<PAGE> 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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
277 MALLORY STATION ROAD, SUITE 130, FRANKLIN, TN 37067
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(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
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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.
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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
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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
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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
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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):
<TABLE>
<CAPTION>
U.S. Canada Leased Owned Managed
-------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ===== ========
</TABLE>
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.
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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
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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
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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
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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:
<TABLE>
<CAPTION>
NUMBER OF FACILITIES
----------------------------
YEAR U.S. CANADA
---- ---- ------
<S> <C> <C>
1997................................................. 0 3
1998................................................. 1 2
1999................................................. 0 3
2000................................................. 0 1
2001................................................. 6 0
2002 and thereafter .............................. 4 9
-- --
Total......................................... 11 18
== ==
</TABLE>
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
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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):
<TABLE>
<CAPTION>
PRO FORMA
ADVOCAT ADVOCAT
--------------------- --------
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
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.
</TABLE>
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
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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
<PAGE> 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:
<TABLE>
<CAPTION>
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
------------- -------- ---- ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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%
----- ---- ---- ----
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
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
------------- -------- ---- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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%
--- ---- ---- ----
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
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
------------- -------- ---- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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%
----- ---- ---- ----
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
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
------------- -------- ---- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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)
===== ==== ==== ====
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
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
------------- -------- --------- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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)
===== ===== ==== =====
</TABLE>
16
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 22
The following table sets forth net patient revenues by payor source for the
Company for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
(DOLLARS IN THOUSANDS)
1996 1995 1994 (1)
----------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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%
======== ===== ======== ===== ======= =====
</TABLE>
----------------------
(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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994 (1)
-------------------- ---------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
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%
========= ===== ========= ===== ========= =====
----------------------
</TABLE>
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
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
</TABLE>
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
<PAGE> 30
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
LONG-TERM CARE
ADVOCAT BUSINESS
--------------------------- ----------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= =======
</TABLE>
(1) See unaudited pro forma consolidated income statements and related notes.
30
<PAGE> 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
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C> <C>
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
========
</TABLE>
- ------------------
(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
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADVOCAT
LONG-TERM -----------------------------
CARE BUSINESS ADJUSTMENTS PRO FORMA
------------- ----------- ---------
REVENUES:
<S> <C> <C> <C>
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
=====
</TABLE>
(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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
PRO FORMA
ADVOCAT ADVOCAT
------------------ ---------
(IN THOUSANDS) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
PRO FORMA
ADVOCAT ADVOCAT
------------------ ---------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
35
<PAGE> 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:
<TABLE>
<CAPTION>
FACILITIES ADDED
------------------ BEDS
PURCHASE LEASE ADDED
-------- ----- -----
<S> <C> <C> <C>
1996 4 1 410
1995 2 2 325
1994 1 7 874
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
Form 10-K
FINANCIAL STATEMENTS Pages
-----
<S> <C>
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
</TABLE>
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
<PAGE> 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.
<TABLE>
<S> <C>
/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
</TABLE>
45
<PAGE> 46
ADVOCAT INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH REPORTS OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
</TABLE>
<PAGE> 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
<PAGE> 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
<PAGE> 50
ADVOCAT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ----------------------------------------------- ----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F - 3
<PAGE> 51
ADVOCAT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
| 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
------------ ----------- ----------- | ----------
<S> <C> <C> <C> | <C>
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
===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F - 4
<PAGE> 52
ADVOCAT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
INVESTMENT
BY COUNSEL
COMMON STOCK AND
------------------ PAID-IN DIVERSICARE RETAINED
SHARES AMOUNT CAPITAL (SEE NOTE 10) EARNINGS TOTAL
-------- -------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
========= ======= =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F - 5
<PAGE> 53
ADVOCAT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
| 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
------------ ----------- ----------- | ----------
<C> <C> <C> <C> | <C>
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)
----------- ----------- ----------- | ----------
</TABLE>
(continued)
F - 6
<PAGE> 54
ADVOCAT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
| 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
------------ ----------- ----------- | ---------------
<S> <C> <C> <C> | <C>
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 |
============ =========== =========== |
</TABLE>
(continued)
F - 7
<PAGE> 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
<PAGE> 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
<PAGE> 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):
<TABLE>
<S> <C>
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
========
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<S> <C>
Buildings and leasehold improvements - 10 to 40 years
Furniture and equipment - 2 to 15 years
Vehicles - 5 years
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 65
7. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
----------- ---------
<C> <C> <C>
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
</TABLE>
F - 18
<PAGE> 66
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<C> <C> <C>
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
</TABLE>
F - 19
<PAGE> 67
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
------------ ----------
<C> <C> <C>
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
=========== ===========
</TABLE>
Principal payments for the Company on long-term debt for the next five
years and thereafter beginning January 1, 1997, are as follows:
<TABLE>
<S> <C>
1997 $ 713,000
1998 745,000
1999 15,588,000
2000 822,000
2001 3,245,000
Thereafter 2,854,000
-----------
$23,967,000
===========
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C> <C>
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
</TABLE> ========== ==========
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
<PAGE> 70
Summarized activity of the stock option plans is presented below:
<TABLE>
<CAPTION>
SHARES
---------------------- WEIGHTED
KEY EMPLOYEE DIRECTOR AVERAGE
PLAN PLAN EXERCISE PRICE
------------ -------- --------------
<S> <C> <C> <C>
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
======= ======= ======
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
LONG-TERM CARE
ADVOCAT BUSINESS
--------------------------------------------- -----------
EIGHT MONTHS FOUR MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, APRIL 30,
1996 1995 1994 1994
---------- ---------- ---------- ---------
<C> <C> <C> <C> <C>
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
========== ========== ========== =========
</TABLE>
F - 24
<PAGE> 72
A reconciliation of taxes computed at statutory income tax rates is as
follows:
<TABLE>
<CAPTION>
LONG-TERM CARE
ADVOCAT BUSINESS
------------------------------------------------ ----------
EIGHT MONTHS FOUR MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, APRIL 30,
1996 1995 1994 1994
---------- ---------- ---------- --------
<C> <C> <C> <C> <C>
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
========== ========== ========== ========
</TABLE>
The net deferred tax assets and liabilities, at the respective income tax
rates, as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
F - 25
<PAGE> 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:
<TABLE>
<S> <C>
1997 $15,162,000
1998 15,540,000
1999 15,962,000
2000 16,380,000
2001 16,794,000
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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):
<TABLE>
<CAPTION>
UNITED STATES CANADA TOTAL
------------- ------ -----
<S> <C> <C> <C>
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
</TABLE>
F - 30
<PAGE> 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)
<TABLE>
<CAPTION>
QUARTER
----------------------------------
1996 FIRST SECOND THIRD FOURTH
- ------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
F - 31
<PAGE> 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
<PAGE> 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
<PAGE> 81
ADVOCAT INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
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
----------- --------- --------- --------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
========= ========= ========= ======== ============= =========
</TABLE>
(1) Amounts written off as uncollectible accounts, net of recoveries.
S-3
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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).
</TABLE>
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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).
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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).
</TABLE>
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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).
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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).
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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).
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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).
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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).
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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).
</TABLE>
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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).
</TABLE>
<PAGE> 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:
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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
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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.
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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.
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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;
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(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.
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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:
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<TABLE>
<CAPTION>
From To Working Capital Borrowing Base
---- -- ------------------------------
<S> <C> <C>
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
</TABLE>
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
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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:
<TABLE>
<CAPTION>
Amount Beneficiary
------ -----------
<S> <C>
$3,800,000 Omega
$ 500,000 TDLP
</TABLE>
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
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<PAGE> 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.
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<PAGE> 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:
<TABLE>
<CAPTION>
Loan to Value Ratio Debt Service Ratio Interest Rate
------------------- ------------------ -------------
Margin
<S> <C> <C>
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%
</TABLE>
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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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)
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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:
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<PAGE> 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.
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<PAGE> 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
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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).
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<PAGE> 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;
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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):
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<PAGE> 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
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<PAGE> 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
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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
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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
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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:
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(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.
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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.
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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.
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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.
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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
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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.
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(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
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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:
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(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;
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(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
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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:
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(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
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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;
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(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.
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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
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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.
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(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.
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(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").
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<PAGE> 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.
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<PAGE> 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;
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<PAGE> 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);
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
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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:
<TABLE>
<S> <C>
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.
</TABLE>
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<PAGE> 60
<TABLE>
<S> <C>
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:
---------------
</TABLE>
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<PAGE> 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)
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<PAGE> 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.
<TABLE>
<CAPTION>
FIRST AMERICAN NATIONAL BANK, a DIVERSICARE MANAGEMENT
national banking association SERVICES CO., a Tennessee corporation
<S> <C>
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
---------------------------------------
</TABLE>
<PAGE> 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
------------------------------------------
<PAGE> 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"
<PAGE> 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
<PAGE> 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
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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.
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"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
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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
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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.
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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
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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.
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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
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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.
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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.
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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
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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
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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
<PAGE> 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
<PAGE> 16
IN WITNESS WHEREOF, the parties have caused this Agreement to be
properly executed as of the date first above written.
<TABLE>
<S> <C>
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
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
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
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C>
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
</TABLE>
18
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 16
IN WITNESS WHEREOF, the parties have caused this Agreement to be
properly executed as of the date first above written.
<TABLE>
<S> <C>
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
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
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
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C>
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
</TABLE>
18
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
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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:
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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
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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.
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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
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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
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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.
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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.
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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
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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
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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
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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.
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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
----------------------------
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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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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
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<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,942
<SECURITIES> 0
<RECEIVABLES> 27,470
<ALLOWANCES> 2,524
<INVENTORY> 667
<CURRENT-ASSETS> 30,966
<PP&E> 41,445
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,714
<CURRENT-LIABILITIES> 17,426
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 27,295
<TOTAL-LIABILITY-AND-EQUITY> 72,386
<SALES> 0
<TOTAL-REVENUES> 166,237
<CGS> 0
<TOTAL-COSTS> 158,861
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,745
<INTEREST-EXPENSE> 1,591
<INCOME-PRETAX> 7,376
<INCOME-TAX> 2,655
<INCOME-CONTINUING> 4,721
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,721
<EPS-PRIMARY> $.89
<EPS-DILUTED> 0
</TABLE>
