any governmental authority or in the filing of any tax return and that Borrower is not involved in a dispute with any taxing authority over tax amounts due. Borrower covenants that all future taxes assessed against Borrower shall be timely paid and that all tax returns required of Borrower shall be timely filed (subject to the right of Borrower to contest such taxes in good faith and in compliance with applicable rules and regulations). e. Borrower will give the Lenders prompt written notice within five (5) days of (i) the discovery of any material additional contingent liability or the occurrence of any other material adverse change in the financial condition of Borrower or of any Guarantor or other person or entity presently or hereafter liable for payment of all or part of the Loan Obligations, and (ii) the occurrence of any event, or presence of any condition, which constitutes an Event of Default hereunder or which with the giving of notice, the passage of time, or both, would constitute an Event of Default. f. Borrower will comply, in all material respects, with all statutes and government regulations applicable to Borrower's operations and pay promptly all taxes, assessments, claims for labor, supplies, rent, and other obligations that, if unpaid, might become a lien against Borrower's property. In the event any such liability or obligation is contested by Borrower in good faith, Borrower, at the request of the Lenders, shall establish reserves in amounts satisfactory to the Lenders to meet such obligation. g. Upon demand, Borrower will advance to the Lenders, or, at the Lenders' option, reimburse the Lenders, for the following expenses: (i) All taxes that the Lenders may be required to pay because of the Loan Obligations (other than state, federal or other income or similar tax payable on the interest income received by the Lenders) or because of the Lenders' interest in any Collateral securing the payment of the Loan Obligations; (ii) All reasonable expenses that the Lenders may incur in connection with the preparation, execution, audit or enforcement of this Agreement or of any other document pertaining to the Loan Obligations; -24- 25 (iii) Following an Event of Default, all reasonable costs of preserving, insuring, preparing for sale (whether by improvement, repair or otherwise), valuing or appraising, or selling any Collateral securing the Loan Obligations; (iv) All court costs and other reasonable costs of collecting any debt, overdraft or other obligation included in the Loan Obligations; (v) All reasonable costs arising from any litigation investigation, or administrative proceeding (whether or not the Lenders are a party thereto) that the Lenders may incur as a result of the Loan Obligations or as a result of the Lenders' association with Borrower, including, but not limited to, expenses incurred by the Lenders in connection with a case or proceeding involving Borrower under any chapter of the Bankruptcy Code or any successor statute thereto; (vi) Reasonable attorney's fees and expenses incurred in connection with any of the foregoing. If the Lenders, upon failure of Borrower to meet such demand, pay any of the foregoing expenses, they shall become a part of the Loan Obligations and shall bear interest at the highest lawful rate. h. Upon the occurrence and continuation of an Event of Default, either Lender shall have the right to obtain and use the services of a collateral control firm at its option. All expenses for such services shall be borne by Borrower. i. Except for the Subsidiaries listed on Exhibit 5.1(i) attached hereto, Borrower presently has no subsidiaries or interests in any partnership, joint venture, or other business entity. j. Borrower will maintain current corporate minute books and stock ledgers and agrees to allow the Lenders to inspect the same at any reasonable time. k. Except as set forth on Exhibit 5.1(k) attached hereto, Borrower does not maintain any plan qualified under the Employee Retirement Income Security Act of 1974, and does not have any unfunded pension liabilities which are not identified on the Borrower's financial statements. l. Except as set forth on Exhibit 5.1(l) attached hereto, Borrower has not been known under or done business under any name other than the name used by Borrower in executing this Agreement. Borrower agrees to give the Lenders at least fifteen (15) days prior written notice before Borrower begins using any corporate name other than that used in executing this Agreement. m. In order to further secure the payment of the Loan Obligations, Borrower hereby grants a security interest and right to setoff against all of Borrower's presently owned or hereafter acquired monies, items, credits, deposits and instruments (including certificates of deposit) presently or hereafter in the possession of the Lenders. By maintaining any such accounts or other property with the Lenders, Borrower acknowledges that Borrower voluntarily subjects the property to the Lenders' rights hereunder. The Lenders may exercise its rights under this paragraph without further notice to Borrower, upon the occurrence of an Event of Default and expiration of applicable notice and cure periods. Borrower agrees -25- 26 that the Lenders shall not be liable for the dishonor of any instrument resulting from the exercise of rights under this paragraph, except in the case of willful misconduct or fraud on the part of the Lenders. n. Borrower will execute such other assignments, security agreements, financing statements, and other documents that the Lenders may deem necessary to further evidence the obligations provided for herein or to perfect, extend, or clarify the Lenders' rights in any property securing or intended to secure the Loan Obligations. In the event Borrower does not execute any such documents as requested by the Lenders, then in such event, any Vice President of the Lenders is hereby appointed as Borrower's attorney-in-fact with full power of substitution for the signing of financing statements and other similar filings with government offices for perfecting security interests granted hereby. Borrower acknowledges that this power of attorney is coupled with an interest and is irrevocable. o. Borrower is not a party to any contract or agreement and is not subject to any contingent liability that does or, to the best of Borrower's knowledge, may impair Borrower's ability to perform under the terms of this Agreement. The execution and performance of this Agreement will not cause a default under any other contract or agreement to which Borrower or any property of Borrower is subject (which would result in a material adverse impact on the Borrower), and will not result in the imposition of any charge, penalty, lien or other encumbrance against any of Borrower's property except in favor of the Lenders. p. Borrower's execution and performance of this Agreement does not require the consent of or the giving of notice to any third party including, but not limited to, any account debtor, other lender, governmental body or regulatory authority, except for such consents or approvals described in Exhibit 5.1(p) attached hereto, which consents and approvals have been obtained. q. Borrower is, and shall remain, in material compliance with all federal, state, and local statutes, ordinances and regulations applicable to Borrower's business operations, and upon request, from time to time, Borrower shall provide the Lenders with evidence, satisfactory to the Lenders, of such compliance, including, without limitation, copies of all licenses, permits and other regulatory approvals required for Borrower's business operations. r. Borrower and Borrower's property and business operations, are and shall remain in material compliance with all Applicable Environmental Laws, and, upon request by the Lenders, from time to time, shall provide the Lenders with evidence satisfactory to the Lenders of Borrower's compliance with all Applicable Environmental Laws. s. Borrower is, and shall remain, in material compliance with all Leases, Management Contracts, and any and all other contracts and agreements material to Borrower's business operations. Borrower shall provide the Lenders with prompt written notice of any default under the terms of any Lease, Management Contract or any other contract or agreement material to the Borrower's business operations. t. All information furnished or to be furnished by Borrower to the Lenders in connection with the Credit Facility 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 the Lenders with true and accurate knowledge of the subject matter. -26- 27 u. Borrower has not changed its name, been known by any other name, or been a party to a merger, reorganization or similar transaction within the last __________ (___) years. v. Borrower is solvent for purposes of 11 U.S.C. Section 548, and the borrowing of the Credit Facility will not render Borrower insolvent for purposes of 11 U.S.C. Section 548. w. Borrower shall 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 the Lenders which is being contested in good faith and with respect to which any execution against properties of Borrower has been effectively stayed and for which reserves and collateral for the payment and security thereof have been established as determined by the Lenders in Lenders' sole discretion. x. Borrower shall pay all taxes, assessments, charges, claims for labor, supplies, rent, and other obligations which, if unpaid, might give rise to a Lien against property of Borrower, except Liens to the extent permitted by this Agreement. y. Borrower shall contribute all advances under the Working Capital Line and the Acquisition Line to AFI as a capital contribution in accordance with Section 2.3 of this Agreement, and Borrower shall cause AFI to disburse such proceeds to the Subsidiaries, in the form of intercompany loans, in accordance with the provisions of Section 2.3. Borrower shall not use or distribute the proceeds of the Credit Facility for any purpose, or in any manner, other than in accordance with Sections 2.2 and 2.3 of this Agreement, without the prior written consent of the Lenders. z. The distribution of the proceeds of the Credit Facility in accordance with Section 2.3 of this Agreement does not violate (i) the Borrower's charter, bylaws or other corporate organizational documents, or (ii) the terms and provisions of any contract or agreement to which Borrower or any property or assets of Borrower is subject. aa. Borrower shall maintain all records, including records pertaining to the Accounts of the Borrower at the chief executive office of the Borrower as set forth in this Agreement. 5.2 Negative Covenants of Borrower. So long as any of the Loan Obligations secured hereby is outstanding, Borrower covenants and warrants that, without the prior written consent of the Lenders, the Borrower will not: a. Consummate any merger, consolidation or similar transaction. b. Sell, assign, lease, convey, or otherwise dispose of (whether in one transaction or a series of transactions) a material part of its property or assets (whether now or hereafter acquired), except in the ordinary course of business. c. Make any investment in any other party or entity, or make any loan or advance to any other party or entity, other than loans or advances to the Subsidiaries as permitted by this Agreement. -27- 28 d. Except for the lease agreements described in Exhibit 1.1(an) attached hereto (and any renewals, replacements or extensions thereof), enter into any lease agreement or other lease transaction, related to the management or operation of additional nursing home facilities or retirement care centers. e. Acquire (i) any stock or other equity interest or ownership interest in any other party or entity, or (ii) all or substantially all of the assets of any other party or entity; provided, however, notwithstanding the foregoing, the consent of Lenders is not required for an acquisition financed with Borrower's funds, provided (i) the amounts expended by the Borrower for such acquisitions (on a consolidated basis with funds used by the Guarantors under Section 5.4(e), do not exceed $500,000, in the aggregate, per fiscal year, (ii) the Borrower does not incur any additional indebtedness or contingent liabilities as a result of the acquisition, and (iii) the acquisition will not result in an Event of Default under this Agreement. Borrower shall give the Lenders notice of any such acquisition. f. Materially alter its current business operations or engage in any new business venture, which is not reasonably compatible with the Borrower's current business operations. g. The Borrower shall not become liable, directly or indirectly, for any obligation for money borrowed, or the equivalent, except for (i) the Credit Facility, or (ii) equipment financing (by purchase money loan or by lease) in the normal course of business, not exceeding (including amounts permitted under Section 5.4(g) hereof) $100,000 in the aggregate at any time. h. Become liable, directly or indirectly, for any obligation of any other person or entity, by guaranty, endorsement or otherwise, except (i) by endorsement of negotiable instruments payable at sight for deposit or collection, and (ii) obligations of the Subsidiaries permitted under this Agreement. i. Suffer or permit, in whole or in part, dissolution, liquidation, or the repurchase, retirement or redemption of any shares of the Borrower's capital stock or the stock of the Subsidiaries, or permit a change in the ownership interests of the Borrower, except with the consent of each Lender which may be granted or refused in each Lender's sole discretion. Notwithstanding the foregoing, with prior notice to the Lenders, Borrower may dissolve an inactive Subsidiary provided any assets of such Subsidiary are transferred to Advocat or an existing Subsidiary (which is a Guarantor under this Agreement) or to the Borrower. j. Declare, set aside, or pay any dividend or make any other distribution, whether in cash, in kind, or otherwise, on account of or with respect to the Borrower's stock, other than distributions or dividends paid to Advocat. k. Make any loans, advances, payments of any fees (including management fees), or distributions of any type to (i) shareholders, directors, employees, and other insiders (except for employee loans to cover moving expenses, transfers, or other miscellaneous needs not exceeding an aggregate amount of One Hundred Thousand Dollars ($100,000) at any time; outside directors fees; and salaries and bonuses paid in the ordinary course of business), or (ii) any other affiliates or other entities that are not Guarantors. l. Make or permit a change in any of the key executive management positions of Advocat or the Subsidiaries. For purposes of this Agreement, the key executives of Advocat shall be -28- 29 deemed to be Charles W. Birkett, Chief Executive Officer, Paul Richardson, President, and Mary Margaret Hamlett, Executive Vice President and Chief Financial Officer. m. Transfer or assign the right to receive advances under the Credit Facility to any party other than the Guarantors, or otherwise use the proceeds of the Credit Facility for any purpose other than as described in this Agreement. n. Take any action, or suffer or permit any action to be taken, that would violate any of the warranties and covenants contained in Section 5.1 hereof or cause any of said warranties and covenants to be or become untrue. o. Submit to the Lenders any certificate or other document that contains any untrue statement of material fact or omits to state a material fact necessary to make it not misleading in any material respect. p. Suffer or permit, at any time, the Working Capital Borrowing Base to be less than the outstanding balance of the Working Capital Line (including all working capital advances and outstanding letters of credit). q. Assign, transfer or convey any of the Borrower's, Advocat's or the Subsidiaries' right, title or interest in the Leases or the Management Contracts. r. Amend, modify or terminate any of the Leases or the Management Contracts, except in the ordinary course of business. Borrower shall give prompt written notice to the Lenders of the termination of a Lease or Management Contract by the landlord or other party to the Lease or Management Contract. s. Use the proceeds of the Credit Facility for any purpose other than as permitted by this Agreement. t. 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. u. Permit (a) the funding requirements of ERISA with respect to any employee plan to be less than the minimum required by ERISA at any time, or (b) any employee plan to be subject to involuntary termination proceedings at any time. v. Enter into any transaction with 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. 5.3 Guarantors Covenants and Warranties. The Guarantors hereby covenant, represent and warrant to the Lenders (the Borrower joins in the covenants, representations and warranties contained in paragraphs b, c, d, e, q, r, and ad): -29- 30 a. The principal place of business and chief executive office for each of the Guarantors is 277 Mallory Station Road, Suite 130, Franklin, TN 37067, except for DCMS which is 2121 Argentia Road, Suite 301 Mississauga, Ontario, L5N2X4. The Guarantors will not change their chief executive offices or their principal places of business without first giving Lenders at least thirty (30) days' prior written notice thereof and promptly providing Lenders such information and amendatory financing statements as Lenders may request in writing. b. Except for the Permitted Encumbrances, the Pledgors are the owners of the Collateral, free from any adverse lien, security interest, or encumbrance. The Pledgors will defend the Collateral against all claims and demands of all persons at any time claiming the same or any interest therein, subject only to the Permitted Encumbrances. c. The Pledgors at all times will keep accurate and complete records of the accounts pledged to the Lenders hereunder. The Lenders, or any of its agents, shall have the right to call at the Pledgors' place or places of business, at reasonable intervals and without unreasonable hindrance or delay, to inspect the Collateral, and to inspect, audit, check, and make extracts from the books, records, journals, orders, receipts, correspondence, and other data relating to the accounts pledged to the Lenders hereunder, or to any other transactions between the parties hereto. d. If any of the accounts pledged to the Lenders hereunder should be evidenced by promissory notes, trade acceptances, or other instruments for the payment of money, the Pledgors immediately will deliver same to the Lenders, appropriately endorsed to the Lenders' order. Regardless of the form of such endorsement, the Pledgors hereby waive presentment, demand, notice of dishonor, protest and notice of protest, and all other notices with respect thereto. e. Except with respect to the Permitted Encumbrances, no financing statement covering any of the Collateral or any proceeds therefrom is on file in any public office. At the request of the Lenders, the Pledgors will join with the Lenders in executing one or more financing statements pursuant to the Uniform Commercial Code, in form satisfactory to the Lenders, and will pay the cost of filing or recording the same or this Agreement in all public offices wherever filing or recording is deemed by the Lenders to be necessary or desirable. A copy of this Agreement or copies of any financing statements executed herewith may be filed in lieu of originals in any public office. f. Advocat is and shall remain a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, is authorized to transact in Tennessee all business that it is now transacting therein and is and shall remain duly qualified to do business in each state in which qualification is necessary. Neither the execution, the delivery nor the performance of this Agreement and all related documents by Advocat will constitute a material default under or violate or conflict with any law, government regulation, decree or judgment, Advocat's Certificate of Incorporation or bylaws, or any other agreement, contract, document, or instrument to which Advocat is now a party. Advocat has full power and authority to borrow the Credit Facility and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related documents on behalf of Advocat is duly authorized to bind Advocat. Each of the Loan Documents to which Advocat is a party constitutes a valid and legally binding obligation of Advocat, enforceable in accordance with its respective terms (except as such enforcement may be limited -30- 31 to bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity). g. DLC is and shall remain a corporation duly organized, validly existing and in good standing under the laws of the State of Tennessee, is authorized to transact in Tennessee all business that it is now transacting therein and is and shall remain duly qualified to do business in each state in which qualification is necessary. Neither the execution, the delivery nor the performance of this Agreement and all related documents by DLC will constitute a material default under or violate or conflict with any law, government regulation, decree or judgment, DLC's charter or bylaws, or any other agreement, contract, document, or instrument to which DLC is now a party. DLC has full power and authority to borrow the Credit Facility and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related documents on behalf of DLC is duly authorized to bind DLC. Each of the Loan Documents to which DLC is a party constitutes a valid and legally binding obligation of DLC, enforceable in accordance with its respective terms (except as such enforcement may be limited to bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity). h. AAS is and shall remain a corporation duly organized, validly existing and in good standing under the laws of the State of Tennessee, is authorized to transact in Tennessee all business that it is now transacting therein and is and shall remain duly qualified to do business in each state in which qualification is necessary. Neither the execution, the delivery nor the performance of this Agreement and all related documents by AAS will constitute a material default under or violate or conflict with any law, government regulation, decree or judgment, AAS's charter or bylaws, or any other agreement, contract, document, or instrument to which AAS is now a party. AAS has full power and authority to borrow the Credit Facility and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related documents on behalf of AAS is duly authorized to bind AAS. Each of the Loan Documents to which AAS is a party constitutes a valid and legally binding obligation of AAS, enforceable in accordance with its respective terms (except as such enforcement may be limited to bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity). i. ADS is and shall remain a corporation duly organized, validly existing and in good standing under the laws of the State of Tennessee, is authorized to transact in Tennessee all business that it is now transacting therein and is and shall remain duly qualified to do business in each province in which qualification is necessary. Neither the execution, the delivery nor the performance of this Agreement and all related documents by ADS will constitute a material default under or violate or conflict with any law, government regulation, decree or judgment, ADS's charter or bylaws, or any other agreement, contract, document, or instrument to which ADS is now a party. ADS has full power and authority to borrow the Credit Facility and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related documents on behalf of ADS is duly authorized to bind ADS. Each of the Loan Documents to which ADS -31- 32 is a party constitutes a valid and legally binding obligation of ADS, enforceable in accordance with its respective terms (except as such enforcement may be limited to bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity). j. DCMS is and shall remain a corporation duly organized, validly existing and in good standing under the laws of Canada, is authorized to transact in Canada all business that it is now transacting therein and is and shall remain duly qualified to do business in each province in which qualification is necessary. Neither the execution, the delivery nor the performance of this Agreement and all related documents by DCMS will constitute a material default under or violate or conflict with any law, government regulation, decree or judgment, DCMS's charter or bylaws, or any other agreement, contract, document, or instrument to which DCMS is now a party. DCMS has full power and authority to borrow the Credit Facility and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related documents on behalf of DCMS is duly authorized to bind DCMS. Each of the Loan Documents to which DCMS is a party constitutes a valid and legally binding obligation of DCMS, enforceable in accordance with its respective terms (except as such enforcement may be limited to bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity). k. DGP is and shall remain a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, is authorized to transact in Texas all business that it is now transacting therein and is and shall remain duly qualified to do business in each state in which qualification is necessary. Neither the execution, the delivery nor the performance of this Agreement and all related documents by DGP will constitute a material default under or violate or conflict with any law, government regulation, decree or judgment, DGP's charter or bylaws, or any other agreement, contract, document, or instrument to which DGP is now a party. DGP has full power and authority to borrow the Credit Facility and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related documents on behalf of DGP is duly authorized to bind DGP. Each of the Loan Documents to which DGP is a party constitutes a valid and legally binding obligation of DGP, enforceable in accordance with its respective terms (except as such enforcement may be limited to bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity). l. AFI is and shall remain a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, is authorized to transact in Delaware all business that it is now transacting therein and is and shall remain duly qualified to do business in each state in which qualification is necessary. Neither the execution, the delivery nor the performance of this Agreement and all related documents by AFI will constitute a material default under or violate or conflict with any law, government regulation, decree or judgment, AFI's charter or bylaws, or any other agreement, contract, document, or instrument to which AFI is now a party. AFI has full power and authority to borrow the Credit Facility and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related -32- 33 documents on behalf of AFI is duly authorized to bind AFI. Each of the Loan Documents to which AFI is a party constitutes a valid and legally binding obligation of AFI, enforceable in accordance with its respective terms (except as such enforcement may be limited to bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity). m. DLCA is and shall remain a corporation duly organized, validly existing and in good standing under the laws of the State of Alabama, is authorized to transact in Alabama all business that it is now transacting therein and is and shall remain duly qualified to do business in each state in which qualification is necessary. Neither the execution, the delivery nor the performance of this Agreement and all related documents by DLCA will constitute a material default under or violate or conflict with any law, government regulation, decree or judgment, DLCA's charter or bylaws, or any other agreement, contract, document, or instrument to which DLCA is now a party. DLCA has full power and authority to borrow the Credit Facility and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related documents on behalf of DLCA is duly authorized to bind DLCA. Each of the Loan Documents to which DLCA is a party constitutes a valid and legally binding obligation of DLCA, enforceable in accordance with its respective terms (except as such enforcement may be limited to bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity). n. FAHC is and shall remain a corporation duly organized, validly existing and in good standing under the laws of the State of Alabama, is authorized to transact in Alabama all business that it is now transacting therein and is and shall remain duly qualified to do business in each state in which qualification is necessary. Neither the execution, the delivery nor the performance of this Agreement and all related documents by FAHC will constitute a material default under or violate or conflict with any law, government regulation, decree or judgment, FAHC's charter or bylaws, or any other agreement, contract, document, or instrument to which FAHC is now a party. FAHC has full power and authority to borrow the Credit Facility and to incur the Loan Obligations provided for herein, all of which have been authorized by all proper and necessary action. The execution of all necessary resolutions and other prerequisites of corporate actions have been duly performed so that the individual executing this Agreement and related documents on behalf of FAHC is duly authorized to bind FAHC. Each of the Loan Documents to which FAHC is a party constitutes a valid and legally binding obligation of FAHC, enforceable in accordance with its respective terms (except as such enforcement may be limited to bankruptcy, insolvency, reorganization, receivership, moratorium, or other laws relating to the rights of creditors generally and by general principles of equity). o. There is no litigation, action, investigation or proceeding pending against a Guarantor or, to the best of the knowledge of the Guarantors, threatened (i) to acquire through the exercise of any power of condemnation, eminent domain, or similar proceeding any part of a Project, any Improvements or any interest therein, or to enjoin or similarly prevent or restrict the use or operation of a Project in any manner, or (ii) before or by any court or administrative agency which might result in any material adverse change in the financial condition, operations or prospects of Guarantors or any lower reimbursement rate under any Reimbursement Contract, or (iii) that is not covered by insurance and seeks damages in the aggregate in excess of $100,000 (or seeks unspecified damages), except as set forth in -33- 34 Exhibit 5.1(c) attached hereof. Guarantors are not subject to any outstanding court or administrative order which would materially impact the ability of the Guarantors to perform their obligations hereunder. Guarantors covenant to give the Lenders prompt written notice of any material litigation, arbitration, administrative proceeding or investigation that may hereafter be instituted or threatened against the Guarantors, which may have a material impact on the Borrower's or Guarantors' obligations under this Agreement or the Loan Documents, whether or not the potential liability under such proceeding would be covered by insurance. p. No Guarantor is presently delinquent in the payment of any taxes imposed by any governmental authority or in the filing of any tax return and no Guarantor is involved in a dispute with any taxing authority over tax amounts due. Guarantors covenant that all future taxes assessed against Guarantors shall be timely paid and that all tax returns required of Guarantors shall be timely filed. q. The Pledgors will keep the Collateral free from any lien, security interest, or encumbrance other than the Permitted Encumbrances and that granted to the Lenders herein, and in good order and repair, and will not waste or destroy the Collateral or any part thereof. the Pledgors will not use the Collateral in violation of any statute or ordinance. The Pledgors' business activities are conducted in all material respects in accordance with all applicable laws and regulations, and the Pledgors covenant that such activities shall continue to be so conducted. The Lenders may examine and inspect the Collateral at any reasonable time, wherever located. r. The Pledgors will maintain insurance, in form, amounts, and with companies in all respects reasonably satisfactory to the Lenders, insuring the Pledgors' inventory, fixtures, equipment, and machinery against loss from fire, theft, and other risks reasonably determined by the Lenders. The Lenders shall be designated as an additional insured under the terms of the policies evidencing such insurance. Upon request by the Lenders, the Pledgors will execute such additional instruments as the Lenders deems necessary to perfect a lien in favor of the Lenders in all of the Pledgors' rights under such policies. s. Guarantors will give the Lenders prompt written notice within five (5) days of (i) the discovery of any material additional contingent liability or the occurrence of any other material adverse change in the financial condition of either a Guarantor, the Borrower, or of any other person or entity presently or hereafter liable for payment of all or part of the Loan Obligations, and (ii) the occurrence of any event, or presence of any condition, which constitutes an Event of Default hereunder or which within the giving of notice, the passage of time, or both, would constitute an Event of Default. t. Guarantors will comply, in all material respects, with all statutes and government regulations applicable to Guarantors' operations and pay promptly all taxes, assessments, claims for labor, supplies, rent, and other obligations that, if unpaid, might become a lien against Guarantors' property. In the event any such liability or obligation is contested by Guarantors in good faith, Guarantors, at the request of the Lenders, shall establish reserves in amounts satisfactory to the Lenders to meet such obligation. u. Upon demand, Guarantors will advance to the Lenders, or, at the Lenders' option, reimburse the Lenders, for the following expenses: -34- 35 (i) All taxes that the Lenders may be required to pay because of the Loan Obligations (other than federal or other income or similar tax) or because of the Lenders' interest in any Collateral securing the payment of the Loan Obligations; (ii) All reasonable expenses that the Lenders may incur in connection with the preparation, execution, audit or enforcement of this Agreement or of any other document pertaining to the Loan Obligations; (iii) Following an Event of Default, all reasonable costs of preserving, insuring, preparing for sale (whether by improvement, repair or otherwise), valuing or appraising, or selling any Collateral securing the Loan Obligations; (iv) All court costs and other reasonable costs of collecting any debt, overdraft or other obligation included in the Loan Obligations; (v) All reasonable costs arising from any litigation investigation, or administrative proceeding (whether or not the Lenders is a party thereto) that the Lenders may incur as a result of the Loan Obligations or as a result of the Lenders' association with Guarantors, including, but not limited to, expenses incurred by the Lenders in connection with a case or proceeding involving Guarantors under any chapter of the Bankruptcy Code or any successor statute thereto; (vi) Reasonable attorney's fees and expenses incurred in connection with any of the foregoing. If the Lenders, upon failure of Guarantors to meet such demand, pay any of the foregoing expenses, they shall become a part of the Loan Obligations and shall bear interest at the highest lawful rate. v. Except for the subsidiaries listed on Exhibit 5.3(v) attached hereto, the Guarantors presently have no subsidiaries or interests in any partnership, joint venture or other business entity. w. Each of the Guarantors will maintain current corporate minute books and stock ledgers and each Guarantor agrees to allow the Lenders to inspect the same at any reasonable time. x. Except as set forth in Exhibit 5.3(x) attached hereto, no Guarantor maintains any plan qualified under the Employee Retirement Income Security Act of 1974. y. Except as set forth in Exhibit 5.3(y) attached hereto, the Guarantors have not been known under or done business under any name other than the name used in executing this Agreement. Each Guarantor agrees to give the Lenders at least fifteen (15) days prior written notice before using any corporate name other than that used in executing this Agreement. z. In order to further secure the payment of the Loan Obligations, Guarantors hereby grant a security interest and right to setoff against all of Guarantors' presently owned or hereafter acquired monies, items, credits, deposits and instruments (including certificates of deposit) presently or hereafter in the possession of the Lenders. By maintaining any such accounts or other property with the Lenders, Guarantors acknowledge that Guarantors voluntarily subject the property to the Lenders' rights hereunder. -35- 36 The Lenders may exercise their rights under this Paragraph without notice to Guarantors, upon the occurrence of an Event of Default, and expiration of applicable notice and cure periods. Guarantors agree that the Lenders shall not be liable for the dishonor of any instrument resulting from the exercise of rights under this Paragraph. aa. Guarantors will execute such other assignments, security agreements, financing statements, and other documents that the Lenders may deem necessary to further evidence the obligations provided for herein or to perfect, extend, or clarify the Lenders' rights in any property securing or intended to secure the Loan Obligations. Any Vice President of the Lenders is hereby appointed as Guarantors' attorney-in-fact with full power of substitution for the signing of financing statements and other similar filings with government offices for perfecting security interests granted hereby. Guarantors acknowledge that this power of attorney is coupled with an interest and is irrevocable. ab. The Guarantors are not a party to any contract or agreement and are not subject to any contingent liability that does or, to the best of Guarantors' knowledge, may impair Guarantors' ability to perform under the terms of this Agreement. The execution and performance of this Agreement will not cause a default under any other contract or agreement to which Guarantors or any property of Guarantors is subject (which would result in a material adverse impact on the Borrower), and will not result in the imposition of any charge, penalty, lien or other encumbrance against any of Guarantors' property except in favor of the Lenders. ac. Guarantors' execution and performance of this Agreement does not require the consent of or the giving of notice to any third party including, but not limited to, any account debtor, other lender, governmental body or regulatory authority, except for such approvals or consents described in Exhibit 5.3(ac) attached hereto, which consents and approvals have been obtained. ad. So long as no default exists hereunder, the Pledgors shall have the right, in the regular course of business, to process and sell the Pledgors' inventory. The Lenders' security interest hereunder shall attach to all proceeds of all sales or other dispositions of the Pledgors' inventory. ae. Guarantors are, and shall remain, in material compliance with all federal, state, and local statutes, ordinances and regulations applicable to Guarantors' business operations, and upon request, from time to time, Guarantors shall provide the Lenders with evidence, satisfactory to the Lenders, of such compliance, including, without limitation, copies of all licenses, permits and other regulatory approvals required for Guarantors' business operations. af. Guarantors and Guarantors' property and business operations, are and shall remain in material compliance with all Applicable Environmental Laws, and, upon request by the Lenders, from time to time, shall provide the Lenders with evidence satisfactory to the Lenders of Guarantors' compliance with all Applicable Environmental Laws. ag. Guarantors are, and shall remain, in material compliance with all Leases, Management Contracts, and any and all other contracts and agreements material to Guarantors' business operations. Guarantors shall provide the Lenders with prompt written notice of any default under the terms of any Lease, Management Contract or any other contract or agreement material to the Guarantors' business operations. -36- 37 ah. All information furnished or to be furnished by a Guarantor to the Lenders in connection with the Credit Facility 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 the Lenders with true and accurate knowledge of the subject matter. ai. Guarantors have not changed their names, been known by any other name, or been a party to a merger, reorganization or similar transaction within the last __________ (___) years, except as set forth in Exhibit 5.3(ai) attached hereto. aj. All of the Guarantors are solvent for purposes of 11 U.S.C. Section 548, and the borrowing of the Credit Facility and the Guaranty Agreements executed in connection therewith will not render a Guarantor insolvent for purposes of 11 U.S.C. Section 548. ak. Guarantors shall duly and punctually pay or cause to be paid all other indebtedness now owing or hereafter incurred by Guarantors in accordance with the terms of such indebtedness, except such indebtedness owing to those other than the Lenders which is being contested in good faith and with respect to which any execution against properties of Guarantors have been effectively stayed and for which reserves and collateral for the payment and security thereof have been established as determined by the Lenders in Lenders' sole discretion. al. Guarantors shall pay all taxes, assessments, charges, claims for labor, supplies, rent, and other obligations which, if unpaid, might give rise to a Lien against property of Guarantors, except Liens to the extent permitted by this Agreement. am. The proceeds of the Credit Facility contributed to AFI by the Borrower in accordance with Section 2.3 of this Agreement, shall be distributed by AFI to the Subsidiaries, in the form of intercompany loans in accordance with Section 2.3 of this Agreement. AFI shall not use or distribute the proceeds of the Credit Facility for any purpose, or in any manner, other than in accordance with Section 2.3 of this Agreement, without the prior written consent of the Lenders. an. The distribution of the proceeds of the Credit Facility in accordance with Section 2.3 of this Agreement does not violate (i) the charter, bylaws or other corporate organizational documents of AFI or any other Guarantor, or (ii) the terms and provisions of any contract or agreement to which AFI or any other Guarantor, or any property or assets of AFI or any Guarantor, is subject. ao. Guarantors shall maintain all records, including records pertaining to the Accounts of the Guarantors at the chief executive office of the Guarantors as set forth in this Agreement. 5.4 Negative Covenants of the Guarantors. So long as any of the Loan Obligations secured hereby is outstanding, the Guarantors covenant and warrant to the Lenders that, without the prior written consent of the Lenders, the Guarantors will not (Borrower joins in the covenants contained in paragraph (m) hereof): a. Consummate any merger, consolidation or similar transaction. -37- 38 b. Sell, assign, lease, convey, or otherwise dispose of (whether in one transaction or a series of transactions) a material part of its property or assets (whether now or hereafter acquired), except in the ordinary course of business. c. Make any investment in, or make any loan or advance to any other party or entity, other than loans or advances to the Borrower as permitted by this Agreement. d. Except for the lease agreements described in Exhibit 1.1(an) attached hereto (and any renewals, replacements or extensions thereof), enter into any lease agreement or other lease transaction, related to the management or operation of additional nursing home facilities or retirement care centers. e. Acquire (i) any stock or other equity interest or ownership interest in any other party or entity, or (ii) all or substantially all of the assets of any other party or entity; provided, however, notwithstanding the foregoing, the Lenders' consent is not required for an acquisition financed with Guarantors' funds, provided (i) the amounts expended by any Guarantor for such acquisition (on a consolidated basis with funds used by the Borrower under Section 5.2(e) do not exceed $500,000, in the aggregate, per fiscal year, (ii) neither any Guarantor nor the Borrower incurs any additional indebtedness or contingent liabilities as a result of the acquisition, and (iii) the acquisition will not result in an Event of Default under this Agreement. The Guarantors shall give the Lenders notice of any such acquisition. f. Materially alter its current business operations or engage in any new business venture, which is not reasonably compatible with the Guarantors' current business operations. g. The Guarantors shall not become liable, directly or indirectly, for any obligation for money borrowed, or the equivalent, except for (i) the Credit Facility, (ii) equipment financing (by purchase money loan or by lease) in the normal course of business, not exceeding (including amounts permitted under Section 5.1(g) hereof) $100,000 in the aggregate at any time. h. Become liable, directly or indirectly, for any obligation of any other person or entity, by guaranty, endorsement, or otherwise, except (i) by endorsement of negotiable instruments payable at sight for deposit or collection, and (ii) obligations of the Borrower and the Subsidiaries permitted under this Agreement. i. Suffer or permit, in whole or in part, dissolution, liquidation, or the repurchase, retirement or redemption of any shares of its own stock or the stock of any subsidiary. j. Declare, set aside, or pay any dividend or make any other distribution, whether in cash, in kind, or otherwise, on account of or with respect to its stock to any party other than Advocat. k. Use the proceeds of the Credit Facility for any purpose other than as permitted by this Agreement. l. Make any loans, advances, payments of any fees (including management fees), or distributions of any type to any affiliates or other entities, other than the Borrower and the Guarantors under this Agreement. -38- 39 m. In the case of the Pledgors, suffer or permit the Collateral to become subject to any security interest, lien, or other encumbrance, except for the following: (i) Any lien created by virtue of this Agreement, or any other lien in favor of the Lenders; (ii) A pledge or deposit in connection with or to secure workman's compensation, unemployment insurance, pensions, or other employee benefits accruing under the provisions of law or under agreements now in force and disclosed to the Lenders; and (iii) The Permitted Encumbrances. n. Take any action, or suffer or permit any action to be taken, that would violate any of the warranties and covenants contained in Section 5.3 hereof or cause any of said warranties and covenants to be or become untrue. o. Submit to the Lenders any certificate or other document that contains any untrue statement of material fact or omits to state a material fact necessary to make it not misleading in any material respect. p. Assign, transfer or convey any of the Borrower's or the Subsidiaries' right, title or interest in the Leases or the Management Contracts. q. Amend, modify or terminate any of the Leases or the Management Contracts, except in the ordinary course of business. Borrower shall give prompt written notice to the Lenders of the termination of a Lease or Management Contract by the landlord or other party to the Lease or Management Contract. r. 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. s. Permit (a) the funding requirements of ERISA with respect to any employee plan to be less than the minimum required by ERISA at any time or (b) any employee plan to be subject to involuntary termination proceedings at any time. t. Enter into any transaction with an affiliate of a Guarantor other than in the ordinary course of its business and on fair and reasonable terms no less favorable to the Guarantor, than those the Guarantor could obtain in a comparable arms-length transaction with a person not an affiliate. 5.5 Financial Condition/Reporting Requirements. The Borrower, Advocat and the other Guarantors covenant and represent to the Lenders: a. The consolidated statement of condition of Advocat _________________, dated previously delivered to the Lenders, fairly and accurately reflects the financial condition and capital structure of the Borrower, Advocat and the Subsidiaries, on a consolidated basis, as of said date. Since said date, no -39- 40 material adverse change in either has occurred or, to the knowledge of Borrower, is threatened. All financial statements delivered to the Lenders have been prepared in accordance with GAAP, and are true, accurate and complete in every respect. A list of all known contingent liabilities is attached hereto as Exhibit 5.5(a). Borrower acknowledges that the Lenders have advanced (or committed to advance) the Credit Facility in reliance upon such financial statements, and Advocat, the Borrower and the Subsidiaries warrant that no material adverse change has occurred in the financial condition of any person or entity as set forth in such financial statements. Advocat, the Borrower and the Subsidiaries warrant that the parties have good and absolute title to the assets disclosed on the balance sheet disclosed to the Lenders, subject only to liens, security interests and other encumbrances noted thereon, or disclosed herein. b. Advocat shall furnish to the Lenders, within ninety (90) days of the close of Advocat's fiscal year two (2) copies of Advocat's complete audited consolidated and internally prepared consolidating financial statements prepared in accordance with GAAP, including balance sheet, income statement, sources and uses statement, and reconciliation of net worth and pertinent footnotes, prepared by a certified public accountant acceptable to the Lenders with such accountant giving an unqualified opinion as to all consolidated statements, together with two (2) copies of the management letter delivered by the certified public accountant. A responsible officer of Advocat shall execute a Compliance Certificate certifying to the Lenders that, as of the date of such Certification, no material Default exists with respect to any of the terms, conditions, and covenants of this Agreement and the Compliance Certificate shall accompany the financial statements. At the Lenders' request, Advocat will furnish the Lenders two (2) copies of all federal income tax returns within fifteen (15) days after they are filed by Advocat. Advocat shall also supply the Lenders with two (2) copies of all 10K, 10Q, and any and all reports and filings prepared for the Securities and Exchange Commission on behalf of Advocat, within ten (10) days following the completion of such schedules and reports. Advocat will promptly provide the Lenders with such press releases, brokerage reports and additional financial information as the Lenders may reasonably request from time to time. c. Within forty-five (45) days after the end of each quarter, Advocat shall furnish to the Lenders two (2) copies of Advocat's quarterly interim consolidated and consolidating financial and operating statements for the preceding quarter (and year-to-date), in form and content satisfactory to the Lenders, which shall be certified by a responsible officer of Advocat and shall reflect accurately the financial condition of Advocat. Such statements shall include, on a quarterly basis, a consolidated accounts receivable aging report, which shall identify the Omega Receivables and all other receivables, and shall otherwise be in form and substance acceptable to the Lenders. Advocat shall also submit to the Lenders on a quarterly basis a fully certified Compliance Certificate, including a calculation of the Working Capital Borrowing Base. All certifications shall be signed by a responsible officer of Advocat satisfactory to the Lenders. d. With respect to any Project acquired or refinanced with Project Loan proceeds, a covenant requiring submission to GMAC-CM (with a copy to First American) of the following: (i) Quarterly financial statements of the operations of the acquired Project within forty-five (45) days of each quarter end, except with respect to the statements for the fourth quarter which shall be delivered within ninety (90) days of fiscal year end. -40- 41 (ii) A quarterly statement, within forty-five (45) days of each quarter end, of the number of bed days available and the actual patient days incurred for the quarter, together with quarterly census information of the acquired Project as of the end of such quarter in sufficient detail to show patient-mix (i.e., private, Medicare, Medicaid, and Veterans Administration) on a daily average basis for such year through the end of such quarter. (iii) Within ten (10) days of filing or receipt of all Medicare and Medicaid cost reports and any amendments thereto filed with respect to the acquired Project, and all responses, and all responses, audit reports, or inquiries with respect to such cost reports. (iv) Within ten (10) days of receipt, a copy of the Medicaid rate calculation worksheet (or the equivalent thereof) issued by the appropriate Medicaid agency for the Project. (v) Within three (3) days of receipt, any and all notices (regardless of form) from any and all licensing and/or certifying agencies that the Project license and/or the Medicare and/or Medicaid certification of the Project 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 Project's license or certification. 5.6 Financial Covenants. The Borrower, Advocat and the other Guarantors shall comply with the following financial covenants, on a consolidated basis: a. Maintain a Current Ratio of not less than 1.25 to 1 at all times. b. Maintain a ratio of Adjusted Funded Debt to EBITDAR of not more than 5.9 to 1 at all times. c. Maintain a Fixed Charge Coverage Ratio of not less than 1.25 to 1 at all times, measured quarterly on a rolling four (4) quarter basis. d. Maintain a Tangible Net Worth of not less than $21,000,000 at Closing. Such minimum Tangible Net Worth shall increase thereafter on a quarterly basis by a minimum of seventy-five percent (75%) of quarterly net income (beginning with the fiscal quarter ended December 31, 1996), plus one hundred percent (100%) of any additions to Borrower's capital. For purposes of this covenant, Tangible Net Worth shall be calculated in accordance with GAAP, except Tangible Net Worth shall include deferred income taxes. e. Such additional financial covenants as may be required by GMAC-CM in a Project Loan Agreement. 5.7 Covenants, Representations and Warranties as to Projects. Advocat, the Borrower and the Subsidiaries covenant, represent and warrant to the Lenders, with respect to each Project financed under the Acquisition Line: a. Advocat, the Borrower and the Subsidiaries shall comply with all applicable laws and regulations to cause all licenses, permits, certificates of need, reimbursement contracts and any other -41- 42 agreements necessary for the use and operation of the Projects and other facilities owned or operated by such parties, or as may be necessary for participation in the Medicaid, Medicare or other applicable reimbursement programs to remain in full force and effect, without reduction in the number of licensed beds authorized for use in such reimbursement programs. b. Advocat shall cause to be furnished to the Lenders, within ten (10) days of the receipt thereof, a copy of any Medicare, Medicaid or other licensing agency survey or report and any statement of deficiencies in connection therewith. Advocat shall also cause to be promptly furnished to the Lenders a copy of any plan of correction generated by Advocat, the Borrower or the Subsidiaries in connection with any such survey or report. Advocat, the Borrower and the Subsidiaries covenant to correct, in requisite time, any deficiency, the curing of which is conditioned to continued licensure or otherwise required for complete participation in Medicaid, Medicare or other reimbursement programs (including reimbursement with respect to existing patients and admission of new patients). c. Each Project is duly licensed to operate under the applicable laws of the state where the Project is located. All permits required for the operation of the Project, including, without limitation, the certificate of need, are in full force and effect and constitute all of the permits, licenses and certificates required for the use and occupancy thereof. The operation of the Project is in compliance in all material respects with the applicable provisions of nursing home, nursing facility or assisted living facility laws, rules, regulations and published interpretations to which the Project 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 Project to operate at the foregoing licensed bed capacity. All reimbursement contracts are in full force and effect with respect to the Project, and the Borrower is in good standing with all the respective agencies governing such applicable nursing home licenses, program certification, and reimbursement contracts. The Project is current in the payment of all so-called provider specific taxes or other assessments with respect to such reimbursement contracts. Borrower will keep all certificate of need and/or any required permits with respect to all Projects in full force and effect. In the event GMAC-CM acquires the Project through foreclosure or otherwise, neither GMAC-CM 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 Project and certification to receive Medicare and Medicaid payments (and its successor programs) for patients having coverage thereunder provided that no service or bed compliment is changed. d. Neither Advocat, the Borrower nor a Subsidiary has granted to any third party the right to reduce the number of licensed beds in the Project or to apply for approval to transfer the right to any and all of the licensed Project beds to any other location. e. All Projects and the operation thereof shall comply in all material respects with all applicable covenants and restrictions of record and applicable laws, ordinances, rules and regulations, including, without limitation, the Americans with Disabilities Act and the regulations promulgated thereunder, and all laws, ordinances, rules and regulations relating to zoning, setback requirements and building codes, Medicaid and Medicare laws and keep the Permits for each Project in full force and effect. f. At all times while the Project Loans are outstanding, Advocat, the Borrower and the Subsidiaries shall cause to be maintained (and provide satisfactory evidence thereof to GMAC-CM) the following insurance with respect to each Project: -42- 43 (i) Professional liability insurance in at least the amount of $1,000,000.00 per occurrence, $2,000,000.00 aggregate, which shall include "tail" coverage insuring the owner of the Project for acts occurring prior to the date hereof, with a $10,000,000.00 umbrella policy which includes coverage for professional liability; (ii) General liability insurance in an amount equal to at least $2,000,000.00 per occurrence, $5,000,000.00 aggregate, with a $10,000,000.00 umbrella policy; (iii) "All-risk" coverage on the Project in an amount not less than the replacement cost thereof, insuring against such potential causes of loss as shall be required by GMAC-CM, including but not limited to loss or damage from wind, fire, ice, and subsidence, and, if customary for the geographic area and if requested by GMAC-CM, earthquake; (iv) Business interruption insurance (including rental value if the Property or Project is leased in whole or part) equal to not less than twelve (12) months estimated gross revenues less expenses not ordinarily incurred during the period of business interruption; and (v) Workers' compensation insurance as required by the laws of the state where the Project is located. [LANGUAGE NEEDS TO BE REVISED TO REFLECT UMBRELLA COVERAGE OF ADVOCAT - LANGUAGE TO BE INSERTED FOLLOWING REVIEW OF INSURANCE COVERAGES.] Each of the policies described in (i) and (ii) above shall name GMAC-CM as an additional insured. Each of the policies described in (iii) and (iv) above shall name GMAC-CM as mortgagee and loss payee under a standard noncontributory mortgagee and lender loss payable clause, and shall provide that GMAC-CM shall receive not less than thirty (30) days written notice prior to cancellation. The proceeds of any of the policies described in (iii) and (iv) above shall be payable by check payable to GMAC-CM or jointly payable to Borrower and to GMAC-CM, delivered to GMAC-CM, and such proceeds shall be applied by GMAC-CM, at its sole option, either (i) to the full or partial payment or prepayment of the Project Loan (without premium), or (ii) to the repair and/or restoration of the Project damaged or taken. Each of the policies described in (iii) and (iv) above must be written by an insurer having a rating of A or better from Standard & Poors, and Fitch Investors Service and a Best rating acceptable to GMAC-CM. Notwithstanding the foregoing, GMAC-CM agrees that GMAC-CM shall make the net proceeds of insurance or condemnation (after payment of GMAC-CM's reasonable costs and expenses) available to Borrower for Borrower's repair, restoration and replacement of a Project damaged or taken on the following terms and subject to Borrower's satisfaction of the following conditions: (1) The aggregate amount of all such proceeds shall not exceed the aggregate amount of the Project Loan related to the damaged Project; (2) At the time of such loss or damage and at all times thereafter while GMAC-CM is holding any portion of such proceeds, there shall exist no Default or Event of Default; -43- 44 (3) The Project for which loss or damage has resulted shall be capable of being restored to its preexisting condition and utility in all material respects with a value equal to or greater than that which existed prior to such loss or damage and such restoration shall be capable of being completed prior to the earlier to occur of (i) the expiration of business interruption insurance as determined by an independent inspector reasonably acceptable to GMAC-CM and the Borrower, or (ii) the Maturity Date; (4) Within thirty (30) days from the date of such loss or damage Borrower shall have given GMAC-CM a written notice electing to have the proceeds applied for such purpose; (5) Within sixty (60) days following the date of notice under the preceding subparagraph (3) and prior to any proceeds being disbursed to Borrower, Borrower shall have provided to GMAC-CM all of the following: (a) complete plans and specifications for restoration, repair and replacement of the Project damaged to the condition, utility and value required by (3) above, (b) if loss or damage exceeds $50,000, fixed-price or guaranteed maximum cost bonded construction contracts for completion of the repair and restoration work in accordance with such plans and specification, (c) builder's risk insurance for the full cost of construction with GMAC-CM named under a standard mortgagee loss-payable clause, (d) such additional funds as in GMAC-CM'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; (6) GMAC-CM may, at Borrower's expense, retain an independent inspector reasonably acceptable to GMAC-CM and the Borrower, 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; (7) No portion of such proceeds shall be made available by GMAC-CM for architectural reviews or for any other purposes which are not directly attributable to the cost of repairing, restoring or replacing a damaged Project for which a loss or damage has occurred unless the same are covered by such insurance; (8) 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; (9) Each disbursement by GMAC-CM 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 -44- 45 only upon receipt of disbursement requests on an AIA G702/703 form (or similar form approved by GMAC-CM) signed and certified by Borrower and, if required by the GMAC-CM, its architect and general contractor with appropriate invoices and lien waivers as required by GMAC-CM; (10) GMAC-CM shall have a first lien 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 GMAC-CM shall request to create, evidence, or perfect such lien and security interest; and (11) In the event and to the extent such proceeds are not required or used for the repair, restoration and replacement of the Project for which a loss or damage has occurred, or in the event Borrower fails to timely make the election to have insurance proceeds applied to the restoration of the Project, or, having made such election, fails to timely comply with the terms and conditions set forth herein, or, if the conditions set forth herein for such application are otherwise not satisfied, then GMAC-CM shall be entitled without notice to or consent from Borrower to apply such proceeds, or the balance thereof, at GMAC-CM's option either (i) to the full or partial payment or prepayment of the Project Loan (without premium) in the manner aforesaid, or (ii) to the repair, restoration and/or replacement of all or any part of such Project for which a loss or damage has occurred. Borrower appoints GMAC-CM as Borrower's attorney-in-fact to cause the issuance of or an endorsement of any insurance policy to bring Borrower into compliance herewith and, as limited above, at GMAC-CM's sole option, to make any claim for, receive payment for, and execute and endorse any documents, checks or other instruments in payment for loss, theft, or damage covered under any such insurance policy; however, in no event will GMAC-CM be liable for failure to collect any amounts payable under any insurance policy. g. Advocat, the Borrower and the Subsidiaries shall cause to be maintained at all times at each Project or the management agent's offices, and upon GMAC-CM's request shall make available at the Project, 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 Project, and copies of all written contracts, leases (if any), and other instruments which affect the Project, which books, records, contracts, leases (if any) and other instruments shall be subject to examination and inspection at any reasonable time by GMAC-CM (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, if an Event of Default has occurred and is continuing, Borrower shall deliver to GMAC-CM upon written demand all books, records, contracts, leases (if any) and other instruments relating to the Project or its operation and Borrower authorizes GMAC-CM to obtain a credit report on Borrower at any time. h. Advocat, the Borrower and the Subsidiaries shall conduct, or cause to be conducted, the operation of the Project at all times in a manner consistent with the level of operation of the Project as of the date hereof, including without limitation, the following: -45- 46 (i) to maintain the standard of care for the patients of the Project at all times at a level necessary to insure quality care for the patients of the Project in accordance with customary and prudent industry standards; (ii) to operate the Project in a prudent manner and in compliance with applicable laws and regulations relating thereto and cause all Permits, Reimbursement Contracts, and any other agreements necessary for the use and operation of the Project or as may be necessary for participation in the Medicaid, Medicare, or other applicable reimbursement programs to remain in effect without reduction in the number of licensed beds or beds authorized for use in the Medicaid, Medicare, or other applicable reimbursement programs (except for reductions mandated by changes in applicable law, provided any such bed reduction does not result in a change in a Project's financial covenants beyond the limits established for such Project by GMAC-CM and set forth in the Loan Documents); (iii) to maintain sufficient Inventory and Equipment of types and quantities at the Project to enable Borrower adequately to perform operations of the Project; (iv) to keep all improvements and equipment located on or used or useful in connection with the Project 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; and (v) to maintain sufficient cash in the operating accounts of the Project in order to satisfy the working capital needs of the Project. i. Advocat, the Borrower and the Subsidiaries shall furnish to GMAC-CM, or cause to be furnished to GMAC-CM, within twenty (20) days of receipt a copy of any Medicare, Medicaid, or other licensing agency survey or report and any statement of deficiencies and/or any other report indicating that any action is pending or being considered to downgrade the Project to a substandard category, and within the time period required by the particular agency for furnishing a plan of correction also furnish or cause to be furnished to GMAC-CM a copy of the plan of correction generated from such survey or report for the Project, and correct or cause to be corrected any deficiency, the curing of which is a condition of continued licensure or for full participation in Medicaid, Medicare or other reimbursement program pursuant to any reimbursement contract for existing patients or for new patients to be admitted with Medicaid or Medicare coverage, by the date required for cure by such agency (plus extensions granted by such agency). j. Upon the written request of a Lender, the Borrower and the Guarantors shall furnish such Lender with a certificate stating that such entities have complied with and are in compliance with all terms, covenants and conditions of the Loan Documents to which each 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. k. For so long as a Project Loan remains outstanding, if any Event of Default shall occur hereunder, or if, in GMAC-CM's judgment, a material depreciation in the value of a Project shall have occurred, then in any such event, GMAC-CM, may cause the Project to be appraised by an appraiser -46- 47 selected by GMAC-CM, and in accordance with GMAC-CM'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 Project. Borrower agrees to pay all reasonable costs incurred by GMAC-CM in connection with such appraisal which costs shall be secured by the Project Loan Documents and shall accrue interest at the Default Rate until paid. l. Advocat, the Borrower and the Subsidiaries shall comply with such other covenants, representations or warranties as may be contained in a Project Loan Commitment, and the GMAC Master Loan Commitment and the Project Loan Documents. m. Borrower and the Guarantors shall cause to be maintained all approved management agreements with respect to each Project in full force and effect and timely perform all of the owner's obligations thereunder and enforce performance of all obligations of the manager thereunder and not permit the termination, amendment or assignment of a management agreement unless the prior written consent of GMAC-CM is first obtained, which consent may be in the sole and absolute discretion of GMAC-CM. Borrower will not enter into any management agreement without Lenders' prior written consent, which may be in the sole and absolute discretion of GMAC-CM. n. Borrower and the Guarantors shall provide all items and pay all amounts required by each Project Loan Commitment. If any term of a Project Loan Commitment shall conflict with the terms of this Agreement, the Project Loan Commitment shall govern and control. As to any matter contained in the GMAC-CM Master Loan Commitment, and as to which no mention is made in this Agreement or the other Loan Documents, the GMAC-CM Master Loan Commitment shall continue to be in effect and shall survive the execution of this Agreement and all other Loan Documents. o. Neither Borrower nor a Guarantor shall assign or transfer any of its interest in any Permits or Reimbursement Contracts (including rights to payment thereunder) pertaining to a Project, or assign, transfer, or remove or permit any other person to assign, transfer, or remove any records pertaining to a Project, including, without limitation, patient records, medical and clinical records (except for removal of such patient records as directed by the patients owning such records), without the Lenders' prior written consent, which consent may be granted or refused in Lenders' sole discretion. p. Neither Borrower nor a Guarantor shall create, incur, assume or suffer to exist any Lien upon or with respect to a Project any of its priorities, rights, income or other assets relating thereto, including, without limitation, the Collateral whether now owned or hereafter acquired, other than the following permitted Liens: (i) Liens at any time existing in favor of the Lenders; (ii) Liens which are listed in Exhibit 5.7(p)(ii) attached hereto; (iii) Inchoate Liens arising by operation of law for the purpose of labor, services, materials, equipment or supplies, provided payment shall not be delinquent and, if such Lien is a lien upon any Project, such Lien must be fully disclosed to the Lenders and bonded off and removed from the Project in a manner satisfactory to Lenders; -47- 48 (iv) Liens incurred in the ordinary course of business in connection with workmen's 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; (v) Liens for current year's taxes, assessments or governmental charges or levies provided payment thereof shall not be delinquent; and (vi) "Permitted Encumbrances" upon the Project, as defined in the Project Loan Documents. q. Neither Borrower nor a Guarantor shall alter or change, in any material respect, the use of a Project or permit any management agreement for a Project or enter into any operating lease for a Project, unless Borrower first notifies GMAC-CM and provides GMAC-CM a copy of the proposed lease agreement or management agreement, obtains GMAC-CM's written consent thereto, which consent may be withheld in GMAC-CM's sole discretion, and obtains and provides GMAC-CM with a subordination agreement in form satisfactory to GMAC-CM, as determined by GMAC-CM in their sole discretion, from such manager or lessee subordinating to all rights of GMAC-CM. r. Advocat, the Borrower and the Subsidiaries shall immediately notify Lenders, upon knowledge thereof, of the assessment by any state or any Medicare, Medicaid, health or licensing agency of any fines or penalties against such entities (or any one of them), the manager of a Project, or a Project. 5.8 Environmental Hazards. The Borrower and the Guarantors hereby represent and warrant to the Lenders: a. Except for matters covered by a written program of operations and maintenance approved in writing by Lenders (an "O&M Program") or matters described in this Section 5.8, neither Borrower nor a Guarantor shall cause or permit any of the following: (i) 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 a Project or any Improvements; (ii) The transportation of any Hazardous Materials to, from, or across a Project; (iii) Any occurrence or condition a Project or any other property of Borrower that is adjacent to a Project, which occurrence or condition is or may be in violation of Hazardous Materials Laws; or (iv) Any violation of or noncompliance with the terms of any Environmental Permit with respect to a Project, the Improvements or any property of Borrower that is adjacent to a Project. -48- 49 The matters described in clauses (i) through (iv) above are referred to collectively herein as "Prohibited Activities and Conditions" and individually as a "Prohibited Activity and Condition". b. Notwithstanding any other provision to the contrary, "Prohibited Activities and Conditions" shall not include the safe and lawful use and storage of quantities of (1) pre-packaged supplies, medical waste, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable facilities, (2) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by occupants of the Project; and (3) petroleum products used in the operation and maintenance of motor vehicles from time to time located at a Project's parking areas, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Hazardous Materials Laws. c. Borrower and the Guarantors shall take all appropriate steps (including the inclusion of appropriate provisions in any leases approved by Lenders which are executed after the date of this Agreement) to prevent its employees, agents, contractors, tenants and occupants of a Project from causing or permitting any Prohibited Activities and Conditions. d. If an O&M Program has been established with respect to Hazardous Materials, Borrower shall comply in a timely manner with, and cause all employees, agents, and contractors of Borrower and any other persons present at a Project 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 Lenders' 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 Lenders. Any such out-of- pocket costs of Lenders which Borrower fails to pay promptly shall become an additional part of the Loan Obligations. e. Borrower shall promptly notify Lenders in writing of any and all of the following that may occur: (i) Borrower's discovery of any Prohibited Activity and Condition. (ii) Borrower's or a Guarantor'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 a Project, or any other property of Borrower or a Guarantor that is adjacent to a Project. (iii) Any representation or warranty in this Section 5.8 which becomes untrue at any time after the date of this Agreement. Any such notice given by Borrower or a Guarantor shall not relieve Borrower or a Guarantor of, or result in a waiver of, any obligation under this Agreement, the Note, or any of the other Loan Documents. f. Borrower and the Guarantors, jointly and severally, agree to pay promptly the costs of any environmental inspections, tests or audits required by the Lenders in connection with any foreclosure -49- 50 or deed in lieu of foreclosure, or, if required by Lenders, as a condition of Lenders' consent to any "Transfer" (as defined in the Project Loan Documents), or required by Lenders following a reasonable determination by Lenders that Prohibited Activities and Conditions may exist. Any such costs incurred by Lenders (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. g. If any investigation, site monitoring, containment, clean-up, restoration or other remedial work ("Remedial Work") is necessary to comply with any Hazardous Materials Law or order of any Governmental Authority that has or acquires jurisdiction over a Project or the use, operation or improvement of a Project under any Hazardous Materials Law, Borrower and the Guarantors shall, by the earlier of (1) the applicable deadline required by Hazardous Materials law or (2) 30 days after notice from Lenders 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 or the Guarantors fail to begin on a timely basis or diligently prosecute any required Remedial Work to be completed, in which case Borrower and the Guarantors shall reimburse Lenders on demand for the cost of doing so. Any reimbursement due from Borrower or the Guarantors to Lenders shall become part of the Loan Obligations. h. Borrower and the Guarantors shall cooperate with inquiry by any Governmental Authority and shall comply with any governmental or judicial order which arises from any alleged Prohibited Activity and Condition. i. (i) Borrower and the Guarantors shall hold harmless, defend and indemnify (i) the Lenders, (ii) the officers, directors, partners, agents, shareholders, employees and trustees of any of the foregoing, and (iii) the heirs, legal representatives, successors and assigns of each of the foregoing (together, the "Indemnitees") against all proceedings, claims, damages, losses, expenses, penalties and costs (whether initiated or sought by any Governmental Authority or private parties), including fees and out of pocket expenses of attorneys and expert witnesses, investigatory fees, and remediation costs, whether incurred in connection with any judicial or administrative process or otherwise, arising directly or indirectly from any of the following: (1) Any breach of any representation or warranty of Borrower or the Guarantors in this Section 5.8. (2) Any failure by Borrower or the Guarantors to perform any of its obligations under this Section 5.8. (3) The existence or alleged existence of any Prohibited Activity and Condition. (4) The presence or alleged presence of Hazardous Materials in, on, or around under a Project, or any property of Borrower or the Guarantors that is adjacent to a Project, or (5) Actual or alleged violation of any Hazardous Materials Law. -50- 51 (ii) Counsel selected by Borrower or the Guarantors to defend Indemnitees shall be subject to the approval of those Indemnitees. Notwithstanding anything contained herein, any Indemnitee may elect to defend any claim or legal or administrative proceeding at the Borrower's and Guarantors' 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 and the Guarantors 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. (iii) Neither Borrower nor a Guarantor shall, 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 Lenders of a written release of those Indemnitees, satisfactory in form and substance to Lenders; or (ii) may materially and adversely affect any Indemnitee, as determined by such Indemnitee in its sole discretion. (iv) The liability of Borrower and the Guarantors to indemnify the Indemnitees shall not be limited or impaired by any of the following, or by any failure of Borrower or the Guarantors to receive notice of or consideration for any of the following: (1) Any amendment or modification of any Loan Document. (2) Any extensions of time for performance required by any of the Loan Documents. (3) The accuracy or inaccuracy of any representations and warranties made by Borrower under this Instrument or any other Loan Document. (4) The release of Borrower, the Guarantors, or any other person, by Lenders or by operation of law, from performance of any obligation under any of the Loan Documents. (5) The release or substitution in whole or in part of any security for the Loan Obligations. (6) Lenders' failure to properly perfect any lien or security interest given as security for the Loan Obligations. (v) Borrower shall, at its own cost and expense, do all of the following: (1) Pay or satisfy any judgment or decree that may be entered against any Indemnitee or Indemnitees in any legal or administrative proceeding incident to any matters against which Indemnitees are entitled to be indemnified under this Section 5.8. (2) Reimburse Indemnitees for any expenses paid or incurred in connection with any matters against which Indemnitees are entitled to be indemnified under this Section 5.8. -51- 52 (3) Reimburse Indemnitees for any and all expenses, including fees and costs of attorneys and expert witnesses, paid or incurred in connection with the enforcement by Indemnitees of their rights under this Section 5.8, or in monitoring and participating in any legal or administrative proceeding. (vi) In any circumstances in which the indemnity under this Section 5.8 applies, each Lender may employ its own legal counsel and consultants to prosecute, defend or negotiate any claim or legal or administrative proceeding and Lenders, 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 and the Guarantors shall reimburse Lenders upon demand for all costs and expenses incurred by Lenders, including all costs of settlements entered into in good faith, and the fees and out of pocket expenses of such attorneys and consultants. (vii) The provisions of this Section 5.8 shall be in addition to any and all other obligations and liabilities that Borrower or the Guarantors may have under the applicable law or under the other Loan Documents, and each Indemnitee shall be entitled to indemnification under this Section 5.8 without regard to whether Lenders or that Indemnitee has exercised any rights against a Project or any other security, pursued any rights against any guarantor, or pursued any other rights available under the Loan Documents or applicable law. The obligation of the Borrower and the Guarantors to indemnify the Indemnitees under this Section 5.8 shall be joint and several. The obligations of Borrower and the Guarantors to indemnify the Indemnitees under this Section 5.8 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 Loan Documents. 6. CONDITIONS PRECEDENT 6.1 Conditions to Closing and Funding. As conditions precedent to the Lenders' obligation to close the Credit Facility and/or to fund any advances, in addition to the conditions precedent set forth in Section 3.2 of this Agreement related to Project Loans, Borrower shall furnish to the Lenders, in form reasonably satisfactory to the Lenders: a. Execution and delivery of this Agreement and all related Loan Documents deemed necessary by the Lenders in connection with the Credit Facility. b. Guaranty and Suretyship Agreements, in form satisfactory to the Lenders, executed by the Guarantors agreeing to be joint and several guarantors and sureties for the full and prompt payment of the Credit Facility. c. Stock Pledge Agreement executed by Advocat and pledging all of the outstanding stock of DLC and the Borrower to the Lenders, as collateral security for the Credit Facility (the "Stock Pledge Agreement"). d. Stock Pledge Agreement executed by DLC pledging all of the outstanding stock of the subsidiaries of DLC to the Lenders, as collateral security for the Credit Facility (the "DLC Stock Pledge Agreement"). -52- 53 e. Stock Pledge Agreement executed by the Borrower pledging all of the outstanding stock of the subsidiaries of the Borrower to the Lenders, as collateral security for the Credit Facility (the "DMS Stock Pledge Agreement"). f. Appropriate corporate resolutions of the Borrower, Advocat and the other Guarantors authorizing the Borrower, Advocat and the other Guarantors to enter into this Agreement, together with authorizations for officers to execute all documents necessary to effectuate the loan transaction described herein. g. Certificates of Existence/Good Standing and copies of the Articles of Incorporation and Bylaws for the Borrower, Advocat and the other Guarantors. h. Opinion of Borrower's counsel to the effect that the documents entered into in connection with the Credit Facility have been validly executed and delivered and are enforceable in accordance with their terms, and such other matters as the Lenders may reasonably request. i. Evidence of insurance on the assets of the Borrower and the Guarantors, naming the Lenders as a loss payee, in form, amount and issued by a company acceptable to the Lenders. j. Certificates from the Borrower, Advocat and the other Guarantors, as the Lenders or its counsel may request, including, without limitation, certificates indicating that there have been no material, adverse changes in the financial condition of Borrower, Advocat or of the other Guarantors, since the date of the most recent financial statements submitted to the Lenders in connection with the Credit Facility. k. All Uniform Commercial Code financing statements required to be executed by the Lenders to perfect the liens on the Collateral. l. Current financial statements, for the Borrower, Advocat and the other Guarantors, which shall be in form and substance reasonably acceptable to the Lenders. m. Evidence satisfactory to the Lenders that the Borrower and each of the Guarantors are in material compliance with all licensing and other governmental regulations applicable to the Borrower's and the Guarantors' business operations. n. The original stock certificates evidencing 100% of the outstanding stock of (i) DLC and DMS being pledged to the Lenders under the Stock Pledge Agreement, and (ii) the Subsidiaries of DLC and the Borrower being pledged to the Lenders under the DLC and DMS Stock Pledge Agreements, together with appropriate stock powers executed in blank, in form and substance acceptable to the Lenders. o. Copies of all consents and other approvals from landlords, owners of nursing home facilities, and other entities, consenting to the acquisition of the Subsidiaries by the Borrower, and the transfer of management contracts and leases to the Borrower, and consents to the assignments contemplated in this Agreement, all as deemed reasonably necessary by the Lenders. -53- 54 p. A complete list of all nursing home facilities managed and/or leased by the Borrower or any Guarantor, including mailing addresses. q. Evidence, satisfactory to the Lenders, that Borrower, Advocat and the Subsidiaries are in material compliance with all management contracts, lease agreements, and other contractual obligations related to Borrower's, Advocat's and the Subsidiaries' business operations. r. Compliance with all conditions set forth in the Windsor Commitment. s. Such other documents or instruments as the Lenders deems necessary to evidence or secure the Credit Facility. 7. PROTECTIVE ACTION 7.1 Discharge of Obligations. At its option, after notice to Borrower, and failure by Borrower to pay such amounts within a reasonable time, the Lenders may discharge taxes, liens, security interests, or other encumbrances at any time levied or placed on the Collateral and may pay for insurance on the Collateral. Borrower agrees to reimburse the Lenders on demand for any payment made, or any expense incurred, by the Lenders pursuant to the foregoing authorization, together with interest thereon from date of payment at the Maximum Rate set forth in the notes evidencing the Loan Obligations. Until the occurrence of an Event of Default, the Borrower and/or the Guarantors may have possession of the Collateral and use it in any lawful manner not inconsistent with any policy of insurance thereon and not inconsistent with this Agreement. 8. DEFAULT 8.1 Events of Default. Regardless of the terms of any promissory note or notes issued in connection herewith, the occurrence of any of the events specified hereinbelow (sometimes hereinafter referred to as an "Event of Default"), unless waived in advance in writing by the Lenders, shall immediately terminate any obligations on the part of the Lenders to make or continue to fund any advance hereunder, and, at the option of the Lenders, shall make all sums of interest and principal remaining on the Loan Obligations immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character, except as hereinafter specified: a. Failure to pay any amount due under any Loan Document evidencing or securing the Credit Facility or any portion thereof, on the date when due; b. Default in performance of any of the covenants, warranties, terms, or provisions contained or referred to in this Agreement or in any other Loan Document, or the occurrence of an Event of Default under any other Loan Document, which is not cured within thirty (30) days of the date of mailing by the Lenders of written notice to Borrower, setting forth the nature of such default; -54- 55 c. Any covenant, warranty, representation, or statement made or furnished to the Lenders by or on behalf of Borrower or the Guarantors, or in connection with this Agreement, or the other Loan Documents, proving to have been false in any material respect when made or furnished; d. The uninsured loss, theft, substantial damage, destruction, sale, or encumbrance to or of a material portion of the Collateral, except for the sale of inventory by the Pledgors in the ordinary course of business, specifically provided for herein; e. The making of any levy or seizure of or on any portion of the Collateral, which is not released within thirty (30) days; f. Except as expressly permitted by this Agreement, the dissolution, liquidation, cessation of business, termination of existence, insolvency, failure to pay debts as they mature, business failure, or appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency law by or against Borrower or the Guarantors, which, in the case of an involuntary proceeding in bankruptcy, is not dismissed within ninety (90) days; g. The filing of any tax lien whatsoever with respect to any of the Collateral pledged hereby, in excess of $100,000, except for a tax lien that is being contested in good faith and for which additional security satisfactory in all respects to the Lenders is provided; h. The issuance of an attachment against the Collateral, in excess of $100,000, which is not removed, by bond or otherwise, within thirty (30) days; i. The occurrence of an event of default (which is not cured within any applicable notice and cure period) under any other agreement between Borrower or the Guarantors and any other bank, savings and loan, insurance company, commercial credit company or other lender, including without limitation any lenders who are subordinated to the Credit Facility, which evidences obligations in excess of $100,000, which results in an acceleration of such obligations and which materially impacts the ability of the Borrower or the Guarantors to fulfill the obligations set forth in this Agreement; j. The occurrence of a default by Borrower or the Subsidiaries under, or the termination of (without the Lenders' prior written consent) Borrower's or the Subsidiaries' interests in, any Lease or Management Contract, which is not cured within any applicable cure period. k. The entry by a court of competent jurisdiction of an order, judgment, or decree approving a petition filed against the Borrower or the Guarantors, which such 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 ninety (90) 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 parties 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 ninety (90) days (whether or not consecutive); -55- 56 l. Unless otherwise permitted hereunder or under any other Loan Documents, the sale, transfer, lease, assignment, or other disposition, voluntarily or involuntarily, of the Collateral, or any part thereof, or any further encumbrance of the Collateral, unless the prior written consent of the Lenders is obtained, which consent will not be unreasonably withheld; m. The failure of Borrower to take the corrective measures required in this Agreement or the other Loan Documents within the time periods specified following GMAC-CM's demand because covenants related to Project Loans have not been met; n. Any certificate, statement, representation, warranty or audit heretofore or hereafter furnished by or on behalf of Borrower or the Guarantors 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 the Lenders to fund monies to Borrower, proves to have been false in any material respect at the time when the facts therein set forth were stated or certified, or proves to have omitted any substantial contingent or unliquidated liability or claim against Borrower or the Guarantors or 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 the Lenders in writing at or prior to the time of such execution; o. The failure of Borrower 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 a Project: (i) A termination of any reimbursement contract or any permit; (ii) A ban on new admissions generally or on admission of patients otherwise qualifying for Medicaid or Medicare coverage; p. The Borrower, the Guarantors or a Project should be assessed fines or penalties by any state or any Medicare, Medicaid, health or licensing agency having jurisdiction over such parties or the Project in excess of $25,000; q. A final judgment shall be rendered by a court of law or equity against Borrower or the Guarantors, and the same shall remain undischarged for a period of thirty (30) days, unless such judgment is either (i) fully covered by collectible insurance, and such insurer has within such period acknowledged such coverage in writing, or (ii) although not fully covered by insurance, enforcement of such judgment has been effectively stayed, such judgment is being contested or appealed by appropriate proceedings and Borrower or the Guarantors, as the case may be, has established reserves adequate for payment in the event such party is ultimately unsuccessful in such contest or appear and evidence thereof is provided to the Lenders; or r. Distribution or use of advances under the Credit Facility in violation of this Agreement, including, without limitation, the distribution of proceeds in violation of Section 2.3 of this Agreement. -56- 57 9. REMEDIES 9.1 Remedies Following Default. Upon the occurrence of an Event of Default and at any time thereafter, the Lenders shall have all the rights and remedies of a secured party under the Uniform Commercial Code and any other right the Lenders may have at law or equity. The Lenders may require the Borrower and/or the Guarantors to assemble the Collateral and make it available to the Lenders at a place or places, to be designated by the Lenders, reasonably convenient to both parties. The Lenders will give the Borrower and/or the Guarantors reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made. The requirements of reasonable notice shall be met if such notice is mailed, postage prepaid, to the addresses of the Borrower and/or the Guarantors set forth in this Agreement, at least five (5) days before the time of the sale or disposition. The Borrower and the Guarantors, jointly and severally, agree to pay all expenses of retaking, holding, preparing for sale, and selling the Collateral, together with any court costs and the Lenders' reasonable attorney's fees; all such expenses, costs and fees shall be deemed part of the Loan Obligations. The Lenders may exercise its lien upon and right of setoff against any monies, credits, deposits or instruments that the Lenders may have in their possession and which belong to the Borrower and/or the Guarantors, or to any other person or entity liable for the payment of any or all of the Loan Obligations. The remedies provided the Lenders in this Agreement are not exclusive of any other remedies that may be available to the Lenders under any other document or at law or equity. 9.2 No Waiver. No delay or omission on the part of the Lenders in exercising any right hereunder or in demanding strict compliance with the terms of this Agreement shall operate as a waiver of such right or of any other right under this Agreement or of demanding strict compliance with the terms of this Agreement. No waiver by the Lenders of any default shall operate as a waiver of any other default or of the same default on a future occasion. 10. MISCELLANEOUS AND DEFINITIONS 10.1 Financial Calculations. Unless otherwise provided herein, all financial ratios and covenants shall be calculated in accordance with GAAP. 10.2 Captions. The captions contained in this Agreement are inserted only as a matter of convenience and shall not be construed as defining, limiting, extending, or describing the scope of this Agreement, any section hereof, or the intent of any provision hereof. 10.3 Successors and Assigns. All rights of the Lenders hereunder shall inure to the benefit of its successors and assigns, and all obligations of Borrower shall bind Borrower's successors and assigns. Without limiting the foregoing, Borrower acknowledges that the Lenders may grant a participation in the Credit Facility. 10.4 Time of the Essence. Time is of the essence with regard to each and every provision of this Agreement. 10.5 No Waiver. Nothing in this Agreement shall be deemed a waiver or prohibition of the Lenders' right of banker's lien or setoff. -57- 58 10.6 Entire Agreement. This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed by all parties. 10.7 Severability. If any provision of this Agreement shall be held invalid under any applicable law, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 10.8 Jurisdiction. Borrower hereby irrevocably consents to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which the Lenders may be a party and which concerns this Agreement or the Credit Facility. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless the Lenders agrees to the contrary in writing. 10.9 No Partnership. Nothing contained herein or in any related document shall be deemed to render the Lenders (i) a partner or joint venturer of Borrower for any purpose, or (ii) a partner or joint venturer of the other for any purpose. This Agreement has been executed for the sole benefit of the Lenders, and no third party is authorized to rely upon the Lenders' rights hereunder or to rely upon an assumption that the Lenders has or will exercise its rights under this Agreement or under any document referred to herein. 10.10 No Election of Remedies. The Lenders may proceed against collateral securing the Credit Facility and against parties liable therefor in such order as it may elect, and neither Borrower nor any surety or guarantor for Borrower shall be entitled to require the Lenders to marshall assets. The benefit of any rule of law or equity to the contrary is hereby expressly waived. 10.11 Waiver. The Lenders may, in their sole discretion, release any collateral securing the Credit Facility or release any party liable therefor. The defenses of impairment of recourse and any requirement of diligence on the Lenders' part in collecting the Loan Obligations are hereby waived 10.12 Business Day. If any payment date under the Loan Obligations falls on a day that is not a business day of the Lenders, or if the last day of any notice period falls on such a day, the payment shall be due and the notice period shall end on the Lenders' next following business day. 10.13 Construction of Agreement. The validity, construction and enforcement of this Agreement and all other documents executed with respect to the Loan Obligations shall be determined to the maximum extent permissible according to the laws of Tennessee, in which state this Agreement has been executed and delivered. 10.14 Costs and Expenses. Advocat, the Borrower and the Subsidiaries will bear all taxes, fees and expenses (including actual attorneys' fees and expenses of counsel for Lenders) in connection with the Credit Facility, 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 a Lenders becomes a party to any suit or proceeding in order to protect its interests or priority in any Collateral for any of the Credit Facility or its -58- 59 rights under this Agreement or any of the Loan Documents, or if Lenders is made a party to any suit or proceeding by virtue of the Credit Facility, this Agreement or any Collateral and as a result of any of the foregoing, a Lenders employs counsel to advise or provide other representation with respect to this Agreement, or to collect the balance of the Credit Facility, or to take any action in or with respect to any suit or proceeding relating to this Agreement, any of the other Loan Documents, any Collateral, Borrower or any Guarantor, or to protect, collect, or liquidate any of the security for the Credit Facility, or attempt to enforce any security interest or lien granted to a Lenders by any of the Loan Documents, then in any such events, all of the attorney's fees arising from such services, including attorneys' fees for preparation of litigation and in any appellate or bankruptcy proceedings, and any expenses, costs and charges relating thereto shall constitute additional obligations of Borrower to the Lenders payable on demand of either Lender. Without limiting the foregoing, Borrower has undertaken the obligation for payment of, and shall pay,all recording and filing fees, revenue or documentary stamps or taxes, intangibles taxes, and other taxes, expenses and charges payable in connection with this Agreement, any of the Loan Documents, the Credit Facility (including, without limitation, each Project Loan), 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 Lenders for the amounts paid by Lenders, together with penalties or interest, if any, incurred by Lenders as a result of underpayment or nonpayment. Such amounts shall constitute a portion of the Credit Facility, shall be secured by the Loan Documents and shall bear interest at the Maximum Rate from the date advanced until repaid. 10.15 Performance of Lenders. At its option, upon Borrower's or a Guarantor's failure to do so, the Lenders may make any payment or do any act on Borrower's or a Guarantor's behalf that Borrower or the Guarantors are required to do to remain in compliance with this Agreement or any of the other Loan Documents, and Borrower and the Guarantors agree to reimburse the Lenders, on demand, for any payment made or expense incurred by Lenders pursuant to the foregoing authorization, including, without limitation, attorneys' fees, and until so repaid any sums advanced by Lenders shall constitute a portion of the Loan Obligations, shall be secured by the Loan Documents and shall bear interest at the Maximum Rate from the date advanced until repaid. 10.16 Notice. Any and all notices, elections, or demands permitted or required under this Agreement shall be in writing, signed by the party giving such notice, and shall be delivered personally, or sent by registered or certified mail, or by recognized overnight courier service, to the other party at the address set forth below, or at such other address as hereafter may be supplied in writing. Such notice, election or demand shall be deemed received, in the case of personal delivery, on the date of such delivery, or in the case of registered or certified mail, on the date which is three (3) business days after the date of depositing such notice, postage prepaid, in the U.S. mail, or in the case of recognized overnight courier service, on the date which is one (1) business day after deposit with such courier service. For purposes of this Agreement: The address of Borrower and the Guarantors is: Advocat Inc. 277 Mallory Station Road, Suite 130 Franklin, TN 37067 Attn: Chairman Copy to: Harwell Howard Hyne Gabbert & Manner, P.C.
-59- 60 1800 First American Center Nashville, TN 37238 Attn: Mark Manner, Esq. The address of First American is: First American National Bank First American Center Nashville, TN 37237 Attn: Sandra G. Hamrick Copy to: Sherrard & Roe, PLC 424 Church Street, Suite 2000 Nashville, TN 37219 Attn: Kim A. Brown, Esq. The address of GMAC-CM is: GMAC-CM Commercial Mortgage Corporation 2200 Woodcrest Place, Suite 305 Birmingham, AL 35209 Attn: ---------------
-60- 61 Copy to: Ballard Spahr Andrews & Ingersoll 555 13th Street, N.W. Suite 900 East Washington, DC 20004-1112 Attn: David A. Pesel, Esq. 10.17 WAIVER OF JURY TRIAL. THE BORROWER AND THE GUARANTORS HEREBY WAIVE ANY RIGHT 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 CREDIT FACILITY, OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF THE LENDERS 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. THE BORROWER AND THE GUARANTORS AGREE THAT THE LENDERS MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF THE BORROWER AND THE GUARANTORS IRREVOCABLY TO WAIVE ITS RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF THE LENDERS TO MAKE THE CREDIT FACILITY, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN THE BORROWER AND THE GUARANTORS AND THE LENDERS SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. 10.18 Rights and Obligations of Lenders. The use in this Agreement of the defined term "Lenders" shall not require First American or GMAC-CM to make joint decisions or in any way require either to consult with the other regarding any actions or forbearance, either or both First American or GMAC-CM may desire to take hereunder including, without limitation, the giving of notice, the application of a Default Rate of interest, the waiver or enforcement of any rights or obligations of the Borrower or the Guarantors hereunder and the exercise of any rights or remedies, including the foreclosure of any Liens granted hereunder to either or both of First American or GMAC-CM. (Remainder of page left intentionally blank) -61- 62 (SIGNATURE PAGE FOR CREDIT AND SECURITY AGREEMENT) IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered on their behalf by their duly authorized officers, on the date first set out above.
FIRST AMERICAN NATIONAL BANK, a DIVERSICARE MANAGEMENT national banking association SERVICES CO., a Tennessee corporation BY: /s/ Sandra G. Hamrick BY: /s/ Mary Margaret Hamlett ------------------------------------ ------------------------------------------ Sandra G. Hamrick Vice President TITLE: Executive Vice President --------------------------------------- "FIRST AMERICAN" "BORROWER" GMAC-COMMERCIAL MORTGAGE ADVOCAT INC., a Delaware corporation CORPORATION, a California corporation BY: /s/ BY: /s/ Mary Margaret Hamlett ------------------------------------ ------------------------------------------ TITLE: E & P TITLE: Executive Vice President --------------------------------- --------------------------------------- "GMAC-CM" "ADVOCAT" DIVERSICARE LEASING CORP., a Tennessee corporation BY: /s/ Mary Margaret Hamlett ------------------------------------------ TITLE: Executive Vice President ---------------------------------------
63 (SIGNATURE PAGE FOR CREDIT AND SECURITY AGREEMENT - Continued) ADVOCAT ANCILLARY SERVICES, INC., a Tennessee corporation BY: /s/ Mary Margaret Hamlett ------------------------------------------ TITLE: Executive Vice President --------------------------------------- DIVERSICARE CANADA MANAGEMENT SERVICES CO., INC., an Ontario, Canada corporation BY: /s/ Mary Margaret Hamlett ------------------------------------------ TITLE: Executive Vice President --------------------------------------- DIVERSICARE GENERAL PARTNER, INC., a Texas corporation BY: /s/ Mary Margaret Hamlett ------------------------------------------ TITLE: Executive Vice President --------------------------------------- FIRST AMERICAN HEALTH CARE, INC., an Alabama corporation BY: /s/ Mary Margaret Hamlett ------------------------------------------ TITLE: Executive Vice President --------------------------------------- ADVOCAT DISTRIBUTION SERVICES, INC., a Tennessee corporation BY: /s/ Mary Margaret Hamlett ------------------------------------------ TITLE: Executive Vice President ------------------------------------------ 64 (SIGNATURE PAGE FOR CREDIT AND SECURITY AGREEMENT - Continued) ADVOCAT FINANCE, INC., a Delaware corporation BY: /s/ Mary Margaret Hamlett ------------------------------------------ TITLE: Executive Vice President --------------------------------------- DIVERSICARE LEASING CORP. OF ALABAMA, INC., an Alabama corporation BY: /s/ Mary Margaret Hamlett ------------------------------------------ TITLE: Executive Vice President --------------------------------------- "SUBSIDIARIES" EX-10.59 3 PROJECT LOAN AGREEMENT 1 EXHIBIT 10.59 PROJECT LOAN AGREEMENT (GOOD SAMARITAN) THIS PROJECT LOAN AGREEMENT (this "Agreement") is made and entered into to be effective as of December 27, 1996, between GMAC-CM Commercial Mortgage Corporation, with offices for purposes of this Agreement at 2200 Woodcrest Place, Suite 305, Birmingham, Alabama 35209 (hereinafter referred to as "Lender"), Advocat Inc., a Delaware corporation (hereinafter referred to as "Advocat"), Diversicare Management Services Co. (the "Borrower" or "DMS"), a Tennessee corporation and wholly-owned subsidiary of Advocat, Diversicare Leasing Corp. ("DLC"), a Tennessee corporation and wholly-owned subsidiary of AFI (defined below), Advocat Ancillary Services, Inc. ("AAS"), a Tennessee corporation and wholly-owned subsidiary of the Borrower, Diversicare Canada Management Services Co., Inc. ("DCMS"), a corporation organized under the laws of Canada and wholly-owned subsidiary of DLC, First American Health Care, Inc. ("FAHC"), an Alabama corporation and wholly-owned subsidiary of DLC, Diversicare Leasing Corp. of Alabama ("DLCA"), an Alabama corporation and wholly-owned subsidiary of DLC, Advocat Distribution Services, Inc. ("ADS"), a Tennessee corporation and wholly-owned subsidiary of DMS, and Advocat Finance, Inc. ("AFI"), a Delaware corporation and wholly-owned subsidiary of DMS (DLC, AAS, DCMS, DGP, FAHC, ADS, DLCA and AFI, together with any other subsidiaries of Advocat or of the Subsidiaries formed or acquired after the date hereof, are sometimes hereinafter referred to collectively as the "Subsidiaries"), 1. Pursuant to the terms of a Master Commitment Letter from GMAC-CM accepted by Advocat on October 22, 1996, the Lender agreed to loan to the Borrower, Advocat, and the Subsidiaries, in accordance with the terms of such letter, sums not to exceed $40,000,000 (the "Acquisition Line"); 2. The Lender, the Borrower, Advocat, the Subsidiaries and First American National Bank, a national banking association ("First American"), have executed a certain Master Credit and Security Agreement of even date herewith setting forth some of the terms and conditions for project loan advancements under the Acquisition Line (the "Master Loan Agreement"); 3. The Borrower has requested a project loan disbursement under the Acquisition Line in the amount of $745,000.00; 4. The Lender, the Borrower, Advocat and the Subsidiaries desire to enter into this Agreement to set forth additional terms and conditions of the $745,000.00 project loan advance under the Acquisition Line; and 2 5. As a condition of making the above referenced loan, the Subsidiaries and Advocat have agreed to absolutely and unconditionally guarantee the proper payment and performance of the "Guaranty Obligations" as described in the Guaranty Agreement (defined below). 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: "ACTUAL MANAGEMENT FEES" shall mean actual management fees paid or incurred in connection with operation of the Nursing Home. "ASSUMED MANAGEMENT FEES" means assumed management fees of five percent (5%) of net patient revenues of the Nursing Home (after Medicaid and Medicare contractual adjustments). "COLLATERAL" means, collectively, the Property, Improvements, Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money, Permits (to the full extent assignable), Reimbursement Contracts, and all Proceeds, all whether now owned or hereafter acquired, and including replacements, additions, accessions, substitutions, and products thereof and thereto, and all other property which is or hereafter may become subject to a Lien in favor of Lender as security for any of the Loan Obligations. "COMMITMENT LETTER" means collectively (i) the commitment letter issued by Lender and accepted by Borrower dated October 14, 1996 and (ii) the master commitment letter issued by Lender and accepted by Borrower dated. "DEBT SERVICE COVERAGE FOR THE NURSING HOME" means a ratio in which the first number is the sum of pre-tax income of the Borrower from the operations of the Nursing Home as set forth in the quarterly statements provided to Lender (without deduction for Actual Management Fees paid or incurred), calculated based upon the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan), plus interest expense and non-cash expenses or allowances for depreciation and amortization of the Nursing Home for said period, less either Assumed Management Fees or Actual Management Fees (based upon the covenant to which such definition relates) and the second number is the sum of the current portion of the Long Term Debt incurred for the benefit of the Nursing Home (including Long Term Debt attributable to the Loan but excluding 2 3 the outstanding principal balance of the Loan due on the Maturity Date) plus the interest expenses for the Nursing Home (including interest on the Loan) for the applicable period. In calculating "pre-tax income," Extraordinary Income and Extraordinary Expenses shall be excluded. "DEFAULT" means the occurrence or existence of any event which, but for the giving of notice or expiration of time or both, would constitute an Event of Default. "DEFAULT RATE" means a per annum rate equal to four percentage points (4%) plus the LIBOR Rate (as defined in the Note). "EVENT OF DEFAULT" means any "Event of Default" as defined in Article VII hereof. "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. "FIRST AMERICAN DOCUMENTS" means, collectively, all documents executed by Borrower, Guarantors or any subsidiary of Borrower or Guarantors with (or in favor of) Lender and First American in connection with a certain $10,000,000.00 working capital line of credit some or all of which has been or will be funded by First American. "GAAP" means, as in effect from time to time, generally accepted accounting principles consistently applied as promulgated by the American Institute of Certified Public Accountants. "GUARANTY AGREEMENT" means collectively (i) that certain Guaranty Agreement of even date herewith from Advocat to Lender, (ii) that certain Guaranty Agreement of even date herewith from DLC to Lender, and (iii) that certain Guaranty Agreement of even date herewith from all other Subsidiaries to Lender (the foregoing guarantors hereinafter the "Guarantors"). "IMPROVEMENTS" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Property, including, but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and storm sashes, and cleaning apparatus which are or shall be attached to the Property or said buildings, structures or improvements. 3 4 "LIEN" means any voluntary or involuntary mortgage, security deed, deed of trust, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, including those contemplated by or permitted in this Agreement and the other Loan Documents. "LOAN" means the Loan in the principal sum of $745,000.00 made by Lender to Borrower as of the date hereof. "LOAN DOCUMENTS" means, collectively, this Agreement, the Note, the Guaranty Agreement, the Mortgage, 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. "LONG TERM DEBT" means all obligations (including capital lease obligations) which are due more than one (1) year from the date as of which the computation thereof is made. "MANAGEMENT AGREEMENT" means that certain Management Agreement dated December 27, 1996 between Manager and Borrower, obligating the Manager to operate and manage the Nursing Home. "MANAGER" means DIVERSICARE MANAGEMENT SERVICES CO., and any successor manager of the Nursing Home approved by Lender in writing. "MATURITY DATE" means December 1, 1999. "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 for members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. Section Section 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 4 5 the Social Security Act (42 U.S.C. Section 1395 et seq.) and the regulations promulgated thereunder. "MORTGAGE" means that certain Mortgage and Security Agreement of even date herewith from the Borrower in favor of or for the benefit of Lender and covering the Property. "NOTE" means the Promissory Note of even date herewith in the principal amount of the Loan payable by Borrower to the order of Lender. "NURSING HOME" means the nursing home facility known as "Good Samaritan Nursing Home", presently a 60-bed licensed skilled nursing facility located on the Property, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any assisted care living facility), now or hereafter operated on the Property. "PROPERTY" means the real estate located in St. Petersburg, Pineallas County, Florida, which is more particularly described in the Mortgage, upon which the Nursing Home is located. "REIMBURSEMENT CONTRACTS" means all third party reimbursement contracts for the Nursing Home which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare, Medicaid and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements. "RENTS" means all rent and other payments of whatever nature from time to time payable pursuant to leases of the Property or the Nursing Home, or for retail space or other space at the Property (including, without limitation, rights to payment earned under leases for space in the Improvements for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians' offices, pharmacies and specialty shops). ARTICLE II TERMS OF THE LOAN [RESERVED] ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES 5 6 To induce Lender to enter into this Agreement, and to make the Loan to Borrower, Borrower, Advocat and the Subsidiaries represent and warrant to Lender as follows: 3.1 TITLE TO COLLATERAL. DLC has good and marketable title to all of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning violation, or encumbrance, except those Liens permitted by this Agreement, none of which Liens materially interfere with the security intended to be provided by the Mortgage or the current use of the Property and the Improvements. All Improvements situated on the Property are situated wholly within the boundaries of the Property. 3.2 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 those Liens permitted by this Agreement or those "Permitted Encumbrances" specifically set forth in the Mortgage, none of which Permitted Encumbrances materially interfere with the security intended to be provided by the Mortgage or the current use of the Property and the Improvements. 3.3 MANAGEMENT AGREEMENT. The Management Agreement is in full force and effect and there are no defaults (either monetarily or non-monetarily) by the Manager or Borrower thereunder. ARTICLE IV AFFIRMATIVE COVENANTS OF BORROWER Borrower, Advocat and the Subsidiaries agree with and covenant unto the Lender that until the Loan Obligations have been paid in full, Borrower, Advocat and the Subsidiaries shall: 4.1 FINANCIAL AND OTHER INFORMATION. Provide Lender, and cause the Guarantors and the Manager to provide to Lender, the following financial statements and information on a continuing basis during the term of the Loan: a. Within one hundred twenty (120) days after the end of the fiscal years of the Borrower and Guarantors, audited and consolidated financial statements of Borrower and Guarantors, prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, certified by the chief financial officer of Borrower and Guarantors, as the case may be, to be true and correct. 6 7 b. Within one hundred twenty (120) days after the end of the fiscal year of the Manager, audited and consolidated financial statements of the Manager prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, certified by a financial officer of Manager to be true and correct. c. Within forty-five (45) days after the end of each month, unaudited monthly financial statements of the Borrower and of the operations of the Nursing Home, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the month then ended, certified by a financial officer of the Borrower to be true and correct. d. Within forty-five (45) days of the end of each calendar quarter, unaudited financial statements of the Guarantors, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by a chief financial officer of the Guarantors to be true and correct. e. Within forty-five (45) days of the end of each calendar quarter, unaudited financial statements of the Manager, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by a financial officer of the Manager to be true and correct. f. Within forty-five (45) days of the end of each calendar quarter, a statement of the number of bed days available and the actual patient days incurred for the quarter, together with quarterly census information of the Nursing Home 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 to be true and correct. Such statements of the Nursing Home shall be accompanied by the Summary of Financial Statements and Census Data attached hereto as Exhibit "A". g. As soon as available, but in no event more than thirty (30) days after the filing deadline, as may be extended from time to time, copies of all federal, state and local tax returns of Borrower and Guarantors, together with all supporting documentation and required schedules. h. Within ten (10) days of filing or receipt, all Medicaid cost reports and any amendments thereto filed with 7 8 respect to the Nursing Home, and all responses, audit reports, or other inquiries with respect to such cost reports. i. Within ten (10) days of receipt, a copy of the Medicaid Rate Calculation Worksheet (or the equivalent thereof) issued by the appropriate Medicaid Agency for the Nursing Home. j. Within ten (10) days of receipt, copies of all licensure and certification survey reports and statements of deficiencies with a copy of the Borrower's correction response, as executed and delivered to the appropriate party, attached thereto. k. Within three (3) days of receipt, any and all notices (regardless of form) from any and all licensing and/or certifying agencies that the Nursing Home license and/or the Medicare and/or Medicaid certification of the Nursing Home is being downgraded to a substandard category, revoked, or suspended or that any such action is pending. l. Upon Lender's request, evidence of payment by Borrower or Manager of any applicable provider bed taxes or similar taxes, which taxes Borrower agrees to pay. m. If requested by Lender, within fifteen (15) days of Lender's request, an aged accounts receivable report of the Nursing Home in sufficient detail to show amounts due from each class of patient-mix (i.e., private, Medicare, Medicaid and V.A.) by the account age classifications of 30 days, 60 days, 90 days, 120 days, and over 120 days. n. Within forty-five (45) days of the end of each calendar quarter, a certificate of the chief financial officer of the Borrower, Guarantors and Manager confirming compliance with the covenants and requirements set forth above. The Lender reserves the right to require that the annual financial statements of the Borrower, Guarantors and Manager be audited and prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender if (i) an Event of Default exists, or (ii) if Lender has reasonable grounds to believe that the unaudited financial statements do not accurately represent the financial condition of the Borrower, Guarantors or Manager as the case may be. The Lender further reserves the right to require such other financial information of Borrower, Guarantors, Manager and/or the Nursing Home, in such form and at such other times (including monthly or more frequently) as Lender shall deem necessary, and Borrower agrees promptly to provide or to cause to be provided, such information to Lender. All financial statements must be in the form and detail as Lender may from time to time reasonably request. 8 9 4.2 COMPLIANCE CERTIFICATE. At the time of furnishing the quarterly operating statements required under the foregoing Section, furnish to Lender a compliance certificate in the form attached hereto as Exhibit "B" executed by its chief financial officer. 4.3 DEBT SERVICE COVERAGE REQUIREMENTS. (a) Commencing with the closing of the Loan and thereafter on the first day of each fiscal quarter, provide evidence to Lender within fifteen (15) days of such date of the achievement and maintenance of the following quarterly Debt Service Coverage ratios based upon operations for the previous twelve (12) months: (i) a Debt Service Coverage for the Nursing Home, after deduction of Actual Management Fees, of not less than 1.0 over 1.0; (ii) a Debt Service Coverage for the Nursing Home, after deduction of Assumed Management Fees, of not less than 1.10 over 1.0; and (iii ) a combined Debt Service Coverage for the combined operations of the Nursing Home, Afton Oaks Nursing Home of Houston, Texas, Pinedale Nursing Home of Newport, Arkansas, and Windsor House Nursing Home of Huntsville, Alabama, after deduction of Assumed Management Fees, of not less than 1.25 over 1.0. (b) If DLC fails to achieve or provide evidence of achievement of the above Debt Service Coverages upon fifteen (15) days written notice to DLC, Borrower and the Guarantors will deposit with Lender additional cash or other liquid collateral in an amount which, when added to the first number of the debt service coverage calculation, would have resulted in the noncomplying debt service requirement having been satisfied. If such failure continues for two (2) consecutive quarters, on the third consecutive quarter, if DLC again fails to achieve or provide evidence of the achievement of the Debt Service Coverages required above, upon fifteen (15) days written notice to DLC, Borrower and the Guarantors will deposit with Lender additional cash or other liquid collateral (with credit for amounts currently being held by Lender pursuant to the foregoing sentence), in an amount which, if the same had been applied on the first (1st) day of such twelve (12) month period (or such lesser period as shall have elapsed following the closing of the Loan) to reduce the outstanding principal indebtedness of the Loan Obligations, would have resulted in the noncomplying debt service coverage requirement having been satisfied, and Borrower and the Guarantors agree promptly to provide such additional cash or other liquid collateral. Such additional collateral shall constitute and will be held by the Lender in a standard custodial 9 10 account, and shall constitute additional Collateral for the Loan Obligations and, upon the occurrence of an Event of Default, may be applied by the Lender, in such order and manner as the Lender may elect, to the reduction of the Loan Obligations. Borrower and the Guarantors shall not be entitled to any interest earned on such additional Collateral. Provided that there is no outstanding Default or Event of Default, such additional Collateral which has not been applied to the Loan Obligations will be released by the Lender at such time as DLC provides the Lender with evidence that the required debt service coverage requirements outlined above have been achieved and maintained (without regard to any cash deposited pursuant to this Section 4.11) as of the end of each of two (2) consecutive quarters. 4.4 CAPITAL EXPENDITURES. Cause DLC to make minimum capital expenditures for the Nursing Home in each fiscal year, in the amount of not less than $250 per bed (which such capital expenditures may include ordinary repairs needed to maintain or improve the conditions of the Nursing Home), and within forty-five (45) days of the end of such fiscal year, to provide evidence thereof satisfactory to Lender. In the event that DLC shall fail to do so, Borrower and the Guarantors shall, upon Lender's written request, immediately establish and maintain a capital expenditures reserve fund with Lender equal to the difference between the required amount per bed and the amount per bed actually spent by DLC. Borrower and Guarantors grant to Lender 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. The proceeds of such capital expenditures reserve fund will be disbursed upon Lender's receipt of satisfactory evidence that DLC has made the required capital expenditures. Upon Borrower's failure to adequately maintain the Nursing Home in good condition, Lender may, but shall not be obligated to, make such capital expenditures and may apply the moneys in the capital expenditures reserve fund for such purpose. To the extent there are insufficient moneys in the capital expenditures reserve fund for such purposes, all funds advanced by Lender to make such capital expenditures shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue interest as the Default Rate (defined in the Note) until paid. Upon an Event of Default, Lender may apply any moneys in the capital expenditures reserve fund to the Loan Obligations, in such order and manner as Lender may elect. Routine maintenance and repair expenses which are necessary to improve or maintain the physical condition of the Nursing Home shall count towards the capital expenditures requirement. For any partial fiscal year during which the Loan is outstanding, the required expenditure amount shall be prorated by multiplying the required amount per bed 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. 10 11 ARTICLES V AND VI [RESERVED] 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. A default under the First American Documents or under the Master Loan Agreement or any document executed in favor of Lender and/or First American by Borrower, Advocat or a Subsidiary in connection with the Loan or any other loan made or to be made by Lender and/or First American to Borrower, Advocat or the Subsidiaries; or b. The failure of Borrower, Advocat or the Subsidiaries properly and timely in any material respect to perform or observe any covenant or condition set forth in this Agreement or any other Loan Documents which is susceptible of being cured and is not cured within any applicable cure period as set forth herein or, if no cure period is specified therefor, is not cured within thirty (30) days of Lender's notice to Borrower of such Default; or c. The failure of DLC to take the corrective measures required in this Agreement within the time periods specified following Lender's demand because the Debt Service Coverage for the Nursing Home has not been met; or Notwithstanding anything in this Section or in the Master Loan Agreement, all requirements of notice shall be deemed eliminated if Lender is prevented from declaring an Event of Default by bankruptcy or other applicable law. The cure period, if any, shall then run from the occurrence of the event or condition of Default rather than from the date of notice. 7.2 REMEDIES. Upon the occurrence of any one or more of the foregoing Events of Default, the Lender may, at its option: a. Declare the entire unpaid principal of the Loan Obligations and all other obligations of Borrower, Advocat and the Subsidiaries to Lender in connection with the Master Loan Agreement, whether now existing or hereinafter incurred whether evidenced by notes, guaranties or other instruments, 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. 11 12 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. c. Exercise any and all rights and remedies afforded by the laws of the United States, the states in which any of the Property or other Collateral is located or any other appropriate jurisdiction as may be available for the collection of debts and enforcement of covenants and conditions such as those contained in this Agreement and the Loan Documents. d. Exercise its rights and remedies pursuant to any other Loan Documents and pursuant to the Master Loan Agreement. ARTICLE VIII MISCELLANEOUS 8.1 WAIVER. No remedy conferred upon, or reserved to, the Lender in this Agreement or any of the other Loan Documents is intended to be exclusive of any other remedy or remedies, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity. Exercise of or omission to exercise any right of the Lender shall not affect any subsequent right of Lender to exercise the same. No course of dealing between Borrower, Advocat or the Subsidiaries, jointly and severally and Lender or any delay on the Lender's part in exercising any rights shall operate as a waiver of any of the Lender's rights. No waiver of any Default under this Agreement or any of the other Loan Documents shall extend to or shall affect any subsequent or other then existing Default or shall impair any rights, remedies or powers of Lender. 8.2 INDEMNIFICATION. Borrower, Advocat or the Subsidiaries, jointly and severally shall, at their sole cost and expense, protect, defend, indemnify and hold harmless the Indemnified Parties (defined below) from and against all 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 Property or any interest therein or receipt of any Rents (as defined in the Mortgage); (b) any amendment to, or restructuring of, the Loan Obligations and/or any of the Loan 12 13 Documents; (c) any and all lawful action that may be taken by Lender in connection with the enforcement of the provisions of the Mortgage or the Note or any of the other Loan Documents, whether or not suit is filed in connection with same, or in connection with Borrower, any Guarantors and/or any partner, joint venturer, member or shareholder thereof becoming a party to a voluntary or involuntary federal or state bankruptcy, insolvency or similar proceeding; (d) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (e) any use, nonuse or condition in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (f) any failure on the part of Borrower or the Guarantors to perform or comply with any of the terms of this Agreement or any of the other Loan Documents; (g) any claims by any broker, person or entity claiming to have participated in arranging the making of the Loan evidenced by the Note; (h) any failure of the Property to be in compliance with any applicable laws; (i) any and all claims and demands whatsoever which may be asserted against Lender by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants, or agreements contained in the Lease Agreement or any replacement or renewal thereof or substitution therefor; (j) performance of any labor or services or the furnishing of any materials or other property with respect to the Property, the Improvements or any part thereof, (k) the failure of any person to file timely with the internal revenue service an accurate Form 1099-b, statement for recipients of proceeds from real estate, broker and barter exchange transactions, which may be required in connection with the Mortgage, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the transaction in connection with which the Loan is made; (l) any material misrepresentation made to Lender in this Agreement or in any of the other Loan Documents; (m) any tax on the making and/or recording of the Mortgage, the Note or any of the other Loan Documents; (n) the violation of any requirements of the Employee Retirement Income Security Act of 1974, as amended; (o) any fines or penalties assessed or any corrective costs incurred by Lender if the Nursing Home or any part of the Property is determined to be in violation of any covenants, restrictions of record, or any applicable laws, ordinances, rules or regulations; or (p) 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 and the Guarantors under this Section 8.4 shall survive any termination, satisfaction, assignment, entry of a judgment of foreclosure or exercise of a 13 14 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 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). 8.3 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. 8.4 NOTICES, ETC. Any notice or other communication required or permitted to be given by this Agreement shall be given in the manner provided in the Master Loan Agreement. 8.5 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 the parties hereto shall be entitled to rely upon this Agreement or be entitled to the benefits of this Agreement. 8.6 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and the instruments referred to herein supersede and incorporate all representations, promises, and statements, oral or written, made by Lender in connection with the Loan. This Agreement may not be varied, altered, or amended except by a written instrument executed by an authorized officer of the Lender. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, but such counterparts shall together constitute one and the same instrument. 8.7 LOAN AGREEMENT GOVERNS. The Loan is governed by terms and provisions set forth in this Loan Agreement and the other 14 15 Loan Documents and in the event of any irreconcilable conflict between the terms of the other Loan Documents or the Master Loan Agreement and the terms of this Loan Agreement, the terms of this Loan Agreement shall control; provided, however, in the event there is any apparent conflict between any particular term or provision which appears in both this Loan Agreement and the other Loan Documents or the Master Loan Agreement and it is possible and reasonable for the terms of both this Loan Agreement and the Loan Documents or the Master Loan Agreement to be performed or complied with then notwithstanding the foregoing all of the terms of this Loan Agreement, the Master Loan Agreement and the other Loan Documents shall be performed and complied with. 8.8 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 DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION. 8.9 WAIVER OF JURY TRIAL. BORROWER HEREBY WAIVES ANY RIGHT THAT IT 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 OF LENDER TO MAKE THE LOAN, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. 15 16 IN WITNESS WHEREOF, the parties have caused this Agreement to be properly executed as of the date first above written. WITNESS: BORROWER: DIVERSICARE MANAGEMENT SERVICES, CO., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President LENDER: WITNESS: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation /s/ S.J. Sumner By: /s/ William E. Shine [Seal] - ------------------------------ ------------------------------------------ William E. Shine Executive Vice President WITNESS: GUARANTORS: ADVOCAT INC., a Delaware corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS MARY MARGARET HAMLETT Assistant Secretary Executive Vice President
16 17 WITNESS: DIVERSICARE LEASING CORP., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President ADVOCAT ANCILLARY SERVICES, INC., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President DIVERSICARE CANADA MANAGEMENT SERVICES CO., INC., an Ontario, Canada corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President DIVERSICARE GENERAL PARTNER, INC., a Texas corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President FIRST AMERICAN HEALTH CARE, INC., an Alabama corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President ADVOCAT DISTRIBUTION SERVICES, INC., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President
17 18 ADVOCAT FINANCE, INC., a Delaware corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President DIVERSICARE LEASING CORP. OF ALABAMA, INC., an Alabama corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President
18 19 STATE OF TENNESSEE ) COUNTY OF DAVIDSON ) I, a Notary Public of the County and State aforesaid, certify that Mary Margaret Hamlett personally appeared before me this day and acknowledged that she is the Executive Vice President of Diversicare Management Services, Co., a Tennessee corporation, the Executive Vice President of Diversicare Leasing Corp., a Tennessee corporation, the Executive Vice President of Advocat Inc., a Delaware corporation, the Executive Vice President of Advocat Ancillary Services, Inc., a Tennessee corporation, the Executive Vice President of Diversicare Canada Management Services Co., Inc., an Ontario, Canada corporation, the Executive Vice President of Diversicare General Partner, Inc., a Texas corporation, the Executive Vice President of First American Health Care, Inc., an Alabama corporation, the Executive Vice President of Advocat Distribution Services, Inc., a Tennessee corporation, the Executive Vice President of Advocat Finance, Inc., a Delaware corporation, the Executive Vice President of Diversicare Leasing Corp. of Alabama, Inc., an Alabama corporation, and that by authority duly given and as an act of said corporation, the foregoing instrument was signed and sealed by him in the name of and on behalf of said corporation. Witness my hand and notarial stamp or seal this 27 day of December, 1996. /s/ Sarah Gwaltney ---------------------------------------- Notary Public My Commission Expires: 9-26-98 (STAMP OR SEAL) 19 20 STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, a Notary Public of the County and State aforesaid, certify that William E. Shine personally appeared before me this day and acknowledged that he is Executive Vice President of GMAC Commercial Mortgage Corporation, a California corporation, and that by authority duly given and as an act of the corporation, the foregoing instrument was signed and sealed by him, as Executive Vice President, in the name of and on behalf of the corporation. Witness my hand and notarial stamp or seal this 19th day of December, 1996. NICOLE S. DANIELS ------------------------------------ Notary Public My Commission Expires: 8-21-97 ------------- (STAMP OR SEAL) 20 EX-10.60 4 PROJECT LOAN AGREEMENT 1 EXHIBIT 10.60 PROJECT LOAN AGREEMENT (AFTON OAKS) THIS PROJECT LOAN AGREEMENT (this "Agreement") is made and entered into to be effective as of December 27, 1996, between GMAC-CM Commercial Mortgage Corporation, with offices for purposes of this Agreement at 2200 Woodcrest Place, Suite 305, Birmingham, Alabama 35209 (hereinafter referred to as "Lender"), Advocat Inc., a Delaware corporation (hereinafter referred to as "Advocat"), Diversicare Management Services Co. (the "Borrower" or "DMS"), a Tennessee corporation and wholly-owned subsidiary of Advocat, Diversicare Leasing Corp. ("DLC"), a Tennessee corporation and wholly-owned subsidiary of AFI (defined below), Advocat Ancillary Services, Inc. ("AAS"), a Tennessee corporation and wholly-owned subsidiary of the Borrower, Diversicare Canada Management Services Co., Inc. ("DCMS"), a corporation organized under the laws of Canada and wholly-owned subsidiary of DLC, First American Health Care, Inc. ("FAHC"), an Alabama corporation and wholly-owned subsidiary of DLC, Diversicare Leasing Corp. of Alabama ("DLCA"), an Alabama corporation and wholly-owned subsidiary of DLC, Advocat Distribution Services, Inc. ("ADS"), a Tennessee corporation and wholly-owned subsidiary of DMS, and Advocat Finance, Inc. ("AFI"), a Delaware corporation and wholly-owned subsidiary of DMS (DLC, AAS, DCMS, DGP, FAHC, ADS, DLCA and AFI, together with any other subsidiaries of Advocat or of the Subsidiaries formed or acquired after the date hereof, are sometimes hereinafter referred to collectively as the "Subsidiaries"), 1. Pursuant to the terms of a Master Commitment Letter from GMAC-CM accepted by Advocat on October 22, 1996, the Lender agreed to loan to the Borrower, Advocat, and the Subsidiaries, in accordance with the terms of such letter, sums not to exceed $40,000,000 (the "Acquisition Line"); 2. The Lender, the Borrower, Advocat, the Subsidiaries and First American National Bank, a national banking association ("First American"), have executed a certain Master Credit and Security Agreement of even date herewith setting forth some of the terms and conditions for project loan advancements under the Acquisition Line (the "Master Loan Agreement"); 3. The Borrower has requested a project loan disbursement under the Acquisition Line in the amount of $3,750,000.00; 4. The Lender, the Borrower, Advocat and the Subsidiaries desire to enter into this Agreement to set forth additional terms and conditions of the $3,750,000.00 project loan advance under the Acquisition Line; and 2 5. As a condition of making the above referenced loan, the Subsidiaries and Advocat have agreed to absolutely and unconditionally guarantee the proper payment and performance of the "Guaranty Obligations" as described in the Guaranty Agreement (defined below). 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: "ACTUAL MANAGEMENT FEES" shall mean actual management fees paid or incurred in connection with operation of the Nursing Home. "ASSUMED MANAGEMENT FEES" means assumed management fees of five percent (5%) of net patient revenues of the Nursing Home (after Medicaid and Medicare contractual adjustments). "COLLATERAL" means, collectively, the Property, Improvements, Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money, Permits (to the full extent assignable), Reimbursement Contracts, and all Proceeds, all whether now owned or hereafter acquired, and including replacements, additions, accessions, substitutions, and products thereof and thereto, and all other property which is or hereafter may become subject to a Lien in favor of Lender as security for any of the Loan Obligations. "COMMITMENT LETTER" means collectively (i) the commitment letter issued by Lender and accepted by Borrower dated October 14, 1996 and (ii) the master commitment letter issued by Lender and accepted by Borrower dated. "DEBT SERVICE COVERAGE FOR THE NURSING HOME" means a ratio in which the first number is the sum of pre-tax income of the Borrower from the operations of the Nursing Home as set forth in the quarterly statements provided to Lender (without deduction for Actual Management Fees paid or incurred), calculated based upon the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan), plus interest expense and non-cash expenses or allowances for depreciation and amortization of the Nursing Home for said period, less either Assumed Management Fees or Actual Management Fees (based upon the covenant to which such definition relates) and the second number is the sum of the current portion of the Long Term Debt incurred for the benefit of the Nursing Home (including Long Term Debt attributable to the Loan but excluding 2 3 the outstanding principal balance of the Loan due on the Maturity Date) plus the interest expenses for the Nursing Home (including interest on the Loan) for the applicable period. In calculating "pre-tax income," Extraordinary Income and Extraordinary Expenses shall be excluded. "DEFAULT" means the occurrence or existence of any event which, but for the giving of notice or expiration of time or both, would constitute an Event of Default. "DEFAULT RATE" means a per annum rate equal to four percentage points (4%) plus the LIBOR Rate (as defined in the Note). "EVENT OF DEFAULT" means any "Event of Default" as defined in Article VII hereof. "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. "FIRST AMERICAN DOCUMENTS" means, collectively, all documents executed by Borrower, Guarantors or any subsidiary of Borrower or Guarantors with (or in favor of) Lender and First American in connection with a certain $10,000,000.00 working capital line of credit some or all of which has been or will be funded by First American. "GAAP" means, as in effect from time to time, generally accepted accounting principles consistently applied as promulgated by the American Institute of Certified Public Accountants. "GUARANTY AGREEMENT" means collectively (i) that certain Guaranty Agreement of even date herewith from Advocat to Lender, (ii) that certain Guaranty Agreement of even date herewith from DLC to Lender, and (iii) that certain Guaranty Agreement of even date herewith from all other Subsidiaries to Lender (the foregoing guarantors hereinafter the "Guarantors"). "IMPROVEMENTS" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Property, including, but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and storm sashes, and cleaning apparatus which are or shall be attached to the Property or said buildings, structures or improvements. 3 4 "LIEN" means any voluntary or involuntary mortgage, security deed, deed of trust, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, including those contemplated by or permitted in this Agreement and the other Loan Documents. "LOAN" means the Loan in the principal sum of $3,750,000.00 made by Lender to Borrower as of the date hereof. "LOAN DOCUMENTS" means, collectively, this Agreement, the Note, the Guaranty Agreement, the Mortgage, 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. "LONG TERM DEBT" means all obligations (including capital lease obligations) which are due more than one (1) year from the date as of which the computation thereof is made. "MANAGEMENT AGREEMENT" means that certain Management Agreement dated November 30, 1995 between Manager and Borrower, obligating the Manager to operate and manage the Nursing Home. "MANAGER" means DIVERSICARE MANAGEMENT SERVICES CO., and any successor manager of the Nursing Home approved by Lender in writing. "MATURITY DATE" means December 1, 1999. "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 for members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. Section 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 4 5 the Social Security Act (42 U.S.C. Section 1395 et seq.) and the regulations promulgated thereunder. "MORTGAGE" means that certain Deed of Trust and Security Agreement of even date herewith from the Borrower in favor of or for the benefit of Lender and covering the Property. "NOTE" means the Promissory Note of even date herewith in the principal amount of the Loan payable by Borrower to the order of Lender. "NURSING HOME" means the nursing home facility known as "Afton Oaks Nursing Home", presently a 169-bed licensed skilled nursing facility located on the Property, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any assisted care living facility), now or hereafter operated on the Property. "PROPERTY" means the real estate located in Houston, Harris County, Texas, which is more particularly described in the Mortgage, upon which the Nursing Home is located. "REIMBURSEMENT CONTRACTS" means all third party reimbursement contracts for the Nursing Home which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare, Medicaid and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements. "RENTS" means all rent and other payments of whatever nature from time to time payable pursuant to leases of the Property or the Nursing Home, or for retail space or other space at the Property (including, without limitation, rights to payment earned under leases for space in the Improvements for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians' offices, pharmacies and specialty shops). ARTICLE II TERMS OF THE LOAN [RESERVED] ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, and to make the Loan to Borrower, Borrower, Advocat and the Subsidiaries represent and warrant to Lender as follows: 5 6 3.1 TITLE TO COLLATERAL. DLC has good and marketable title to all of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning violation, or encumbrance, except those Liens permitted by this Agreement, none of which Liens materially interfere with the security intended to be provided by the Mortgage or the current use of the Property and the Improvements. All Improvements situated on the Property are situated wholly within the boundaries of the Property. 3.2 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 those Liens permitted by this Agreement or those "Permitted Encumbrances" specifically set forth in the Mortgage, none of which Permitted Encumbrances materially interfere with the security intended to be provided by the Mortgage or the current use of the Property and the Improvements. 3.3 MANAGEMENT AGREEMENT. The Management Agreement is in full force and effect and there are no defaults (either monetarily or non-monetarily) by the Manager or Borrower thereunder. ARTICLE IV AFFIRMATIVE COVENANTS OF BORROWER Borrower, Advocat and the Subsidiaries agree with and covenant unto the Lender that until the Loan Obligations have been paid in full, Borrower, Advocat and the Subsidiaries shall: 4.1 FINANCIAL AND OTHER INFORMATION. Provide Lender, and cause the Guarantors and the Manager to provide to Lender, the following financial statements and information on a continuing basis during the term of the Loan: a. Within one hundred twenty (120) days after the end of the fiscal years of the Borrower and Guarantors, audited and consolidated financial statements of Borrower and Guarantors, prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, certified by the chief financial officer of Borrower and Guarantors, as the case may be, to be true and correct. b. Within one hundred twenty (120) days after the end of the fiscal year of the Manager, audited and consolidated financial statements of the Manager prepared by a nationally recognized accounting firm or independent certified public 6 7 accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, certified by a financial officer of Manager to be true and correct. c. Within forty-five (45) days after the end of each month, unaudited monthly financial statements of the Borrower and of the operations of the Nursing Home, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the month then ended, certified by a financial officer of the Borrower to be true and correct. d. Within forty-five (45) days of the end of each calendar quarter, unaudited financial statements of the Guarantors, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by a chief financial officer of the Guarantors to be true and correct. e. Within forty-five (45) days of the end of each calendar quarter, unaudited financial statements of the Manager, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by a financial officer of the Manager to be true and correct. f. Within forty-five (45) days of the end of each calendar quarter, a statement of the number of bed days available and the actual patient days incurred for the quarter, together with quarterly census information of the Nursing Home 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 to be true and correct. Such statements of the Nursing Home shall be accompanied by the Summary of Financial Statements and Census Data attached hereto as Exhibit "A". g. As soon as available, but in no event more than thirty (30) days after the filing deadline, as may be extended from time to time, copies of all federal, state and local tax returns of Borrower and Guarantors, together with all supporting documentation and required schedules. h. Within ten (10) days of filing or receipt, all Medicaid cost reports and any amendments thereto filed with respect to the Nursing Home, and all responses, audit reports, or other inquiries with respect to such cost reports. 7 8 i. Within ten (10) days of receipt, a copy of the Medicaid Rate Calculation Worksheet (or the equivalent thereof) issued by the appropriate Medicaid Agency for the Nursing Home. j. Within ten (10) days of receipt, copies of all licensure and certification survey reports and statements of deficiencies with a copy of the Borrower's correction response, as executed and delivered to the appropriate party, attached thereto. k. Within three (3) days of receipt, any and all notices (regardless of form) from any and all licensing and/or certifying agencies that the Nursing Home license and/or the Medicare and/or Medicaid certification of the Nursing Home is being downgraded to a substandard category, revoked, or suspended or that any such action is pending. l. Upon Lender's request, evidence of payment by Borrower or Manager of any applicable provider bed taxes or similar taxes, which taxes Borrower agrees to pay. m. If requested by Lender, within fifteen (15) days of Lender's request, an aged accounts receivable report of the Nursing Home in sufficient detail to show amounts due from each class of patient-mix (i.e., private, Medicare, Medicaid and V.A.) by the account age classifications of 30 days, 60 days, 90 days, 120 days, and over 120 days. n. Within forty-five (45) days of the end of each calendar quarter, a certificate of the chief financial officer of the Borrower, Guarantors and Manager confirming compliance with the covenants and requirements set forth above. The Lender reserves the right to require that the annual financial statements of the Borrower, Guarantors and Manager be audited and prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender if (i) an Event of Default exists, or (ii) if Lender has reasonable grounds to believe that the unaudited financial statements do not accurately represent the financial condition of the Borrower, Guarantors or Manager as the case may be. The Lender further reserves the right to require such other financial information of Borrower, Guarantors, Manager and/or the Nursing Home, in such form and at such other times (including monthly or more frequently) as Lender shall deem necessary, and Borrower agrees promptly to provide or to cause to be provided, such information to Lender. All financial statements must be in the form and detail as Lender may from time to time reasonably request. 4.2 COMPLIANCE CERTIFICATE. At the time of furnishing the quarterly operating statements required under the foregoing 8 9 Section, furnish to Lender a compliance certificate in the form attached hereto as Exhibit "B" executed by its chief financial officer. 4.3 DEBT SERVICE COVERAGE REQUIREMENTS. (a) Commencing with the closing of the Loan and thereafter on the first day of each fiscal quarter, provide evidence to Lender within fifteen (15) days of such date of the achievement and maintenance of the following quarterly Debt Service Coverage ratios based upon operations for the previous twelve (12) months: (i) a Debt Service Coverage for the Nursing Home, after deduction of Actual Management Fees, of not less than 1.0 over 1.0; (ii) a Debt Service Coverage for the Nursing Home, after deduction of Assumed Management Fees, of not less than 1.10 over 1.0*; and (iii ) a combined Debt Service Coverage for the combined operations of the Nursing Home, Good Samaritan Nursing Home of St. Petersburg, Florida, Pinedale Nursing Home of Newport, Arkansas, and Windsor House Nursing Home of Huntsville, Alabama, after deduction of Assumed Management Fees, of not less than 1.25 over 1.0. (b) If DLC fails to achieve or provide evidence of achievement of the above Debt Service Coverages upon fifteen (15) days written notice to DLC, Borrower and the Guarantors will deposit with Lender additional cash or other liquid collateral in an amount which, when added to the first number of the debt service coverage calculation, would have resulted in the noncomplying debt service requirement having been satisfied. If such failure continues for two (2) consecutive quarters, on the third consecutive quarter, if DLC again fails to achieve or provide evidence of the achievement of the Debt Service Coverages required above, upon fifteen (15) days written notice to DLC, Borrower and the Guarantors will deposit with Lender additional cash or other liquid collateral (with credit for amounts currently being held by Lender pursuant to the foregoing sentence), in an amount which, if the same had been applied on the first (1st) day of such twelve (12) month period (or such lesser period as shall have elapsed following the closing of the Loan) to reduce the outstanding principal indebtedness of the Loan Obligations, would have resulted in the noncomplying debt service coverage requirement having been satisfied, and Borrower and the Guarantors agree promptly to provide such additional cash or other liquid collateral. Such additional collateral shall constitute and will be held by the Lender in a standard custodial account, and shall constitute additional Collateral for the Loan 9 10 Obligations and, upon the occurrence of an Event of Default, may be applied by the Lender, in such order and manner as the Lender may elect, to the reduction of the Loan Obligations. Borrower and the Guarantors shall not be entitled to any interest earned on such additional Collateral. Provided that there is no outstanding Default or Event of Default, such additional Collateral which has not been applied to the Loan Obligations will be released by the Lender at such time as DLC provides the Lender with evidence that the required debt service coverage requirements outlined above have been achieved and maintained (without regard to any cash deposited pursuant to this Section 4.11) as of the end of each of two (2) consecutive quarters. 4.4 CAPITAL EXPENDITURES. Cause DLC to make minimum capital expenditures for the Nursing Home in each fiscal year, in the amount of not less than $250 per bed (which such capital expenditures may include ordinary repairs needed to maintain or improve the conditions of the Nursing Home), and within forty-five (45) days of the end of such fiscal year, to provide evidence thereof satisfactory to Lender. In the event that DLC shall fail to do so, Borrower and the Guarantors shall, upon Lender's written request, immediately establish and maintain a capital expenditures reserve fund with Lender equal to the difference between the required amount per bed and the amount per bed actually spent by DLC. Borrower and Guarantors grant to Lender 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. The proceeds of such capital expenditures reserve fund will be disbursed upon Lender's receipt of satisfactory evidence that DLC has made the required capital expenditures. Upon Borrower's failure to adequately maintain the Nursing Home in good condition, Lender may, but shall not be obligated to, make such capital expenditures and may apply the moneys in the capital expenditures reserve fund for such purpose. To the extent there are insufficient moneys in the capital expenditures reserve fund for such purposes, all funds advanced by Lender to make such capital expenditures shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue interest as the Default Rate (defined in the Note) until paid. Upon an Event of Default, Lender may apply any moneys in the capital expenditures reserve fund to the Loan Obligations, in such order and manner as Lender may elect. Routine maintenance and repair expenses which are necessary to improve or maintain the physical condition of the Nursing Home shall count towards the capital expenditures requirement. For any partial fiscal year during which the Loan is outstanding, the required expenditure amount shall be prorated by multiplying the required amount per bed 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. 10 11 ARTICLES V AND VI [RESERVED] 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. A default under the First American Documents or under the Master Loan Agreement or any document executed in favor of Lender and/or First American by Borrower, Advocat or a Subsidiary in connection with the Loan or any other loan made or to be made by Lender and/or First American to Borrower, Advocat or the Subsidiaries; or b. The failure of Borrower, Advocat or the Subsidiaries properly and timely in any material respect to perform or observe any covenant or condition set forth in this Agreement or any other Loan Documents which is susceptible of being cured and is not cured within any applicable cure period as set forth herein or, if no cure period is specified therefor, is not cured within thirty (30) days of Lender's notice to Borrower of such Default; or c. The failure of DLC to take the corrective measures required in this Agreement within the time periods specified following Lender's demand because the Debt Service Coverage for the Nursing Home has not been met; or Notwithstanding anything in this Section or in the Master Loan Agreement, all requirements of notice shall be deemed eliminated if Lender is prevented from declaring an Event of Default by bankruptcy or other applicable law. The cure period, if any, shall then run from the occurrence of the event or condition of Default rather than from the date of notice. 7.2 REMEDIES. Upon the occurrence of any one or more of the foregoing Events of Default, the Lender may, at its option: a. Declare the entire unpaid principal of the Loan Obligations and all other obligations of Borrower, Advocat and the Subsidiaries to Lender in connection with the Master Loan Agreement, whether now existing or hereinafter incurred whether evidenced by notes, guaranties or other instruments, 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. 11 12 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. c. Exercise any and all rights and remedies afforded by the laws of the United States, the states in which any of the Property or other Collateral is located or any other appropriate jurisdiction as may be available for the collection of debts and enforcement of covenants and conditions such as those contained in this Agreement and the Loan Documents. d. Exercise its rights and remedies pursuant to any other Loan Documents and pursuant to the Master Loan Agreement. ARTICLE VIII MISCELLANEOUS 8.1 WAIVER. No remedy conferred upon, or reserved to, the Lender in this Agreement or any of the other Loan Documents is intended to be exclusive of any other remedy or remedies, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity. Exercise of or omission to exercise any right of the Lender shall not affect any subsequent right of Lender to exercise the same. No course of dealing between Borrower, Advocat or the Subsidiaries, jointly and severally and Lender or any delay on the Lender's part in exercising any rights shall operate as a waiver of any of the Lender's rights. No waiver of any Default under this Agreement or any of the other Loan Documents shall extend to or shall affect any subsequent or other then existing Default or shall impair any rights, remedies or powers of Lender. 8.2 INDEMNIFICATION. Borrower, Advocat or the Subsidiaries, jointly and severally shall, at their sole cost and expense, protect, defend, indemnify and hold harmless the Indemnified Parties (defined below) from and against all 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 Property or any interest therein or receipt of any Rents (as defined in the Mortgage); (b) any amendment to, or restructuring of, the Loan Obligations and/or any of the Loan 12 13 Documents; (c) any and all lawful action that may be taken by Lender in connection with the enforcement of the provisions of the Mortgage or the Note or any of the other Loan Documents, whether or not suit is filed in connection with same, or in connection with Borrower, any Guarantors and/or any partner, joint venturer, member or shareholder thereof becoming a party to a voluntary or involuntary federal or state bankruptcy, insolvency or similar proceeding; (d) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (e) any use, nonuse or condition in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (f) any failure on the part of Borrower or the Guarantors to perform or comply with any of the terms of this Agreement or any of the other Loan Documents; (g) any claims by any broker, person or entity claiming to have participated in arranging the making of the Loan evidenced by the Note; (h) any failure of the Property to be in compliance with any applicable laws; (i) any and all claims and demands whatsoever which may be asserted against Lender by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants, or agreements contained in the Lease Agreement or any replacement or renewal thereof or substitution therefor; (j) performance of any labor or services or the furnishing of any materials or other property with respect to the Property, the Improvements or any part thereof, (k) the failure of any person to file timely with the internal revenue service an accurate Form 1099-b, statement for recipients of proceeds from real estate, broker and barter exchange transactions, which may be required in connection with the Mortgage, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the transaction in connection with which the Loan is made; (l) any material misrepresentation made to Lender in this Agreement or in any of the other Loan Documents; (m) any tax on the making and/or recording of the Mortgage, the Note or any of the other Loan Documents; (n) the violation of any requirements of the Employee Retirement Income Security Act of 1974, as amended; (o) any fines or penalties assessed or any corrective costs incurred by Lender if the Nursing Home or any part of the Property is determined to be in violation of any covenants, restrictions of record, or any applicable laws, ordinances, rules or regulations; or (p) 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 and the Guarantors under this Section 8.4 shall survive any termination, satisfaction, assignment, entry of a judgment of foreclosure or exercise of a 13 14 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 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). 8.3 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. 8.4 NOTICES, ETC. Any notice or other communication required or permitted to be given by this Agreement shall be given in the manner provided in the Master Loan Agreement. 8.5 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 the parties hereto shall be entitled to rely upon this Agreement or be entitled to the benefits of this Agreement. 8.6 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and the instruments referred to herein supersede and incorporate all representations, promises, and statements, oral or written, made by Lender in connection with the Loan. This Agreement may not be varied, altered, or amended except by a written instrument executed by an authorized officer of the Lender. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, but such counterparts shall together constitute one and the same instrument. 8.7 LOAN AGREEMENT GOVERNS. The Loan is governed by terms and provisions set forth in this Loan Agreement and the other 14 15 Loan Documents and in the event of any irreconcilable conflict between the terms of the other Loan Documents or the Master Loan Agreement and the terms of this Loan Agreement, the terms of this Loan Agreement shall control; provided, however, in the event there is any apparent conflict between any particular term or provision which appears in both this Loan Agreement and the other Loan Documents or the Master Loan Agreement and it is possible and reasonable for the terms of both this Loan Agreement and the Loan Documents or the Master Loan Agreement to be performed or complied with then notwithstanding the foregoing all of the terms of this Loan Agreement, the Master Loan Agreement and the other Loan Documents shall be performed and complied with. 8.8 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 DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION. 8.9 WAIVER OF JURY TRIAL. BORROWER HEREBY WAIVES ANY RIGHT THAT IT 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 OF LENDER TO MAKE THE LOAN, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. 15 16 IN WITNESS WHEREOF, the parties have caused this Agreement to be properly executed as of the date first above written. WITNESS: BORROWER: DIVERSICARE MANAGEMENT SERVICES, CO., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President LENDER: WITNESS: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation /s/ S.J. Sumner By: /s/ William E. Shine[Seal] - ------------------------------ ------------------------------------ S.J. Sumner William E. Shine Executive Vice President WITNESS: GUARANTORS: ADVOCAT INC., a Delaware corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President
16 17 WITNESS: DIVERSICARE LEASING CORP., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President ADVOCAT ANCILLARY SERVICES, INC., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President DIVERSICARE CANADA MANAGEMENT SERVICES CO., INC., an Ontario, Canada corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President DIVERSICARE GENERAL PARTNER, INC., a Texas corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President FIRST AMERICAN HEALTH CARE, INC., an Alabama corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President ADVOCAT DISTRIBUTION SERVICES, INC., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President
17 18 ADVOCAT FINANCE, INC., a Delaware corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President DIVERSICARE LEASING CORP. OF ALABAMA, INC., an Alabama corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ------------------------------ ------------------------------------------ C. PATRICK WILLIAMS Printed: MARY MARGARET HAMLETT Assistant Secretary Title: Executive Vice President
18 19 STATE OF Tennessee ) COUNTY OF Davidson ) I, a Notary Public of the County and State aforesaid, certify that Mary Margaret Hamlett personally appeared before me this day and acknowledged that she is the Executive Vice President of Diversicare Management Services, Co., a Tennessee corporation, the Executive Vice President of Diversicare Leasing Corp., a Tennessee corporation, the Executive Vice President of Advocat Inc., a Delaware corporation, the Executive Vice President of Advocat Ancillary Services, Inc., a Tennessee corporation, the Executive Vice President of Diversicare Canada Management Services Co., Inc., an Ontario, Canada corporation, the Executive Vice President of Diversicare General Partner, Inc., a Texas corporation, the Executive Vice President of First American Health Care, Inc., an Alabama corporation, the Executive Vice President of Advocat Distribution Services, Inc., a Tennessee corporation, the Executive Vice President of Advocat Finance, Inc., a Delaware corporation, the Executive Vice President of Diversicare Leasing Corp. of Alabama, Inc., an Alabama corporation, and that by authority duly given and as an act of said corporation, the foregoing instrument was signed and sealed by him in the name of and on behalf of said corporation. Witness my hand and notarial stamp or seal this 27th day of December, 1996. /s/ Sarah Gwaltney ----------------------------------- Notary Public My Commission Expires: 09-26-98 ------------ (STAMP OR SEAL) 19 20 STATE OF ALABAMA ) COUNTY OF JEFFERSON ) I, a Notary Public of the County and State aforesaid, certify that William E. Shine personally appeared before me this day and acknowledged that he is Executive Vice President of GMAC Commercial Mortgage Corporation, a California corporation, and that by authority duly given and as an act of the corporation, the foregoing instrument was signed and sealed by him, as Executive Vice President, in the name of and on behalf of the corporation. Witness my hand and notarial stamp or seal this 19th day of December, 1996. /s/ Nicole S. Daniels ----------------------------------- Notary Public My Commission Expires: 8-27-97 (STAMP OR SEAL) 20 EX-10.61 5 PROJECT LOAN AGREEMENT 1 EXHIBIT 10.61 PROJECT LOAN AGREEMENT (PINEDALE) THIS PROJECT LOAN AGREEMENT (this "Agreement") is made and entered into to be effective as of December 27, 1996, between GMAC-CM Commercial Mortgage Corporation, with offices for purposes of this Agreement at 2200 Woodcrest Place, Suite 305, Birmingham, Alabama 35209 (hereinafter referred to as "Lender"), Advocat Inc., a Delaware corporation (hereinafter referred to as "Advocat"), Diversicare Management Services Co. (the "Borrower" or "DMS"), a Tennessee corporation and wholly-owned subsidiary of Advocat, Diversicare Leasing Corp. ("DLC"), a Tennessee corporation and wholly-owned subsidiary of AFI (defined below), Advocat Ancillary Services, Inc. ("AAS"), a Tennessee corporation and wholly-owned subsidiary of the Borrower, Diversicare Canada Management Services Co., Inc. ("DCMS"), a corporation organized under the laws of Canada and wholly-owned subsidiary of DLC, First American Health Care, Inc. ("FAHC"), an Alabama corporation and wholly-owned subsidiary of DLC, Diversicare Leasing Corp. of Alabama ("DLCA"), an Alabama corporation and wholly-owned subsidiary of DLC, Advocat Distribution Services, Inc. ("ADS"), a Tennessee corporation and wholly-owned subsidiary of DMS, and Advocat Finance, Inc. ("AFI"), a Delaware corporation and wholly-owned subsidiary of DMS (DLC, AAS, DCMS, DGP, FAHC, ADS, DLCA and AFI, together with any other subsidiaries of Advocat or of the Subsidiaries formed or acquired after the date hereof, are sometimes hereinafter referred to collectively as the "Subsidiaries"), 1. Pursuant to the terms of a Master Commitment Letter from GMAC-CM accepted by Advocat on October 22, 1996, the Lender agreed to loan to the Borrower, Advocat, and the Subsidiaries, in accordance with the terms of such letter, sums not to exceed $40,000,000 (the "Acquisition Line"); 2. The Lender, the Borrower, Advocat, the Subsidiaries and First American National Bank, a national banking association ("First American"), have executed a certain Master Credit and Security Agreement of even date herewith setting forth some of the terms and conditions for project loan advancements under the Acquisition Line (the "Master Loan Agreement"); 3. The Borrower has requested a project loan disbursement under the Acquisition Line in the amount of $2,805,000.00; 4. The Lender, the Borrower, Advocat and the Subsidiaries desire to enter into this Agreement to set forth additional terms and conditions of the $2,805,000.00 project loan advance under the Acquisition Line; and 2 5. As a condition of making the above referenced loan, the Subsidiaries and Advocat have agreed to absolutely and unconditionally guarantee the proper payment and performance of the "Guaranty Obligations" as described in the Guaranty Agreement (defined below). 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: "ACTUAL MANAGEMENT FEES" shall mean actual management fees paid or incurred in connection with operation of the Nursing Home. "ASSUMED MANAGEMENT FEES" means assumed management fees of five percent (5%) of net patient revenues of the Nursing Home (after Medicaid and Medicare contractual adjustments). "COLLATERAL" means, collectively, the Property, Improvements, Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money, Permits (to the full extent assignable), Reimbursement Contracts, and all Proceeds, all whether now owned or hereafter acquired, and including replacements, additions, accessions, substitutions, and products thereof and thereto, and all other property which is or hereafter may become subject to a Lien in favor of Lender as security for any of the Loan Obligations. "COMMITMENT LETTER" means collectively (i) the commitment letter issued by Lender and accepted by Borrower dated October 14, 1996 and (ii) the master commitment letter issued by Lender and accepted by Borrower dated. "DEBT SERVICE COVERAGE FOR THE NURSING HOME" means a ratio in which the first number is the sum of pre-tax income of the Borrower from the operations of the Nursing Home as set forth in the quarterly statements provided to Lender (without deduction for Actual Management Fees paid or incurred), calculated based upon the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan), plus interest expense and non-cash expenses or allowances for depreciation and amortization of the Nursing Home for said period, less either Assumed Management Fees or Actual Management Fees (based upon the covenant to which such definition relates) and the second number is the sum of the current portion of the Long Term Debt incurred for the benefit of the Nursing Home (including Long Term Debt attributable to the Loan but excluding 2 3 the outstanding principal balance of the Loan due on the Maturity Date) plus the interest expenses for the Nursing Home (including interest on the Loan) for the applicable period. In calculating "pre-tax income," Extraordinary Income and Extraordinary Expenses shall be excluded. "DEFAULT" means the occurrence or existence of any event which, but for the giving of notice or expiration of time or both, would constitute an Event of Default. "DEFAULT RATE" means a per annum rate equal to four percentage points (4%) plus the LIBOR Rate (as defined in the Note). "EVENT OF DEFAULT" means any "Event of Default" as defined in Article VII hereof. "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. "FIRST AMERICAN DOCUMENTS" means, collectively, all documents executed by Borrower, Guarantors or any subsidiary of Borrower or Guarantors with (or in favor of) Lender and First American in connection with a certain $10,000,000.00 working capital line of credit some or all of which has been or will be funded by First American. "GAAP" means, as in effect from time to time, generally accepted accounting principles consistently applied as promulgated by the American Institute of Certified Public Accountants. "GUARANTY AGREEMENT" means collectively (i) that certain Guaranty Agreement of even date herewith from Advocat to Lender, (ii) that certain Guaranty Agreement of even date herewith from DLC to Lender, and (iii) that certain Guaranty Agreement of even date herewith from all other Subsidiaries to Lender (the foregoing guarantors hereinafter the "Guarantors"). "IMPROVEMENTS" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Property, including, but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and storm sashes, and cleaning apparatus which are or shall be attached to the Property or said buildings, structures or improvements. 3 4 "LIEN" means any voluntary or involuntary mortgage, security deed, deed of trust, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, including those contemplated by or permitted in this Agreement and the other Loan Documents. "LOAN" means the Loan in the principal sum of $2,805,000.00 made by Lender to Borrower as of the date hereof. "LOAN DOCUMENTS" means, collectively, this Agreement, the Note, the Guaranty Agreement, the Mortgage, 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. "LONG TERM DEBT" means all obligations (including capital lease obligations) which are due more than one (1) year from the date as of which the computation thereof is made. "MANAGEMENT AGREEMENT" means that certain Management Agreement dated December 27, 1996 between Manager and Borrower, obligating the Manager to operate and manage the Nursing Home. "MANAGER" means DIVERSICARE MANAGEMENT SERVICES CO., and any successor manager of the Nursing Home approved by Lender in writing. "MATURITY DATE" means December 1, 1999. "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 for members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. Section Section 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 4 5 the Social Security Act (42 U.S.C. Section Section 1395 et seq.) and the regulations promulgated thereunder. "MORTGAGE" means that certain Mortgage and Security Agreement of even date herewith from the Borrower in favor of or for the benefit of Lender and covering the Property. "NOTE" means the Promissory Note of even date herewith in the principal amount of the Loan payable by Borrower to the order of Lender. "NURSING HOME" means the nursing home facility known as "Pinedale Nursing Home", presently a 130-bed licensed skilled nursing facility located on the Property, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any assisted care living facility), now or hereafter operated on the Property. "PROPERTY" means the real estate located in Newport, Jackson County, Arkansas, which is more particularly described in the Mortgage, upon which the Nursing Home is located. "REIMBURSEMENT CONTRACTS" means all third party reimbursement contracts for the Nursing Home which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare, Medicaid and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements. "RENTS" means all rent and other payments of whatever nature from time to time payable pursuant to leases of the Property or the Nursing Home, or for retail space or other space at the Property (including, without limitation, rights to payment earned under leases for space in the Improvements for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians' offices, pharmacies and specialty shops). ARTICLE II TERMS OF THE LOAN [RESERVED] ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, and to make the Loan to Borrower, Borrower, Advocat and the Subsidiaries represent and warrant to Lender as follows: 5 6 3.1 TITLE TO COLLATERAL. DLC has good and marketable title to all of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning violation, or encumbrance, except those Liens permitted by this Agreement, none of which Liens materially interfere with the security intended to be provided by the Mortgage or the current use of the Property and the Improvements. All Improvements situated on the Property are situated wholly within the boundaries of the Property. 3.2 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 those Liens permitted by this Agreement or those "Permitted Encumbrances" specifically set forth in the Mortgage, none of which Permitted Encumbrances materially interfere with the security intended to be provided by the Mortgage or the current use of the Property and the Improvements. 3.3 MANAGEMENT AGREEMENT. The Management Agreement is in full force and effect and there are no defaults (either monetarily or non-monetarily) by the Manager or Borrower thereunder. ARTICLE IV AFFIRMATIVE COVENANTS OF BORROWER Borrower, Advocat and the Subsidiaries agree with and covenant unto the Lender that until the Loan Obligations have been paid in full, Borrower, Advocat and the Subsidiaries shall: 4.1 FINANCIAL AND OTHER INFORMATION. Provide Lender, and cause the Guarantors and the Manager to provide to Lender, the following financial statements and information on a continuing basis during the term of the Loan: a. Within one hundred twenty (120) days after the end of the fiscal years of the Borrower and Guarantors, audited and consolidated financial statements of Borrower and Guarantors, prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, certified by the chief financial officer of Borrower and Guarantors, as the case may be, to be true and correct. b. Within one hundred twenty (120) days after the end of the fiscal year of the Manager, audited and consolidated financial statements of the Manager prepared by a nationally recognized accounting firm or independent certified public 6 7 accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, certified by a financial officer of Manager to be true and correct. c. Within forty-five (45) days after the end of each month, unaudited monthly financial statements of the Borrower and of the operations of the Nursing Home, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the month then ended, certified by a financial officer of the Borrower to be true and correct. d. Within forty-five (45) days of the end of each calendar quarter, unaudited financial statements of the Guarantors, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by a chief financial officer of the Guarantors to be true and correct. e. Within forty-five (45) days of the end of each calendar quarter, unaudited financial statements of the Manager, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by a financial officer of the Manager to be true and correct. f. Within forty-five (45) days of the end of each calendar quarter, a statement of the number of bed days available and the actual patient days incurred for the quarter, together with quarterly census information of the Nursing Home 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 to be true and correct. Such statements of the Nursing Home shall be accompanied by the Summary of Financial Statements and Census Data attached hereto as Exhibit "A". g. As soon as available, but in no event more than thirty (30) days after the filing deadline, as may be extended from time to time, copies of all federal, state and local tax returns of Borrower and Guarantors, together with all supporting documentation and required schedules. h. Within ten (10) days of filing or receipt, all Medicaid cost reports and any amendments thereto filed with respect to the Nursing Home, and all responses, audit reports, or other inquiries with respect to such cost reports. 7 8 i. Within ten (10) days of receipt, a copy of the Medicaid Rate Calculation Worksheet (or the equivalent thereof) issued by the appropriate Medicaid Agency for the Nursing Home. j. Within ten (10) days of receipt, copies of all licensure and certification survey reports and statements of deficiencies with a copy of the Borrower's correction response, as executed and delivered to the appropriate party, attached thereto. k. Within three (3) days of receipt, any and all notices (regardless of form) from any and all licensing and/or certifying agencies that the Nursing Home license and/or the Medicare and/or Medicaid certification of the Nursing Home is being downgraded to a substandard category, revoked, or suspended or that any such action is pending. l. Upon Lender's request, evidence of payment by Borrower or Manager of any applicable provider bed taxes or similar taxes, which taxes Borrower agrees to pay. m. If requested by Lender, within fifteen (15) days of Lender's request, an aged accounts receivable report of the Nursing Home in sufficient detail to show amounts due from each class of patient-mix (i.e., private, Medicare, Medicaid and V.A.) by the account age classifications of 30 days, 60 days, 90 days, 120 days, and over 120 days. n. Within forty-five (45) days of the end of each calendar quarter, a certificate of the chief financial officer of the Borrower, Guarantors and Manager confirming compliance with the covenants and requirements set forth above. The Lender reserves the right to require that the annual financial statements of the Borrower, Guarantors and Manager be audited and prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender if (i) an Event of Default exists, or (ii) if Lender has reasonable grounds to believe that the unaudited financial statements do not accurately represent the financial condition of the Borrower, Guarantors or Manager as the case may be. The Lender further reserves the right to require such other financial information of Borrower, Guarantors, Manager and/or the Nursing Home, in such form and at such other times (including monthly or more frequently) as Lender shall deem necessary, and Borrower agrees promptly to provide or to cause to be provided, such information to Lender. All financial statements must be in the form and detail as Lender may from time to time reasonably request. 4.2 COMPLIANCE CERTIFICATE. At the time of furnishing the quarterly operating statements required under the foregoing 8 9 Section, furnish to Lender a compliance certificate in the form attached hereto as Exhibit "B" executed by its chief financial officer. 4.3 DEBT SERVICE COVERAGE REQUIREMENTS. (a) Commencing with the closing of the Loan and thereafter on the first day of each fiscal quarter, provide evidence to Lender within fifteen (15) days of such date of the achievement and maintenance of the following quarterly Debt Service Coverage ratios based upon operations for the previous twelve (12) months: (i) a Debt Service Coverage for the Nursing Home, after deduction of Actual Management Fees, of not less than 1.0 over 1.0; (ii) a Debt Service Coverage for the Nursing Home, after deduction of Assumed Management Fees, of not less than 1.10 over 1.0; and (iii) a combined Debt Service Coverage for the combined operations of the Nursing Home, Good Samaritan Nursing Home of St. Petersburg, Florida, Afton Oaks Nursing Home of Houston, Texas, and Windsor House Nursing Home of Huntsville, Alabama, after deduction of Assumed Management Fees, of not less than 1.25 over 1.0. (b) If DLC fails to achieve or provide evidence of achievement of the above Debt Service Coverages upon fifteen (15) days written notice to DLC, Borrower and the Guarantors will deposit with Lender additional cash or other liquid collateral in an amount which, when added to the first number of the debt service coverage calculation, would have resulted in the noncomplying debt service requirement having been satisfied. If such failure continues for two (2) consecutive quarters, on the third consecutive quarter, if DLC again fails to achieve or provide evidence of the achievement of the Debt Service Coverages required above, upon fifteen (15) days written notice to DLC, Borrower and the Guarantors will deposit with Lender additional cash or other liquid collateral (with credit for amounts currently being held by Lender pursuant to the foregoing sentence), in an amount which, if the same had been applied on the first (1st) day of such twelve (12) month period (or such lesser period as shall have elapsed following the closing of the Loan) to reduce the outstanding principal indebtedness of the Loan Obligations, would have resulted in the noncomplying debt service coverage requirement having been satisfied, and Borrower and the Guarantors agree promptly to provide such additional cash or other liquid collateral. Such additional collateral shall constitute and will be held by the Lender in a standard custodial account, and shall constitute additional Collateral for the Loan 9 10 Obligations and, upon the occurrence of an Event of Default, may be applied by the Lender, in such order and manner as the Lender may elect, to the reduction of the Loan Obligations. Borrower and the Guarantors shall not be entitled to any interest earned on such additional Collateral. Provided that there is no outstanding Default or Event of Default, such additional Collateral which has not been applied to the Loan Obligations will be released by the Lender at such time as DLC provides the Lender with evidence that the required debt service coverage requirements outlined above have been achieved and maintained (without regard to any cash deposited pursuant to this Section 4.11) as of the end of each of two (2) consecutive quarters. 4.4 CAPITAL EXPENDITURES. Cause DLC to make minimum capital expenditures for the Nursing Home in each fiscal year, in the amount of not less than $250 per bed (which such capital expenditures may include ordinary repairs needed to maintain or improve the conditions of the Nursing Home), and within forty-five (45) days of the end of such fiscal year, to provide evidence thereof satisfactory to Lender. In the event that DLC shall fail to do so, Borrower and the Guarantors shall, upon Lender's written request, immediately establish and maintain a capital expenditures reserve fund with Lender equal to the difference between the required amount per bed and the amount per bed actually spent by DLC. Borrower and Guarantors grant to Lender 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. The proceeds of such capital expenditures reserve fund will be disbursed upon Lender's receipt of satisfactory evidence that DLC has made the required capital expenditures. Upon Borrower's failure to adequately maintain the Nursing Home in good condition, Lender may, but shall not be obligated to, make such capital expenditures and may apply the moneys in the capital expenditures reserve fund for such purpose. To the extent there are insufficient moneys in the capital expenditures reserve fund for such purposes, all funds advanced by Lender to make such capital expenditures shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue interest as the Default Rate (defined in the Note) until paid. Upon an Event of Default, Lender may apply any moneys in the capital expenditures reserve fund to the Loan Obligations, in such order and manner as Lender may elect. Routine maintenance and repair expenses which are necessary to improve or maintain the physical condition of the Nursing Home shall count towards the capital expenditures requirement. For any partial fiscal year during which the Loan is outstanding, the required expenditure amount shall be prorated by multiplying the required amount per bed 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. 10 11 ARTICLES V AND VI [RESERVED] 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. A default under the First American Documents or under the Master Loan Agreement or any document executed in favor of Lender and/or First American by Borrower, Advocat or a Subsidiary in connection with the Loan or any other loan made or to be made by Lender and/or First American to Borrower, Advocat or the Subsidiaries; or b. The failure of Borrower, Advocat or the Subsidiaries properly and timely in any material respect to perform or observe any covenant or condition set forth in this Agreement or any other Loan Documents which is susceptible of being cured and is not cured within any applicable cure period as set forth herein or, if no cure period is specified therefor, is not cured within thirty (30) days of Lender's notice to Borrower of such Default; or c. The failure of DLC to take the corrective measures required in this Agreement within the time periods specified following Lender's demand because the Debt Service Coverage for the Nursing Home has not been met; or Notwithstanding anything in this Section or in the Master Loan Agreement, all requirements of notice shall be deemed eliminated if Lender is prevented from declaring an Event of Default by bankruptcy or other applicable law. The cure period, if any, shall then run from the occurrence of the event or condition of Default rather than from the date of notice. 7.2 REMEDIES. Upon the occurrence of any one or more of the foregoing Events of Default, the Lender may, at its option: a. Declare the entire unpaid principal of the Loan Obligations and all other obligations of Borrower, Advocat and the Subsidiaries to Lender in connection with the Master Loan Agreement, whether now existing or hereinafter incurred whether evidenced by notes, guaranties or other instruments, 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. 11 12 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. c. Exercise any and all rights and remedies afforded by the laws of the United States, the states in which any of the Property or other Collateral is located or any other appropriate jurisdiction as may be available for the collection of debts and enforcement of covenants and conditions such as those contained in this Agreement and the Loan Documents. d. Exercise its rights and remedies pursuant to any other Loan Documents and pursuant to the Master Loan Agreement. ARTICLE VIII MISCELLANEOUS 8.1 WAIVER. No remedy conferred upon, or reserved to, the Lender in this Agreement or any of the other Loan Documents is intended to be exclusive of any other remedy or remedies, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity. Exercise of or omission to exercise any right of the Lender shall not affect any subsequent right of Lender to exercise the same. No course of dealing between Borrower, Advocat or the Subsidiaries, jointly and severally and Lender or any delay on the Lender's part in exercising any rights shall operate as a waiver of any of the Lender's rights. No waiver of any Default under this Agreement or any of the other Loan Documents shall extend to or shall affect any subsequent or other then existing Default or shall impair any rights, remedies or powers of Lender. 8.2 INDEMNIFICATION. Borrower, Advocat or the Subsidiaries, jointly and severally shall, at their sole cost and expense, protect, defend, indemnify and hold harmless the Indemnified Parties (defined below) from and against all 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 Property or any interest therein or receipt of any Rents (as defined in the Mortgage); (b) any amendment to, or restructuring of, the Loan Obligations and/or any of the Loan 12 13 Documents; (c) any and all lawful action that may be taken by Lender in connection with the enforcement of the provisions of the Mortgage or the Note or any of the other Loan Documents, whether or not suit is filed in connection with same, or in connection with Borrower, any Guarantors and/or any partner, joint venturer, member or shareholder thereof becoming a party to a voluntary or involuntary federal or state bankruptcy, insolvency or similar proceeding; (d) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (e) any use, nonuse or condition in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (f) any failure on the part of Borrower or the Guarantors to perform or comply with any of the terms of this Agreement or any of the other Loan Documents; (g) any claims by any broker, person or entity claiming to have participated in arranging the making of the Loan evidenced by the Note; (h) any failure of the Property to be in compliance with any applicable laws; (i) any and all claims and demands whatsoever which may be asserted against Lender by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants, or agreements contained in the Lease Agreement or any replacement or renewal thereof or substitution therefor; (j) performance of any labor or services or the furnishing of any materials or other property with respect to the Property, the Improvements or any part thereof, (k) the failure of any person to file timely with the internal revenue service an accurate Form 1099-b, statement for recipients of proceeds from real estate, broker and barter exchange transactions, which may be required in connection with the Mortgage, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the transaction in connection with which the Loan is made; (l) any material misrepresentation made to Lender in this Agreement or in any of the other Loan Documents; (m) any tax on the making and/or recording of the Mortgage, the Note or any of the other Loan Documents; (n) the violation of any requirements of the Employee Retirement Income Security Act of 1974, as amended; (o) any fines or penalties assessed or any corrective costs incurred by Lender if the Nursing Home or any part of the Property is determined to be in violation of any covenants, restrictions of record, or any applicable laws, ordinances, rules or regulations; or (p) 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 and the Guarantors under this Section 8.4 shall survive any termination, satisfaction, assignment, entry of a judgment of foreclosure or exercise of a 13 14 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 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). 8.3 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. 8.4 NOTICES, ETC. Any notice or other communication required or permitted to be given by this Agreement shall be given in the manner provided in the Master Loan Agreement. 8.5 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 the parties hereto shall be entitled to rely upon this Agreement or be entitled to the benefits of this Agreement. 8.6 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and the instruments referred to herein supersede and incorporate all representations, promises, and statements, oral or written, made by Lender in connection with the Loan. This Agreement may not be varied, altered, or amended except by a written instrument executed by an authorized officer of the Lender. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, but such counterparts shall together constitute one and the same instrument. 8.7 LOAN AGREEMENT GOVERNS. The Loan is governed by terms and provisions set forth in this Loan Agreement and the other 14 15 Loan Documents and in the event of any irreconcilable conflict between the terms of the other Loan Documents or the Master Loan Agreement and the terms of this Loan Agreement, the terms of this Loan Agreement shall control; provided, however, in the event there is any apparent conflict between any particular term or provision which appears in both this Loan Agreement and the other Loan Documents or the Master Loan Agreement and it is possible and reasonable for the terms of both this Loan Agreement and the Loan Documents or the Master Loan Agreement to be performed or complied with then notwithstanding the foregoing all of the terms of this Loan Agreement, the Master Loan Agreement and the other Loan Documents shall be performed and complied with. 8.8 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 DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION. 8.9 WAIVER OF JURY TRIAL. BORROWER HEREBY WAIVES ANY RIGHT THAT IT 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 OF LENDER TO MAKE THE LOAN, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. 15 16 IN WITNESS WHEREOF, the parties have caused this Agreement to be properly executed as of the date first above written. WITNESS: BORROWER: DIVERSICARE MANAGEMENT SERVICES, CO., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ Assistant Secretary Name: Mary Margaret Hamlett C. Patrick Williams ----------------------------- Title: Executive Vice President ---------------------------- LENDER: WITNESS: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation /s/ S.J. Summer By: /s/ William E. Shine [Seal] - ----------------------------- ------------------------------ William E. Shine Executive Vice President WITNESS: GUARANTORS: ADVOCAT INC., a Delaware corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Name: Mary Margaret Hamlett Assistant Secretary ----------------------------- Title: Executive Vice President ---------------------------- 16 17 WITNESS: DIVERSICARE LEASING CORP., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- ADVOCAT ANCILLARY SERVICES, INC., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- DIVERSICARE CANADA MANAGEMENT SERVICES CO., INC., an Ontario, Canada corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- DIVERSICARE GENERAL PARTNER, INC., a Texas corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- FIRST AMERICAN HEALTH CARE, INC., an Alabama corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- ADVOCAT DISTRIBUTION SERVICES, INC., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- 17 18 ADVOCAT FINANCE, INC., a Delaware corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- DIVERSICARE LEASING CORP. OF ALABAMA, INC., an Alabama corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- 18 19 STATE OF Tennessee ) COUNTY OF Davidson ) I, a Notary Public of the County and State aforesaid, certify that Mary Margaret Hamlett personally appeared before me this day and acknowledged that she is the Executive Vice President of Diversicare Management Services, Co., a Tennessee corporation, the Executive Vice President of Diversicare Leasing Corp., a Tennessee corporation, the Executive Vice President of Advocat Inc., a Delaware corporation, the Executive Vice President of Advocat Ancillary Services, Inc., a Tennessee corporation, the Executive Vice President of Diversicare Canada Management Services Co., Inc., an Ontario, Canada corporation, the Executive Vice President of Diversicare General Partner, Inc., a Texas corporation, the Executive Vice President of First American Health Care, Inc., an Alabama corporation, the Executive Vice President of Advocat Distribution Services, Inc., a Tennessee corporation, the Executive Vice President of Advocat Finance, Inc., a Delaware corporation, the Executive Vice President of Diversicare Leasing Corp. of Alabama, Inc., an Alabama corporation, and that by authority duly given and as an act of said corporation, the foregoing instrument was signed and sealed by him in the name of and on behalf of said corporation. Witness my hand and notarial stamp or seal this 27th day of December, 1996. /s/ Sarah Gwaltney ----------------------------------- Notary Public My Commission Expires: 9-26-98 (STAMP OR SEAL) 19 20 STATE OF Alabama ) COUNTY OF Jefferson ) I, a Notary Public of the County and State aforesaid, certify that William E. Shine personally appeared before me this day and acknowledged that he is Executive Vice President of GMAC Commercial Mortgage Corporation, a California corporation, and that by authority duly given and as an act of the corporation, the foregoing instrument was signed and sealed by him, as Executive Vice President, in the name of and on behalf of the corporation. Witness my hand and notarial stamp or seal this 19th day of December, 1996. /s/ Nicole S. Daniels ----------------------------------- Notary Public My Commission Expires: 8-21-97 (STAMP OR SEAL) 20 EX-10.62 6 PROJECT LOAN AGREEMENT 1 EXHIBIT 10.62 PROJECT LOAN AGREEMENT (WINDSOR HOUSE) THIS PROJECT LOAN AGREEMENT (this "Agreement") is made and entered into to be effective as of December 27, 1996, between GMAC-CM Commercial Mortgage Corporation, with offices for purposes of this Agreement at 2200 Woodcrest Place, Suite 305, Birmingham, Alabama 35209 (hereinafter referred to as "Lender"), Advocat Inc., a Delaware corporation (hereinafter referred to as "Advocat"), Diversicare Management Services Co. (the "Borrower" or "DMS"), a Tennessee corporation and wholly-owned subsidiary of Advocat, Diversicare Leasing Corp. ("DLC"), a Tennessee corporation and wholly-owned subsidiary of AFI (defined below), Advocat Ancillary Services, Inc. ("AAS"), a Tennessee corporation and wholly-owned subsidiary of the Borrower, Diversicare Canada Management Services Co., Inc. ("DCMS"), a corporation organized under the laws of Canada and wholly-owned subsidiary of DLC, First American Health Care, Inc. ("FAHC"), an Alabama corporation and wholly-owned subsidiary of DLC, Diversicare Leasing Corp. of Alabama ("DLCA"), an Alabama corporation and wholly-owned subsidiary of DLC, Advocat Distribution Services, Inc. ("ADS"), a Tennessee corporation and wholly-owned subsidiary of DMS, and Advocat Finance, Inc. ("AFI"), a Delaware corporation and wholly-owned subsidiary of DMS (DLC, AAS, DCMS, DGP, FAHC, ADS, DLCA and AFI, together with any other subsidiaries of Advocat or of the Subsidiaries formed or acquired after the date hereof, are sometimes hereinafter referred to collectively as the "Subsidiaries"), 1. Pursuant to the terms of a Master Commitment Letter from GMAC-CM accepted by Advocat on October 22, 1996, the Lender agreed to loan to the Borrower, Advocat, and the Subsidiaries, in accordance with the terms of such letter, sums not to exceed $40,000,000 (the "Acquisition Line"); 2. The Lender, the Borrower, Advocat, the Subsidiaries and First American National Bank, a national banking association ("First American"), have executed a certain Master Credit and Security Agreement of even date herewith setting forth some of the terms and conditions for project loan advancements under the Acquisition Line (the "Master Loan Agreement"); 3. The Borrower has requested a project loan disbursement under the Acquisition Line in the amount of $3,800,000.00; 4. The Lender, the Borrower, Advocat and the Subsidiaries desire to enter into this Agreement to set forth additional terms and conditions of the $3,800,000.00 project loan advance under the Acquisition Line; and 2 5. As a condition of making the above referenced loan, the Subsidiaries and Advocat have agreed to absolutely and unconditionally guarantee the proper payment and performance of the "Guaranty Obligations" as described in the Guaranty Agreement (defined below). 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: "ACTUAL MANAGEMENT FEES" shall mean actual management fees paid or incurred in connection with operation of the Nursing Home. "ASSUMED MANAGEMENT FEES" means assumed management fees of five percent (5%) of net patient revenues of the Nursing Home (after Medicaid and Medicare contractual adjustments). "COLLATERAL" means, collectively, the Property, Improvements, Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money, Permits (to the full extent assignable), Reimbursement Contracts, and all Proceeds, all whether now owned or hereafter acquired, and including replacements, additions, accessions, substitutions, and products thereof and thereto, and all other property which is or hereafter may become subject to a Lien in favor of Lender as security for any of the Loan Obligations. "COMMITMENT LETTER" means collectively (i) the commitment letter issued by Lender and accepted by Borrower dated October 14, 1996 and (ii) the master commitment letter issued by Lender and accepted by Borrower dated. "DEBT SERVICE COVERAGE FOR THE NURSING HOME" means a ratio in which the first number is the sum of pre-tax income of the Borrower from the operations of the Nursing Home as set forth in the quarterly statements provided to Lender (without deduction for Actual Management Fees paid or incurred), calculated based upon the preceding twelve (12) months (or such lesser period as shall have elapsed following the closing of the Loan), plus interest expense and non-cash expenses or allowances for depreciation and amortization of the Nursing Home for said period, less either Assumed Management Fees or Actual Management Fees (based upon the covenant to which such definition relates) and the second number is the sum of the current portion of the Long Term Debt incurred for the benefit of the Nursing Home (including Long Term Debt attributable to the Loan but excluding 2 3 the outstanding principal balance of the Loan due on the Maturity Date) plus the interest expenses for the Nursing Home (including interest on the Loan) for the applicable period. In calculating "pre-tax income," Extraordinary Income and Extraordinary Expenses shall be excluded. "DEFAULT" means the occurrence or existence of any event which, but for the giving of notice or expiration of time or both, would constitute an Event of Default. "DEFAULT RATE" means a per annum rate equal to four percentage points (4%) plus the LIBOR Rate (as defined in the Note). "EVENT OF DEFAULT" means any "Event of Default" as defined in Article VII hereof. "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. "FIRST AMERICAN DOCUMENTS" means, collectively, all documents executed by Borrower, Guarantors or any subsidiary of Borrower or Guarantors with (or in favor of) Lender and First American in connection with a certain $10,000,000.00 working capital line of credit some or all of which has been or will be funded by First American. "GAAP" means, as in effect from time to time, generally accepted accounting principles consistently applied as promulgated by the American Institute of Certified Public Accountants. "GUARANTY AGREEMENT" means collectively (i) that certain Guaranty Agreement of even date herewith from Advocat to Lender, (ii) that certain Guaranty Agreement of even date herewith from DLC to Lender, and (iii) that certain Guaranty Agreement of even date herewith from all other Subsidiaries to Lender (the foregoing guarantors hereinafter the "Guarantors"). "IMPROVEMENTS" means all buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Property, including, but not limited to, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, elevators and motors, plumbing and heating fixtures, carpeting and other floor coverings, water heaters, awnings and storm sashes, and cleaning apparatus which are or shall be attached to the Property or said buildings, structures or improvements. 3 4 "LIEN" means any voluntary or involuntary mortgage, security deed, deed of trust, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, including those contemplated by or permitted in this Agreement and the other Loan Documents. "LOAN" means the Loan in the principal sum of $3,800,000.00 made by Lender to Borrower as of the date hereof. "LOAN DOCUMENTS" means, collectively, this Agreement, the Note, the Guaranty Agreement, the Mortgage, 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. "LONG TERM DEBT" means all obligations (including capital lease obligations) which are due more than one (1) year from the date as of which the computation thereof is made. "MANAGEMENT AGREEMENT" means that certain Management Agreement dated October 1, 1991 between Manager and Borrower, obligating the Manager to operate and manage the Nursing Home. "MANAGER" means DIVERSICARE MANAGEMENT SERVICES CO., and any successor manager of the Nursing Home approved by Lender in writing. "MATURITY DATE" means December 1, 1999. "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 for members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. Section Section 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 4 5 the Social Security Act (42 U.S.C. Section Section 1395 et seq.) and the regulations promulgated thereunder. "MORTGAGE" means that certain Mortgage and Security Agreement of even date herewith from the Borrower in favor of or for the benefit of Lender and covering the Property. "NOTE" means the Promissory Note of even date herewith in the principal amount of the Loan payable by Borrower to the order of Lender. "NURSING HOME" means the nursing home facility known as "Windsor House Nursing Home", presently a 117-bed licensed skilled nursing facility located on the Property, as it may now or hereafter exist, together with any other general or specialized care facilities, if any (including any Alzheimer's care unit, subacute, and any assisted care living facility), now or hereafter operated on the Property. "PROPERTY" means the real estate located in Huntsville, Madison County, Texas, which is more particularly described in the Mortgage, upon which the Nursing Home is located. "REIMBURSEMENT CONTRACTS" means all third party reimbursement contracts for the Nursing Home which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare, Medicaid and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements. "RENTS" means all rent and other payments of whatever nature from time to time payable pursuant to leases of the Property or the Nursing Home, or for retail space or other space at the Property (including, without limitation, rights to payment earned under leases for space in the Improvements for the operation of ongoing retail businesses such as newsstands, barbershops, beauty shops, physicians' offices, pharmacies and specialty shops). ARTICLE II TERMS OF THE LOAN [RESERVED] ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, and to make the Loan to Borrower, Borrower, Advocat and the Subsidiaries represent and warrant to Lender as follows: 5 6 3.1 TITLE TO COLLATERAL. DLC has good and marketable title to all of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning violation, or encumbrance, except those Liens permitted by this Agreement, none of which Liens materially interfere with the security intended to be provided by the Mortgage or the current use of the Property and the Improvements. All Improvements situated on the Property are situated wholly within the boundaries of the Property. 3.2 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 those Liens permitted by this Agreement or those "Permitted Encumbrances" specifically set forth in the Mortgage, none of which Permitted Encumbrances materially interfere with the security intended to be provided by the Mortgage or the current use of the Property and the Improvements. 3.3 MANAGEMENT AGREEMENT. The Management Agreement is in full force and effect and there are no defaults (either monetarily or non-monetarily) by the Manager or Borrower thereunder. ARTICLE IV AFFIRMATIVE COVENANTS OF BORROWER Borrower, Advocat and the Subsidiaries agree with and covenant unto the Lender that until the Loan Obligations have been paid in full, Borrower, Advocat and the Subsidiaries shall: 4.1 FINANCIAL AND OTHER INFORMATION. Provide Lender, and cause the Guarantors and the Manager to provide to Lender, the following financial statements and information on a continuing basis during the term of the Loan: a. Within one hundred twenty (120) days after the end of the fiscal years of the Borrower and Guarantors, audited and consolidated financial statements of Borrower and Guarantors, prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, certified by the chief financial officer of Borrower and Guarantors, as the case may be, to be true and correct. b. Within one hundred twenty (120) days after the end of the fiscal year of the Manager, audited and consolidated financial statements of the Manager prepared by a nationally recognized accounting firm or independent certified public 6 7 accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and a statement of income and expenses for the year then ended, certified by a financial officer of Manager to be true and correct. c. Within forty-five (45) days after the end of each month, unaudited monthly financial statements of the Borrower and of the operations of the Nursing Home, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the month then ended, certified by a financial officer of the Borrower to be true and correct. d. Within forty-five (45) days of the end of each calendar quarter, unaudited financial statements of the Guarantors, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by a chief financial officer of the Guarantors to be true and correct. e. Within forty-five (45) days of the end of each calendar quarter, unaudited financial statements of the Manager, prepared in accordance with GAAP, which such statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by a financial officer of the Manager to be true and correct. f. Within forty-five (45) days of the end of each calendar quarter, a statement of the number of bed days available and the actual patient days incurred for the quarter, together with quarterly census information of the Nursing Home 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 to be true and correct. Such statements of the Nursing Home shall be accompanied by the Summary of Financial Statements and Census Data attached hereto as Exhibit "A". g. As soon as available, but in no event more than thirty (30) days after the filing deadline, as may be extended from time to time, copies of all federal, state and local tax returns of Borrower and Guarantors, together with all supporting documentation and required schedules. h. Within ten (10) days of filing or receipt, all Medicaid cost reports and any amendments thereto filed with respect to the Nursing Home, and all responses, audit reports, or other inquiries with respect to such cost reports. 7 8 i. Within ten (10) days of receipt, a copy of the Medicaid Rate Calculation Worksheet (or the equivalent thereof) issued by the appropriate Medicaid Agency for the Nursing Home. j. Within ten (10) days of receipt, copies of all licensure and certification survey reports and statements of deficiencies with a copy of the Borrower's correction response, as executed and delivered to the appropriate party, attached thereto. k. Within three (3) days of receipt, any and all notices (regardless of form) from any and all licensing and/or certifying agencies that the Nursing Home license and/or the Medicare and/or Medicaid certification of the Nursing Home is being downgraded to a substandard category, revoked, or suspended or that any such action is pending. l. Upon Lender's request, evidence of payment by Borrower or Manager of any applicable provider bed taxes or similar taxes, which taxes Borrower agrees to pay. m. If requested by Lender, within fifteen (15) days of Lender's request, an aged accounts receivable report of the Nursing Home in sufficient detail to show amounts due from each class of patient-mix (i.e., private, Medicare, Medicaid and V.A.) by the account age classifications of 30 days, 60 days, 90 days, 120 days, and over 120 days. n. Within forty-five (45) days of the end of each calendar quarter, a certificate of the chief financial officer of the Borrower, Guarantors and Manager confirming compliance with the covenants and requirements set forth above. The Lender reserves the right to require that the annual financial statements of the Borrower, Guarantors and Manager be audited and prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender if (i) an Event of Default exists, or (ii) if Lender has reasonable grounds to believe that the unaudited financial statements do not accurately represent the financial condition of the Borrower, Guarantors or Manager as the case may be. The Lender further reserves the right to require such other financial information of Borrower, Guarantors, Manager and/or the Nursing Home, in such form and at such other times (including monthly or more frequently) as Lender shall deem necessary, and Borrower agrees promptly to provide or to cause to be provided, such information to Lender. All financial statements must be in the form and detail as Lender may from time to time reasonably request. 4.2 COMPLIANCE CERTIFICATE. At the time of furnishing the quarterly operating statements required under the foregoing 8 9 Section, furnish to Lender a compliance certificate in the form attached hereto as Exhibit "B" executed by its chief financial officer. 4.3 DEBT SERVICE COVERAGE REQUIREMENTS. (a) Commencing with the closing of the Loan and thereafter on the first day of each fiscal quarter, provide evidence to Lender within fifteen (15) days of such date of the achievement and maintenance of the following quarterly Debt Service Coverage ratios based upon operations for the previous twelve (12) months: (i) a Debt Service Coverage for the Nursing Home, after deduction of Actual Management Fees, of not less than 1.0 over 1.0; (ii) a Debt Service Coverage for the Nursing Home, after deduction of Assumed Management Fees, of not less than 1.10 over 1.0; and (iii ) a combined Debt Service Coverage for the combined operations of the Nursing Home, Good Samaritan Nursing Home of St. Petersburg, Florida, Pinedale Nursing Home of Newport, Arkansas, and Afton Oaks Nursing Home of Houston, Texas, after deduction of Assumed Management Fees, of not less than 1.25 over 1.0. (b) If DLC fails to achieve or provide evidence of achievement of the above Debt Service Coverages upon fifteen (15) days written notice to DLC, Borrower and the Guarantors will deposit with Lender additional cash or other liquid collateral in an amount which, when added to the first number of the debt service coverage calculation, would have resulted in the noncomplying debt service requirement having been satisfied. If such failure continues for two (2) consecutive quarters, on the third consecutive quarter, if DLC again fails to achieve or provide evidence of the achievement of the Debt Service Coverages required above, upon fifteen (15) days written notice to DLC, Borrower and the Guarantors will deposit with Lender additional cash or other liquid collateral (with credit for amounts currently being held by Lender pursuant to the foregoing sentence), in an amount which, if the same had been applied on the first (1st) day of such twelve (12) month period (or such lesser period as shall have elapsed following the closing of the Loan) to reduce the outstanding principal indebtedness of the Loan Obligations, would have resulted in the noncomplying debt service coverage requirement having been satisfied, and Borrower and the Guarantors agree promptly to provide such additional cash or other liquid collateral. Such additional collateral shall constitute and will be held by the Lender in a standard custodial account, and shall constitute additional Collateral for the Loan 9 10 Obligations and, upon the occurrence of an Event of Default, may be applied by the Lender, in such order and manner as the Lender may elect, to the reduction of the Loan Obligations. Borrower and the Guarantors shall not be entitled to any interest earned on such additional Collateral. Provided that there is no outstanding Default or Event of Default, such additional Collateral which has not been applied to the Loan Obligations will be released by the Lender at such time as DLC provides the Lender with evidence that the required debt service coverage requirements outlined above have been achieved and maintained (without regard to any cash deposited pursuant to this Section 4.11) as of the end of each of two (2) consecutive quarters. 4.4 CAPITAL EXPENDITURES. Cause DLC to make minimum capital expenditures for the Nursing Home in each fiscal year, in the amount of not less than $250 per bed (which such capital expenditures may include ordinary repairs needed to maintain or improve the conditions of the Nursing Home), and within forty-five (45) days of the end of such fiscal year, to provide evidence thereof satisfactory to Lender. In the event that DLC shall fail to do so, Borrower and the Guarantors shall, upon Lender's written request, immediately establish and maintain a capital expenditures reserve fund with Lender equal to the difference between the required amount per bed and the amount per bed actually spent by DLC. Borrower and Guarantors grant to Lender 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. The proceeds of such capital expenditures reserve fund will be disbursed upon Lender's receipt of satisfactory evidence that DLC has made the required capital expenditures. Upon Borrower's failure to adequately maintain the Nursing Home in good condition, Lender may, but shall not be obligated to, make such capital expenditures and may apply the moneys in the capital expenditures reserve fund for such purpose. To the extent there are insufficient moneys in the capital expenditures reserve fund for such purposes, all funds advanced by Lender to make such capital expenditures shall constitute a portion of the Loan Obligations, shall be secured by the Mortgage and shall accrue interest as the Default Rate (defined in the Note) until paid. Upon an Event of Default, Lender may apply any moneys in the capital expenditures reserve fund to the Loan Obligations, in such order and manner as Lender may elect. Routine maintenance and repair expenses which are necessary to improve or maintain the physical condition of the Nursing Home shall count towards the capital expenditures requirement. For any partial fiscal year during which the Loan is outstanding, the required expenditure amount shall be prorated by multiplying the required amount per bed 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. 10 11 ARTICLES V AND VI [RESERVED] 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. A default under the First American Documents or under the Master Loan Agreement or any document executed in favor of Lender and/or First American by Borrower, Advocat or a Subsidiary in connection with the Loan or any other loan made or to be made by Lender and/or First American to Borrower, Advocat or the Subsidiaries; or b. The failure of Borrower, Advocat or the Subsidiaries properly and timely in any material respect to perform or observe any covenant or condition set forth in this Agreement or any other Loan Documents which is susceptible of being cured and is not cured within any applicable cure period as set forth herein or, if no cure period is specified therefor, is not cured within thirty (30) days of Lender's notice to Borrower of such Default; or c. The failure of DLC to take the corrective measures required in this Agreement within the time periods specified following Lender's demand because the Debt Service Coverage for the Nursing Home has not been met; or Notwithstanding anything in this Section or in the Master Loan Agreement, all requirements of notice shall be deemed eliminated if Lender is prevented from declaring an Event of Default by bankruptcy or other applicable law. The cure period, if any, shall then run from the occurrence of the event or condition of Default rather than from the date of notice. 7.2 REMEDIES. Upon the occurrence of any one or more of the foregoing Events of Default, the Lender may, at its option: a. Declare the entire unpaid principal of the Loan Obligations and all other obligations of Borrower, Advocat and the Subsidiaries to Lender in connection with the Master Loan Agreement, whether now existing or hereinafter incurred whether evidenced by notes, guaranties or other instruments, 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. 11 12 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. c. Exercise any and all rights and remedies afforded by the laws of the United States, the states in which any of the Property or other Collateral is located or any other appropriate jurisdiction as may be available for the collection of debts and enforcement of covenants and conditions such as those contained in this Agreement and the Loan Documents. d. Exercise its rights and remedies pursuant to any other Loan Documents and pursuant to the Master Loan Agreement. ARTICLE VIII MISCELLANEOUS 8.1 WAIVER. No remedy conferred upon, or reserved to, the Lender in this Agreement or any of the other Loan Documents is intended to be exclusive of any other remedy or remedies, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity. Exercise of or omission to exercise any right of the Lender shall not affect any subsequent right of Lender to exercise the same. No course of dealing between Borrower, Advocat or the Subsidiaries, jointly and severally and Lender or any delay on the Lender's part in exercising any rights shall operate as a waiver of any of the Lender's rights. No waiver of any Default under this Agreement or any of the other Loan Documents shall extend to or shall affect any subsequent or other then existing Default or shall impair any rights, remedies or powers of Lender. 8.2 INDEMNIFICATION. Borrower, Advocat or the Subsidiaries, jointly and severally shall, at their sole cost and expense, protect, defend, indemnify and hold harmless the Indemnified Parties (defined below) from and against all 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 Property or any interest therein or receipt of any Rents (as defined in the Mortgage); (b) any amendment to, or restructuring of, the Loan Obligations and/or any of the Loan 12 13 Documents; (c) any and all lawful action that may be taken by Lender in connection with the enforcement of the provisions of the Mortgage or the Note or any of the other Loan Documents, whether or not suit is filed in connection with same, or in connection with Borrower, any Guarantors and/or any partner, joint venturer, member or shareholder thereof becoming a party to a voluntary or involuntary federal or state bankruptcy, insolvency or similar proceeding; (d) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (e) any use, nonuse or condition in, on or about the Property, the Improvements or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (f) any failure on the part of Borrower or the Guarantors to perform or comply with any of the terms of this Agreement or any of the other Loan Documents; (g) any claims by any broker, person or entity claiming to have participated in arranging the making of the Loan evidenced by the Note; (h) any failure of the Property to be in compliance with any applicable laws; (i) any and all claims and demands whatsoever which may be asserted against Lender by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants, or agreements contained in the Lease Agreement or any replacement or renewal thereof or substitution therefor; (j) performance of any labor or services or the furnishing of any materials or other property with respect to the Property, the Improvements or any part thereof, (k) the failure of any person to file timely with the internal revenue service an accurate Form 1099-b, statement for recipients of proceeds from real estate, broker and barter exchange transactions, which may be required in connection with the Mortgage, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the transaction in connection with which the Loan is made; (l) any material misrepresentation made to Lender in this Agreement or in any of the other Loan Documents; (m) any tax on the making and/or recording of the Mortgage, the Note or any of the other Loan Documents; (n) the violation of any requirements of the Employee Retirement Income Security Act of 1974, as amended; (o) any fines or penalties assessed or any corrective costs incurred by Lender if the Nursing Home or any part of the Property is determined to be in violation of any covenants, restrictions of record, or any applicable laws, ordinances, rules or regulations; or (p) 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 and the Guarantors under this Section 8.4 shall survive any termination, satisfaction, assignment, entry of a judgment of foreclosure or exercise of a 13 14 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 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). 8.3 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. 8.4 NOTICES, ETC. Any notice or other communication required or permitted to be given by this Agreement shall be given in the manner provided in the Master Loan Agreement. 8.5 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 the parties hereto shall be entitled to rely upon this Agreement or be entitled to the benefits of this Agreement. 8.6 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and the instruments referred to herein supersede and incorporate all representations, promises, and statements, oral or written, made by Lender in connection with the Loan. This Agreement may not be varied, altered, or amended except by a written instrument executed by an authorized officer of the Lender. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, but such counterparts shall together constitute one and the same instrument. 8.7 LOAN AGREEMENT GOVERNS. The Loan is governed by terms and provisions set forth in this Loan Agreement and the other 14 15 Loan Documents and in the event of any irreconcilable conflict between the terms of the other Loan Documents or the Master Loan Agreement and the terms of this Loan Agreement, the terms of this Loan Agreement shall control; provided, however, in the event there is any apparent conflict between any particular term or provision which appears in both this Loan Agreement and the other Loan Documents or the Master Loan Agreement and it is possible and reasonable for the terms of both this Loan Agreement and the Loan Documents or the Master Loan Agreement to be performed or complied with then notwithstanding the foregoing all of the terms of this Loan Agreement, the Master Loan Agreement and the other Loan Documents shall be performed and complied with. 8.8 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 DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION. 8.9 WAIVER OF JURY TRIAL. BORROWER HEREBY WAIVES ANY RIGHT THAT IT 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 OF LENDER TO MAKE THE LOAN, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. 15 16 IN WITNESS WHEREOF, the parties have caused this Agreement to be properly executed as of the date first above written. WITNESS: BORROWER: DIVERSICARE MANAGEMENT SERVICES, CO., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- LENDER: WITNESS: GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation /s/ S.J. Summer By: /s/ William E. Shine [Seal] - ----------------------------- ------------------------------ William E. Shine Executive Vice President WITNESS: GUARANTORS: ADVOCAT INC., a Delaware corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Mary Margaret Hamlett Assistant Secretary Executive Vice President 16 17 WITNESS: DIVERSICARE LEASING CORP., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- ADVOCAT ANCILLARY SERVICES, INC., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- DIVERSICARE CANADA MANAGEMENT SERVICES CO., INC., an Ontario, Canada corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- DIVERSICARE GENERAL PARTNER, INC., a Texas corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- FIRST AMERICAN HEALTH CARE, INC., an Alabama corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- ADVOCAT DISTRIBUTION SERVICES, INC., a Tennessee corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- 17 18 ADVOCAT FINANCE, INC., a Delaware corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- DIVERSICARE LEASING CORP. OF ALABAMA, INC., an Alabama corporation /s/ C. Patrick Williams By: /s/ Mary Margaret Hamlett [Seal] - ----------------------------- ------------------------------ C. Patrick Williams Printed: Mary Margaret Hamlett Assistant Secretary -------------------------- Title: Executive Vice President ---------------------------- 18 19 STATE OF Tennessee ) COUNTY OF Davidson ) I, a Notary Public of the County and State aforesaid, certify that Mary Margaret Hamlett personally appeared before me this day and acknowledged that she is the Executive Vice President of Diversicare Management Services, Co., a Tennessee corporation, the Executive Vice President of Diversicare Leasing Corp., a Tennessee corporation, the Executive Vice President of Advocat Inc., a Delaware corporation, the Executive Vice President of Advocat Ancillary Services, Inc., a Tennessee corporation, the Executive Vice President of Diversicare Canada Management Services Co., Inc., an Ontario, Canada corporation, the Executive Vice President of Diversicare General Partner, Inc., a Texas corporation, the Executive Vice President of First American Health Care, Inc., an Alabama corporation, the Executive Vice President of Advocat Distribution Services, Inc., a Tennessee corporation, the Executive Vice President of Advocat Finance, Inc., a Delaware corporation, the Executive Vice President of Diversicare Leasing Corp. of Alabama, Inc., an Alabama corporation, and that by authority duly given and as an act of said corporation, the foregoing instrument was signed and sealed by him in the name of and on behalf of said corporation. Witness my hand and notarial stamp or seal this 27th day of December, 1996. /s/ Sarah Givaltruy ------------------------------ Notary Public My Commission Expires: 9-26-98 (STAMP OR SEAL) 19 20 STATE OF Alabama ) COUNTY OF Jefferson ) I, a Notary Public of the County and State aforesaid, certify that William E. Shine personally appeared before me this day and acknowledged that he is Executive Vice President of GMAC Commercial Mortgage Corporation, a California corporation, and that by authority duly given and as an act of the corporation, the foregoing instrument was signed and sealed by him, as Executive Vice President, in the name of and on behalf of the corporation. Witness my hand and notarial stamp or seal this 19th day of December, 1996. /s/ Nicole S. Daniels ------------------------------ Notary Public My Commission Expires: 8-21-97 (STAMP OR SEAL) 20 EX-21 7 SUBSIDIARIES OF THE COMPANY 1 Exhibit 21 NAME OF SUBSIDIARY INCORPORATION Diversicare Management Services Co. Tennessee Advocat Ancillary Services, Inc. Tennessee Advocat Distribution Services, Inc. Tennessee Advocat Finance, Inc. Delaware Diversicare Leasing Corp. Tennessee Diversicare Canada Management Services Co., Inc. Ontario, Canada Diversicare General Partner, Inc. Texas First American Health Care, Inc. Alabama Diversicare Leasing Corp. of Alabama Alabama EX-23 8 CONSENT OF ARTHUR ANDERSEN & CO., LLP 1 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Annual Report on Form 10-K of Advocat Inc. and Subsidiaries into the Company's previously filed Registration Statement File Numbers 33-93940, 33-93946 and 33-93950. ARTHUR ANDERSEN LLP Nashville, Tennessee March 26, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ADVOCAT, INC. FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K OF ADVOCAT INC. FOR THE YEAR ENDED DECEMBER 31, 1996. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,942 0 27,470 2,524 667 30,966 41,445 0 9,714 17,426 0 0 0 53 27,295 72,386 0 166,237 0 158,861 0 1,745 1,591 7,376 2,655 4,721 0 0 0 4,721 $.89 0
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