<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE:
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM _________ TO _________.
COMMISSION FILE NO.: 1-12996
-------
ADVOCAT INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1559667
------------------------------ -------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
277 MALLORY STATION ROAD, SUITE 130, FRANKLIN, TN 37067
-------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 771-7575
--------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
--------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
5,398,710
---------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF AUGUST 13, 1999)
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 998 $ 2,347
Receivables, less allowance for doubtful
accounts of $1,360 and $2,650,
respectively 23,110 26,289
Income taxes receivable 1 800
Inventories 1,234 1,102
Prepaid expenses and other assets 1,224 1,528
Deferred income taxes 2,069 1,719
--------- ---------
Total current assets 28,636 33,785
--------- ---------
PROPERTY AND EQUIPMENT, at cost 83,741 82,140
Less accumulated depreciation
and amortization (16,253) (15,548)
--------- ---------
Net property and equipment 67,488 66,592
--------- ---------
OTHER ASSETS:
Deferred tax benefit 6,069 6,338
Deferred financing and other costs, net 1,131 1,150
Assets held for sale or redevelopment 3,465 3,465
Investments in and receivables from joint ventures 7,943 7,194
Other 1,977 2,770
--------- ---------
Total other assets 20,585 20,917
--------- ---------
$ 116,709 $ 121,294
========= =========
</TABLE>
(Continued)
-2-
<PAGE> 3
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 29,478 $ 30,126
Trade accounts payable 6,344 9,327
Accrued expenses:
Payroll and employee benefits 4,734 4,920
Interest 382 857
Self-insurance reserves 2,259 2,375
Other 2,490 2,413
-------- --------
Total current liabilities 45,687 50,018
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 34,105 33,514
Deferred gains with respect to leases, net 3,170 3,293
Self-insurance reserves, less current portion 2,000 1,665
Other 4,016 5,243
-------- --------
Total noncurrent liabilities 43,291 43,715
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares,
$.10 par value, none issued and outstanding -0- -0-
Common stock, authorized 20,000,000 shares,
$.01 par value, 5,399,000 issued and outstanding at
June 30, 1999 and December 31, 1998, respectively 54 54
Paid-in capital 15,765 15,765
Retained earnings 11,912 11,742
-------- --------
Total shareholders' equity 27,731 27,561
-------- --------
$116,709 $121,294
======== ========
</TABLE>
The accompanying notes are an integral part of these
interim consolidated balance sheets.
-3-
<PAGE> 4
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
------- --------
<S> <C> <C>
REVENUES:
Patient revenues $35,022 $ 43,108
Resident revenues 9,323 8,629
Management fees 877 906
Interest 38 55
------- --------
Net revenues 45,260 52,698
------- --------
EXPENSES:
Operating 34,885 42,131
Lease 4,956 4,809
General and administrative 2,876 2,730
Interest 1,325 1,254
Depreciation and amortization 1,066 832
Non-recurring charges -0- 1,468
------- --------
Total expenses 45,108 53,224
------- --------
INCOME (LOSS) BEFORE INCOME TAXES 152 (526)
PROVISION (BENEFIT) FOR INCOME TAXES 55 (189)
------- --------
NET INCOME (LOSS) $ 97 $ (337)
======= ========
BASIC EARNINGS PER SHARE:
Net income (loss) $ .02 $ (.06)
======= ========
DILUTED EARNINGS PER SHARE
Net income (loss) $ .02 $ (.06)
======= ========
WEIGHTED AVERAGE SHARES:
Basic 5,399 5,377
======= ========
Diluted 5,484 5,377
======= ========
</TABLE>
The accompanying notes are an integral part of these
interim consolidated financial statements.
-4-
<PAGE> 5
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
-------- ---------
<S> <C> <C>
REVENUES:
Patient revenues $ 71,876 $ 84,946
Resident revenues 18,227 17,334
Management fees 1,796 1,812
Interest 73 99
-------- ---------
Net revenues 91,972 104,191
-------- ---------
EXPENSES:
Operating 71,384 83,383
Lease 9,811 9,563
General and administrative 5,611 5,456
Interest 2,632 2,499
Depreciation and amortization 2,133 1,794
Non-recurring charges -0- 1,468
-------- ---------
Total expenses 91,571 104,163
-------- ---------
INCOME BEFORE INCOME TAXES 401 28
PROVISION FOR INCOME TAXES 145 10
-------- ---------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 256 18
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX (277) -0-
-------- ---------
NET INCOME (LOSS) $ (21) $ 18
======== =========
BASIC EARNINGS PER SHARE:
Income before accounting change $ .05 $ .00
Cumulative effect of change in accounting principle, net of tax (.05) (.00)
-------- ---------
Net income (loss) $ (.00) $ (.00)
======== =========
DILUTED EARNINGS PER SHARE
Income before accounting change $ .05 $ .00
Cumulative effect of change in accounting principle, net of tax (.05) $ (.00)
-------- ---------
Net income (loss) $ (.00) $ (.00)
======== =========
WEIGHTED AVERAGE SHARES:
Basic 5,399 5,377
======== =========
Diluted 5,399 5,391
======== =========
</TABLE>
The accompanying notes are an integral part of these
interim consolidated financial statements.
-5-
<PAGE> 6
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 97 $(337) $ (21) $ 18
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments 223 (162) 297 (125)
Income tax expense (80) 58 (107) 45
----- ----- ----- -----
143 (104) 190 (80)
----- ----- ----- -----
COMPREHENSIVE INCOME (LOSS) $ 240 $(441) $ 169 $ (62)
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these
interim consolidated financial statements.
-6-
<PAGE> 7
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (21) $ 18
Items not involving cash:
Depreciation and amortization 2,133 1,795
Provision for doubtful accounts 510 786
Equity (earnings) loss in joint ventures 28 (42)
Amortization of deferred credits (248) (278)
Deferred income taxes (188) (360)
Write off pursuant to change in accounting principle 433 -0-
Non-recurring charge write-off -0- 1,028
Changes in other assets and liabilities:
Receivables, net 3,171 (2,332)
Inventories (132) 34
Prepaid expenses and other assets 274 (478)
Trade accounts payable and accrued expenses (3,081) 2,446
Other (77) 47
------- ------
Net cash provided from operating activities 2,802 2,664
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,573) (2,737)
Investment in TDLP (160) (632)
Mortgages receivable, net 152 (305)
Deposits, pre-opening costs and other (360) (435)
Investment in and advances to joint ventures, net (449) (1,345)
TDLP partnership distributions 151 152
------- ------
Net cash used in investing activities (3,239) (5,302)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt obligations 26,183 -0-
Repayment of debt obligations (24,972) (411)
Net proceeds from (repayment of) bank line of credit (1,497) 2,908
Advances to TDLP, net (138) (815)
Financing costs (488) (68)
------- ------
Net cash provided from financing activities (912) $1,614
------- ------
</TABLE>
(Continued)
-7-
<PAGE> 8
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
------- -------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(1,349) $(1,024)
CASH AND CASH EQUIVALENTS, beginning of period 2,347 2,673
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 998 $ 1,649
======= =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 3,106 $ 2,362
======= =======
Cash payments (refunds) of income taxes, net $ (623) $ 637
======= =======
</TABLE>
During the second quarter of 1999, the Company's executive benefit plan was
terminated. In connection therewith, Advocat distributed net benefit plan
deposits and relieved net benefit plan liabilities of $1,163,000 in the six
months ended June 30, 1999. Advocat received net benefit plan deposits and
earnings and recorded net benefit plan liabilities of $286,000 in the six month
period ended June 30, 1998.
The accompanying notes are an integral part of these
interim consolidated financial statements.
-8-
<PAGE> 9
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. BUSINESS
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") is a
leading provider of long-term care services to the elderly. The Company operates
nursing homes and assisted living facilities in 12 Southeastern states and three
Canadian provinces.
As of June 30, 1999, the Company operates 122 facilities consisting of 65
nursing homes with 7,307 licensed beds and 57 assisted living facilities with
5,295 units. The Company owns seven nursing homes, leases 36 others, and manages
22 nursing homes. The Company owns 17 assisted living facilities, leases 27
others, and manages 13 assisted living facilities. The Company holds a minority
equity interest in six of these managed assisted living facilities. The Company
operates 51 nursing homes and 36 assisted living facilities in the United States
and 14 nursing homes and 21 assisted living facilities in Canada. The Company's
facilities provide a range of health care services to their patients and
residents. In addition to the nursing and social services usually provided in
the long-term care facilities, the Company offers a variety of comprehensive
rehabilitative, nutritional, respiratory and other specialized ancillary
services. The Company operates facilities in Alabama, Arkansas, Florida,
Georgia, Kentucky, North Carolina, Ohio, South Carolina, Tennessee, Texas,
Virginia, West Virginia and the Canadian provinces of Ontario, British Columbia,
and Alberta.
2. BASIS OF FINANCIAL STATEMENTS
The interim financial statements for the three and six month periods ended June
30, 1999 and 1998, included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, the accompanying
interim combined financial statements reflect all adjustments (consisting of
only normally recurring accruals) necessary to present fairly the financial
position at June 30, 1999 and the results of operations for the three and six
month periods ended June 30, 1999, and the cash flows for the six month periods
ended June 30, 1999 and 1998.
The results of operations for the three and six month periods ended June 30,
1999 and 1998 are not necessarily indicative of the operating results for the
entire respective years. These interim financial statements should be read in
connection with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
-9-
<PAGE> 10
3. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1999, the Company adopted Statement of Position ("SOP")
98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5, issued by the
Accounting Standards Executive Committee, requires that the cost of start-up
activities be expensed as these costs are incurred. Start-up activities include
one-time activities and organization costs. Upon adoption, the Company incurred
a pre-tax charge to income of $433,000 ($277,000 net of tax), representing the
write off of all previously deferred balances. This write off has been reported
as the cumulative effect of a change in accounting principle in the accompanying
interim consolidated statements of operations.
4. EARNINGS PER SHARE
Information with respect to the calculation of basic and diluted earnings per
share data follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NUMERATOR:
Income (loss) before cumulative effect
of change in accounting principle $ 97,000 $ (337,000) $ 256,000 $ 18,000
Cumulative effect of change in
accounting principle, net of tax -0- -0- (277,000) -0-
------------- ------------- ------------- -------------
Net income (loss) $ 97,000 $ (337,000) $ (21,000) $ 18,000
============= ============= ============= =============
DENOMINATOR:
Basic average shares outstanding 5,399,000 5,377,000 5,399,000 5,377,000
Employee stock purchase plan 81,000 N/A(1) N/A(1) 13,000
Options 4,000 N/A(1) N/A(1) 1,000
------------- ------------- ------------- -------------
Diluted average shares outstanding 5,484,000 5,377,000 5,399,000 5,391,000
============= ============= ============= =============
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before accounting change $ .02 $ (.06) $ .05 $ .00
Cumulative effect of change in
accounting principle, net of tax .00 .00 (.05) .00
------------- ------------- ------------- -------------
Net income (loss) $ .02 $ (.06) $ (.00) $ .00
============= ============= ============= =============
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before accounting change $ .02 $ (.06) $ .05 $ .00
Cumulative effect of change in accounting
principle, net of tax .00 $ (.00) (.05) .00
------------- ------------- ------------- -------------
Net income (loss) $ .02 $ (.06) $ (.00) $ .00
============= ============= ============= =============
</TABLE>
- -----------------
(1) Not applicable since inclusion would be anti-dilutive.
-10-
<PAGE> 11
5. OTHER COMPREHENSIVE INCOME
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
requires the reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income.
Information with respect to the accumulated other comprehensive income balance
is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Foreign currency items:
Beginning balance $(365,000) $(172,000) $(412,000) $(196,000)
Current period change, net of income tax 143,000 (104,000) 190,000 (80,000)
--------- --------- --------- ---------
Ending balance $(222,000) $(276,000) $(222,000) $(276,000)
========= ========= ========= =========
</TABLE>
Positive amounts represent unrealized gains and negative amounts represent
unrealized losses.
6. NON-RECURRING CHARGES
During the quarter ended June 30, 1998, the Company recorded non-recurring
charges in the amount of $1.5 million. Of this amount, $1.0 million was a
restructuring charge related to the Company's management information system
conversion with respect to its U.S. nursing homes. Pursuant to this conversion,
the Company abandoned much of its existing software and dismantled much of its
regional infrastructure in favor of a centralized accounting organization. This
restructuring charge represented the costs associated with the closing of
certain regional offices, severance packages for affected personnel, the
write-off of capitalized software costs, and other costs related to the systems
being replaced. In addition to the restructuring charge, the Company also
recognized costs associated with the write-off of prospective financing
arrangements or acquisitions, each of which had been abandoned during the
quarter, and costs related to legal issues that were settled during the quarter.
7. OPERATING SEGMENT INFORMATION
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information." The Company has three reportable
segments: U.S. nursing homes, U.S. assisted living facilities, and Canadian
operations, which consists of both nursing home and assisted living services.
Management evaluates each of these segments independently due to the geographic,
reimbursement, marketing, and regulatory differences between the segments.
Management evaluates performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses and foreign exchange
gains and losses. The following information is derived from the Company's
segments' internal financial statements and includes information related to the
Company's unallocated corporate revenues and expenses:
-11-
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS) 1999 1998 1999 1998
-------- --------- ------ -------
<S> <C> <C> <C> <C>
Net revenues:
U.S. nursing homes $ 34,490 $ 42,690 $ 71,006 $ 84,137
U.S. assisted living facilities 7,057 6,248 13,679 12,554
Canadian operations 3,710 3,759 7,337 7,497
Corporate 237 239 420 479
Eliminations (235) (238) (470) (476)
-------- -------- -------- --------
Total $ 45,259 $ 52,698 $ 91,972 $104,191
======== ======== ======== ========
Depreciation and amortization:
U.S. nursing homes $ 595 $ 405 $ 1,192 $ 946
U.S. assisted living facilities 362 312 723 618
Canadian operations 90 89 175 177
Corporate 19 27 43 54
Eliminations -0- -0- -0- -0-
-------- -------- -------- --------
Total $ 1,066 $ 833 $ 2,133 $ 1,795
======== ======== ======== ========
Operating income (loss):
U.S. nursing homes $ 20 $ 265 $ (80) $ 589
U.S. assisted living facilities (100) 154 143 254
Canadian operations 414 517 810 990
Corporate (182) (1,462) (472) (1,805)
Eliminations -0- -0- -0- -0-
-------- -------- -------- --------
Total $ 152 $ (5,26) $ 401 $ 28
======== ======== ======== ========
JUNE 30, DECEMBER 31
1999 1998
------ --------
Long-lived assets:
U.S. nursing homes $ 55,347 $ 56,396
U.S. assisted living facilities 34,272 33,987
Canadian operations 9,988 10,536
Corporate 22,574 21,725
Eliminations (36,858) (35,135)
-------- --------
Total $ 85,323 $ 87,509
======== ========
Total assets:
U.S. nursing homes $ 87,870 $ 88,473
U.S. assisted living facilities 36,740 36,926
Canadian operations 15,133 13,718
Corporate 23,584 24,909
Eliminations (44,405) (42,732)
-------- --------
Total $118,922 $121,294
======== ========
</TABLE>
-12-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Advocat (together with its subsidiaries, "Advocat" or the "Company") provides
long-term care services to nursing home patients and residents of assisted
living facilities in 12 Southeastern states and three Canadian provinces. The
Company completed its initial public offering in May 1994; however, its
operational history can be traced to February 1980 through common senior
management who were involved in different organizational structures.
The Company's facilities provide a range of health care services to their
patients and residents. In addition to the nursing, personal care and social
services usually provided in long-term care facilities, the Company, through
arrangements with third parties, offers a variety of comprehensive
rehabilitation services as well as medical supply and nutritional support
services.
As of June 30, 1999, Advocat's portfolio includes 122 facilities composed of 65
nursing homes containing 7,307 licensed beds and 57 assisted living facilities
containing 5,295 units. In comparison, at June 30, 1998, the Company operated
116 facilities composed of 64 nursing homes containing 7,221 licensed beds and
52 assisted living facilities containing 4,980 units. As of June 30, 1999, the
Company owns seven nursing homes, leases 36 others, and manages the remaining 22
nursing homes. Additionally, the Company owns 17 assisted living facilities,
leases 27 others, and manages the remaining 13 assisted living facilities. The
Company holds a minority equity interest in six of these managed assisted living
facilities. In the United States, the Company operates 51 nursing homes and 36
assisted living facilities, and in Canada, the Company operates 14 nursing homes
and 21 assisted living facilities.
Basis of Financial Statements. The Company's patient and resident revenues
consist of the fees charged for the care of patients in the nursing homes and
residents of the assisted living facilities owned and leased by the Company.
Management fee revenues consists of the fees charged to the owners of the
facilities managed by the Company. The management fee revenues are based on the
respective contractual terms of the Company's management agreements, which
generally provide for management fees ranging from 3.5% to 6.0% of the net
revenues of the managed facilities. As a result, the level of management fees is
affected positively or negatively by the increase or decrease in the average
occupancy level rates of the managed facilities. Management fees also include
consulting and development fee income. The Company's operating expenses include
the costs, other than lease, depreciation and amortization expenses, incurred in
the nursing homes and assisted living facilities owned and leased by the
Company. The Company's general and administrative expenses consist of the costs
of the corporate office and regional support functions, including the costs
incurred in providing management services to other owners. The Company's
depreciation, amortization and interest expenses include all such expenses
across the range of the Company's operations.
-13-
<PAGE> 14
RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of operations and
related data for the three months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998 CHANGE %
-------- --------- -------- ------
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $ 35,022 $ 43,108 $ (8,086) (18.8)
Resident revenues 9,323 8,629 694 8.0
Management fees 877 906 (29) (3.2)
Interest 38 55 (17) (30.9)
-------- --------- --------
Net revenues 45,260 52,698 (7,438) (14.1)
-------- --------- --------
EXPENSES:
Operating 34,885 42,131 (7,246) (17.2)
Lease 4,956 4,809 147 3.1
General and administrative 2,876 2,730 146 5.4
Interest 1,325 1,254 71 5.6
Depreciation and amortization 1,066 832 234 28.1
Non-recurring charges -0- 1,468 (1,468) (100.0)
-------- --------- --------
Total expenses 45,108 53,224 (8,116) (15.2)
-------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES 152 (526) 678 128.9
PROVISION (BENEFIT) FOR INCOME TAXES 55 (189) 244 128.9
-------- --------- --------
NET INCOME (LOSS) $ 97 $ (337) $ 434 128.9
======== ========= ========
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998 CHANGE %
-------- --------- -------- ------
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $ 71,876 $ 84,946 $(13,070) (15.4)
Resident revenues 18,227 17,334 893 5.2
Management fees 1,796 1,812 (16) (0.8)
Interest 73 99 (26) (26.6)
-------- --------- --------
Net revenues 91,972 104,191 (12,219) (11.7)
-------- --------- --------
EXPENSES:
Operating 71,384 83,383 (11,999) (14.4)
Lease 9,811 9,563 248 2.6
General and administrative 5,611 5,456 155 2.9
Interest 2,632 2,499 133 5.3
Depreciation and amortization 2,133 1,794 339 18.9
Non-recurring charges -0- 1,468 (1,468) (100.0)
-------- --------- --------
Total expenses 91,571 104,163 (12,592) (12.1)
-------- --------- --------
INCOME BEFORE INCOME TAXES 401 28 373 1,348.3
PROVISION FOR INCOME TAXES 145 10 135 1,348.3
-------- --------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 256 18 238 1,348.3
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX (277) -0- (277) N/A
-------- --------- --------
NET INCOME (LOSS) $ (21) $ 18 $ (39) (216.3)
======== ========= ========
</TABLE>
-14-
<PAGE> 15
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues 77.4% 81.8% 78.1% 81.5%
Resident revenues 20.6 16.4 19.8 16.7
Management fees 1.9 1.7 2.0 1.7
Interest 0.1 0.1 0.1 0.1
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
OPERATING EXPENSES:
Operating 77.1 79.9 77.6 80.0
Lease 10.9 9.1 10.7 9.2
General and administrative 6.4 5.2 6.1 5.3
Interest 2.9 2.4 2.9 1.7
Depreciation and amortization 2.4 1.6 2.3 2.4
Non-recurring charges 0.0 2.8 0.0 1.4
----- ----- ----- -----
Total expenses 99.7 101.0 99.6 100.0
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES 0.3 (1.0) 0.4 0.0
PROVISION (BENEFIT) FOR INCOME TAXES 0.1 (0.4) 0.1 0.0
----- ----- ----- -----
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 0.2 (0.6) 0.3 0.0
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX 0.0 0.0 (0.3) 0.0
----- ----- ----- -----
NET INCOME (LOSS) 0.2% 0.6% (0.0)% 0.0
===== ===== ===== =====
</TABLE>
GENERAL
Medicare and Other Reimbursement Changes. In 1999, the Company has continued to
experience the impact of Medicare cost limitations imposed by the Health Care
Finance Administration upon all providers of nursing home Medicare services.
Beginning in July 1998, a portion of the Company's facilities began the
three-year transition from the cost reimbursement system to the prospective
payment system ("PPS"). In general, PPS provides a standard payment for Medicare
Part A services to all providers regardless of their costs. PPS creates an
incentive for providers to reduce their costs, and management has responded
accordingly. The phase-in of PPS began for all providers at some point during
the twelve-month period ending June 30, 1999. Management estimates that the
ultimate impact of PPS on its revenues will be a reduction of $16.0 to $17.0
million per year. Since PPS is still an evolving process, the ultimate impact
cannot be known with certainty. However, Management presently believes that it
can reduce its costs in response to PPS, as it is currently structured, such
that there will be little or no impact on net income.
Beginning in January 1998, the allowable costs for cost reimbursement components
of Medicare Part B services became subject to a limitation factor of 90% of
actual cost. For the Company, such revenues are primarily derived from
reimbursement of subcontracted therapy costs. In 1999, cost reimbursement of
Part B services has been replaced by a system of fee screens that effectively
limit the maximum fees that may be charged for therapy services. The Company is
certain that this will further negatively impact operations although the
ultimate effect cannot yet be reasonably estimated.
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These changes have combined to cause a dramatic decrease in the Company's
ancillary revenues and expenses. In general, the Company has been successful in
reducing costs in tandem with the revenue reductions from the provision of
therapy services. The Company also believes that it and the industry have
experienced occupancy declines as doctors have kept patients in hospitals
rather than allowing their admittance to nursing homes where therapy services
are now limited.
These changes are endemic upon the industry. As the impact of these changes upon
both providers and beneficiaries has become known, there has been growing
political awareness of a need to reexamine the drastic cuts that have been
implemented. There are currently bills scheduled for consideration by Congress
this fall as well as movement to institute administrative changes that would
restore some revenues to the U.S. nursing home industry. While such activity is
positive, there is no assurance that it will result in increased revenues to the
industry or the Company.
Non-Recurring Charges. During the quarter ended June 30, 1998, the Company
recorded non-recurring charges in the amount of $1.5 million. Of this amount,
$1.0 million was a restructuring charge related to the Company's management
information system conversion with respect to its U.S. nursing homes. Pursuant
to this conversion, the Company abandoned much of its existing software and
dismantled much of its regional infrastructure in favor of a centralized
accounting organization. This restructuring charge represented the costs
associated with the closing of certain regional offices, severance packages for
affected personnel, the write-off of capitalized software costs, and other costs
related to the systems being replaced. In addition to the restructuring charge,
the Company also recognized costs associated with the write-off of prospective
financing arrangements or acquisitions, each of which had been abandoned during
the quarter, and costs related to legal issues that were settled during the
quarter.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
Revenues. Net revenues decreased to $45.3 million in 1999 from $52.7 million in
1998, a decrease of $7.4 million, or 14.1%. Resident revenues increased to $9.3
million in 1999 from $8.6 million in 1998, an increase of $694,000, or 8.0%.
Patient revenues decreased to $35.0 million in 1999 from $43.1 million in 1998,
a decrease of $8.1 million, or 18.8%. This decrease in patient revenues is due
primarily to the Medicare reimbursement changes and a decline in Medicare
census. In addition, effective April 1, 1999, the Company stopped operating a
facility it had previously leased; this facility provided $1.7 million in
comparable revenues that were not repeated in 1999. There was a 6.2% decline in
patient and resident days, approximately 38,000 days, which was primarily due to
decreases in the nursing home segment. Approximately 12,000 of this decline in
days related to the terminated lease. There was a 34.0% decline in Medicare
days, approximately 11,000 days, and reductions of approximately 10,000 days
each among Medicaid and private-pay patients. This decline in Medicare days
accounts for approximately $3.7 million of the overall revenue reduction. As a
percent of patient and resident revenues, Medicare decreased to 14.8% in 1999
from 25.8% in 1998 while Medicaid and similar programs increased to 66.7% in
1999 from 55.1% in 1998.
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<PAGE> 17
Ancillary service revenues, prior to contractual allowances, decreased to $5.9
million in 1999 from $17.3 million in 1998, a decrease of $11.4 million or
65.9%. The decrease is primarily attributable to reductions in revenue
availability under Medicare and is consistent with the Company's expectation.
Cost limits are continuing to be placed on ancillary services as part of the
transition to PPS; additionally, other cost limitation provisions could occur.
Therefore, the Company anticipates that ancillary service revenues will remain
flat or continue trending down during 1999. The ultimate effect on the Company's
operations cannot be predicted at this time because the extent and composition
of the cost limitations are subject to change.
Operating Expense. Operating expense decreased to $34.9 million in 1999 from
$42.1 million in 1998, a decrease of $7.2 million, or 17.2%. The decrease is
primarily attributable to cost reductions implemented in response to the
Medicare reimbursement changes (that is, reduced provision of therapy services
and in the contracted costs to provide them). As a percent of patient and
resident revenues, operating expense decreased to 78.7% in 1999 from 81.4% in
1998. The largest component of operating expense is wages, which remained flat
at about $18.9 million in both the 1999 and 1998 periods. The Company's wage
increases are generally in line with inflation. The Company has been able to
reduce staffing at certain facilities that have experienced occupancy declines.
Lease Expense. Lease expense increased to $5.0 million in 1999 from $4.8 million
in 1998, an increase of $147,000, or 3.1%. Adjustments in the Company's lease
agreements are generally tied to inflation.
General and Administrative Expense. General and administrative expense increased
to $2.9 million in 1999 from $2.7 million in 1998, an increase of $146,000, or
5.4%. As a percent of total net revenues, general and administrative expense
increased to 6.4% in 1999 compared with 5.2% in 1998. The percentage increase is
attributable to the lower revenue base.
Interest Expense. Interest expense increased to $1.3 million in 1999 from $1.2
million in 1998, an increase of $71,000, or 5.6%.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $1.1 million in 1999 from $832,000 in 1998, an increase of $234,000, or
28.1%.
Non-Recurring Charges. The Company incurred $1.5 million in charges in 1998 that
were not repeated in 1999.
Income (Loss) Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share.
As a result of the above, income before income taxes was $152,000 in 1999 as
compared with a loss of $(526,000) in 1998, an increase of $678,000, or 128.9%.
The effective combined federal, state and provincial income tax rate was 36.0%
in both 1999 and 1998. Net income was $97,000 in 1999 as compared with a net
loss of $(337,000) in 1998, an increase of $434,000, and basic and diluted
earnings per share were each $.02 in 1999 as compared with a loss of $(.06) per
share in 1998.
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<PAGE> 18
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Revenues. Net revenues decreased to $92.0 million in 1999 from $104.2 million in
1998, a decrease of $12.2 million, or 11.7%. Resident revenues increased to
$18.2 million in 1999 from $17.3 million in 1998, an increase of $893,000, or
5.2%. Patient revenues decreased to $71.9 million in 1999 from $85.0 million in
1998, a decrease of $13.1 million, or 15.4%. This decrease in patient revenues
is due primarily to the Medicare reimbursement changes and a decline in Medicare
census. In addition, effective April 1, 1999, the Company stopped operating a
facility it had previously leased; this facility provided $1.7 million in
comparable revenues that were not repeated in 1999. There was a 4.3% decline in
patient and resident days, approximately 52,000 days, which was primarily due to
decreases in the nursing home segment. Approximately 12,000 of this decline in
days related to the terminated lease. There was a 35.6% decline in Medicare
days, approximately 23,000 days, and reductions of approximately 10,000 and
6,000 among private-pay and Medicaid patients, respectively. This decline in
Medicare days accounts for approximately $7.6 million of the overall revenue
reduction. As a percent of patient and resident revenues, Medicare decreased to
15.3% in 1999 from 25.8% in 1998 while Medicaid and similar programs increased
to 66.1% in 1999 from 55.3% in 1998.
Ancillary service revenues, prior to contractual allowances, decreased to $13.6
million in 1999 from $34.0 million in 1998, a decrease of $20.4 million or
60.0%. The decrease is primarily attributable to reductions in revenue
availability under Medicare and is consistent with the Company's expectation.
Cost limits are continuing to be placed on ancillary services as part of the
transition to PPS; additionally, other cost limitation provisions could occur.
Therefore, the Company anticipates that ancillary service revenues will remain
flat or continue trending down during 1999. The ultimate effect on the Company's
operations cannot be predicted at this time because the extent and composition
of the cost limitations are subject to change.
Operating Expense. Operating expense decreased to $71.4 million in 1999 from
$83.4 million in 1998, a decrease of $12.0 million, or 14.4%. The decrease is
primarily attributable to cost reductions implemented in response to the
Medicare reimbursement changes (that is, reduced provision of therapy services
and in the contracted costs to provide them). As a percent of patient and
resident revenues, operating expense decreased to 79.2% in 1999 from 81.5% in
1998. The largest component of operating expense is wages, which increased to
$37.6 million in 1999 from $37.4 million in 1998, an increase of $156,000, or
0.4%. The Company's wage increases are generally in line with inflation. The
Company has been able to reduce staffing at certain facilities that have
experienced occupancy declines.
Lease Expense. Lease expense increased to $9.8 million in 1999 from $9.6 million
in 1998, an increase of $248,000, or 2.6%. Adjustments in the Company's lease
agreements are generally tied to inflation.
General and Administrative Expense. General and administrative expense increased
to $5.6 million in 1999 from $5.5 million in 1998, an increase of $155,000, or
2.9%. As a percent of total net revenues, general and administrative expense
increased to 6.1% in 1999 compared with 5.3% in 1998. The percentage increase is
attributable to the lower revenue base.
Interest Expense. Interest expense increased to $2.6 million in 1999 from $2.5
million in 1998, an increase of $133,000, or 5.3%.
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<PAGE> 19
Depreciation and Amortization. Depreciation and amortization expenses increased
to $2.1 million in 1999 from $1.8 million in 1998, an increase of $339,000, or
18.9%.
Change in Accounting Principle. Effective January 1, 1999, the Company adopted
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5, issued by the Accounting Standards Executive Committee,
requires that the cost of start-up activities be expensed as these costs are
incurred. Start-up activities include one-time activities and organization
costs. Upon adoption, the Company incurred a pre-tax charge to income of
$433,000 ($277,000 net of tax), representing the write off of all previously
deferred balances. This write off has been reported as the cumulative effect of
a change in accounting principle in accordance with the provisions of SOP 98-5.
Non-Recurring Charges. The Company incurred $1.5 million in charges in 1998 that
were not repeated in 1999.
Income Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a
result of the above, income before income taxes and the cumulative effect of the
change in accounting principle was $401,000 in 1999 as compared with $28,000 in
1998, an increase of $373,000, or 1,348.3%. The effective combined federal,
state and provincial income tax rate was 36.0% in both 1999 and 1998. The net
loss after the cumulative effect of the change in accounting principle was
$(21,000) in 1999 as compared with net income of $18,000 in 1998, a decrease of
$39,000, and basic and diluted earnings (loss) per share were all $0.00 in both
years.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 and December 31, 1998, the Company had negative working capital
of $(17.0) million and $(16.2) million, respectively, and the current ratio was
0.6 and 0.7, respectively. The negative working capital results primarily from
the Company's current maturities of long-term debt.
Net cash provided by operating activities totaled $2.8 million and $2.7 million
in the six month periods ended June 30, 1999 and 1998, respectively. These
amounts primarily represent the cash flows from net income plus changes in
non-cash components of operations and by working capital changes.
Net cash used by investing activities totaled $3.2 million and $5.3 million in
the six months periods ended June 30, 1999 and 1998, respectively. These amounts
primarily represent purchases of property plant and equipment, investments in
and advances to joint ventures and additional investment in TDLP, a limited
partnership for which the Company serves as the general partner. The Company has
used between $2.4 million and $5.2 million for capital expenditures in each of
the last three calendar years ending December 31, 1998. Substantially all such
expenditures were for facility improvements and equipment, which were financed
principally through working capital. For the year ended December 31, 1999, the
Company anticipates that capital expenditures for improvements and equipment for
its existing facility operations will be approximately $5.4 million, including
$2.8 million for non-routine projects.
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<PAGE> 20
Net cash provided (used) by financing activities totaled $(912,000) and $1.6
million in the six month periods ended June 30, 1999 and 1998, respectively. The
net cash provided from financing activities primarily represents net proceeds
from issuance and repayment of debt and advances to or repayments from related
parties.
At June 30, 1999, the Company had total debt outstanding of $63.6 million, of
which $36.5 million was principally mortgage debt bearing interest, generally at
floating rates ranging from 6.3% to 10.0%. The Company also had outstanding a
promissory note (the "Bridge Loan") in the amount of $9.4 million. The Company's
remaining debt of $17.7 million was drawn under the Company's lines of credit.
Most of the Company's debt is at floating interest rates, generally at a spread
above the London Interbank Offered Rate ("LIBOR").
On June 4, 1999, the Company closed two loans totaling $25.25 million (the "NC
Loans"). The NC Loans are secured by the owned assisted living facilities the
Company operates in the state of North Carolina. The NC Loans mature in July
2001, bear interest at LIBOR plus 2.35%, and provide for principal amortization
under a 25-year amortization schedule. The net proceeds available at closing,
$24.7 million, were applied against the Company's indebtedness under the Bridge
Loan. As of both June 30 and August 13, 1999, the outstanding indebtedness
under the NC Loans was approximately $25.2 million and the interest rate was
7.3% and 7.5%, respectively.
The Bridge Loan had an original indebtedness of $34.1 million. It was used to
fund the purchase of the Company's North Carolina assisted living operations in
1997. With the application of the net proceeds from the NC Loans, the balance of
the Bridge Loan was reduced to $9.4 million. Prior to the principal reduction,
the Bridge Loan had a maturity date of July 1, 1999, carried interest at LIBOR
plus 3.0%, and had a restriction against pledging the North Carolina assets as
collateral with any other lender. With the reduction in the principal balance,
the Company and its lenders have agreed to modify the terms of the Bridge Loan
by extending the stated maturity date to October 1, 1999, increasing the
interest rate to 12.0% fixed, and providing certain security interests to the
lenders. These security interests include two non-operating properties in North
Carolina and the Company's interests in the assets of TDLP. No further principal
reductions are scheduled at this time, but the Company has agreed to apply
against the Bridge Loan indebtedness any net proceeds received from the sale of
the additional security interests.
As of June 30, 1999, the Company had drawn $2.6 million, had $5.65 million of
letters of credit outstanding, and had $1.7 million remaining borrowing
capability under its working capital line of credit. As of August 13, 1999, the
Company had drawn $1.0 million, had $5.65 million of letters of credit
outstanding, and had $3.3 million remaining borrowing capability under its
working capital line of credit. The interest rates applicable at June 30 and
August 13 were 7.6% and 7.7%, respectively.
Over the past several months, the Company's bank lender has provided additional
line of credit availabilty of $4.0 million (the "Overline"). Since April 14,
1999, the Overline has carried interest at 14.0% but was otherwise subject to
the same terms and conditions as the Company's working capital line of credit,
and it matured July 1, 1999. Coincident with the changes with respect to the
Bridge Loan, the Company and its lender have agreed to revised terms with
respect to the Overline. These revisions include reduction in the availability
to $3.75 million, extension of the maturity date to October 1, 1999, and
completion of an accounts receivable audit by October 1, 1999.
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<PAGE> 21
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.
Individual advances made under the acquisition line are due three years from the
date of initial funding. As of both June 30, 1999, and August 13, 1999, the
Company has 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, though additional draws are unlikely at this time.
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 June
30, 1999, the Company was in compliance with the covenants or was negotiating
with its lenders for a waiver in the event of non-compliance.
At June 30, 1999, $29.5 million of the Company's total debt of $63.6 million was
current, meaning that it must be repaid or refinanced during the next 12 months.
These current maturities are as follows: $11.1 million under the acquisition
line, secured by four nursing homes, due in December 1999; $1.2 million mortgage
payable to a Canadian bank, secured by one nursing home, due in December 1999;
$2.6 million under the working capital line of credit, due in December 1999 and
$4.0 million under the Overline, due in October 1999; $9.4 million under the
Bridge Loan due in October 1999; and miscellaneous current maturities of $1.1
million. The Company expects to refinance the $11.1 million drawn under the
acquisition line and the $1.2 million Canadian mortgage with long-term
fixed-rate debt with the existing mortgage holders during the fall of 1999. The
Company is currently negotiating with the existing lenders to further
restructure the terms with respect to the Bridge Loan and the Overline,
including extension of their maturity dates beyond October 1, 1999. The Company
expects to repay a portion of this debt through various means such as the sale
of certain assets, refinancing mortgage debt, and through cash generated from
operations. The Company expects to repay the miscellaneous current maturities of
$1.1 million with cash generated from operations. The Company believes that it
will be successful in restructuring its debt in 1999 as described. However,
there can be no assurance that the Company's restructuring efforts will be
successful. If unsuccessful, the Company would be required to seek other equity
or debt sources that may or may not be available.
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 has no immediate plans to acquire additional operations
other than as opportunities arise to do so through leases or other arrangements
that do not require significant, up-front cash outlays. 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,
Medicaid and other third-party revenue sources. The Company's future liquidity
will continue to be dependent upon the relative amounts
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<PAGE> 22
of current assets (principally cash, accounts receivable and inventories) and
current liabilities (principally accounts payable and accrued expenses). In that
regard, accounts receivable can have a significant impact on the Company's
liquidity. Continued efforts by governmental and third-party payors to contain
or reduce the acceleration of costs by monitoring reimbursement rates, by
increasing medical review of bills for services, or by negotiating reduced
contract rates, as well as any delay by the Company in the processing of its
invoices, could adversely affect the Company's liquidity and results of
operations.
Gross accounts receivable attributable to the provision of patient and resident
services at June 30, 1999 and December 31, 1998, totaled $24.5 million and $28.3
million, respectively, representing approximately 51 and 53 days in accounts
receivable, respectively. Accounts receivable from the provision of management
services was $400,000 and $387,000 at June 30, 1999 and December 31, 1998,
respectively, representing approximately 42 and 39 days in accounts receivable,
respectively.
The Company is subject to accounting losses from uncollectible receivables in
excess of its reserves. The Company continually evaluates the adequacy of its
bad debt reserves based on patient mix trends, agings of older balances, payment
terms and delays with regard to third-party payors, collateral and deposit
resources, as well as other factors. The Company continues to evaluate and
implement additional procedures to strengthen its collection efforts and reduce
the incidence of uncollectible accounts.
HEALTH CARE INDUSTRY
The health care industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations by health care providers of fraud and abuse statutes and
regulations. Violations of these laws and regulations could result in expulsion
from government health care programs together with the imposition of significant
fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with
fraud and abuse laws and regulations as well as other applicable government laws
and regulations. Compliance with such laws and regulations can be subject to
future government review and interpretation as well as regulatory actions
unknown or unasserted at this time.
During 1997, the Federal government enacted the Balanced Budget Act of 1997
("BBA"), which contains numerous Medicare and Medicaid cost-saving measures. The
BBA requires that nursing homes transition to a prospective payment system
("PPS") under the Medicare program during a three-year "transition period,"
commencing with the first cost reporting period beginning on or after July 1,
1998. As of June 30, 1999, all of the Company's facilities had begun the PPS
transition. The BBA also contains certain measures that have and could lead to
further future reductions in Medicare therapy cost reimbursement and Medicaid
payment rates. As facts are now known, other than systemic occupancy declines,
management believes there will be little or no impact on net operations from
PPS, although
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<PAGE> 23
both revenues and expenses are expected to be reduced from the levels prior to
PPS. With respect to Medicare therapy allowable cost and fee reductions, the
Company estimates that net operations was negatively impacted in 1998 and will
be further negatively impacted in 1999, but the ultimate negative impact on the
Company's operations cannot be reasonably estimated. Given the recent enactment
of the BBA, the Company is unable to predict the ultimate impact of the BBA on
its future operations. However, any reductions in government spending for
long-term health care could have an adverse effect on the operating results and
cash flows of the Company. The Company will attempt to maximize the revenues
available to it from governmental sources within the changes that will occur
under the BBA. In addition, the Company will attempt to increase revenues from
nongovernmental sources, including expansion of its assisted living and Canadian
operations.
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
facilities (one of which is owned) and two owned Canadian nursing homes.
Although not material to the Company as a whole, if the currency exchange rate
fluctuates, the Company may experience currency translation gains and losses
with respect to the operations of these activities and the capital resources
dedicated to their support. While such currency exchange rate fluctuations have
not been material to the Company in the past, there can be no assurance that the
Company will not be adversely affected by shifts in the currency exchange rates
in the future.
EXECUTIVE MANAGEMENT CHANGES
Effective June 30, 1999, Mary Margaret Hamlett resigned as Executive Vice
President, Chief Financial Officer and Secretary of the Company. Mr. Richard B.
Vacek, Jr. replaced Ms. Hamlett in those capacities effective August 16, 1999.
Ms. Hamlett also resigned as a Director of the Company coincident with her
resignation as an employee of the Company.
In addition, Mr. Charles H. Rinne joined the Company effective June 28, 1999.
Mr. Rinne is President and Chief Operating Officer of the Company.
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.
IMPACT OF THE YEAR 2000
The Company has established a Year 2000 ("Y2K") compliance committee. The
committee is charged with identifying potential problems faced by the Company as
a result of Y2K and develop
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<PAGE> 24
remedial or contingency plans in anticipation of them. Working closely with the
Company's insurance carrier, the Committee has developed a formal, documented
plan to address potential Y2K problems, which is being implemented at this time.
The plan requires assessment and preparatory activity that is being addressed at
the Company's facilities.
Management has completed the management information systems conversion with
respect to its United States nursing home operations. Included in the process of
selecting hardware and software, assurances were received from the various
vendors that their products are or will be Y2K compliant. The Company continues
to evaluate other information technology areas that may be affected including
existing hardware systems. To date, no issues of a material nature have been
identified, and the costs of ensuring compliance are not expected to have a
material impact on the Company's results of operations.
In addition, the Company has ongoing relationships with third-party payors,
suppliers, vendors, and others that may have computer systems with Y2K problems
that the Company does not control. The Company has received assurances from its
major vendors that they will not be adversely impacted by this issue. There can
be no assurance that the fiscal intermediaries and governmental agencies with
which the Company transacts business and who are responsible for payment to the
Company under the Medicare and Medicaid programs, as well as other payors, will
not experience significant problems with Y2K compliance. Congress' General
Accounting Office ("GAO") has recently concluded that it is highly unlikely that
all Medicare systems will be compliant on time to ensure the delivery of
uninterrupted benefits and services into the year 2000. While the Company does
not receive payments directly from Medicare, the GAO statement could be
interpreted as applying to intermediaries from whom the Company does receive
payment. The Company intends to actively confirm the Y2K readiness status for
each of its intermediaries and other payors. However, the failure of the Company
or third parties to be fully Y2K compliant for essential systems and equipment
by January 1, 2000 could result in interruptions of normal business
transactions.
Paying agencies are only one example of dependence of the Company on the Y2K
preparedness of other entities and vendors. Other examples include the normal
flow of patient care and nutritional supplies, utilities, communications,
banking services and therapy subcontractors. Just as with the Company's own
systems, the failure of third parties to remedy Y2K problems or the failure to
address unanticipated Y2K problems could have a material adverse effect on the
Company's business, financial condition and results of operations.
Management has reported to the Board of Directors on the Company's ability to
deal with Y2K issues. Management is mandated by the Board of Directors to
continue its evaluations of Y2K preparedness and to make periodic reports of its
assessments and plans. Contingency plans for the Company's Y2K related issues
continue to be developed, including identification of alternate suppliers and
vendors, alternate technologies, and manual systems. Management believes that it
is well-positioned to experience Y2K successfully. Costs of the Company's Y2K
preparedness programs through June 30, 1999 have not been material, and
management does not expect costs to be material in future periods. The Company
is fortunate in that the service it provides is generally custodial in nature
and lacking in a heavy dependance on highly technical biomedical equipment.
However, the worst case result of assumed non-compliance in any of several
critical areas would likely have a catastrophic impact on the Company's ability
to deliver
-24-
<PAGE> 25
its services to patients and residents in a safe manner and, consequently, on
the Company's results of operations. Should catastrophic events occur that are
out of the Company's control such as those described above, the magnitude of
that problem will affect not only the Company, but society as a whole.
The foregoing Y2K disclosure is intended to be a "Year 2000 statement" as the
term is defined in the Year 2000 Information and Readiness Disclosure Act of
1998 (the "Year 2000 Act"), and, to the extent such disclosure relates to Y2K
processing of the Company or to products or services offered by the Company, it
is also intended to be the "Year 2000 readiness disclosure," as that term is
defined in the Year 2000 Act.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis provides information deemed by Management
to be relevant to an assessment and understanding of the Company's consolidated
results of operations and its financial condition. It should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. Certain statements made by or on behalf of the Company,
including those contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere, are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. These statements involve risks and uncertainties including,
but not limited to, changes in governmental reimbursement or regulation, health
care reforms, the increased cost of borrowing under the Company's credit
agreements, covenant waivers from the Company's lenders, possible amendments to
the Company's credit agreements, the impact of future licensing surveys, the
ability to execute on the Company's acquisition program, both in obtaining
suitable acquisitions and financing therefor, changing economic conditions as
well as others. Actual results may differ materially from those 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. In addition, the
Company disclaims any intent or obligation to update these forward-looking
statements.
-25-
<PAGE> 26
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders was held on May 14, 1999.
(c) Matters voted upon at the meeting:
- Election of Directors:
Mary Margaret Hamlett
---------------------
FOR 4,297,926
AGAINST -0-
WITHHELD 130,108
ABSTENTIONS -0-
NON-VOTING(1) 970,676
---------
ELIGIBLE SHARES 5,398,710
=========
J. Bransford Wallace
--------------------
FOR 4,296,676
AGAINST -0-
WITHHELD 131,358
ABSTENTIONS -0-
NON-VOTING(1) 970,676
---------
ELIGIBLE SHARES 5,398,710
=========
(Continuing directors include Charles W. Birkett, M.D.,
Paul Richardson, and Edward G. Nelson)
-----------
(1) Including broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits filed as part of the report on Form 10-Q are listed in
the Exhibit Index immediately following the signature page.
(b) Reports on Form 8-K: None.
-26-
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVOCAT INC.
August 16, 1999
By: /s/ Charles W. Birkett
-----------------------------------------
Charles W. Birkett, M.D.
Chief Executive Officer, Interim Principal
Financial Officer and Chief Accounting
Officer and An Officer Duly Authorized to
Sign on Behalf of the Registrant
-27-
<PAGE> 1
EXHIBIT 10.1
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT (the "Agreement"), dated as of June 30, 1999,
is by and between Mary Margaret Hamlett ("Hamlett") and Advocat Inc., a Delaware
corporation (the "Company").
RECITALS
1. Hamlett and the Company entered into an Employment Agreement dated
as of May 14, 1994 (the "Employment Agreement").
2. Hamlett and the Company desire to document their agreement regarding
Hamlett's separation from employment with the Company effective June 30, 1999
(the "Effective Date").
3. Under the Company's 1994 Non-Qualified Stock Option Plan for
Directors of Advocat Inc. (the "Directors Plan"), Hamlett was granted a total of
20,000 options to purchase shares of Company stock, and under the Company's
Incentive and Non-Qualified Stock Option Plan for Key Personnel of Advocat Inc.
(the "Key Personnel Plan"), Hamlett was granted a total of 110,000 options to
purchase shares of Company stock (together the "Options") pursuant to certain
stock option agreements dated May 10, 1994, December 31, 1995, March 1, 1996,
December 31, 1997, April 1, 1998 and December 31, 1998 between Hamlett and the
Company (collectively, the "Option Agreements").
4. The parties have agreed to settle in the manner set forth in this
Agreement any claims or controversies which might arise between Hamlett and the
Company with respect to Hamlett's employment with the Company, Hamlett's
separation from the Company, and any claims pursuant to the Employment
Agreement, or any issues concerning the Options.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. Termination. Hamlett's employment with the Company and her position
as Director, Chief Financial Officer, Executive Vice President and Secretary of
the Company and its subsidiaries are hereby terminated as of the Effective Date
of this Agreement.
2. Agreements with Respect to Certain Obligations. Hamlett and the
Company agree as follows:
(a) In full satisfaction of the Company's obligations to Hamlett
under the Employment Agreement, the Company hereby agrees (i) to pay Hamlett a
sum equal to one hundred percent (100%) of her annual base salary, including
monthly auto allowance,
<PAGE> 2
as in effect on the Effective Date, in twelve (12) equal monthly installments,
less the usual and customary withholdings, commencing on the Effective Date;
(ii) that all Options issued to Hamlett under the Option Agreements shall be
fully vested as of the Effective Date, and Hamlett shall have eighteen (18)
months to exercise such options; (iii) to pay Hamlett accrued but unpaid salary,
including accrued but unpaid vacation pay, due from Company through the
Effective Date; (iv) to continue providing Hamlett employee benefits and
perquisites to which she is entitled on the Effective Date for twelve (12)
months; or until Hamlett begins receiving similar benefits and perquisites from
another employer, whichever is earlier; and (v) to provide continuing coverage
under the Company's directors and officers insurance plan as specified in
Section 2(b) below. With respect to subsection 2(a)(iv) hereof, any such
benefits and perquisites Hamlett does not receive from another employer will
continue for the full 12 months.
(b) The Company will provide director and officer liability
insurance coverage in amounts, and on terms and conditions, no less favorable to
Hamlett than the coverage provided for any other present or former officer or
director of the Company, until the earlier of (i) the fifth anniversary of the
Effective Date or (ii) such time as the Company and its affiliates no longer
maintain any policy of insurance covering errors or omissions by any of the
Company's present or former officers or directors. The Company will, promptly
upon written request and to the fullest extent legally permitted or authorized
by the Company's certificate of incorporation, by-laws or Board resolutions or,
if greater, by the laws of the State of Delaware, indemnify and hold harmless
Hamlett in all pending or threatened actions, suits and proceedings, against her
or threatened against her, whether civil, criminal, administrative, or
investigative by reason of the fact that Hamlett was a director, officer, or
agent of the Company, or was at the Company's request serving as a director,
officer, employee or agent of another entity, against all costs, expenses,
liabilities and losses (including, without limitation, judgments, interest,
penalties, fines, ERISA excise taxes or penalties, attorneys' fees reasonably
incurred, expenses of investigation reasonably incurred, and reasonably amounts
paid to or to be paid in settlement) that are suffered or incurred by her in
connection with any such pending or threatened action, suit or proceeding, and
such indemnification shall inure to the benefit of Hamlett's heirs, executives,
and administrators. In addition, The Company shall advance to Hamlett all costs
and expenses (including, without limitation, attorneys fees) reasonably incurred
by her in connection with any such pending or threatened action, suit or
proceeding within 20 days after receipt by the Company of a written request for
advancement accompanied by (x) documentation reasonably evidencing the sums for
which advancement is sought and (y) to the extent required by law, an
undertaking by Hamlett to repay the amount advanced if she is ultimately
determined not to be entitled to indemnification against such costs and
expenses. Notwithstanding anything herein to the contrary, Hamlett shall not be
entitled to indemnification if it is prohibited by Delaware General Corporation
Law, and nothing in this Agreement shall limit or reduce Hamlett's rights under
the Company's current Certificate of Incorporation.
2
<PAGE> 3
(c) In the event that any of the entities or individuals with
which Hamlett has worked on the Company's behalf during the twelve (12) months
preceding the Effective Date enters into a binding agreement before the first
(1st) anniversary of the Effective Date which ultimately results in change of
control of the Company, the Change in Control provisions set forth in Section XI
of the Employment Agreement shall apply, and any payments due under Section
2(a)(i) hereof shall be accelerated and the total of such payments under Section
2 (a)(i) shall be applied toward any amounts owed to Hamlett under Section XI of
the Employment Agreement. For purposes of this section, a Change in Control
shall be defined as such term is defined in the Employment Agreement.
(d) If a significant number of options belonging to directors or
management employees are repriced during the 18 months after the Effective Date,
the Company will reprice Hamlett's options in the same manner at the same price
level.
3. Releases. Hamlett and the Company agree as follows:
(a) Hamlett hereby releases the Company and its shareholders,
affiliates, agents and representatives from any causes of action, claims,
demands, debts, liability, expense or costs of court of any and every character
and nature whatsoever, whether or not previously asserted, whether known or
unknown, either in or arising out of law of contracts, torts, property rights,
statutes or ordinances as to all wrongful discharge claims, all tort,
intentional tort, negligence, employee benefit claims and contract claims, any
claim for attorneys' fees, costs, or expenses or any claim arising from any
federal, state or local civil rights and/or employment law (including but not
limited to, Title VII of the Civil Rights Act of 1964, The Age Discrimination in
Employment Act, and the Americans With Disabilities Act) and/or wages bonuses,
commissions, at law or in equity, arising out of any matter at any time up to
and including the date of execution of this Agreement; and any other matter
whatsoever, it being the parties' intention that the scope and breadth of this
release be as broad and extensive as lawfully possible in order to lay to rest
forever any potential controversies concerning any matters existing or occurring
prior to the execution of this Agreement; provided, however, that Hamlett does
not intend by this Agreement to release any rights that she may have arising
from the terms of this Agreement.
(b) The Company hereby releases Hamlett from any causes of action,
claims, demands, debts, liability, expense or costs of court of any and every
character and nature whatsoever, whether or not previously asserted, whether
known or unknown, either in or arising out of the law of contracts, torts,
property rights, statutes or ordinances, all tort, intentional tort, negligence,
reimbursement claims, employee benefit claims and contract claims, any claim for
attorneys' fees, costs, or expenses, at law or in equity, arising out of any
matter related to the Company employment of Hamlett up to and including the date
of execution of this Agreement; and any other matter whatsoever, it being the
parties' intention that the scope and breadth of this release be as broad and
extensive as lawfully possible in order to lay to rest forever any potential
controversies concerning any matters existing or occurring prior to the
execution of this Agreement; provided, however, that the Company does not intend
by this Agreement to release any rights that it may have arising
3
<PAGE> 4
from the terms of this Agreement or from the provisions of the Employment
Agreement that by their terms survive a termination of the Period of Employment.
(c) Although Hamlett has never raised an age discrimination issue,
in order for this Agreement to embody a release of all claims as contemplated by
both parties, federal law stipulates that Hamlett specifically release any
potential claims on the basis of age discrimination. Therefore, in consideration
for such release, and in addition to other considerations stipulated in this
Agreement, the Company has agreed that it will pay Hamlett an additional One
Hundred and No/100 Dollars ($100.00) promptly upon the following release
becoming effective. For such consideration, Hamlett specifically releases the
Company from any claims based upon any law prohibiting discrimination on the
basis of Hamlett's age including but not limited to the Age Discrimination in
Employment Act ("ADEA").
(d) Hamlett acknowledges she understands the terms and conditions of
this Agreement. Hamlett has had the opportunity to discuss thoroughly all
aspects of this Agreement with Hamlett's legal counsel and has been advised to
do so by the Company. Hamlett is voluntarily entering into this Agreement of her
own free will, free of any coercion, pressure or duress. She is knowingly
releasing the Company in accordance with the terms contained herein. Hamlett
further acknowledges that she is receiving consideration beyond anything of
value to which she is already entitled. Should Hamlett ever attempt to challenge
this Agreement, Hamlett will, as a precondition, return to the Company all
consideration provided to Hamlett hereunder. Hamlett will have up to twenty-one
(21) days in which to consider this Agreement. After the execution of this
Agreement, Hamlett will have an additional seven (7) days to revoke this
Agreement. Therefore, this Agreement will become final on the eighth (8th) day
after Hamlett has executed it. Notwithstanding anything to the contrary stated
in this Agreement, the Company will not be required to make any payments or
provide any benefits or other consideration to Hamlett as stipulated under this
Agreement until this Agreement becomes final pursuant to the provisions of this
Section 3.
(e) The parties declare that each has carefully read this Agreement,
that each has reviewed its terms with each one's respective counsel, and that
each agrees to it for the purpose of making a full and final adjustment and
resolution of the matters addressed herein. Nothing in this Agreement is to be
construed as an admission of any kind by either Hamlett or the Company.
4. Confidential Information. Hamlett recognizes and acknowledges that
all information pertaining to the affairs, business, clients, customers or other
relationships of the Company is confidential and is a unique and valuable asset
of the Company. Hamlett will not, except to the extent required by law, give to
any person, firm, association, corporation or governmental agency any
information concerning the affairs, business, clients, customers or other
relationships of the Company. Hamlett will not make use of this type of
information for her own purposes or for the benefit of any person or
organization
4
<PAGE> 5
other than the Company. Hamlett will also use her best efforts to prevent the
disclosure of this information by others. All records, memoranda, etc. relating
to the business of the Company, whether made by Hamlett or otherwise in her
possession, are confidential and will remain property of the Company.
5. Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given on the date of service if served personally on the party to whom notice is
to be given, or on the third day after mailing if mailed to the party to whom
notice is to be given properly addressed, certified mail, return receipt
requested, postage prepaid as follows: if to the Company, to:
Advocat Inc.
277 Mallory Station Road
Suite 130
Franklin, Tennessee 37067
Attention: C.W. Birkett, CEO
with a copy to:
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
Nashville, Tennessee 37238
Attention: Mark Manner
and if to Hamlett, at:
1608 Nottingham Place
Nashville, Tennessee 37221
6. In the event that any provision of this Agreement shall be held
invalid or illegal for any reason, any illegality or invalidity shall not affect
the remaining parts of this Agreement, but this Agreement shall be construed and
enforced as if the illegal or invalid provision had never been inserted.
7. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Tennessee.
8. Entire Agreement. Except as set forth herein, this Agreement
constitutes the entire Agreement among the parties with respect to the
transactions contemplated in this Agreement and there are no understandings or
agreements relating to this Agreement that are not fully expressed in this
Agreement.
5
<PAGE> 6
9. Waivers and Amendments. This Agreement may be amended, superseded,
canceled, renewed, or modified, and the terms hereof may be waived, only by a
written instrument signed by the parties, or in the case of a waiver, by the
party waiving compliance. No delay on the part of any party in exercising the
right, power or privilege hereunder shall authorize a waiver thereof.
10. Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and the respective successors and
permitted assigns and legal representatives.
11. Arbitration. The parties agree to negotiate in good faith with
respect to any dispute with respect to this Agreement or the transactions
contemplated hereby. If the parties are not successful in resolving the dispute
through such negotiations, then the parties agree that the dispute shall be
settled by arbitration in accordance with the provisions of the Commercial
Arbitration Rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitrator(s) may be entered in any court having
jurisdiction. Notwithstanding anything in this Agreement to the contrary, this
Section 12 shall not apply to any dispute arising from an alleged breach of
Section 4 of this Agreement.
12. Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument.
13. Headings. The headings in this Agreement are for reference only,
and shall not effect the interpretation of this Agreement.
14. Authorization. The Company represents and warrants that the person
executing this Agreement on behalf of the Company is duly authorized to act for
and on behalf of the Company to execute and deliver this Agreement and that this
Agreement is a valid, binding and enforceable agreement of the Company.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have signed this Agreement as of June
30, 1999.
ADVOCAT INC.
By: /s/ Charles W. Birkett, M.D.
------------------------------------
Name: Chairman/CEO
----------------------------------
Its:
-----------------------------------
/s/ Mary Margaret Hamlett
---------------------------------------
MARY MARGARET HAMLETT
7
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This Agreement made effective as of June 28, 1999 by and between
ADVOCAT INC., a Delaware corporation (the "Company"), and Charles H. Rinne (the
"Executive").
In consideration of the mutual covenants contained in this Agreement,
the parties hereby agree as follows:
SECTION I
EMPLOYMENT
The Company agrees to employ the Executive and the Executive agrees to
be employed by the Company for the Period of Employment as provided in Section
III.A. below and upon the terms and conditions provided in the Agreement.
SECTION II
POSITION AND RESPONSIBILITIES
During the Period of Employment, the Executive agrees to serve as
President of the Company and to be responsible for the typical management
responsibilities expected of an officer holding such positions and such other
responsibilities as may be assigned to Executive from time to time by the Chief
Executive Officer or Board of Directors of the Company.
SECTION III
TERMS AND DUTIES
A. Period of Employment
The period of Executive's employment under this Agreement will
commence as of the date hereof and shall continue through June 28, 2000, subject
to extension or termination as provided in this Agreement ("Period of
Employment"). On each anniversary of the commencement of the Period of
Employment, the period of Executive's employment shall be extended for
additional one (1) year periods, unless either party gives notice thirty (30)
days in advance of the expiration of the then current period of employment of
such party's intent not to extend the Period of Employment.
B. Duties
During the Period of Employment, the Executive shall devote
all of his business time, attention and skill to the business and affairs of the
Company and its subsidiaries. The
<PAGE> 2
Executive will perform faithfully the duties which may be assigned to him from
time to time by the Chief Executive Officer or the Board of Directors.
SECTION IV
COMPENSATION AND BENEFITS
A. Compensation
For all services rendered by the Executive in any capacity
during the Period of Employment, the Executive shall be compensated as follows:
1. Base Salary
The Company shall pay the Executive a base salary
("Base Salary") as follows: Two Hundred Twenty-Five Thousand Dollars ($225,000)
per annum.
Base Salary shall be payable according to the
customary payroll practices of the Company but in no event less frequently than
once each month. The base salary shall be reviewed annually and shall be subject
to increase according to the policies and practices adopted by the Company from
time to time.
B. Annual Incentive Awards
The Company will pay the Executive annual incentive
compensation awards as may be granted by the Board or a Compensation Committee
to the Executive up to 30% of Base Salary, conditional upon achievement of
pre-agreed goals.
C. Additional Benefits
The Executive will be entitled to participate in all
compensation or employee benefit plans or programs and receive all benefits and
perquisites for which any salaried employees are eligible under any existing or
future plan or program established by the Company for salaried employees. The
Executive will participate to the extent permissible under the terms and
provisions of such plans or programs in accordance with program provisions.
These may include group hospitalization, health, dental care, life or other
insurance, tax qualified pension, car allowance, savings, thrift and profit
sharing plans, termination pay programs, sick leave plans, travel or accident
insurance, disability insurance, and contingent compensation plans including
capital accumulation programs, Restricted Stock programs, stock purchase
programs and stock option plans. Nothing in this Agreement will preclude the
Company from amending or terminating any of the plans or programs applicable to
salaried or senior executives as long as such amendment or termination is
applicable to all salaried employees or senior executives. The Executive will be
entitled to an annual four-week paid vacation.
D. Stock Option Plan
2
<PAGE> 3
The Company will grant to the Executive options for the
purchase of 50,000 shares of the Company's common stock under the Company's 1994
Incentive and Nonqualified Stock Option Plan for Key Personnel. The exercise
price for these options will be the price on the market close on June 25, 1999.
SECTION V
BUSINESS EXPENSES
The Company will reimburse the Executive for all reasonable travel and
other expenses incurred by the Executive in connection with the performance of
his duties and obligations under this Agreement.
SECTION VI
DISABILITY
A. In the event of disability of the Executive during the Period of
Employment, the Company will continue to pay the Executive according to the
compensation provisions of this Agreement during the period of his disability,
until such time as Executive's long term disability insurance benefits are
available. However, in the event the Executive is disabled for a continuous
period of six (6) months after the Executive first becomes disabled, the Company
may terminate the employment of the Executive. In this case, normal compensation
will cease except for earned but unpaid Base Salary and Incentive Compensation
Awards which would be payable on a pro-rated basis for the year in which the
disability occurred. In the event of such termination, all unvested stock
options held by Executive shall be deemed fully vested on the date of such
termination.
B. During the period the Executive is receiving payments of either
regular compensation or disability insurance described in this Agreement and as
long as he is physically and mentally able to do so, the Executive will furnish
information and assistance to the Company and from time to time will make
herself available to the Company to undertake assignments consistent with his
prior position with the Company and his physical and mental health. If the
Company fails to make a payment or provide a benefit required as part of the
Agreement, the Executive's obligation to fulfill information and assistance will
end.
C. The term "disability" will have the same meaning as under any
disability insurance provided pursuant to this Agreement or otherwise.
3
<PAGE> 4
SECTION VII
DEATH
In the event of the death of the Executive during the Period of
Employment, the Company's obligation to make payments under this Agreement shall
cease as of the date of death, except for earned but unpaid Base Salary and
Incentive Compensation Awards which will be paid on a pro-rated basis for that
year. The Executive's designated beneficiary will be entitled to receive the
proceeds of any life or other insurance or other death benefit programs provided
in this Agreement.
SECTION VIII
EFFECT OF TERMINATION OF EMPLOYMENT
A. If the Executive's employment terminates due to either a Without
Cause Termination or a Constructive Discharge, as defined later in this
Agreement, the Company will pay the Executive in a lump sum upon such
Termination or Constructive Discharge an amount equal to 200% of his Base Salary
as in effect at the time of the termination. Earned but unpaid Base Salary and
Incentive Compensation Awards will be paid in a lump sum at such time. The
benefits and perquisites described in this Agreement as in effect at the date of
termination of employment will be continued for eighteen (18) months. If the
Executive's employment terminates due to either a Without Cause Termination or a
Constructive Discharge, or pursuant to Section XI, all stock options ("Options")
granted to the Executive under the Company's 1991 Non-Qualified Stock Option
Plan or other stock option program or plan (the "Plan") shall be deemed vested,
and the Company shall cause the Options to remain exercisable for eighteen (18)
months from the date of termination.
B. If the Executive's employment terminates due to a Termination for
Cause, earned but unpaid Base Salary will be paid on a pro-rated basis for the
year in which the termination occurs. No other payments will be made or benefits
provided by the Company.
C. Upon termination of the Executive's employment other than for
reasons due to death, disability, or pursuant to Paragraph A of this Section or
Section XI, the Period of Employment and the Company's obligation to make
payments under this Agreement will cease as of the date of the termination
except as expressly defined in this Agreement.
D. For this Agreement, the following terms have the following meanings:
1. "Termination for Cause" means termination of the Executive's
employment by the Company's Board of Directors acting in good faith by the
Company by written notice to the Executive specifying the event relied upon for
such termination, due to the Executive's serious, willful misconduct with
respect to his duties under this Agreement, including but not limited to
conviction for a felony or perpetration of a common law fraud, which has
resulted or is likely to result in material economic damage to the Company.
2. "Constructive Discharge" means termination of the Executive's
employment by the Executive due to a failure of the Company to fulfill its
obligations under this Agreement in any material respect including any reduction
of the Executive's Base Salary or
4
<PAGE> 5
other compensation other than reductions applicable to all employees of the
Company or failure to appoint or reappoint the Executive to the position
specified in Section II hereof, or other material change by the Company in the
functions, duties or responsibilities of the position which would reduce the
ranking or level, responsibility, importance or scope of the position. The
Executive will provide the Company a written notice which describes the
circumstances being relied on for the termination with respect to the Agreement
within ninety (90) days after the event giving rise to the notice. The Company
will have thirty (30) days to remedy the situation prior to the Termination for
Constructive Dismissal.
3. "Without Cause Termination" means termination of the
Executive's employment by the Company (a) other than due to death, disability,
Termination for Cause or pursuant to Section XI; or (b) upon expiration of the
Period of Employment as a result of the giving of notice by the Company of its
intent not to extend the Period of Employment as provided in Section III.A.
E. Stock Option Repurchase.
If the Executive's employment terminates due to either a
Without Cause Termination or a Constructive Discharge or pursuant to Section XI,
Executive may require the Company to repurchase any Options for an amount equal
to the difference between the fair market value of a share of the Company's
common stock on the date of termination and the per share exercise price set
forth in the Options, times the number of shares (whether vested or unvested)
granted to the Executive under the Options.
SECTION IX
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE PERIOD OF EMPLOYMENT
A. The Executive will, with reasonable notice during or after the
Period of Employment, furnish information as may be in his possession and
cooperate with the Company as may reasonably be requested in connection with any
claims or legal actions in which the Company is or may become a party.
B. The Executive recognizes and acknowledges that all information
pertaining to the affairs, business, clients, customers or other relationships
of the Company, as hereinafter defined, is confidential and is a unique and
valuable asset of the Company. Access to and knowledge of this information are
essential to the performance of the Executive's duties under this Agreement. The
Executive will not during the Period of Employment or after except to the extent
reasonably necessary in performance of the duties under this Agreement, give to
any person, firm, association, corporation or governmental agency any
information concerning the affairs, business, clients, customers or other
relationships of the Company except as required by law. The Executive will not
make use of this type of information for his own purposes or for the benefit of
any person or organization other than the Company. The Executive will also use
his best efforts to prevent the disclosure of this information by others. All
records, memoranda, etc.
5
<PAGE> 6
relating to the business of the Company whether made by the Executive or
otherwise coming into his possession are confidential and will remain the
property of the Company.
C. During the Period of Employment and for a twelve (12) month period
thereafter, the Executive will not use his status with the Company to obtain
loans, goods or services from another organization on terms that would not be
available to him in the absence of his relationship to the Company. During the
Period of Employment and for a twelve (12) month period following termination of
the Period of Employment, other than termination due to a Without Cause
Termination, a Constructive Discharge or termination pursuant to Section XI: the
Executive will not make any statements or perform any acts intended to advance
the interest of any existing or prospective competitors of the Company in any
way that will injure the interest of the Company; the Executive without prior
express written approval by the Board of Directors of the Company will not
directly or indirectly own or hold any proprietary interest in or be employed by
or receive compensation from any party engaged in the same or any similar
business in the same geographic areas the Company does business; and the
Executive without express prior written approval from the Board of Directors,
will not solicit any members of the then current clients of the Company or
discuss with any employee of the Company information or operation of any
business intended to compete with the Company. For the purposes of the
Agreement, proprietary interest means legal or equitable ownership, whether
through stock holdings or otherwise, of a debt or equity interest (including
options, warrants, rights and convertible interests) in a business firm or
entity, or ownership of more than 5% of any class of equity interest in a
publicly-held company. The Executive acknowledges that the covenants contained
herein are reasonable as to geographic and temporal scope. For a twelve (12)
month period after termination of the Period of Employment for any reason, the
Executive will not directly or indirectly hire any employee of the Company or
solicit or encourage any such employee to leave the employ of the Company.
D. The Executive acknowledges that his breach or threatened or
attempted breach of any provision of Section IX would cause irreparable harm to
the Company not compensable in monetary damages and that the Company shall be
entitled, in addition to all other applicable remedies, to a temporary and
permanent injunction and a decree for specific performance of the terms of
Section IX without being required to prove damages or furnish any bond or other
security.
E. The Executive shall not be bound by the provisions of Section IX in
the event of the default by the Company in its obligations under this Agreement
which are to be performed upon or after termination of this Agreement.
SECTION X
INDEMNIFICATION, LITIGATION
The Company will indemnify the Executive to the fullest extent
permitted by the laws of the state of incorporation in effect at that time, or
certificate of incorporation and by-laws of the Company whichever affords the
greater protection to the Executive. The Executive will be entitled to any
insurance proceeds related to any award, or any fees or expenses incurred in
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connection with any action, suit or proceeding to which he may be made a party
by reason of being a director or officer of the Company.
SECTION XI
CHANGE IN CONTROL
In the event there is a Change in Control of the ownership of the
Company, the Executive may at any time immediately resign upon written notice to
the Company. In this event, the Company shall pay to the Executive in a lump sum
upon such resignation an amount equal to 200% of his Base Salary as in effect at
the time of such resignation. In addition, earned but unpaid Base Salary and
Incentive Compensation Awards will be paid on a pro-rated basis for the year in
which resignation occurs. Any stock options granted to the Executive prior to
termination pursuant to the Plan, but subject to vesting restrictions, will be
fully vested upon a Change in Control whether or not the Executive resigns. The
benefits and perquisites described in this Agreement as in effect at the date of
termination of employment will also be continued for eighteen (18) months from
the effective date of termination pursuant to Change of Control.
A "Change in Control" shall be deemed to have occurred if (i) a tender
offer shall be made and consummated for the ownership of more than 50% of the
outstanding voting securities of the Company, (ii) the Company shall be merged
or consolidated with another corporation and as a result of such merger or
consolidation less than 75% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of the Company, as the same shall have existed immediately prior to
such merger or consolidation, (iii) the Company shall sell all or substantially
all of its assets to another corporation which is not a wholly-owned subsidiary,
or (iv) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3)
(as in effect on the date hereof) of the Securities and Exchange Act of 1934
("Exchange "Act")), shall acquire more than 50% of the outstanding voting
securities of the Company (whether directly, indirectly, beneficially or of
record). For purposes hereof, ownership of voting securities shall take into
account and shall include ownership as determined by applying the provisions of
Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange
Act.
SECTION XII
WITHHOLDING TAXES
The Company may directly or indirectly withhold from any payments under
this Agreement all federal, state, city or other taxes that shall be required
pursuant to any law or governmental regulation.
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SECTION XIII
EFFECTIVE PRIOR AGREEMENTS
This Agreement contains the entire understanding between the Company
and the Executive with respect to the subject matter and supersedes any prior
employment or severance agreements between the Company and its affiliates, and
the Executive.
SECTION XIV
CONSOLIDATION, MERGER OR SALE OF ASSETS
Nothing in this Agreement shall preclude the Company from consolidating
or merging into or with, or transferring all or substantially all of its assets
to, another corporation which assumes this Agreement and all obligations and
undertakings of the Company hereunder. Upon such a Consolidation, Merger or Sale
of Assets, the term "the Company" as used will mean the other corporation and
this Agreement shall continue in full force and effect. This Section XIV is not
intended to modify or limit the rights of the Executive hereunder, including
without limitation, the rights of Executive under Section XI.
SECTION XV
MODIFICATION
This Agreement may not be modified or amended except in writing signed
by the parties. No term or condition of this Agreement will be deemed to have
been waived except in writing by the party charged with waiver. A waiver shall
operate only as to the specific term or condition waived and will not constitute
a waiver for the future or act on anything other than that which is specifically
waived.
SECTION XVI
GOVERNING LAW; ARBITRATION
This Agreement has been executed and delivered in the State of
Tennessee and its validity, interpretation, performance and enforcement shall be
governed by the laws of that state.
Any dispute among the parties hereto shall be settled by arbitration in
Nashville, Tennessee, in accordance with the rules then obtaining of the
American Arbitration Association and judgment upon the award rendered may be
entered in any court having jurisdiction thereof.
SECTION XVII
NOTICES
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid by registered mail, return receipt requested,
or if delivered by hand, overnight delivery service or confirmed facsimile
transmission, to the following:
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(a) If to the Company, at 277 Mallory Station Road, Suite 130,
Franklin, Tennessee 37067, Attention: President or Chief Executive Officer, or
at such other address as may have been furnished to the Executive by the Company
in writing; or
(b) If to the Executive, at _________________________________,
or such other address as may have been furnished to the Company by the Executive
in writing.
SECTION XVIII
BINDING AGREEMENT
This Agreement shall be binding on the parties' successors, heirs and
assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
ADVOCAT INC.
By: /s/ Charles W. Birkett, M.D.
------------------------------------
Title: Chairman & CEO
---------------------------------
EXECUTIVE:
/s/ Charles H. Rinne
---------------------------------------
Charles H. Rinne
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Agreement made effective as of August 16, 1999 by and between
ADVOCAT INC., a Delaware corporation (the "Company"), and Richard Vacek (the
"Executive").
In consideration of the mutual covenants contained in this Agreement,
the parties hereby agree as follows:
SECTION I
EMPLOYMENT
The Company agrees to employ the Executive and the Executive agrees to
be employed by the Company for the Period of Employment as provided in Section
III.A. below and upon the terms and conditions provided in the Agreement.
SECTION II
POSITION AND RESPONSIBILITIES
During the Period of Employment, the Executive agrees to serve as
Executive Vice- President, Chief Financial Officer, Secretary and Treasurer of
the Company and to be responsible for the typical management responsibilities
expected of an officer holding such positions and such other responsibilities as
may be assigned to Executive from time to time by the Chief Executive Officer or
Board of Directors of the Company.
SECTION III
TERMS AND DUTIES
A. Period of Employment
The period of Executive's employment under this Agreement will
commence as of the date hereof and shall continue through August 16, 2000,
subject to extension or termination as provided in this Agreement ("Period of
Employment"). On each anniversary of the commencement of the Period of
Employment, the period of Executive's employment shall be extended for
additional one (1) year periods, unless either party gives notice thirty (30)
days in advance of the expiration of the then current period of employment of
such party's intent not to extend the Period of Employment.
B. Duties
During the Period of Employment, the Executive shall devote
all of his business time, attention and skill to the business and affairs of the
Company and its subsidiaries. The
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Executive will perform faithfully the duties which may be assigned to him from
time to time by the Chief Executive Officer or the Board of Directors.
SECTION IV
COMPENSATION AND BENEFITS
A. Compensation
For all services rendered by the Executive in any capacity
during the Period of Employment, the Executive shall be compensated as follows:
1. Base Salary
The Company shall pay the Executive a base salary
("Base Salary") as follows: One Hundred Seventy-Five Thousand Dollars ($175,000)
per annum.
Base Salary shall be payable according to the
customary payroll practices of the Company but in no event less frequently than
once each month. The base salary shall be reviewed annually and shall be subject
to increase according to the policies and practices adopted by the Company from
time to time.
B. Annual Incentive Awards
The Company will pay the Executive annual incentive
compensation awards as may be granted by the Board or a Compensation Committee
to the Executive up to 30% of Base Salary, conditional upon achievement of
pre-agreed goals.
C. Additional Benefits
The Executive will be entitled to participate in all
compensation or employee benefit plans or programs and receive all benefits and
perquisites for which any salaried employees are eligible under any existing or
future plan or program established by the Company for salaried employees. The
Executive will participate to the extent permissible under the terms and
provisions of such plans or programs in accordance with program provisions.
These may include group hospitalization, health, dental care, life or other
insurance, tax qualified pension, car allowance, savings, thrift and profit
sharing plans, termination pay programs, sick leave plans, travel or accident
insurance, disability insurance, and contingent compensation plans including
capital accumulation programs, Restricted Stock programs, stock purchase
programs and stock option plans. Nothing in this Agreement will preclude the
Company from amending or terminating any of the plans or programs applicable to
salaried or senior executives as long as such amendment or termination is
applicable to all salaried employees or senior executives. The Executive will be
entitled to an annual four-week paid vacation.
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D. Stock Option Plan
The Company will grant to the Executive options for the
purchase of 25,000 shares of the Company under the Company's 1994 Incentive and
Nonqualified Stock Option Plan for Key Personnel. The exercise price for these
options will be the price on the market close on August 13, 1999.
E. 401(k) Plan
If the Executive declines to participate in the 401(k) Plan
provided by the Company, an amount equivalent to what the Executive would
receive by the Company pursuant to the 401(k) Plan will be paid toward the
monthly premiums for the life insurance policy which has served as the funding
vehicle for the nonqualified Retirement Supplement Plan provided by Horace Small
Apparel plc.
SECTION V
BUSINESS EXPENSES
The Company will reimburse the Executive for all reasonable travel and
other expenses incurred by the Executive in connection with the performance of
his duties and obligations under this Agreement.
SECTION VI
DISABILITY
A. In the event of disability of the Executive during the Period of
Employment, the Company will continue to pay the Executive according to the
compensation provisions of this Agreement during the period of his disability,
until such time as Executive's long term disability insurance benefits are
available. However, in the event the Executive is disabled for a continuous
period of six (6) months after the Executive first becomes disabled, the Company
may terminate the employment of the Executive. In this case, normal compensation
will cease except for earned but unpaid Base Salary and Incentive Compensation
Awards which would be payable on a pro-rated basis for the year in which the
disability occurred. In the event of such termination, all unvested stock
options held by Executive shall be deemed fully vested on the date of such
termination.
B. During the period the Executive is receiving payments of either
regular compensation or disability insurance described in this Agreement and as
long as he is physically and mentally able to do so, the Executive will furnish
information and assistance to the Company and from time to time will make
himself available to the Company to undertake assignments consistent with his
prior position with the Company and his physical and mental health. If the
Company fails to make a payment or provide a benefit required as part of the
Agreement, the Executive's obligation to furnish information and assistance will
end.
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C. The term "disability" will have the same meaning as under any
disability insurance provided pursuant to this Agreement or otherwise.
SECTION VII
DEATH
In the event of the death of the Executive during the Period of
Employment, the Company's obligation to make payments under this Agreement shall
cease as of the date of death, except for earned but unpaid Base Salary and
Incentive Compensation Awards which will be paid on a pro-rated basis for that
year. The Executive's designated beneficiary will be entitled to receive the
proceeds of any life or other insurance or other death benefit programs provided
in this Agreement.
SECTION VIII
EFFECT OF TERMINATION OF EMPLOYMENT
A. If the Executive's employment terminates due to either a Without
Cause Termination or a Constructive Discharge, as defined later in this
Agreement, the Company will pay the Executive in a lump sum upon such
Termination or Constructive Discharge an amount equal to 200% of his Base Salary
as in effect at the time of the termination. Earned but unpaid Base Salary and
Incentive Compensation Awards will be paid in a lump sum at such time. The
benefits and perquisites described in this Agreement as in effect at the date of
termination of employment will be continued for eighteen (18) months. If the
Executive's employment terminates due to either a Without Cause Termination or a
Constructive Discharge, or pursuant to Section XI, all stock options ("Options")
granted to the Executive under the Company's 1994 Non-Qualified Stock Option
Plan or other stock option program or plan (the "Plan") shall be deemed vested,
and the Company shall cause the Options to remain exercisable for eighteen (18)
months from the date of termination.
B. If the Executive's employment terminates due to a Termination for
Cause, earned but unpaid Base Salary will be paid on a pro-rated basis for the
year in which the termination occurs. No other payments will be made or benefits
provided by the Company.
C. Upon termination of the Executive's employment other than for
reasons due to death, disability, or pursuant to Paragraph A of this Section or
Section XI, the Period of Employment and the Company's obligation to make
payments under this Agreement will cease as of the date of the termination
except as expressly defined in this Agreement.
D. For this Agreement, the following terms have the following meanings:
1. "Termination for Cause" means termination of the Executive's
employment by the Company's Board of Directors acting in good faith by the
Company by
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written notice to the Executive specifying the event relied upon for such
termination, due to the Executive's serious, willful misconduct with respect to
his duties under this Agreement, including but not limited to conviction for a
felony or perpetration of a common law fraud, which has resulted or is likely to
result in material economic damage to the Company.
2. "Constructive Discharge" means termination of the Executive's
employment by the Executive due to a failure of the Company to fulfill its
obligations under this Agreement in any material respect including any reduction
of the Executive's Base Salary or other compensation other than reductions
applicable to all employees of the Company or failure to appoint or reappoint
the Executive to the position specified in Section II hereof, or other material
change by the Company in the functions, duties or responsibilities of the
position which would reduce the ranking or level, responsibility, importance or
scope of the position. The Executive will provide the Company a written notice
which describes the circumstances being relied on for the termination with
respect to the Agreement within ninety (90) days after the event giving rise to
the notice. The Company will have thirty (30) days to remedy the situation prior
to the Termination for Constructive Dismissal.
3. "Without Cause Termination" means termination of the Executive's
employment by the Company (a) other than due to death, disability, Termination
for Cause or pursuant to Section XI; or (b) upon expiration of the Period of
Employment as a result of the giving of notice by the Company of its intent not
to extend the Period of Employment as provided in Section III.A.
E. Stock Option Repurchase
If the Executive's employment terminates due to either a Without
Cause Termination or a Constructive Discharge or pursuant to Section XI,
Executive may require the Company to repurchase any Options for an amount equal
to the difference between the fair market value of a share of the Company's
common stock on the date of termination and the per share exercise price set
forth in the Options, times the number of shares (whether vested or unvested)
granted to the Executive under the Options.
SECTION IX
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE PERIOD OF EMPLOYMENT
A. The Executive will, with reasonable notice during or after the
Period of Employment, furnish information as may be in his possession and
cooperate with the Company as may reasonably be requested in connection with any
claims or legal actions in which the Company is or may become a party.
B. The Executive recognizes and acknowledges that all information
pertaining to the affairs, business, clients, customers or other relationships
of the Company, as hereinafter defined, is confidential and is a unique and
valuable asset of the Company. Access to and knowledge of
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this information are essential to the performance of the Executive's duties
under this Agreement. The Executive will not during the Period of Employment or
after except to the extent reasonably necessary in performance of the duties
under this Agreement, give to any person, firm, association, corporation or
governmental agency any information concerning the affairs, business, clients,
customers or other relationships of the Company except as required by law. The
Executive will not make use of this type of information for his own purposes or
for the benefit of any person or organization other than the Company. The
Executive will also use his best efforts to prevent the disclosure of this
information by others. All records, memoranda, etc. relating to the business of
the Company whether made by the Executive or otherwise coming into his
possession are confidential and will remain the property of the Company.
C. During the Period of Employment and for a twelve (12) month period
thereafter, the Executive will not use his status with the Company to obtain
loans, goods or services from another organization on terms that would not be
available to him in the absence of his relationship to the Company. During the
Period of Employment and for a twelve (12) month period following termination of
the Period of Employment, other than termination due to a Without Cause
Termination, a Constructive Discharge or termination pursuant to Section XI: the
Executive will not make any statements or perform any acts intended to advance
the interest of any existing or prospective competitors of the Company in any
way that will injure the interest of the Company; the Executive without prior
express written approval by the Board of Directors of the Company will not
directly or indirectly own or hold any proprietary interest in or be employed by
or receive compensation from any party engaged in the same or any similar
business in the same geographic areas the Company does business; and the
Executive without express prior written approval from the Board of Directors,
will not solicit any members of the then current clients of the Company or
discuss with any employee of the Company information or operation of any
business intended to compete with the Company. For the purposes of the
Agreement, proprietary interest means legal or equitable ownership, whether
through stock holdings or otherwise, of a debt or equity interest (including
options, warrants, rights and convertible interests) in a business firm or
entity, or ownership of more than 5% of any class of equity interest in a
publicly-held company. The Executive acknowledges that the covenants contained
herein are reasonable as to geographic and temporal scope. For a twelve (12)
month period after termination of the Period of Employment for any reason, the
Executive will not directly or indirectly hire any employee of the Company or
solicit or encourage any such employee to leave the employ of the Company.
D. The Executive acknowledges that his breach or threatened or
attempted breach of any provision of Section IX would cause irreparable harm to
the Company not compensable in monetary damages and that the Company shall be
entitled, in addition to all other applicable remedies, to a temporary and
permanent injunction and a decree for specific performance of the terms of
Section IX without being required to prove damages or furnish any bond or other
security.
E. The Executive shall not be bound by the provisions of Section IX in
the event of the default by the Company in its obligations under this Agreement
which are to be performed upon or after termination of this Agreement.
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SECTION X
INDEMNIFICATION, LITIGATION
The Company will indemnify the Executive to the fullest extent
permitted by the laws of the state of incorporation in effect at that time, or
certificate of incorporation and by-laws of the Company whichever affords the
greater protection to the Executive. The Executive will be entitled to any
insurance proceeds related to any award, or any fees or expenses incurred in
connection with any action, suit or proceeding to which he may be made a party
by reason of being a director or officer of the Company.
SECTION XI
CHANGE IN CONTROL
In the event there is a Change in Control of the ownership of the
Company, the Executive may at any time immediately resign upon written notice to
the Company. In this event, the Company shall pay to the Executive in a lump sum
upon such resignation an amount equal to 200% of his Base Salary as in effect at
the time of such resignation. In addition, earned but unpaid Base Salary and
Incentive Compensation Awards will be paid on a pro-rated basis for the year in
which resignation occurs. Any stock options granted to the Executive prior to
termination pursuant to the Plan, but subject to vesting restrictions, will be
fully vested upon a Change in Control whether or not the Executive resigns. The
benefits and perquisites described in this Agreement as in effect at the date of
termination of employment will also be continued for eighteen (18) months from
the effective date of termination pursuant to Change of Control.
A "Change in Control" shall be deemed to have occurred if (i) a tender
offer shall be made and consummated for the ownership of more than 50% of the
outstanding voting securities of the Company, (ii) the Company shall be merged
or consolidated with another corporation and as a result of such merger or
consolidation less than 75% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of the Company, as the same shall have existed immediately prior to
such merger or consolidation, (iii) the Company shall sell all or substantially
all of its assets to another corporation which is not a wholly-owned subsidiary,
or (iv) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3)
(as in effect on the date hereof) of the Securities and Exchange Act of 1934
("Exchange "Act")), shall acquire more than 50% of the outstanding voting
securities of the Company (whether directly, indirectly, beneficially or of
record). For purposes hereof, ownership of voting securities shall take into
account and shall include ownership as determined by applying the provisions of
Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange
Act.
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SECTION XII
WITHHOLDING TAXES
The Company may directly or indirectly withhold from any payments under
this Agreement all federal, state, city or other taxes that shall be required
pursuant to any law or governmental regulation.
SECTION XIII
EFFECTIVE PRIOR AGREEMENTS
This Agreement contains the entire understanding between the Company
and the Executive with respect to the subject matter and supersedes any prior
employment or severance agreements between the Company and its affiliates, and
the Executive.
SECTION XIV
CONSOLIDATION, MERGER OR SALE OF ASSETS
Nothing in this Agreement shall preclude the Company from consolidating
or merging into or with, or transferring all or substantially all of its assets
to, another corporation which assumes this Agreement and all obligations and
undertakings of the Company hereunder. Upon such a Consolidation, Merger or Sale
of Assets, the term "the Company" as used will mean the other corporation and
this Agreement shall continue in full force and effect. This Section XIV is not
intended to modify or limit the rights of the Executive hereunder, including
without limitation, the rights of Executive under Section XI.
SECTION XV
MODIFICATION
This Agreement may not be modified or amended except in writing signed
by the parties. No term or condition of this Agreement will be deemed to have
been waived except in writing by the party charged with waiver. A waiver shall
operate only as to the specific term or condition waived and will not constitute
a waiver for the future or act on anything other than that which is specifically
waived.
SECTION XVI
GOVERNING LAW; ARBITRATION
This Agreement has been executed and delivered in the State of
Tennessee and its validity, interpretation, performance and enforcement shall be
governed by the laws of that state.
Any dispute among the parties hereto shall be settled by arbitration in
Nashville, Tennessee, in accordance with the rules then obtaining of the
American Arbitration Association and judgment upon the award rendered may be
entered in any court having jurisdiction thereof.
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SECTION XVII
NOTICES
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid by registered mail, return receipt requested,
or if delivered by hand, overnight delivery service or confirmed facsimile
transmission, to the following:
(a) If to the Company, at 277 Mallory Station Road, Suite 130,
Franklin, Tennessee 37067, Attention: President or Chief Executive Officer, or
at such other address as may have been furnished to the Executive by the Company
in writing; or
(b) If to the Executive, at 925 Ashford Court, Brentwood,
Tennessee 37027, or such other address as may have been furnished to the Company
by the Executive in writing.
SECTION XVIII
BINDING AGREEMENT
This Agreement shall be binding on the parties' successors, heirs and
assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
ADVOCAT INC.
By: /s/ Charles W. Birkett, M.D.
----------------------------------
Title: Chairman & CEO
-------------------------------
EXECUTIVE:
/s/ Richard Vacek
-----------------------------------
Richard Vacek
9
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EXHIBIT 10.4
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is made as of the 4th day of
June, 1999, by and between DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a
Delaware limited liability company (together with its successors and assigns,
the "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California
corporation (together with its successors and assigns, the "Lender").
R E C I T A L S:
1. Borrower has requested that the Lender make a loan to Borrower in
the principal sum of $12,480,000 (the "Loan").
2. Lender has agreed to make the Loan on the terms and conditions
hereinafter set forth.
A G R E E M E N T:
NOW, THEREFORE, it is hereby agreed as follows:
ARTICLE I
DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS.
1.1 As used in this Agreement, the following terms shall have the
following meanings unless the context hereof shall otherwise indicate:
"Accounts" means any rights of Borrower arising from the operation
of the Facilities to payment for goods sold or leased or for services rendered,
not evidenced by an Instrument, including, without limitation, (i) all accounts
arising from the operation of the Facilities, (ii) all moneys and accounts held
by Lender pursuant to Section 4.12 of this Agreement, and (iii) all rights to
payment from 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 Facilities, including
rights to payment pursuant to Reimbursement Contracts. Accounts shall include
the proceeds thereof (whether cash or noncash, moveable or immoveable, tangible
or intangible) received from the sale, exchange, transfer, collection or other
disposition or substitution thereof.
"Acquisition Line" means the $40,000,000 non-revolving line of
credit extended by the Lender to Advocat for the sole purpose of acquisitions of
healthcare related facilities, pursuant to a Commitment Letter accepted October
22, 1996.
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"Actual Management Fees" means actual management fees paid or
incurred in connection with operation of a Facility.
"Advocat" means Advocat, Inc., a Delaware corporation.
"Affiliate" means, with respect to any Person, (i) each Person that
controls, is controlled by or is under common control with such Person, (ii)
each Person that, directly or indirectly, owns or controls, whether beneficially
or as a trustee, guardian or other fiduciary, any of the Stock of such Person,
and (iii) each of such Person's officers, directors, members, joint venturers
and partners.
"Allocated Loan Amount" means, with respect to a Facility, the
portion of the Loan allocated to such Facility, as set forth on Schedule A
attached hereto.
"Assignment of Leases and Rents" means that certain Assignment of
Leases and Rents of even date herewith by and between Lender and Borrower.
"Assignment of Licenses" means that certain Assignment of Licenses,
Permits and Contracts executed by the Borrower in favor of the Lender.
"Assumed Management Fees" means assumed management fees of five
percent (5%) of net patient revenues of a Facility (after Medicaid contractual
adjustments).
"Bridge Loan" means the loan to Diversicare Assisted Living
Services NC, LLC extended by the Working Capital Lender and AmSouth Bank.
"Business Day" means a day on which commercial banks are not
authorized or required by law to close in New York, New York.
"Closing Date" means the date on which all or any part of the Loan
is disbursed by the Lender to or for the benefit of Borrower.
"Collateral" means, collectively, the Property, Improvements,
Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money,
Permits (to the full extent assignable), Reimbursement Contracts, and all
Proceeds, all whether now owned or hereafter acquired, and including
replacements, additions, accessions, substitutions, and products thereof and
thereto, and all other property which is or hereafter may become subject to a
Lien in favor of Lender as security for any of the Loan Obligations.
"Commitment Letter" means the commitment letter issued by Lender to
Borrower dated February 19, 1999.
"Debt Service Coverage" means a ratio in which the first number is
the sum of net pre-tax income of the Borrower from the normal operations of a
Facility as set forth in the quarterly statements provided to Lender (without
deduction for Actual Management Fees paid or incurred),
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calculated based upon the preceding twelve (12) months (or such lesser period as
shall have elapsed following the closing of the Loan), plus interest expense, to
the extent deducted in determining net income, plus non-cash expenses or
allowances for depreciation and amortization of the Facility for said period,
less either Assumed Management Fees or Actual Management Fees, as applicable,
and the second number is the sum of the scheduled principal amounts due (even if
not paid) on such Facility's Allocated Loan Amount (excluding the amount of any
prepayment made during such period) for the applicable period plus the interest
expense on such Facility's Allocated Loan Amount 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" shall have the meaning given to that term in the
Note.
"Environmental Permit" means any permit, license, or other
authorization issued under any Hazardous Materials Law with respect to any
activities or businesses conducted on or in relation to the Property and/or the
Improvements.
"Environmental Reserve Agreement" means that certain Environmental
Reserve Escrow and Security Agreement of even date herewith between Lender and
Borrower.
"Equipment" means all beds, linen, televisions, carpeting,
telephones, cash registers, computers, lamps, glassware, rehabilitation
equipment, restaurant and kitchen equipment, and other fixtures and equipment
owned by Borrower located on, attached to or used or useful in connection with
any of the Property or the Facilities 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 Facility and not owned by Borrower, the
Equipment shall include the leasehold interest only of Borrower together with
any options to purchase any of said items and any additional or greater rights
with respect to such items which Borrower may hereafter acquire, but the
foregoing shall not be construed to mean that such leasing shall be permitted
hereunder and under the other Loan Documents.
"Event of Default" means any "Event of Default" as defined in
Article VII hereof.
"Extraordinary Income and Extraordinary Expenses" means material
items of a character significantly different from the typical or customary
business activities of Borrower which would not be expected to recur frequently
and which would not be considered as recurring factors in any evaluation of the
ordinary operating processes of Borrower's business, and which would be treated
as extraordinary income or extraordinary expenses under GAAP.
"Exhibit" means an Exhibit to this Agreement, unless the context
refers to another document, and each such Exhibit shall be deemed a part of this
Agreement to the same extent as if it were set forth in its entirety wherever
reference is made thereto.
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"Facilities" means the seven (7) adult care facilities described on
Schedule A attached hereto, as they may now or hereafter exist, together with
any other general or specialized care facilities, if any (including any
Alzheimer's care unit, subacute, and any skilled care facilities), now or
hereafter operated on the Property; each of the Facilities, individually, is
herein called a "Facility".
"GAAP" means, as in effect from time to time, generally accepted
accounting principles consistently applied as promulgated by the American
Institute of Certified Public Accountants.
"General Intangibles" means all intangible personal property of
Borrower arising out of or connected with the Property or the Facilities and all
renewals and replacements thereof and substitutions therefor (other than
Accounts, Rents, Instruments, Inventory, Money, Permits, and Reimbursement
Contracts), including, without limitation, things in action, contract rights and
other rights to payment of money.
"Governmental Authority" means any board, commission, department or
body of any municipal, county, state or federal governmental unit, or any
subdivision of any of them, that has or acquires jurisdiction over the Property
and/or the Improvements or the use, operation or improvement of the Property.
"Guarantors" mean Advocat, Diversified Management Services Co.,
Advocat Finance, Inc., Diversicare Assisted Living Services, Inc., Diversicare
Assisted Living Services NC, LLC and Diversicare Assisted Living Services NC I,
LLC.
"Guaranty Agreements" means those certain Guaranty Agreements of
even date herewith from Guarantors to Lender.
"Hazardous Materials" means petroleum and petroleum products and
compounds containing them, including gasoline, diesel fuel and oil; explosives;
flammable materials; radioactive materials; polychlorinated biphenyls ("PCBs")
and compounds containing them; lead and lead-based paint; asbestos or
asbestos-containing materials in any form that is or-could become friable;
underground storage tanks, whether empty or containing any substance; any
substance the presence of which on the Property is prohibited by any federal,
state or local authority; any substance that requires special handling; and any
other material or substance now or in the future defined as a "hazardous
substance," "hazardous material," "hazardous waste," "toxic substance," "toxic
pollutant," "contaminant," or "pollutant" within the meaning of any Hazardous
Materials Law.
"Hazardous Materials Laws" means all federal, state, and local
laws, ordinances and regulations and standards, rules, policies and other
governmental requirements, administrative rulings and court judgments and
decrees in effect now or in the future and including all amendments, that relate
to Hazardous Materials and apply to Borrower or to the Property and/or the
Improvements. Hazardous Materials Laws include, but are not limited to, the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et seq., the Toxic Substance
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Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C.
Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, and their state analogs.
"Improvements" means all buildings, structures and improvements of
every nature whatsoever now or hereafter situated on the Property, including,
but not limited to, all gas and electric fixtures, radiators, heaters, engines
and machinery, boilers, ranges, elevators and motors, plumbing and heating
fixtures, carpeting and other floor coverings, water heaters, awnings and storm
sashes, and cleaning apparatus which are or shall be attached to the Property or
said buildings, structures or improvements.
"Indebtedness" means any (i) obligations for borrowed money, (ii)
obligations, payment for which is being deferred by more than thirty (30) days,
representing the deferred purchase price of property other than accounts payable
arising in connection with the purchase of inventory customary in the trade and
in the ordinary course of Borrower's business, (iii) obligations, whether or not
assumed, secured by Liens or payable out of the proceeds or production from the
Accounts and/or property now or hereafter owned or acquired, and (iv) the amount
of any other obligation (including obligations under financing leases) which
would be shown as a liability on a balance sheet prepared in accordance with
GAAP.
"Instruments" means all instruments, chattel paper, documents or
other writings obtained from or in connection with the operation of the Property
or the Facilities (including, without limitation, all ledger sheets, computer
records and printouts, data bases, programs, books of account and files relating
thereto).
"Inventory" means all inventories of food, beverages and other
comestibles held by Borrower for sale or use at or from the Property or the
Facilities, and soap, paper supplies, medical supplies, drugs and all other such
goods, wares and merchandise held by Borrower for sale to or for consumption by
guests, patients or residents of the Property or the Facilities and all such
other goods returned to or repossessed by Borrower.
"Lien" means any voluntary or involuntary mortgage, security deed,
deed of trust, lien, pledge, assignment, security interest, title retention
agreement, financing lease, levy, execution, seizure, judgment, attachment,
garnishment, charge, lien or other encumbrance of any kind, including those
contemplated by or permitted in this Agreement and the other Loan Documents.
"Loan" means the Loan in the principal sum of $12,480,000 made by
Lender to Borrower as of the date hereof.
"Loan Documents" means, collectively, this Agreement, the
Assignment of Leases and Rents, the Note, the Environmental Reserve Agreement,
the Assignment of Licenses, the Guaranty Agreements, the Mortgage, and the
Subordination Agreement, together with any and all other documents executed by
Borrower or others, evidencing, securing or otherwise relating to the Loan.
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"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, together with the Borrower's obligations, as a Guarantor,
for the Related Loan, and all covenants, agreements and other obligations of
Borrower from time to time owing to, or for the benefit of, Lender pursuant to
the Loan Documents.
"Management Agreement" means that certain Management Agreement
dated as of May 26, 1999, by and between Manager and Borrower, obligating the
Manager to operate and manage the Facilities.
"Manager" means Diversicare Management Services Co., a Tennessee
corporation, and any successor manager of the Facilities approved by Lender in
writing.
"Maturity Date" means July 1, 2002.
"Medicaid" means that certain program of medical assistance, funded
jointly by the federal government and the States, for impoverished individuals
who are aged, blind and/or disabled, and/or members of families with dependent
children, which program is more fully described in Title XIX of the Social
Security Act (42 U.S.C. ss.ss. 1396 et seq.) and the regulations promulgated
thereunder.
"Money" means all monies, cash, rights to deposit or savings
accounts or other items of legal tender obtained from or for use in connection
with the operation of the Facility.
"Mortgage" means collectively those certain Deeds of Trust and
Security Agreements, of even date herewith, from the Borrower in favor of or for
the benefit of Lender and covering the Property.
"Note" means the Promissory Note of even date herewith in the
principal amount of the Loan payable by Borrower to the order of Lender.
"O&M Program" means a written program of operations and maintenance
established or approved in writing by Lender relating to any Hazardous Materials
in, on or under the Property or Improvements.
"Overline Facility" means the $10,000,000 temporary working capital
loan extended by the Working Capital Lender to Advocat.
"Permits" means all licenses, permits and certificates used or
necessary in connection with the ownership, operation, use or occupancy of the
Property and/or the Facility, including, without limitation, business licenses,
state health department licenses, food service licenses, licenses to conduct
business, certificates of need and all such other permits, licenses and rights,
obtained from any governmental, quasi-governmental or private person or entity
whatsoever concerning ownership, operation, use or occupancy.
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"Permitted Encumbrances" has the meaning given to that term in
Section 5.2 hereof.
"Person" means any natural person, firm, trust, corporation,
partnership, limited liability company, trust and any other form of legal
entity.
"Proceeds" means all proceeds (including proceeds of insurance and
condemnation) from the sale, exchange, transfer, collection, loss, damage,
disposition, substitution or replacement of any of the Collateral.
"Property" means the tracts of real estate located in North
Carolina, which are more particularly described in Exhibit "A" hereto, upon
which the Facilities are located.
"Reimbursement Contracts" means all third party reimbursement
contracts for the Facility which are now or hereafter in effect with respect to
residents or patients qualifying for coverage under the same, including Medicaid
and private insurance agreements, and any successor program or other similar
reimbursement program and/or private insurance agreements.
"Related Loan" means that certain loan in the principal amount of
$12,770,000 extended by the Lender to Diversicare Assisted Living Services NC I,
LLC, an Affiliate of the Borrower.
"Rents" means all rent and other payments of whatever nature from
time to time payable pursuant to leases of the Property or the Facilities, or
for retail space or other space at the Property (including, without limitation,
rights to payment earned under leases for space in the Improvements for the
operation of ongoing retail businesses such as newsstands, barbershops, beauty
shops, physicians' offices, pharmacies and specialty shops).
Single-Purpose Entity" means a Person which owns no interest or
property other than the Property and the Improvements.
"Stock" means all shares, options, warrants, general or limited
partnership interests, membership interests, participating or other equivalents
(regardless of how designated) in a corporation, limited liability company,
partnership or any equivalent entity, whether voting or nonvoting, including,
without limitation, common stock, preferred stock, or any other "equity
security" (as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended).
"Subordination Agreement" means that certain Subordination of
Management Agreement of even date herewith by and among Borrower, Manager, and
Lender.
"Working Capital Lender" means First American National Bank, a
national banking association with a principal place of business in Nashville,
Tennessee.
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"Working Capital Loan" means the $10,000,000 line of credit
extended by the Working Capital Lender to Advocat and certain of the Guarantors,
secured by, among other collateral, a first lien on the Borrower's Accounts.
1.2 Singular terms shall include the plural forms and vice versa, as
applicable, of the terms defined.
1.3 Terms contained in this Agreement shall, unless otherwise defined
herein or unless the context otherwise indicates, have the meanings, if any,
assigned to them by the Uniform Commercial Code in effect in the State of North
Carolina.
1.4 All accounting terms used in this Agreement shall be construed in
accordance with GAAP, except as otherwise specified.
1.5 All references to other documents or instruments shall be deemed to
refer to such documents or instruments as they may hereafter be extended,
renewed, modified, or amended and all replacements and substitutions therefor.
1.6 All references herein to "Medicaid" shall be deemed to include any
successor program thereto.
ARTICLE II
TERMS OF THE LOAN
2.1 THE LOAN. Borrower has agreed to borrow the Loan from Lender, and
Lender has agreed to make the Loan to Borrower, subject to Borrower's compliance
with and observance of the terms, conditions, covenants, and provisions of this
Agreement and the other Loan Documents, and Borrower has made the covenants,
representations, and warranties herein and therein as a material inducement to
Lender to make the Loan.
2.2 SECURITY FOR THE LOAN. The Loan will be evidenced, secured and
guaranteed by the Loan Documents.
2.3 RELEASE OF A FACILITY. So long as no Event of Default has occurred
and is continuing, a Facility may be released from the lien and security
interest of the Mortgage and the other Loan Documents if, after giving effect to
such release, the Facilities remaining subject to the Mortgage and the other
Loan Documents would have a combined Debt Service Coverage equal to the greater
of (a) 1.25 to 1.0 or (b) the Debt Service Coverage for all Facilities
(including the to-be-released Facility) for the testing period immediately
preceding such proposed release. The provisions of this Section 2.3 may be
utilized by the Borrower in the event of a sale or refinancing of a Facility,
and the damage, destruction or condemnation of a Facility.
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ARTICLE III
BORROWER'S REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into this Agreement, and to make the Loan to
Borrower, Borrower represents and warrants to Lender as follows:
3.1 EXISTENCE, POWER AND QUALIFICATION. Borrower is a duly organized
and validly existing limited liability company, organized under the laws of the
State of Delaware, has the power to own its properties and to carry on its
business as is now being conducted, and is duly qualified to do business and is
in good standing in every jurisdiction in which the character of the properties
owned by it or in which the transaction of its business makes its qualification
necessary, specifically including, without limitation, the State of North
Carolina.
3.2 POWER AND AUTHORITY. Borrower has full power and authority to
borrow the indebtedness evidenced by the Note and to incur the Loan Obligations
provided for herein, all of which have been authorized by all proper and
necessary limited liability company action on the part of the Borrower. All
consents, approvals, authorizations, orders or filings of or with any court or
governmental agency or body, if any, required for the execution, delivery and
performance of the Loan Documents by the Borrower have been obtained or made.
3.3 DUE EXECUTION AND ENFORCEMENT. Each of the Loan Documents to which
Borrower is a party constitutes a valid and legally binding obligation of
Borrower, enforceable in accordance with its respective terms (except as such
enforcement may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium, or other laws relating to the rights of creditors
generally and by general principles of equity) and does not violate, conflict
with, or constitute any default under any law, government regulation, decree,
judgment, Borrower's articles of organization or operating agreement, or any
other agreement or instrument binding upon Borrower.
3.4 SINGLE PURPOSE ENTITY. Borrower is a Single Purpose Entity.
3.5 PENDING MATTERS.
a. Operations; Financial Condition. No action or investigation is
pending or, to the best of Borrower's knowledge, threatened before or by any
court or administrative agency which might result in any material adverse change
in the financial condition, operations or prospects of Borrower or any lower
reimbursement rate under the Reimbursement Contracts. The Borrower is not in
violation of any agreement, the violation of which might reasonably be expected
to have a material adverse effect on its business or assets, and the Borrower is
not in violation of any order, judgment, or decree of any court, or any material
violation of statute or governmental regulation to which it is subject.
b. Condemnation or Casualty. There are no proceedings pending, or,
to the best of Borrower's knowledge, threatened, to acquire through the exercise
of any power of condemnation, eminent domain or similar proceeding any part of
the Property, the Improvements or any interest
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therein, or to enjoin or similarly prevent or restrict the use of the Property
or the operation of any Facility in any manner. None of the Improvements is
subject to any unrepaired casualty or other damage.
3.6 FINANCIAL STATEMENTS ACCURATE. All financial statements heretofore
or hereafter provided by Borrower are and will be true and complete in all
material respects as of their respective dates and fairly present the respective
financial condition of Borrower, and there are no material liabilities, direct
or indirect, fixed or contingent, as of the respective dates of such statements
which are not reflected therein or in the notes thereto or in a written
certificate delivered with such statements. The financial statements of the
Borrower have been prepared in accordance with GAAP. There has been no material
adverse change in the financial condition, operations, or prospects of Borrower
since the dates of such statements except as fully disclosed in writing with the
delivery of such statements. All financial statements of the operations of each
Facility heretofore or hereafter provided to Lender are and will be true and
complete in all material respects as of their respective dates.
3.7 COMPLIANCE WITH FACILITY LAWS. Each Facility is duly licensed and
is currently operated at the unit and/or bed level shown on Exhibit "F" attached
hereto, under the applicable laws of the state where the Property is located.
Borrower is the lawful owner of all Permits for each Facility, including,
without limitation, the Adult Care Home License issued by the North Carolina
Department of Health and Human Services (the "Adult Care Home License"), which
(a) are in full force and effect, (b) constitute all of the permits, licenses
and certificates required for the use, operation and occupancy thereof, (c) have
not been pledged as collateral for any other loan or Indebtedness, (d) are held
free from restrictions or any encumbrance which would materially adversely
affect the use or operation of any Facility, and (e) are not provisional,
probationary or restricted in any way. The Borrower and Manager as well as the
operation of each Facility are in compliance in all material respects with the
applicable provisions of assisted living facility laws, rules, regulations and
published interpretations to which the Facility is subject. No waivers of any
laws, rules, regulations, or requirements (including, but not limited to,
minimum foot requirements per bed) are required for a Facility to operate at the
current licensed bed or unit capacity. All Reimbursement Contracts, if any, are
in full force and effect with respect to each Facility, and Borrower and Manager
are in good standing with all the respective agencies governing such applicable
licenses, program certification, and Reimbursement Contracts. Borrower and
Manager are current in the payment of all so-called provider specific taxes or
other assessments with respect to such Reimbursement Contracts. Borrower will
maintain or cause Manager to maintain (without allowing to lapse) the Adult Care
Home License, and any required Permits. In the event Lender acquires a Facility
through foreclosure or otherwise, neither Lender nor a subsequent manager, a
subsequent lessee or any subsequent purchaser (through foreclosure or otherwise)
is currently required to obtain a certificate of need prior to applying for and
receiving an Adult Care Home License to operate such Facility and certification
to receive Medicaid payments (and its successor programs) for patients having
coverage thereunder provided that no service or bed or unit complement is
changed.
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3.8 MAINTAIN CAPACITY. Neither Borrower nor the Manager has granted to
any third party the right to reduce the number of licensed beds or units in any
Facility or to apply for approval to transfer the right to any and all of the
licensed beds or units to any other location.
3.9 COMPLIANCE. Each Facility is in compliance with all requirements
for participation in Medicaid. Each Facility is in conformance in all material
respects with all insurance, reimbursement and cost reporting requirements and
has a current provider agreement which is in full force and effect under
Medicaid.
3.10 THIRD-PARTY PAYORS. There is no threatened or pending revocation,
suspension, termination, probation, restriction, limitation, or nonrenewal
affecting Borrower, Manager or any Facility or any participation or provider
agreement with any third-party payor, including Medicaid, Blue Cross and/or Blue
Shield, and any other private commercial insurance managed care and employee
assistance program (such programs, the "Third-Party Payors' Programs") to which
Borrower or Manager presently is subject. All Medicaid and private insurance
cost reports and financial reports submitted by Borrower or Manager are and will
be materially accurate and complete and have not been and will not be misleading
in any material respects. No cost reports for the Facility remain "open" or
unsettled, except as otherwise disclosed.
3.11 GOVERNMENTAL PROCEEDINGS AND NOTICES. Neither Borrower nor Manager
nor any Facility is currently the subject of any proceeding by any governmental
agency, and no notice of any violation has been received by Borrower or Manager
from a governmental agency that would, directly or indirectly, or with the
passage of time:
a. Have a material adverse impact on Borrower's ability to accept
and/or retain residents or result in the imposition of a fine, a sanction, a
lower rate certification or a lower reimbursement rate for services rendered to
eligible residents;
b. Modify, limit or annul or result in the transfer, suspension,
revocation or imposition of probationary use of any of the Permits; or
c. Affect Borrower's continued participation in the Medicaid
programs or any other Third-Party Payors' Programs, or any successor programs
thereto, at current rate certifications.
3.12 PHYSICAL PLANT STANDARDS. To the best of Borrower's knowledge,
each Facility and the use thereof complies in all material respects with all
applicable local, state and federal building codes, fire codes, zoning codes,
use restrictions, health care, health care facility and other similar regulatory
requirements (the "Physical Plant Standards"), and no waivers of Physical Plant
Standards exist at any Facility.
3.13 PLEDGES OF RECEIVABLES. Except to secure the Working Capital Loan,
the Borrower has not pledged its Accounts as collateral security for any loan or
indebtedness other than the Loan.
3.14 PAYMENT OF TAXES AND PROPERTY IMPOSITIONS. Borrower has filed all
federal, state, and local tax returns which it is required to file and has paid,
or made adequate provision for the
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payment of, all taxes which are shown pursuant to such returns or are required
to be shown thereon or to assessments received by Borrower, including, without
limitation, provider taxes. All such returns are complete and accurate in all
respects. Borrower has paid or made adequate provision for the payment of all
applicable water and sewer charges, government assessments, ground rents (if
applicable) and Taxes (as defined in the Mortgage) with respect to the Property.
3.15 TITLE TO COLLATERAL. Borrower has good and marketable title to all
of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning
violation, or encumbrance, except Permitted Encumbrances, which Permitted
Encumbrances do not and will not materially interfere with the security intended
to be provided by the Mortgage or the current use or operation of the Property
and or the current ability of the Facility to generate net operating income
sufficient to service the Loan. Except as shown on the current as-built survey
for each Facility provided by Borrower to Lender in connection with the Loan,
all Improvements situated on the Property are situated wholly within the
boundaries of the Property.
3.16 PRIORITY OF MORTGAGE. The Mortgage constitutes a valid first lien
against the real and personal property described therein, prior to all other
liens or encumbrances, including those which may hereafter accrue, excepting
only "Permitted Encumbrances", which Permitted Encumbrances do not and will not
materially and adversely affect (a) the ability of the Borrower to pay in full
the principal of and interest on the Note when due, (b) the security (and its
value) intended to be provided by the Mortgage or (c) the current use of the
Property and the Improvements.
3.17 LOCATION OF CHIEF EXECUTIVE OFFICES. The location of Borrower's
principal place of business and chief executive office is set forth on Exhibit
"B" hereto.
3.18 DISCLOSURE. All information furnished or to be furnished by
Borrower to Lender in connection with the Loan or any of the Loan Documents, is,
or will be at the time the same is furnished, accurate and correct in all
material respects and complete insofar as completeness may be necessary to
provide Lender with true and accurate knowledge of the subject matter.
3.19 TRADE NAMES. Neither Borrower nor any Facility has changed its
name, been known by any other name, or been a party to a merger, reorganization
or similar transaction within the last five (5) years.
3.20 ERISA. Borrower is in compliance with all applicable provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
3.21 OWNERSHIP. The ownership interests of the Persons comprising the
Borrower and each of the respective interests in the Borrower are correctly and
accurately set forth on Exhibit "C" hereto.
3.22 COMPLIANCE WITH APPLICABLE LAWS. Each Facility and its operations
and the Property comply in all material respects with all covenants and
restrictions of record and applicable laws, ordinances, rules and regulations,
including, without limitation, the Americans with Disabilities Act (to the
extent required) and the regulations thereunder, and all laws, ordinances,
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rules and regulations relating to zoning, setback requirements and building
codes and there are no waivers of any building codes currently in existence for
any Facility.
3.23 SOLVENCY. Borrower is solvent for purposes of 11 U.S.C. ss.548,
and the borrowing of the Loan will not render Borrower insolvent for purposes of
11 U.S.C. ss.548.
3.24 OTHER INDEBTEDNESS. Borrower has no outstanding Indebtedness,
secured or unsecured, direct or contingent (including any guaranties), other
than (a) the Loan, (b) the Related Loan, (c) the Working Capital Loan, (d) the
Overline Facility and (e) indebtedness which represents trade payables or
accrued expenses incurred in the ordinary course of business of owning and
operating the Property; no other debt will be secured (senior, subordinate or
pari passu) by the Property.
3.25 OTHER OBLIGATIONS. Except as disclosed in Section 3.24, Borrower
has no material financial obligation under any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which Borrower is a
party or by which Borrower or the Property is otherwise bound, other than
obligations incurred in the ordinary course of the operation of the Property and
other than obligations under the Mortgage and the other Loan Documents.
3.26 FRAUDULENT CONVEYANCES. Borrower (1) has not entered into this
Agreement or any of the other Loan Documents with the actual intent to hinder,
delay, or defraud any creditor and (2) has received reasonably equivalent value
in exchange for its obligations under the Loan Documents. Giving effect to the
transactions contemplated by the Loan Documents, to the best of Borrower's
knowledge, the fair saleable value of Borrower's assets exceeds and will,
immediately following the execution and delivery of the Loan Documents, be
greater than Borrower's probable liabilities, including the maximum amount of
its contingent liabilities or its debts as such debts become absolute and
mature. Borrower's assets do not and, immediately following the execution and
delivery of the Loan Documents will not, constitute unreasonably small capital
to carry out its business as conducted or as proposed to be conducted. Borrower
does not intend to, and does not believe that it will, incur debts and
liabilities (including, without limitation, contingent liabilities and other
commitments) beyond its ability to pay such debts as they mature (taking into
account the timing and amounts to be payable on or in respect of obligations of
Borrower).
3.27 MANAGEMENT AGREEMENT. The Management Agreement is in full force
and effect and there are no defaults (either monetary or nonmonetary) by the
Manager thereunder.
3.28 REPRESENTATIONS AND WARRANTIES. Borrower agrees that its
representations and warranties and covenants contained herein are true and
correct as of the date hereof and shall survive closing of the Loan.
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ARTICLE IV
AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees with and covenants unto the Lender that until the Loan
Obligations have been paid in full, Borrower shall:
4.1 PAYMENT OF LOAN/PERFORMANCE OF LOAN OBLIGATIONS. Duly and
punctually pay or cause to be paid the principal and interest of the Note in
accordance with its terms and duly and punctually pay and perform or cause to be
paid or performed all Loan Obligations hereunder and under the other Loan
Documents.
4.2 MAINTENANCE OF EXISTENCE. Maintain its existence as a Delaware
limited liability company, and, in each jurisdiction in which the character of
the property owned by it or in which the transaction of its business makes
qualification necessary, maintain good standing.
4.3 ACCRUAL AND PAYMENT OF TAXES. During each fiscal year, make
accurate provision for the payment of all current tax liabilities of all kinds
(including, without limitation, federal and state income taxes, franchise taxes,
payroll taxes, provider taxes (to the extent necessary to participate in and
receive maximum funding pursuant to Reimbursement Contracts) and Taxes (as
defined in the Mortgage)), all required withholding of income taxes of
employees, all required old age and unemployment contributions, and all required
payments to employee benefit plans, and pay the same when they become due.
4.4 INSURANCE. Maintain the following insurance coverages with respect
to the Property and each Facility:
a. Insurance against loss or damage by fire, casualty and other
hazards as now are or subsequently may be covered by a "special risk" policy or
a policy covering "special" causes of loss, with such endorsements as Lender may
from time to time reasonably require and which are customarily required by
institutional lenders of similar properties similarly situated, including,
without limitation, building ordinance law, lightning, windstorm, civil
commotion, hail, riot, strike, water damage, sprinkler leakage, collapse,
malicious mischief, explosion, smoke, aircraft, vehicles, vandalism, falling
objects and weight of snow, ice or sleet, and covering the Facility in an amount
equal to 100% of the full insurable replacement value of the Facility (exclusive
of footings and foundations below the lowest basement floor) without deduction
for depreciation. The determination of the replacement cost amount shall be
adjusted annually to comply with the requirements of the insurer issuing the
coverage or, at Lender's election, by reference to such indexes, appraisals or
information as Lender determines in its reasonable discretion, and, unless the
insurance required by this paragraph shall be effected by blanket and/or
umbrella policies in accordance with the requirements of this Agreement, the
policy shall include inflation guard coverage that ensures that the policy
limits will be increased over time to reflect the effect of inflation. Each
policy shall, subject to Lender's approval, contain (i) a replacement cost
endorsement, without deduction for depreciation, (ii) either an agreed amount
endorsement or a waiver of any co-insurance provisions, and (iii) an ordinance
or law coverage or enforcement endorsement if the Improvements or the use
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<PAGE> 15
of the Property constitutes any legal nonconforming structures or uses, and
shall provide for deductibles in such amounts as Lender may permit in its sole
discretion.
b. Commercial general liability insurance under a policy containing
"Comprehensive General Liability Form" of coverage (or a comparably worded form
of coverage) and the "Broad Form CGL" endorsement (or a policy which otherwise
incorporates the language of such endorsement), providing coverage on an
occurrence (not "claims made") basis, which policy shall include, without
limitation, coverage against claims for personal injury, bodily injury, death
and property damage liability with respect to the Facility and the operations
related thereto, whether on or off the Property, and the following coverages:
Employee as Additional Insured, Product Liability/Completed Operations; Broad
Form Contractual Liability, Independent Contractor, Personal Injury and
Advertising Injury Protection, Medical Payment (with a minimum limit of $5,000
per person), Broad Form Cross Suits Liability Endorsement, where applicable,
hired and non-owned automobile coverage (including rented and leased vehicles),
and, if any alcoholic beverages shall be sold, manufactured or distributed in
the Facility, liquor liability coverage, all of which shall be in such amounts
as Lender may from time to time reasonably require, but not less than One
Million Dollars ($1,000,000) per occurrence, Two Million Dollars ($2,000,000) in
the aggregate and with umbrella coverage not less than Three Million Dollars
($3,000,000). If such policy shall cover more than one property, such limits
shall apply on a "per location" basis. If any health club facilities or swimming
pools are located at a Facility, the foregoing amounts shall be increased to
Three Million Dollars ($3,000,000), Six Million Dollars ($6,000,000) and Fifteen
Million Dollars ($15,000,000), respectively. Such liability policy shall delete
the contractual exclusion under the personal injury coverage, if possible, and
if available, shall include the following endorsements: Notice of Accident,
Knowledge of Occurrence, and Unintentional Error and Omission.
c. Professional liability insurance coverage in an amount equal to
not less than One Million Dollars ($1,000,000) per occurrence and Three Million
Dollars ($3,000,000) in the aggregate and insuring Borrower for acts occurring
prior to the date of the Loan.
d. Business interruption insurance, which may be in the form of
Blanket Earnings and Extra Expense coverage (i) covering the same perils of loss
as are required to be covered by the property insurance required under Section
4.4(a) above, (ii) in an amount equal to the projected annual net income from
the Facility plus carrying costs and extraordinary expenses of the Property for
a period of twelve (12) months, based upon Borrower's reasonable estimate
thereof as approved by Lender, (iii) including either an agreed amount
endorsement or a waiver of any co-insurance provisions, so as to prevent
Borrower, Lender and any other insured thereunder from being a co-insurer, and
(iv) providing that any covered loss thereunder shall be payable to Lender.
e. During the period of any new construction on the Property, a
so-called "Builder's All-Risk Completed Value" or "Course of Construction"
insurance policy in non-reporting form for any improvements under construction,
including, without limitation, for demolition and increased cost of construction
or renovation, in an amount equal to 100% of the estimated replacement cost
value on the date of completion, including "soft cost" coverage, and Workers'
Compensation Insurance covering all persons engaged in such construction, in an
amount at least equal to the minimum required by law. In addition, each
contractor and subcontractor shall be
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<PAGE> 16
required to provide Lender with a certificate of insurance for (i) workers'
compensation insurance covering all persons engaged by such contractor or
subcontractor in such construction in an amount at least equal to the minimum
required by law, and (ii) general liability insurance showing minimum limits of
at least $5,000,000, including coverage for products and completed operations.
Each contractor and subcontractor also shall cover Borrower and Lender as an
additional insured under such liability policy and shall indemnify and hold
Borrower and Lender harmless from and against any and all claims, damages,
liabilities, costs and expenses arising out of, relating to or otherwise in
connection with its performance of such construction.
f. If a Facility contains steam boilers, steam pipes, steam
engines, steam turbines or other high pressure vessels, insurance covering the
major components of the central heating, air conditioning and ventilating
systems, boilers, other pressure vessels, high pressure piping and machinery,
elevators and escalators, if any, and other similar equipment installed in the
Improvements, in an amount equal to one hundred percent (100%) of the full
replacement cost of the Facility, which policies shall insure against physical
damage to and loss of occupancy and use of the Improvements arising out of an
accident or breakdown covered thereunder.
g. Flood insurance with a deductible not to exceed Three Thousand
Dollars ($3,000), or such greater amount as may be satisfactory to Lender in its
sole discretion, and in an amount equal to the full insurable value of the
Facility or the maximum amount available, whichever is less, from the "flood
pool", if the Facility is located in an area designated by the Secretary of
Housing and Urban Development or the Federal Emergency Management Agency as
having special flood hazards.
h. Workers' compensation insurance or other similar insurance
which may be required by governmental authorities or applicable legal
requirements in an amount at least equal to the minimum required by law, and
employer's liability insurance with a limit of Five Hundred Thousand Dollars
($500,000) per accident and per disease per employee, and Five Hundred Thousand
Dollars ($500,000) in the aggregate for disease arising in connection with the
operation of the Property.
i. Such other insurance coverages, in such amounts, and such other
forms and endorsements, as may from time to time be required by Lender and which
are customarily required by institutional lenders to similar properties,
similarly situated, including, without limitation, coverages against other
insurable hazards (including, by way of example only, earthquake, sinkhole and
mine subsidence), which at the time are commonly insured against and generally
available.
All insurance required under this Section 4.4 shall have a term of
not less than one year and shall be in the form and amount and with deductibles
as, from time to time, shall be reasonably acceptable to Lender, under valid and
enforceable policies issued by financially responsible insurers either licensed
to transact business in the State where the Facility is located, or obtained
through a duly authorized surplus lines insurance agent or otherwise in
conformity with the laws of such State, with (a) a rating of not less than the
third (3rd) highest rating category by either Standard & Poor's Ratings Group,
Duff & Phelps Credit Rating Co., Moody's Investors Service, Inc., Fitch
Investors Service, Inc. or any successors thereto, or (b) an A:V rating in
Best's Key Rating
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<PAGE> 17
Guide; provided, however, that if the initial principal balance of the Loan is
greater than Seven Million Five Hundred Thousand Dollars ($7,500,000.00), such
insurer must, in lieu of such Best's rating, have a long term senior debt rating
of at least "A" by Standard & Poor's Ratings Group. On the date hereof, the
Borrower's professional liability insurance carrier does not meet the above
requirements, and the Borrower acknowledges that it shall have one hundred
twenty (120) days from the date hereof to provide either a carrier meeting such
requirements or a "cut-through" endorsement satisfactory in all respects to the
Lender. Originals or certified copies of all insurance policies shall be
delivered to and held by Lender. All such policies shall name Lender as an
additional insured, shall provide for loss payable solely to Lender and shall
contain: (i) standard "non-contributory mortgagee" endorsement or its equivalent
relating, inter alia, to recovery by Lender notwithstanding the negligent or
willful acts or omissions of Borrower and notwithstanding (a) occupancy or use
of the Facility for purposes more hazardous than those permitted by the terms of
such policy, (b) any foreclosure or other action taken by Lender pursuant to the
Mortgage upon the occurrence of an Event of Default, or (c) any change in title
or ownership of the Facility; and (ii) a provision that such policies shall not
be canceled or amended, including, without limitation, any amendment reducing
the scope or limits of coverage, or failed to be renewed, without at least
thirty (30) days prior written notice to Lender in each instance. With respect
to insurance policies which require payment of premiums annually, not less than
thirty (30) days prior to the expiration dates of the insurance policies
obtained pursuant to this Agreement, Borrower shall pay such amount, except to
the extent Lender is escrowing sums therefor pursuant to the Loan Documents. Not
less than thirty (30) days prior to the expiration dates of the insurance
policies obtained pursuant to this Agreement, originals or certified copies of
renewals of such policies (or certificates evidencing such renewals) bearing
notations evidencing the payment of premiums or accompanied by other evidence
satisfactory to Lender of such payment, which premiums shall not be paid by
Borrower through or by any financing arrangement, shall be delivered by Borrower
to Lender. Borrower shall not carry separate insurance, concurrent in kind or
form or contributing in the event of loss, with any insurance required under
this Section 4.4. If the limits of any policy required hereunder are reduced or
eliminated due to a covered loss, Borrower shall pay the additional premium, if
any, in order to have the original limits of insurance reinstated, or Borrower
shall purchase new insurance in the same type and amount that existed
immediately prior to the loss.
If Borrower fails to maintain and deliver to Lender the original
policies or certificates of insurance required by this Agreement, Lender may, at
its option, procure such insurance and Borrower shall pay or, as the case may
be, reimburse Lender for, all premiums thereon promptly, upon demand by Lender,
with interest thereon at the Default Rate from the date paid by Lender to the
date of repayment and such sum shall constitute a part of the Loan Obligations.
The insurance required by this Agreement may, at the option of
Borrower, be effected by blanket and/or umbrella policies issued to Borrower or
to an Affiliate of Borrower covering the Facility and the properties of such
Affiliate; provided that, in each case, the policies otherwise comply with the
provisions of this Agreement and allocate to the Facility, from time to time,
the coverage specified by this Agreement, without possibility of reduction or
coinsurance by reason of, or damage to, any other property (real or personal)
named therein. If the insurance required by this Agreement shall be effected by
any such blanket or umbrella policies, Borrower shall furnish to
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<PAGE> 18
Lender original policies or certified copies thereof, with schedules attached
thereto showing the amount of the insurance provided under such policies which
is applicable to the Facility.
Neither Lender nor its agents or employees shall be liable for any
loss or damage insured by the insurance policies required to be maintained under
this Agreement; it being understood that (i) Borrower shall look solely to its
insurance company for the recovery of such loss or damage, (ii) such insurance
company shall have no rights of subrogation against Lender, its agents or
employees, and (iii) Borrower shall use its best efforts to procure from such
insurance company a waiver of subrogation rights against Lender. If, however,
such insurance policies do not provide for a waiver of subrogation rights
against Lender (whether because such a waiver is unavailable or otherwise), then
Borrower hereby agrees, to the extent permitted by law and to the extent not
prohibited by such insurance policies, to waive its rights of recovery, if any,
against Lender, its agents and employees, whether resulting from any damage to
the Facility, any liability claim in connection with the Facility or otherwise.
If any such insurance policy shall prohibit Borrower from waiving such claims,
then Borrower must obtain from such insurance company a waiver of subrogation
rights against Lender.
If loss or damage to a Facility is equal to or less than $25,000
and there shall exist no Default or Event of Default at the time, the insurance
proceeds shall be made available to the Borrower for the sole purpose of the
repair and restoration of the Facility, to the same quality and condition as
existed prior to such loss or damage.
If the loss or damage insured by the casualty insurance policies
required to be maintained under this Agreement exceeds $25,000, Lender may make
the net proceeds of insurance or condemnation (after payment of Lender's
reasonable costs and expenses) available to Borrower for Borrower's repair,
restoration and replacement of the Improvements, Equipment and Inventory damaged
or taken on the following terms and subject to Borrower's satisfaction of the
following conditions:
a. The aggregate amount of all such proceeds shall not exceed the
aggregate amount of all such Loan Obligations.
b. At the time of such loss or damage and at all times thereafter
while Lender is holding any portion of such proceeds, there shall exist no
Default or Event of Default;
c. The Improvements, Equipment, and Inventory for which loss or
damage has resulted shall be capable of being restored to its preexisting
condition and utility in all material respects with a value equal to or greater
than that which existed prior to such loss or damage and such restoration shall
be capable of being completed prior to the earlier to occur of (i) the
expiration of business interruption insurance as determined by an independent
inspector or (ii) the Maturity Date;
d. Within thirty (30) days from the date of such loss or damage
Borrower shall have given Lender a written notice electing to have the proceeds
applied for such purpose;
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e. Within sixty (60) days following the date of notice under the
preceding subparagraph (c) and prior to any proceeds being disbursed to
Borrower, Borrower shall have provided to Lender all of the following:
(i) complete plans and specifications for restoration, repair
and replacement of the Improvements, Equipment, and
Inventory damaged to the condition, utility and value
required by (b) above,
(ii) if loss or damage exceeds $100,000, fixed-price or
guaranteed maximum cost bonded construction contracts for
completion of the repair and restoration work in
accordance with such plans and specifications,
(iii) builder's risk insurance for the full cost of
construction with Lender named under a standard mortgagee
loss-payable clause,
(iv) such additional funds as in Lender's reasonable opinion
are necessary to complete such repair, restoration and
replacement, and
(v) copies of all permits and licenses necessary to complete
the work in accordance with the plans and specifications;
f. Lender may, at Borrower's expense, retain an independent
inspector to review and approve plans and specifications and completed
construction and to approve all requests for disbursement, which approvals shall
be conditions precedent to release of proceeds as work progresses;
g. No portion of such proceeds shall be made available by Lender
for architectural reviews or for any other purposes which are not directly
attributable to the cost of repairing, restoring or replacing the Improvements,
Equipment and Inventory for which a loss or damage has occurred unless the same
are covered by such insurance;
h. Borrower shall diligently pursue such work and shall complete
such work prior to the earlier to occur of the expiration of business
interruption insurance or the Maturity Date;
i. The damaged Facility continues to achieve the Debt Service
Coverage requirements set forth in Section 4.12 below;
j. Each disbursement by Lender of such proceeds and deposits shall
be funded subject to conditions and in accordance with disbursement procedures
which a commercial construction lender would typically establish in the exercise
of sound banking practices and shall be made only upon receipt of disbursement
requests on an AIA G702/703 form (or similar form approved by Lender) signed and
certified by Borrower and, if required by the Lender, its architect and general
contractor with appropriate invoices and lien waivers as required by Lender;
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k. Lender shall have a first lien security interest in all building
materials and completed repair and restoration work and in all fixtures and
equipment acquired with such proceeds, and Borrower shall execute and deliver
such mortgages, deeds of trust, security agreements, financing statements and
other instruments as Lender shall request to create, evidence, or perfect such
lien and security interest; and
l. In the event and to the extent such proceeds are not required or
used for the repair, restoration and replacement of the Improvements, Equipment
and Inventory for which a loss or damage has occurred, or in the event Borrower
fails to timely make the election to have insurance proceeds applied to the
restoration of the Improvements, Equipment, or Inventory, or, having made such
election, fails to timely comply with the terms and conditions set forth herein,
or, if the conditions set forth herein for such application are otherwise not
satisfied, then Lender shall be entitled without notice to or consent from
Borrower to apply such proceeds, or the balance thereof, at Lender's option
either (i) to the full or partial payment or prepayment of the Loan Obligations
(without premium) in the manner aforesaid, or (ii) to the repair, restoration
and/or replacement of all or any part of such Improvements, Equipment and
Inventory for which a loss or damage has occurred.
Borrower appoints Lender as Borrower's attorney-in-fact to cause
the issuance of or an endorsement of any insurance policy to bring Borrower into
compliance herewith and, as limited above, at Lender's sole option, to make any
claim for, receive payment for, and execute and endorse any documents, checks or
other instruments in payment for loss, theft, or damage covered under any such
insurance policy; however, in no event will Lender be liable for failure to
collect any amounts payable under any insurance policy.
4.5 FINANCIAL AND OTHER INFORMATION. Provide Lender, or cause the
Manager or Guarantors to provide to Lender, at its address set forth in Section
8.7 and at GMAC Commercial Mortgage Corporation, 2200 Woodcrest Place, Suite
305, Birmingham, Alabama 35209, the following financial statements and
information on a continuing basis during the term of the Loan:
a. Within one hundred twenty (120) days after the end of each
fiscal year of Advocat, audited financial statements of Advocat 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 Advocat to be true
and correct.
b. Within one hundred twenty (120) days after the end of each
fiscal year of the Borrower, unaudited and consolidating financial statements of
the Borrower prepared by a nationally recognized accounting firm or independent
certified public accountant acceptable to Lender, which statements shall be
prepared in accordance with GAAP, and shall include a balance sheet and a
statement of income and expenses for the year then ended, and, shall be
certified as true and correct in all material respects by a financial officer of
the Borrower.
c. Within forty-five (45) days after the end of each fiscal quarter
of each Facility and Borrower, unaudited financial statements of the operations
of such Facility and Borrower
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<PAGE> 21
prepared in accordance with GAAP, which statements shall include a balance sheet
and statement of income and expenses for the quarter then ended, and shall be
certified as true and correct in all material respects by a financial officer of
Borrower to be true and correct.
d. Within forty-five (45) days after the end of each fiscal quarter
of Advocat, unaudited financial statements of Advocat, prepared in accordance
with GAAP, which shall include a balance sheet and statement of income and
expenses for the quarter then ended, and shall be certified as true and correct
in all material respects by a financial officer of Advocat to be true and
correct.
e. Within forty-five (45) days of the end of each calendar quarter,
a statement of the number of bed days available and the actual patient days
incurred for the quarter, together with quarterly census information of each
Facility as of the end of such quarter in sufficient detail to show patient-mix
(i.e., private, Medicaid) 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 Facility shall be accompanied by the Summary
of Financial Statements and Census Data attached hereto as Exhibit "D".
f. Upon request by Lender, as soon as available, but in no event
more than thirty (30) days after the filing deadline, as may be extended from
time to time, copies of all federal, state and local tax returns of Borrower and
federal income tax returns for each Guarantor, together with all supporting
documentation and required schedules.
g. Within twenty (20) days of filing or receipt, all Medicaid cost
reports and any amendments thereto filed with respect to each Facility, and all
responses, audit reports, or other inquiries with respect to such cost reports.
h. Within twenty (20) days of receipt, a copy of the Medicaid Rate
Calculation Worksheet (or the equivalent thereof) issued by the appropriate
Medicaid Agency for the Facility.
i. Within six (6) business days of receipt, any and all notices
(regardless of form) from any and all licensing and/or certifying agencies that
any Facility license and/or the Medicaid certification of a Facility is being
downgraded to a substandard category, revoked, or suspended or that any such
action is pending or being considered.
j. Upon Lender's request, evidence of payment by Borrower of any
applicable provider bed taxes or similar taxes.
k. Within one hundred twenty (120) days of the Borrower's fiscal
year end, and more frequently if reasonably requested by Lender, an aged
accounts receivable report of the Facility in sufficient detail to show amounts
due from each class of patient-mix (i.e., private and Medicaid) by the account
age classifications of 30 days, 60 days, 90 days, 120 days, and over 120 days.
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l. Within ten (10) business days of receipt, copies of all
licensure and certification survey reports and statements of deficiencies (with,
if determined at the time, plans of correction attached thereto or as soon
thereafter as reasonably possible).
m. Within forty-five (45) days of the end of each calendar quarter,
a certificate of the chief financial officer of the Borrower 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 be audited and prepared by a nationally recognized
accounting firm or independent certified public accountant acceptable to Lender
if (i) an Event of Default exists, (ii) if required by internal policy or by any
investor in any securities backed in whole or in part by the Loan or any rating
agency rating such securities, or (iii) if Lender has reasonable grounds to
believe that the unaudited financial statements do not accurately represent the
financial condition of the Borrower.
The Lender further reserves the right to require such other
financial information of Borrower, any Guarantor, Manager and/or any Facility,
in such form and at such other times (including monthly or more frequently, but
not more frequently than reasonable) as Lender shall reasonably 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.
4.6 COMPLIANCE CERTIFICATE. (a) At the time of furnishing the quarterly
operating statements required under the foregoing Section, furnish to Lender a
compliance certificate in the form attached hereto as Exhibit "E" executed by
the chief financial officer, of the Borrower; and
(b) Upon Lender's written request, furnish Lender with a
certificate stating that Borrower has complied with and is in compliance with
all terms, covenants and conditions of the Loan Documents to which Borrower is a
party and that there exists no Default or Event of Default or, if such is not
the case, that one or more specified events have occurred, and that the
representations and warranties contained herein are true and correct with the
same effect as though made on the date of such certificate.
4.7 BOOKS AND RECORDS. Keep and maintain at all times at Kernersville,
North Carolina, and upon Lender's request shall make available at each Facility,
complete and accurate books of account and records (including copies of
supporting bills and invoices) adequate to reflect correctly the results of the
operation of each Facility, and copies of all written contracts, leases (if
any), and other instruments which affect the Property, which books, records,
contracts, leases (if any) and other instruments shall be subject to examination
and inspection at any reasonable time by Lender (upon reasonable advance notice,
which for such purposes only may be given orally, except in the case of an
emergency or following an Event of Default, in which case no advance notice
shall be required) provided, however, that if an Event of Default has occurred
and is continuing, Borrower shall deliver to Lender upon written demand all
books, records, contracts, leases (if any) and other instruments relating to a
Facility or its operation and Borrower authorizes Lender to obtain a credit
report on Borrower at any time.
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4.8 PAYMENT OF INDEBTEDNESS. Duly and punctually pay or cause to be
paid all other Indebtedness now owing or hereafter incurred by Borrower in
accordance with the terms of such Indebtedness, except such Indebtedness owing
to those other than Lender which is being contested in good faith and with
respect to which any execution against properties of Borrower has been
effectively stayed and for which reserves and collateral for the payment and
security thereof have been established as determined by Lender in its sole
discretion.
4.9 RECORDS OF ACCOUNTS. Maintain all records, including records
pertaining to the Accounts of Borrower, at the chief executive office of
Borrower as set forth in this Agreement.
4.10 CONDUCT OF BUSINESS. Conduct, or cause the Manager to conduct, the
operation of each Facility at all times in a manner consistent with the level of
operation of such Facility as of the date hereof, including without limitation,
the following:
(i) to maintain the standard of care for the residents of the
Facility at all times at a level necessary to ensure
quality care for the residents of the Facility in
accordance with customary and prudent industry standards;
(ii) to operate the Facility in a prudent manner and in
compliance with applicable laws and regulations relating
thereto and cause all Permits, Reimbursement Contracts, and
any other agreements necessary for the use and operation of
the Facility or as may be necessary for participation in
the Medicaid or other applicable reimbursement programs to
remain in effect without reduction in the number of
licensed beds or units authorized for use in the Medicaid
or other applicable reimbursement programs;
(iii) to maintain sufficient Inventory and Equipment of types and
quantities at the Facility to enable Borrower adequately to
perform operations of the Facility;
(iv) to keep all Improvements and Equipment located on or used
or useful in connection with the Facility in good repair,
working order and condition, reasonable wear and tear
excepted, and from time to time make all needed and proper
repairs, renewals, replacements, additions, and
improvements thereto to keep the same in good operating
condition;
(v) to maintain sufficient cash in the operating accounts of
the Facility in order to satisfy the working capital needs
of the Facility; and
(vi) to keep all required Permits current and in full force and
effect.
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4.11 PERIODIC SURVEYS. Furnish or cause Manager to furnish to Lender
within six (6) business days of receipt a copy of any 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 any Facility to a substandard category, and within the time period
required by the particular agency for furnishing a plan of correction also
furnish or cause to be furnished to Lender a copy of the plan of correction
generated from such survey or report for the Facility, and correct or cause to
be corrected any deficiency, the curing of which is a condition of continued
licensure or for full participation in Medicaid or other reimbursement program
pursuant to any Reimbursement Contract for existing patients or for new patients
to be admitted with Medicaid coverage, by the date required for cure by such
agency (plus extensions granted by such agency).
4.12 DEBT SERVICE COVERAGE REQUIREMENTS.
a. Achieve (commencing with the closing of the Loan), and, within
forty-five (45) days after the end of each fiscal quarter of Borrower, provide
evidence satisfactory to the Lender of the achievement of, the following Debt
Service Coverage ratios:
(i) a Debt Service Coverage for each Facility, individually,
after deduction of Actual Management Fees, of not less
than 1.0 to 1.0, to be tested quarterly based on the
operation of the individual Facility for the prior twelve
(12) months;
(ii) a Debt Service Coverage for each Facility, individually,
after deduction of Assumed Management Fees, of not less
than 1.10 to 1.0, to be tested quarterly based on the
operation of the individual Facility for the prior twelve
(12) months; and
(iii) a Debt Service Coverage for the Facilities, combined,
after deduction of Assumed Management Fees, of not less
than 1.25 to 1.0, to be tested quarterly based on the
combined operations of the Facilities for the prior
twelve (12) months.
b. If Borrower fails to achieve or provide evidence of achievement
of the Debt Service Coverage, upon fifteen (15) days written notice to Borrower,
Borrower will deposit with Lender additional cash or other liquid collateral in
an amount which, when added to the first number of the Debt Service Coverage
calculation, would have resulted in the noncomplying Debt Service Coverage
requirement having been satisfied. If such failure continues for two (2)
consecutive quarters, upon fifteen (15) days written notice to Borrower,
Borrower will deposit with Lender additional cash or other liquid collateral
(with credit for amounts currently being held by Lender pursuant to the
foregoing sentence), in an amount which, if the same had been applied on the
first day of the prior twelve (12) month period to reduce the outstanding
principal indebtedness of the Loan Obligations, would have resulted in the
noncomplying Debt Service Coverage requirement having been satisfied, Borrower
agrees promptly to provide such additional cash or other liquid collateral,
which shall be held for an additional two (2) consecutive quarters. Such
additional Collateral will be held by the Lender in a standard custodial
account, and shall constitute additional
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collateral for the Loan Obligations and an "Account" as defined in this
Agreement, and, upon the occurrence of an Event of Default, may be applied by
the Lender, in such order and manner as the Lender may elect, to the reduction
of the Loan Obligations. Borrower shall not be entitled to any interest earned
on such additional Collateral. Provided that there is no outstanding Default or
Event of Default, such additional Collateral which has not been applied to the
Loan Obligations will be released by the Lender at such time as Borrower
provides the Lender with evidence that the required Debt Service Coverage
requirements outlined above have been achieved and maintained (without regard to
any cash deposited pursuant to this Section 4.12) as of the end of each of two
(2) consecutive quarters. Notwithstanding the foregoing, Lender will agree to
forbear from requiring Borrower to post such cash or additional collateral if
any one Facility fails to meet the required individual Debt Service Coverage as
long as (i) there is no other outstanding Event of Default and (ii) the Debt
Service Coverage on a combined basis for all Facilities is at least 1.4 to 1.0.
However, Lender shall have the right to terminate its forbearance and to require
that the Borrower post such additional collateral if said Facility fails to meet
its required individual Debt Service Coverage ratios for more than four (4)
consecutive quarters.
4.13 OCCUPANCY. Maintain or cause to be maintained an average annual
occupancy for the Facilities, combined, of eighty percent (80%) or higher, based
on the number of licensed beds or units shown on Exhibit "F".
4.14 CAPITAL EXPENDITURES. Maintain each Facility in good condition and
make minimum capital expenditures for each Facility in each fiscal year in the
amount of $250 per licensed bed or unit (which capital expenditures may include
those necessary for ordinary repairs and routine maintenance), and, within
forty-five (45) days of the end of such fiscal year, provide evidence thereof
satisfactory to Lender. In the event that Borrower shall fail to do so, Borrower
shall, upon Lender's written request, immediately establish and maintain a
capital expenditures reserve fund with Lender equal to the difference between
the required amount per licensed bed or unit and the amount per licensed bed or
unit actually spent by the Borrower. Borrower grants 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 monthly upon Lender's receipt of
satisfactory evidence that Borrower has made the required capital expenditures.
Upon Borrower's failure to adequately maintain any Facility in good condition,
ordinary and reasonable wear and tear excepted, Lender may, but shall not be
obligated to, make such capital expenditures and may apply the moneys in the
capital expenditures reserve fund for such purpose. To the extent there are
insufficient moneys in the capital expenditures reserve fund for such purposes,
all funds advanced by Lender to make such capital expenditures shall constitute
a portion of the Loan Obligations, shall be secured by the Mortgage and shall
accrue interest at the Default Rate until paid. Upon an Event of Default, Lender
may apply any moneys in the capital expenditures reserve fund to the Loan
Obligations, in such order and manner as Lender may elect. For any partial
fiscal year during which the Loan is outstanding, the required expenditure
amount shall be prorated by multiplying the total of the required amount per
licensed bed or unit by a fraction, the numerator of which is the number of days
during such year for which all or part of the Loan is outstanding and the
denominator of which is the number of days in such year.
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4.15 MANAGEMENT AGREEMENT. Maintain the Management Agreement in full
force and effect and timely perform all of Borrower's obligations thereunder and
enforce performance of all obligations of the Manager thereunder and not permit
the termination, amendment or assignment of the Management Agreement unless the
prior written consent of Lender is first obtained, which consent shall not be
unreasonably withheld. Borrower will enter and cause the Manager to enter into
the Subordination Agreement. Borrower will not enter into any other management
agreement without Lender's prior written consent, which consent shall not be
unreasonably withheld.
4.16 UPDATED APPRAISALS. For so long as the Loan remains outstanding,
if any Event of Default shall occur hereunder, or if, in Lender's reasonable
business judgment, a material depreciation in the value of the Property shall
have occurred, then in any such event, Lender may cause the Property to be
appraised by an appraiser selected by Lender, and in accordance with Lender's
appraisal guidelines and procedures then in effect, and Borrower agrees to
cooperate in all respects with such appraisals and furnish to the appraisers all
requested information regarding the Property and the Facilities. Borrower agrees
to pay all reasonable costs incurred by Lender in connection with such appraisal
which costs shall be secured by the Mortgage and shall accrue interest at the
Default Rate until paid.
4.17 COMPLY WITH COVENANTS AND LAWS. Comply, in all material respects,
with all applicable covenants and restrictions of record and all laws,
ordinances, rules and regulations and keep the Facilities and the Property in
compliance with all applicable laws, ordinances, rules and regulations,
including, without limitation, the Americans with Disabilities Act and
regulations promulgated thereunder, and laws, ordinances, rules and regulations
relating to zoning, health, building codes, setback requirements, Medicaid laws
and keep the Permits for the Facilities in full force and effect.
4.18 TAXES AND OTHER CHARGES. Subject to Borrower's right to contest
the same as set forth in Section 9(c) of the Mortgage, pay all taxes,
assessments, charges, claims for labor, supplies, rent, and other obligations
which, if unpaid, might give rise to a Lien against property of Borrower, except
Liens to the extent permitted by this Agreement.
4.19 COMMITMENT LETTER. Provide all items and pay all amounts required
by the Commitment Letter. If any term of the Commitment Letter shall conflict
with the terms of this Agreement, this Agreement shall govern and control. As to
any matter contained in the Commitment Letter, and as to which no mention is
made in this Agreement or the other Loan Documents, the Commitment Letter shall
continue to be in effect and shall survive the execution of this Agreement and
all other Loan Documents.
4.20 NOTICE OF FEES OR PENALTIES. Immediately notify Lender, upon
Borrower's knowledge thereof, of the assessment by any state or any Medicaid,
health or licensing agency of any fines or penalties against Borrower, Manager
or any Facility.
4.21 INTENTIONALLY DELETED.
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4.22 CAPITAL IMPROVEMENTS AND REPAIRS. Commence immediately and
complete within 180 days from the date hereof the repairs listed on Schedule
4.22 attached hereto.
4.23 LOAN CLOSING CERTIFICATION. Immediately notify Lender, in writing,
in the event any representation, warranty or covenant contained herein or in
that certain Loan Closing Certification, executed by Borrower for the benefit of
Lender of even date herewith, becomes untrue or there shall have been any
material adverse change in any such representation, warranty or covenant.
4.24 ADVOCAT FINANCIAL COVENANTS. Borrower, and Advocat, by the
execution and delivery of its Guaranty Agreement, agree to cause compliance with
the following:
a. Advocat shall maintain a current ratio of not less than 1.25 to
1.00 at all times.
For purposes of calculating the "current ratio", the following
debt will be excluded from current maturities of long term debt:
(i) the principal balance outstanding under the Acquisition
Line;
(ii) the principal balance outstanding under the Working
Capital Loan or the Overline Facility; and
(iii) the outstanding principal balance on the Bridge Loan,
which remains outstanding following the closing of the
Loan and the Related Loan.
Current maturities of long term debt shall include an assumed
amortization of five percent (5%) of the principal outstanding balance under
the Acquisition Line.
b. Advocat shall maintain a ratio of "Adjusted Funded Debt"
(defined below) to "EBITDAR" (defined below) of not more than 8.0 to 1.0 through
December 30, 1999, and 7.5 to 1.0 on December 31, 1999, and thereafter.
For purposes of this Section 4.24, "Adjusted Funded Debt"
means the sum of (i) "Funded Debt" (defined below) plus (ii) the product of (A)
8 multiplied by (B) lease expense for the preceding four (4) quarters. For
purposes hereof, EBITDAR shall mean the sum of earnings before interest, taxes,
depreciation, amortization and rent/lease expense (excluding accounts receivable
of Texas Diversicare Limited Partnership), calculated for the immediately
preceding twelve (12) month period. In addition, for purposes of calculating
EBITDAR, EBITDAR will include non-recurring charges as quantified in the
December 31, 1998 audited statement of operations and defined in Note 16 of the
December 31, 1998 audit report. EBITDAR will also add back the non-recurring
charge of $433,440 taken in the first quarter of fiscal year 1999 relating to an
accounting change (SOP 98-5).
For purposes of this Section 4.24, "Funded Debt" means all
indebtedness for money borrowed, deferred purchase money obligations (other than
accounts payable arising in the
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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 the Borrower, or supported by a letter of credit issued for the
account of the Borrower. Funded Debt shall also include the redemption amount
with respect to any stock of the Borrower required to be redeemed within the
twelve months following the date of determination.
c. Advocat shall maintain a minimum fixed charge coverage ratio of
not less than 1.0 to 1.0 through December 31, 1999, and 1.05 to 1.0 at all times
thereafter (measured quarterly on a rolling four (4) quarter basis). The fixed
charge coverage ratio shall mean EBITDAR divided by the sum of current
maturities of long-term debt plus interest expenses plus lease expenses. Current
maturities will include five percent (5%) of the then outstanding principal
balance under the Acquisition Line. Current maturities shall exclude:
(i) the principal balance outstanding under the Acquisition
Line;
(ii) the principal balance outstanding under the Working
Capital Loan or the Overline Facility; and
(iii) the outstanding principal balance on the Bridge Loan,
which remains outstanding following the closing of the
Loan and the Related Loan.
d. Advocat shall maintain a minimum "Tangible Net Worth" (defined
below) of $24,000,000 as of the date hereof. Such minimum Tangible Net Worth
shall increase (but shall not decrease) on a quarterly basis by a minimum of 75%
of Advocat's calendar quarterly net income (but not loss) beginning with the
fiscal quarter ended June 30, 1999 plus 100% of additions to capital.
e. Advocat shall provide to the Lender a certificate no later than
45 days after the end of each fiscal quarter, certifying compliance with the
covenants in this Section 4.24.
ARTICLE V
NEGATIVE COVENANTS OF BORROWER
Until the Loan Obligations have been paid in full, Borrower shall not:
5.1 ASSIGNMENT OF LICENSES AND PERMITS. Assign or transfer any of its
interest in the Permits, or Reimbursement Contracts (including rights to payment
thereunder) pertaining to any Facility, or assign, transfer, or remove or permit
any other person to assign, transfer, or remove any records pertaining to a
Facility including, without limitation, patient records, medical and clinical
records (except for removal of such patient records as directed by the residents
owning such records or by governmental or judicial direction or order), without
Lender's prior written consent, which consent may be granted or refused in
Lender's sole discretion.
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5.2 NO LIENS; EXCEPTIONS. Create, incur, assume or suffer to exist any
Lien upon or with respect to any Facility or any of its properties, rights,
income or other assets relating thereto, including, without limitation, the
Collateral, whether now owned or hereafter acquired, other than the following
permitted Liens ("Permitted Encumbrances"):
a. Liens at any time existing in favor of the Lender;
b. Liens which are permitted under the terms of the Lender's title
insurance policies insuring the Mortgage;
c. Inchoate Liens arising by operation of law for the purchase of
labor, services, materials, equipment or supplies, provided payment shall not be
delinquent and, if such Lien is a lien upon any of the Property or Improvements,
such Lien must be fully disclosed to Lender and bonded off and removed from the
Property and Improvements within thirty (30) days of its creation in a manner
satisfactory to Lender;
d. Liens incurred in the ordinary course of business in connection
with workers' compensation, unemployment insurance or other forms of
governmental insurance or benefits, or to secure performance of tenders,
statutory obligations, leases and contracts (other than for money borrowed or
for credit received with respect to property acquired) entered into in the
ordinary course of business as presently conducted or to secure obligations for
surety or appeal bonds;
e. Liens for current year's taxes, assessments or governmental
charges or levies not yet due and payable;
f. Liens on Accounts securing the Working Capital Loan and the
Overline Facility; and
g. Liens securing purchase money loans not to exceed $300,000 in
the aggregate at any one time outstanding.
5.3 MERGER, CONSOLIDATION, ETC. Consummate any merger, consolidation or
similar transaction, or sell, assign, lease or otherwise dispose of (whether in
one transaction or in a series of transactions), all or substantially all of its
assets (whether now or hereafter acquired), without the prior written consent of
the Lender, which consent may be granted or refused in Lender's sole discretion.
5.4 MAINTAIN SINGLE-PURPOSE ENTITY STATUS.
a. Dissolve or terminate or materially amend the terms of its
articles of organization or operating agreement, the terms of which require
Borrower to be a Single-Purpose Entity;
b. enter into any transaction of merger or consolidation, or
liquidate or dissolve itself (or suffer any liquidation or dissolution), or
acquire by purchase or otherwise all or
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substantially all the business or assets of, or any Stock or other evidence of
beneficial ownership of, any Person;
c. guarantee or otherwise become liable on or in connection with
any obligation of any other Person, except for the Related Loan, the Working
Capital Loan and the Overline Facility;
d. at any time own any encumbered asset other than (i) the
Property, and (ii) incidental personal property necessary for the operation of
the Property;
e. at any time be engaged directly or indirectly, in any business
other than the ownership, management and operation of the Property;
f. enter into any contract or agreement with any general partner,
principal, member or Affiliate of Borrower or any Affiliate of any general
partner, principal or member of Borrower (other than the Management Agreement)
except upon terms and conditions that are intrinsically fair and substantially
similar to those that would be available on an arm's-length basis with third
parties other than an Affiliate;
g. incur, create or assume any indebtedness, secured or unsecured,
direct or contingent (including guaranteeing any obligation), other than (i) the
Loan, (ii) the Working Capital Loan, (iii) the Overline Facility, (iv) the
Related Loan, and (v) indebtedness which represents trade payables or accrued
expenses incurred in the ordinary course of business of owning and operating the
Property; no other debt will be secured (senior, subordinate or pari passu) by
the Property;
h. make any loans or advances for borrowed money to any third party
(including any Affiliate);
i. become insolvent or fail to pay its debts from its assets as the
same shall become due;
j. fail to do all things necessary to preserve its existence as a
Single-Purpose Entity, and will not, nor will any member thereof, amend, modify
or otherwise change its articles of organization or operating agreement in a
manner which adversely affects Borrower's existence as a Single-Purpose Entity;
k. fail to conduct and operate its business as presently conducted
and operated;
l. fail to maintain books and records and bank accounts separate
from those of its Affiliates, including its members, general partners or
shareholders, as applicable;
m. fail to at all times hold itself out to the public as a legal
entity separate and distinct from any other entity (including any Affiliate
thereof, including any member of Borrower or any Affiliate of the general
partner or any member or shareholder of Borrower, as applicable);
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n. fail to maintain adequate capital for the normal obligations
reasonably foreseeable in a business of its size and character and in light of
its contemplated business operations;
o. seek the dissolution or winding up, in whole or in part, of
Borrower;
p. commingle the funds and other assets of Borrower with those of
any general partner, any member, any shareholder, any Affiliate or any other
Person except for daily sweeps to a master account for Borrower and its
Affiliates from which necessary operating funds will be disbursed to a control
account in the name of Borrower;
q. fail to maintain its assets in such a manner that it is not
costly or difficult to segregate, ascertain or identify its individual assets
from those of any Affiliate or any other Person; and
r. hold itself out to be responsible for the debts or obligations
of any other Person, except for the Related Loan, the Working Capital Loan and
the Overline Facility.
5.5 CHANGE OF BUSINESS. Make any material change in the nature of its
business as it is being conducted as of the date hereof.
5.6 CHANGES IN ACCOUNTING. Change its methods of accounting, unless
such change is permitted by GAAP, and provided such change does not have the
effect of curing or preventing what would otherwise be an Event of Default or
Default had such change not taken place.
5.7 ERISA FUNDING AND TERMINATION. Permit (a) the funding requirements
of ERISA with respect to any employee plan to be less than the minimum required
by ERISA at any time, or (b) any employee plan to be subject to involuntary
termination proceedings at any time.
5.8 TRANSACTIONS WITH AFFILIATES. Enter into any transaction (other
than the Management Agreement) with any Affiliate of Borrower other than in the
ordinary course of its business and on fair and reasonable terms no less
favorable to Borrower than those it could obtain in a comparable arms-length
transaction with a Person not an Affiliate.
5.9 TRANSFER OF OWNERSHIP INTERESTS. Except for the pledge of
membership interests to secure the Working Capital Loan, permit a change in the
ownership interests of the Persons comprising the Borrower unless the written
consent of the Lender is first obtained, which consent may be granted or refused
in Lender's sole discretion.
5.10 CHANGE OF USE. Alter or change the use of any Facility or permit
any management agreement other than the Management Agreement or enter into any
operating lease for a Facility, unless Borrower first notifies Lender and
provides Lender a copy of the proposed lease agreement or management agreement,
obtains Lender's written consent thereto, which consent may be withheld in
Lender's sole discretion, and obtains and provides Lender with a subordination
agreement in form
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satisfactory to Lender, as determined by Lender in its sole discretion, from
such manager or lessee subordinating to all rights of Lender.
5.11 PLACE OF BUSINESS. Change its chief executive office or its
principal place of business without first giving Lender at least thirty (30)
days prior written notice thereof and promptly providing Lender such information
and amendatory financing statements as Lender may request in connection
therewith.
5.12 ACQUISITIONS. Directly or indirectly, purchase, lease, manage,
own, operate, or otherwise acquire any property or other assets (or any interest
therein) which are not used in connection with the operation of the Facilities.
ARTICLE VI
ENVIRONMENTAL HAZARDS
6.1 PROHIBITED ACTIVITIES AND CONDITIONS. Except for matters covered by
a written program of operations and maintenance approved in writing by Lender
(an "O&M Program") or matters described in Section 6.2, Borrower shall not cause
or permit any of the following:
a. The presence, use, generation, release, treatment, processing,
storage, handling, or disposal-of any Hazardous Materials in, on or under the
Property or any Improvements;
b. The transportation of any Hazardous Materials to, from, or
across the Property;
c. Any occurrence or condition on the Property or in the
Improvements or any other property of Borrower that is adjacent to the Property,
which occurrence or condition is or may be in violation of Hazardous Materials
Laws; or
d. Any violation of or noncompliance with the terms of any
Environmental Permit with respect to the Property, the Improvements or any
property of Borrower that is adjacent to the Property.
The matters described in clauses (a) through (d) above are referred to
collectively in this Article VI as "Prohibited Activities and Conditions" and
individually as a "Prohibited Activity and Condition."
6.2 EXCLUSIONS. Notwithstanding any other provision of Article VI to
the contrary, "Prohibited Activities and Conditions" shall not include the safe
and lawful use and storage of quantities of (i) pre-packaged supplies, medical
waste, cleaning materials and petroleum products customarily used in the
operation and maintenance of comparable Facilities, (ii) cleaning materials,
personal grooming items and other items sold in pre-packaged containers for
consumer use and used by occupants of the Facility; (iii) petroleum products
used in the operation and maintenance of motor vehicles from time to time
located on the Property's parking areas, or stored in underground
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or above ground storage tanks used in the operation of any Facility; and (iv)
nonfriable asbestos or asbestos-containing materials currently located at any
Facility as shown in the Phase I Environmental Reports prepared by Bhate
Engineering for Lender in connection with the Loan, so long as all of the
foregoing are used, stored, handled, transported and disposed of in compliance
with Hazardous Materials Laws.
6.3 PREVENTIVE ACTION. Borrower shall take all appropriate steps
(including the inclusion of appropriate provisions in any Leases approved by
Lender which are executed after the date of this Agreement) to prevent its
employees, agents, contractors, tenants and occupants of the Facility from
causing or permitting any Prohibited Activities and Conditions.
6.4 O & M PROGRAM COMPLIANCE. If an O&M Program has been established
with respect to Hazardous Materials, Borrower shall comply in a timely manner
with, and cause all employees, agents, and contractors of Borrower and any other
persons present on the Property to comply with the O&M Program. All costs of
performance of Borrower's obligations under any O&M Program shall be paid by
Borrower, and Lender's out-of-pocket costs incurred in connection with the
monitoring and review of the O&M Program and Borrower's performance shall be
paid by Borrower upon demand by Lender. Any such out-of-pocket costs of Lender
which Borrower fails to pay promptly shall become an additional part of the Loan
Obligations.
6.5 BORROWER'S ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES. Borrower
represents and warrants to Lender that, except as previously disclosed by
Borrower to Lender in writing or in the Phase I Environmental Reports prepared
for Lender by Bhate Engineering (the "Environmental Reports"):
a. Borrower has not at any time caused or permitted any Prohibited
Activities and Conditions.
b. No Prohibited Activities and Conditions exist or, to the best
knowledge of Borrower, have existed.
c. The Property and the Improvements do not now contain any
underground storage tanks, and, to the best of Borrower's knowledge after
reasonable and diligent inquiry, the Property and the Improvements have not
contained any underground storage tanks in the past. If there is an underground
storage tank located on the Property or the Improvements which has been
previously disclosed by Borrower to Lender in writing or in the Environmental
Reports, that tank complies with all requirements of Hazardous Materials Laws,
except as disclosed in the Environmental Reports.
d. Borrower has complied with all Hazardous Materials Laws,
including all requirements for notification regarding releases of Hazardous
Materials. Without limiting the generality of the foregoing, Borrower has
obtained all Environmental Permits required for the operation of the Property
and the Improvements in accordance with Hazardous Materials Laws now in effect
and all such Environmental Permits are in full force and effect. No event has
occurred with
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respect to the Property and/or Improvements that constitutes, or with the
passing of time or the giving of notice would constitute, noncompliance with the
terms of any Environmental Permit.
e. There are no actions, suits, claims or proceedings pending or,
to the best of Borrower's knowledge after reasonable and diligent inquiry,
threatened that involve the Property and/or the Improvements and allege, arise
out of, or relate to any Prohibited Activity and Condition.
f. Borrower has not received any complaint, order, notice of
violation or other communication from any Governmental Authority with regard to
air emissions, water discharges, noise emissions or Hazardous Materials, or any
other environmental, health or safety matters affecting the Property, the
Improvements or any other property of Borrower that is adjacent to the Property.
The representations and warranties in this Article VI shall be continuing
representations and warranties that shall be deemed to be made by Borrower
throughout the term of the Loan evidenced by the Note, until the Loan
Obligations have been paid in full.
6.6 NOTICE OF CERTAIN EVENTS. Borrower shall promptly notify Lender in
writing of any and all of the following that may occur:
a. Borrower's discovery of any Prohibited Activity and Condition.
b. Borrower's receipt of or knowledge of any complaint, order,
notice of violation or other communication from any Governmental Authority or
other person with regard to present, or future alleged Prohibited Activities and
Conditions or any other environmental, health or safety matters affecting the
Property, the Improvements or any other property of Borrower that is adjacent to
the Property.
c. Any representation or warranty in this Article VI which becomes
untrue at any time after the date of this Agreement.
Any such notice given by Borrower shall not relieve Borrower of, or
result in a waiver of, any obligation under this Agreement, the Note, or any of
the other Loan Documents.
6.7 COSTS OF INSPECTION. Borrower shall pay promptly the costs of any
environmental inspections, tests or audits required by Lender in connection with
any foreclosure or deed in lieu of foreclosure, or, if required by Lender, as a
condition of Lender's consent to any "Transfer" (as defined in the Mortgage), or
required by Lender following a reasonable determination by Lender that
Prohibited Activities and Conditions may exist. Any such costs incurred by
Lender (including the fees and out-of-pocket costs of attorneys and technical
consultants whether incurred in connection with any judicial or administrative
process or otherwise) which Borrower fails to pay promptly shall become an
additional part of the Loan Obligations.
6.8 REMEDIAL WORK. If any investigation, site monitoring, containment,
clean-up, restoration or other remedial work ("Remedial Work") is necessary to
comply with any Hazardous Materials Laws or order of any Governmental Authority
that has or acquires jurisdiction over the Property, the Improvements or the
use, operation or improvement of the Property under any
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Hazardous Materials Laws, Borrower shall, by the earlier of (1) the applicable
deadline required by Hazardous Materials Laws or (2) 30 days after notice from
Lender demanding such action, begin performing the Remedial Work, and thereafter
diligently prosecute it to completion, and shall in any event complete such work
by the time required by applicable Hazardous Materials Laws. If Borrower fails
to begin on a timely basis or diligently prosecute any required Remedial Work,
Lender may, at its option, cause the Remedial Work to be completed, in which
case Borrower shall reimburse Lender on demand for the cost of doing so. Any
reimbursement due from Borrower to Lender shall become part of the Loan
Obligations.
6.9 COOPERATION WITH GOVERNMENTAL AUTHORITIES. Borrower shall cooperate
with any inquiry by any Governmental Authority and shall comply with any
governmental or judicial order which arises from any alleged Prohibited Activity
and Condition.
6.10 INDEMNITY.
a. Borrower shall hold harmless, defend and indemnify (i) Lender,
(ii) any successor owner or holder of the Note, (iii) the officers, directors,
partners, agents, shareholders, employees and trustees of any of the foregoing,
and (iv) the heirs, legal representatives, successors and assigns of each of the
foregoing (together, the "Indemnitees") against all proceedings, claims,
damages, losses, expenses, penalties and costs (whether initiated or sought by
any Governmental Authority or private parties), including fees and out of pocket
expenses of attorneys and expert witnesses, investigatory fees, and remediation
costs, whether incurred in connection with any judicial or administrative
process or otherwise, arising directly or indirectly from any of the following
except to the extent the same relate solely to Hazardous Materials first
introduced to the Property or any part thereof by anyone other than Borrower
following foreclosure of the Mortgage (or the delivery and acceptance of a deed
in lieu of such foreclosure) or the sale or transfer of the Property or part
thereof by Borrower with Lender's consent subject to the Mortgage):
1. Any breach of any representation or warranty of Borrower in
this Article VI.
2. Any failure by Borrower to perform any of its obligations
under this Article VI.
3. The existence or alleged existence of any Prohibited Activity
and Condition.
4. The presence or alleged presence of Hazardous Materials in,
on, or around under the Property, the Improvements or any property of Borrower
that is adjacent to the Property, or
5. Actual or alleged violation of any Hazardous Materials Laws.
b. Counsel selected by Borrower to defend Indemnitees shall be
subject to the approval of those Indemnitees. Notwithstanding anything contained
herein, any Indemnitee may
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<PAGE> 36
elect to defend any claim or legal or administrative proceeding at the
Borrower's expense if such Indemnitee has reason to believe that its interests
are not being adequately represented or diverge from other interests being
represented by such counsel (but Borrower shall be obligated to bear the expense
of at most only one such separate counsel). Nothing contained herein shall
prevent an Indemnitee from employing separate counsel in any such action at any
time and participating in the defense thereof at its own expense.
c. Borrower shall not, without the prior written consent of those
Indemnitees who are named as parties to a claim or legal or administrative
proceeding (a "Claim") settle or compromise the Claim if the settlement (1)
results in the entry of any judgment that does not include as an unconditional
term the delivery by the claimant or plaintiff to Lender of a written release of
those Indemnitees, satisfactory in form and substance to Lender or (2) may
materially and adversely affect any Indemnitee, as determined by such Indemnitee
in its sole discretion.
d. The liability of Borrower to indemnify the Indemnitees shall not
be limited or impaired by any of the following, or by any failure of Borrower or
any Guarantor to receive notice of or consideration for any of the following:
1. Any amendment or modification of any Loan Document.
2. Any extensions of time for performance required by any of the
Loan Documents.
3. The accuracy or inaccuracy of any representations and
warranties made by Borrower under this Agreement or any other Loan Document.
4. The release of Borrower or any other person, by Lender or by
operation of law, from performance of any obligation under any of the Loan
Documents.
5. The release or substitution in whole or in part of any
security for the Loan Obligations.
6. Lender's failure to properly perfect any lien or security
interest given as security for the Loan Obligations.
e. Borrower shall, at its own cost and expense, do all of the
following:
1. Pay or satisfy any judgment or decree that may be entered
against any Indemnitee or Indemnitees in any legal or administrative proceeding
incident to any matters against which Indemnitees are entitled to be indemnified
under this Article VI.
2. Reimburse Indemnitees for any expenses paid or incurred in
connection with any matters against which Indemnitees are entitled to be
indemnified under this Article VI.
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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 Article VI, or in
monitoring and participating in any legal or administrative proceeding.
f. In any circumstances in which the indemnity under this Article
VI applies, Lender may employ its own legal counsel and consultants to
prosecute, defend or negotiate any claim or legal or administrative proceeding
and Lender, with the prior written consent of Borrower (which shall not be
unreasonably withheld, delayed or conditioned) may settle or compromise any
action or legal or administrative proceeding. Borrower shall reimburse Lender
upon demand for all costs and expenses incurred by Lender, including all costs
of settlements entered into in good faith, and the fees and out of pocket
expenses of such attorneys and consultants.
g. The provisions of this Article VI shall be in addition to any
and all other obligations and liabilities that Borrower may have under the
applicable law or under the other Loan Documents, and each Indemnitee shall be
entitled to indemnification under this Article VI without regard to whether
Lender or that Indemnitee has exercised any rights against the Property and/or
the Improvements or any other security, pursued any rights against any
guarantor, or pursued any other rights available under the Loan Documents or
applicable law. If Borrower consists of more than one person or entity, the
obligation of those persons or entities to indemnify the Indemnitees under this
Article VI shall be joint and several. The obligations of Borrower to indemnify
the Indemnitees under this Article VI shall survive any repayment or discharge
of the Loan Obligations, any foreclosure proceeding, any foreclosure sale, any
delivery of any deed in lieu of foreclosure, and any release of record of the
lien of the Mortgage.
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall constitute an "Event of Default" hereunder:
a. The failure by Borrower to pay any installment of principal,
interest, or other payments required under the Note, within five (5) business
days after the same becomes due; or
b. Borrower's violation of any covenant set forth in Article V
hereof; or
c. Borrower's failure to deliver or cause to be delivered the
financial statements and information set forth in Section 4.5 above within the
times required and such failure is not cured within thirty (30) days following
Lender's written notice to Borrower thereof; or
d. The failure of Borrower properly and timely to perform or
observe any covenant or condition set forth in this Agreement (other than those
specified in (a), (b) and (c) of this Section) or any other Loan Documents which
is not cured within any applicable cure period as set
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<PAGE> 38
forth herein or in such other Loan Document, or, if no cure period is specified
therefor, is not cured within thirty (30) days of Lender's notice to Borrower of
such Default; provided, however, that if such default cannot be cured within
such thirty (30) day period, such cure period shall be extended for an
additional sixty (60) days, as long as Borrower is diligently and in good faith
prosecuting said cure to completion.
e. The filing by Borrower or any Guarantor or Manager of a
voluntary petition, or the adjudication of any of the aforesaid Persons, or the
filing by any of the aforesaid Persons of any petition or answer seeking or
acquiescing, in any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief for itself under any present or
future federal, state or other statute, law or regulation relating to
bankruptcy, insolvency or other relief for debtors, or if any of the aforesaid
Persons should seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator for itself or of all or any substantial part of
its property or of any or all of the rents, revenues, issues, earnings, profits
or income thereof, or the mailing of any general assignment for the benefit of
creditors or the admission in writing by any of the aforesaid Persons of its
inability to pay its debts generally as they become due; or
f. The entry by a court of competent jurisdiction of an order,
judgment, or decree approving a petition filed against Borrower or any Guarantor
or Manager which petition seeks any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future federal, state or other statute, law or regulation relating to
bankruptcy, insolvency, or other relief for debtors, which order, judgment or
decree remains unvacated and unstayed for an aggregate of sixty (60) days
(whether or not consecutive) from the date of entry thereof, or the appointment
of any trustee, receiver or liquidator of any of the aforesaid Persons or of all
or any substantial part of its properties or of any or all of the rents,
revenues, issues, earnings, profits or income thereof, which appointment shall
remain unvacated and unstayed for an aggregate of sixty (60) days (whether or
not consecutive); or
g. Unless otherwise permitted hereunder or under any other Loan
Documents, the sale, transfer, lease, assignment, or other disposition,
voluntarily or involuntarily, of the Collateral, or any part thereof, or, except
for Permitted Encumbrances, any further encumbrance of the Collateral, unless
the prior written consent of Lender is obtained; or
h. The failure of Borrower to take the corrective measures required
in this Agreement within the time periods specified following Lender's demand
because a Debt Service Coverage has not been met; or
i. Any certificate, statement, representation, warranty or audit
heretofore or hereafter furnished by or on behalf of Borrower or any Guarantor
or Manager pursuant to or in connection with this Agreement (including, without
limitation, representations and warranties contained herein or in any Loan
Documents) or as an inducement to Lender to make the Loan to Borrower, (i)
proves to have been false in any material respect at the time when the facts
therein set forth were stated or certified, or (ii) proves to have omitted any
substantial contingent or unliquidated liability or claim against Borrower, or
(iii) on the date of execution of this Agreement there shall have been any
material adverse change in any of the facts previously disclosed by any
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<PAGE> 39
such certificate, statement, representation, warranty or audit, which change
shall not have been disclosed to Lender in writing at or prior to the time of
such execution; or
j. The failure of Borrower to correct or cause the Manager to
correct, within the time deadlines set by any applicable Medicaid or licensing
agency, any deficiency which would result in the following actions by such
agency with respect to the Facility:
1. a termination of any Reimbursement Contract or any Permit; or
2. a ban on new admissions generally or on admission of patients
otherwise qualifying for Medicaid coverage; or
k. The Borrower, Manager or any Facility should be assessed fines
or penalties by any state or any Medicaid, health or licensing agency having
jurisdiction over such Persons or Facility in excess of $50,000; or
l. A final judgment shall be rendered by a court of law or equity
against Borrower, or Manager or any Guarantor in excess of $100,000, and the
same shall remain undischarged for a period of thirty (30) days, unless such
judgment is either (i) fully covered by collectible insurance and such insurer
has within such period acknowledged such coverage in writing, or (ii) although
not fully covered by insurance, enforcement of such judgment has been
effectively stayed, such judgment is being contested or appealed by appropriate
proceedings and Borrower or any Guarantor or Manager, as the case may be, has
established reserves adequate for payment in the event such Person is ultimately
unsuccessful in such contest or appeal and evidence thereof is provided to
Lender; or
m. The occurrence of any material adverse change in the financial
condition or prospects of Borrower or any Guarantor or Manager, or the existence
of any other condition which, in Lender's reasonable determination, constitutes
a material impairment of any such Person's ability to operate the Facility or of
such Person's ability to perform their respective obligations under the Loan
Documents, and is not remedied within thirty (30) days after written notice; or
n. The occurrence of any Event of Default under (and as defined in
the loan documents relating to) the Related Loan.
Notwithstanding anything in this Section, all requirements of
notice shall be deemed eliminated if Lender is prevented from declaring an Event
of Default by bankruptcy or other applicable law. The cure period, if any, shall
then run from the occurrence of the event or condition of Default rather than
from the date of notice.
7.2 REMEDIES. Upon the occurrence of any one or more of the foregoing
Events of Default, the Lender may, at its option:
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<PAGE> 40
a. Declare the entire unpaid principal of the Loan Obligations to
be, and the same shall thereupon become, immediately due and payable, without
presentment, protest or further demand or notice of any kind, all of which are
hereby expressly waived.
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 the rights and remedies of setoff and/or banker's lien
against the interest of Borrower in and to every account and other property of
Borrower which is in the possession of the Lender or any person who then owns a
participating interest in the Loan, to the extent of the full amount of the
Loan.
e. Exercise its rights and remedies pursuant to any other Loan
Documents.
ARTICLE VIII
MISCELLANEOUS
8.1 WAIVER. No remedy conferred upon, or reserved to, the Lender in
this Agreement or any of the other Loan Documents is intended to be exclusive of
any other remedy or remedies, and each and every remedy shall be cumulative and
shall be in addition to every other remedy given hereunder or now or hereafter
existing in law or in equity. Exercise of or omission to exercise any right of
the Lender shall not affect any subsequent right of Lender to exercise the same.
No course of dealing between Borrower and Lender or any delay on the Lender's
part in exercising any rights shall operate as a waiver of any of the Lender's
rights. No waiver of any Default under this Agreement or any of the other Loan
Documents shall extend to or shall affect any subsequent or other then existing
Default or shall impair any rights, remedies or powers of Lender.
8.2 COSTS AND EXPENSES. Borrower will bear all taxes, fees and expenses
(including actual and reasonable attorneys' fees and expenses of counsel for
Lender) in connection with the Loan, the Note, the preparation of this Agreement
and the other Loan Documents (including any amendments hereafter made), and in
connection with any modifications thereto and the recording of any of the Loan
Documents. If, at any time, a Default occurs or Lender becomes a party to any
suit or proceeding in order to protect its interests or priority in any
Collateral for any of the Loan Obligations or its rights under this Agreement or
any of the Loan Documents, or if Lender is made a party to any suit or
proceeding by virtue of the Loan, this Agreement or any Collateral and as a
result of any of the foregoing, the Lender employs counsel to advise or provide
other representation
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<PAGE> 41
with respect to this Agreement, or to collect the balance of the Loan
Obligations, or to take any action in or with respect to any suit or proceeding
relating to this Agreement, any of the other Loan Documents, any Collateral,
Borrower, Manager, or any Guarantor or to protect, collect, or liquidate any of
the security for the Loan Obligations, or attempt to enforce any security
interest or lien granted to the Lender by any of the Loan Documents, then in any
such events, all of the actual and reasonable attorney's fees arising from such
services, including attorneys' fees for preparation of litigation and in any
appellate or bankruptcy proceedings, and any expenses, costs and charges
relating thereto shall constitute additional obligations of Borrower to the
Lender payable on demand of the Lender. Without limiting the foregoing, Borrower
has undertaken the obligation for payment of, and shall pay, all recording and
filing fees, revenue or documentary stamps or taxes, intangibles taxes, and
other taxes, expenses and charges payable in connection with this Agreement, any
of the Loan Documents, the Loan Obligations, or the filing of any financing
statements or other instruments required to effectuate the purposes of this
Agreement, and should Borrower fail to do so, Borrower agrees to reimburse
Lender for the amounts paid by Lender, together with penalties or interest, if
any, incurred by Lender as a result of underpayment or nonpayment. Such amounts
shall constitute a portion of the Loan Obligations, shall be secured by the
Mortgage and shall bear interest at the Default Rate from the date advanced
until repaid.
8.3 PERFORMANCE OF LENDER. At its option, upon Borrower's failure to do
so, the Lender may make any payment or do any act on Borrower's behalf that
Borrower or others are inquired to do to remain in compliance with this
Agreement or any of the other Loan Documents, and Borrower agrees to reimburse
the Lender, on demand, for any payment made or expense incurred by Lender
pursuant to the foregoing authorization, including, without limitation,
attorneys' fees, and until so repaid any sums advanced by Lender shall
constitute a portion of the Loan Obligations, shall be secured by the Mortgage
and shall bear interest at the Default Rate from the date advanced until repaid.
8.4 INDEMNIFICATION. Except to the extent caused solely by the gross
negligence or willful misconduct or illegal activity of Lender or its agents,
Borrower shall, at its sole cost and expense, protect, defend, indemnify and
hold harmless the Indemnified Parties from and against any and all claims,
suits, liabilities (including, without limitation, strict liabilities), actions,
proceedings, obligations, debts, damages, losses, costs, expenses, diminutions
in value, fines, penalties, charges, fees, judgments, awards, amounts paid in
settlement, punitive damages, foreseeable and unforeseeable consequential
damages, of whatever kind or nature (including but not limited to reasonable
attorneys' fees and other costs of defense) imposed upon or incurred by or
asserted against Lender by reason of (a) ownership of the Note, the Mortgage,
the Property or any interest therein or receipt of any Rents; (b) any amendment
to, or restructuring of, the Loan Obligations and/or any of the Loan Documents;
(c) any and all lawful action that may be taken by Lender in connection with the
enforcement of the provisions of the Mortgage or the Note or any of the other
Loan Documents, whether or not suit is filed in connection with same, or in
connection with Borrower, any Guarantor and/or any member 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
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<PAGE> 42
any part thereof or on the adjoining sidewalks, curbs, adjacent property or
adjacent parking areas, streets or ways; (f) any failure on the part of
Borrower, or any Guarantor to perform or comply with any of the terms of this
Agreement or any of the other Loan Documents; (g) any claims by any broker,
person or entity claiming to have participated on behalf of Borrower in
arranging the making of the Loan evidenced by the Note; (h) any failure of the
Property to be in compliance with any applicable laws; (i) performance of any
labor or services or the furnishing of any materials or other property with
respect to the Property, the Improvements or any part thereof; (j) the failure
of any person to file timely with the Internal Revenue Service an accurate Form
1099-b, statement for recipients of proceeds from real estate, broker and barter
exchange transactions, which may be required in connection with the Mortgage, or
to supply a copy thereof in a timely fashion to the recipient of the proceeds of
the transaction in connection with which the Loan is made; (k) any
misrepresentation made to Lender in this Agreement or in any of the other Loan
Documents; (l) any tax on the making and/or recording of the Mortgage, the Note
or any of the other Loan Documents; (m) the violation of any requirements of the
Employee Retirement Income Security Act of 1974, as amended; (n) any fines or
penalties assessed or any corrective costs incurred by Lender if the Facility or
any part of the Property is determined to be in violation of any covenants,
restrictions of record, or any applicable laws, ordinances, rules or
regulations; or (o) the enforcement by any of the Indemnified Parties of the
provisions of this Section 8.4. Any amounts payable to Lender by reason of the
application of this Section 8.4 shall become immediately due and payable and
shall constitute a portion of the Loan Obligations, shall be secured by the
Mortgage and shall accrue interest at the Default Rate. The obligations and
liabilities of Borrower under this Section 8.4 shall survive any termination,
satisfaction, assignment, entry of a judgment of foreclosure or exercise of a
power of sale or delivery of a deed in lieu of foreclosure of the Mortgage
except to the extent such obligations and liabilities arise solely out of events
or circumstances first occurring after any termination, satisfaction,
foreclosure, or delivery of a deed in lieu of foreclosure of the Mortgage or the
transfer or sale of the Property by the Borrower with Lender's consent subject
to the Mortgage. For purposes of this Section 8.4, the term "Indemnified
Parties" means Lender and any Person who is or will have been involved in the
origination of the Loan, any Person who is or will have been involved in the
servicing of the Loan, any Person in whose name the encumbrance created by the
Mortgage is or will have been recorded, any Person who may hold or acquire or
will have held a full or partial interest in the Loan (including, without
limitation, any investor in any securities backed in whole or in part by the
Loan) as well as the respective directors, officers, shareholder, partners,
members, employees, agents, servants, representatives, contractors,
subcontractors, affiliates, subsidiaries, participants, successors and assigns
of any and all of the foregoing (including, without limitation, any other Person
who holds or acquires or will have held a participation or other full or partial
interest in the Loan or the Property, whether during the term of the Mortgage or
as a part of or following a foreclosure of the Loan and including, without
limitation, any successors by merger, consolidation or acquisition of all or a
substantial portion of Lender's assets and business).
8.5 HEADINGS. The headings of the Sections of this Agreement are for
convenience of reference only, are not to be considered a part hereof, and shall
not limit or otherwise affect any of the terms hereof.
8.6 SURVIVAL OF COVENANTS. All covenants, agreements, representations
and warranties made herein and in certificates or reports delivered pursuant
hereto shall be deemed to have been
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material and relied on by Lender, notwithstanding any investigation made by or
on behalf of Lender, and shall survive the execution and delivery to Lender of
the Note and this Agreement.
8.7 NOTICES, ETC. Any notice or other communication required or
permitted to be given by this Agreement or the other Loan Documents or by
applicable law shall be in writing and shall be deemed received (a) on the date
delivered, if sent by hand delivery (to the person or department if one is
specified below) with receipt acknowledged by the recipient thereof, (b) three
(3) Business Days following the date deposited in the U.S. mail, certified or
registered, with return receipt requested, or (c) one (1) Business Day following
the date deposited with Federal Express or other national overnight carrier, and
in each case addressed as follows:
If to Borrower:
277 Mallory Station Road
Suite 130
Franklin, Tennessee 37067
with a copy to:
John N. Popham, IV, Esq.
Harwell, Howard, Hyne, Gabbert & Manner, PC
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238-1800
If to Lender:
GMAC Commercial Mortgage Corporation
650 Dresher Road
P.O. Box 1015
Horsham, Pennsylvania 19044-8015
ATTN: Servicing Department
with a copy to:
Kay K. Bains, Esq.
Walston, Wells, Anderson & Bains, LLP
505 20th Street North, Suite 500
Birmingham, Alabama 35203
Either party may change its address to another single address by notice given as
herein provided, except any change of address notice must be actually received
in order to be effective.
8.8 BENEFITS. All of the terms and provisions of this Agreement shall
bind and inure to the benefit of the parties hereto and their respective
successors and assigns. No Person other than
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Borrower or Lender shall be entitled to rely upon this Agreement or be entitled
to the benefits of this Agreement.
8.9 PARTICIPATION. Borrower acknowledges that Lender may, at its
option, sell participation interests in the Loan or to other participating banks
or Lender may (but shall not be obligated to) assign its interest in the Loan to
its affiliates or to other assignees (the "Assignee") to be included as a pool
of properties to be financed in a proposed Real Estate Mortgage Investment
Conduit (REMIC). Borrower agrees with each present and future participant in the
Loan or Assignee of the Loan that if an Event of Default should occur, each
present and future participant or Assignee shall have all of the rights and
remedies of Lender with respect to any deposit due from the Borrower. The
execution by a participant of a participation agreement with Lender, and the
execution by the Borrower of this Agreement, regardless of the order of
execution, shall evidence an agreement between Borrower and said participant in
accordance with the terms of this Section. If the Loan is assigned to the
Assignee, the Assignee will engage an underwriter (the "Underwriter"), who will
be responsible for the due diligence, documentation, preparation and execution
of certain documents required in connection with the offering of interests in
the REMIC. Borrower agrees that Lender may, at its sole option and without
notice to or consent of the Borrower, assign its interest in the Loan to the
Assignee for inclusion in the REMIC and, in such event, Borrower agrees to
provide the Assignee with such information as may be reasonably required by the
Underwriter in connection therewith or by an investor in any securities backed
in whole or in part by the Loan or any rating agency rating such securities.
Borrower irrevocably waives any and all right it may have under applicable law
to prohibit such disclosure, including, but not limited to, any right of privacy
(except as to the rights of any patients or residents of any Facility), and
consents to the disclosure of such information to the Underwriter, to potential
investors in the REMIC, and to such rating agencies.
8.10 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and the
instruments referred to herein supersede and incorporate all representations,
promises, and statements, oral or written, made by Lender in connection with the
Loan. This Agreement may not be varied, altered, or amended except by a written
instrument executed by an authorized officer of the Lender. This Agreement may
be executed in any number of counterparts, each of which, when executed and
delivered, shall be an original, but such counterparts shall together constitute
one and the same instrument.
8.11 LOAN AGREEMENT GOVERNS. The Loan is governed by terms and
provisions set forth in this Loan Agreement and the other Loan Documents and in
the event of any irreconcilable conflict between the terms of the other Loan
Documents and the terms of this Loan Agreement, the terms of this Loan Agreement
shall control; provided, however, that in the event there is any apparent
conflict between any particular term or provision which appears in both this
Loan Agreement and the other Loan Documents, and it is possible and reasonable
for the terms of both this Loan Agreement and the Loan Documents to be performed
or complied with, then, notwithstanding the foregoing, both the terms of this
Loan Agreement and the other Loan Documents shall be performed and complied
with.
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8.12 CONTROLLING LAW. THE PARTIES HERETO AGREE THAT THE VALIDITY,
INTERPRETATION, ENFORCEMENT AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NORTH CAROLINA AND
THE PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE
PERSONAL JURISDICTION IN THE STATE OF NORTH CAROLINA, 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 NORTH
CAROLINA OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION.
8.13 WAIVER OF JURY TRIAL. TO THE EXTENT ENFORCEABLE UNDER APPLICABLE
LAW, BORROWER AND LENDER HEREBY WAIVE ANY RIGHT THAT THEY MAY HAVE TO A TRIAL BY
JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A)
ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE LOAN OR (B) IN ANY
WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF
LENDER AND/OR BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR IN CONNECTION WITH
THIS AGREEMENT OR THE EXERCISE OF EITHER PARTY'S RIGHTS AND REMEDIES UNDER THIS
AGREEMENT OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES
HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING
AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. BORROWER AND LENDER AGREE
THAT EITHER PARTY MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN
EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF EITHER PARTY
HERETO TO IRREVOCABLY WAIVE THEIR RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF
LENDER TO MAKE THE LOAN AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY
DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN
BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION
BY A JUDGE SITTING WITHOUT A JURY.
8.14 INTEREST LIMITATION. Notwithstanding anything to the contrary
contained herein or in the Mortgage or in any other of the Loan Documents, the
effective rate of interest on the obligation evidenced by the Note shall not
exceed the lawful maximum rate of interest permitted to be paid. Without
limiting the generality of the foregoing, in the event that the interest charged
under the Note results in an effective rate of interest higher than that
lawfully permitted to be paid, then such charges shall be reduced by the sum
sufficient to result in an effective rate of interest permitted and any amount
which would exceed the highest lawful rate already received and held by the
Lender shall be applied to a reduction of principal and not to the payment of
interest. Borrower agrees that
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<PAGE> 46
for the purpose of determining highest rate permitted by law, any non-principal
payment (including, without limitation, late fees and other fees) shall be
deemed, to the extent permitted by law, to be an expense, fee or premium rather
than interest. This provision shall control every other provision of the Note
and the other Loan Documents with respect to the changing, collecting and
payment of interest on the indebtedness evidenced by the Note.
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<PAGE> 47
WITNESS: BORROWER:
DIVERSICARE ASSISTED LIVING SERVICES
NC II, LLC, a Delaware limited liability
company
/s/ Brenda Wimsatt
- ------------------------------
By: Diversicare Assisted Living
Services NC, LLC,
a Tennessee limited liability company
Its: Sole Member
/s/ Brenda Wimsatt
- ------------------------------
[Print Name] By: /s/ Charles W. Birkett, M.D.
-----------------------------------
Name: Charles W. Birkett, M.D.
Title: Chief Manager and President
WITNESS: LENDER:
GMAC COMMERCIAL MORTGAGE
CORPORATION, a California
corporation
/s/ Donna C. Phillips
- ------------------------------
By: /s/ Sarah Summer Duggan (Seal)
-----------------------------------
Sarah Sumner Duggan
Senior Vice President
<PAGE> 48
EXHIBIT "A"
[LEGAL DESCRIPTION]
<PAGE> 49
EXHIBIT A
ROCKINGHAM COUNTY
MEASURED LEGAL DESCRIPTION
PROPERTY OF HEALTH CARE INVESTMENTS PARTNERSHIP, KNOWN AND DESIGNATED AS
BRANCHWOOD REST HOME LOCATED IN REIDSVILLE TOWNSHIP, ROCKINGHAM COUNTY, NORTH
CAROLINA.
BEGINNING at an existing iron pipe located in the eastern margin of the 40
foot right-of-way of South Branch Street near the intersection of South Branch
Street and Church Street and in the southern margin of lands of Mattie Ware
Heirs; thence along the southern margin of Mattie Ware Heirs and Ruby A.
Barksdale, S. 86' 25' 29" E. 201.63 feet to an existing iron pipe; thence S.
03' 39' 55" W. 12.76 feet to an existing iron pipe; thence S. 86' 25' 41" E.
96.38 feet to an existing iron pipe located in the western margin of the 30 foot
right-of-way of Pennsylvania Avenue (unopened); thence along the western margin
of Pennsylvania Avenue (unopened), S. 05' 31' 57" W. 163.00 feet to an existing
iron pipe; thence along the line of Park Hills Development (P.B. 3, Page 24), S.
83' 49' 49" E. 433.52 feet to an existing iron pipe located in the western
margin of a creek, and continuing 21.32 feet to a point located in the
centerline of said creek; thence along the centerline of said creek as follows;
S.05' 57' 30" W. 25.12 feet to a point, S. 28' 03' 50" W. 72.19 feet to a point
and S. 62' 21' 40" W. 58.50 feet to a point in the line of Mount Herman
Pentecostal (D.B. 805, Page 1014); thence along the line of Mount Herman
Pentecostal, N. 82' 35' 40" W. 30.00 feet to an existing iron pipe; thence
continuing along the line of Mount Herman Pentecostal and Percy Lawson, N. 82'
35' 40" W. 642.28 feet to an existing iron pipe located in the eastern margin of
the 40 foot right-of-way of South Branch Street; thence along the eastern margin
of the 40 foot right-of-way of South Branch Street, N. 04' 17' 10" E. 273.16
feet to the point and place of BEGINNING, containing 3.10 net acres as per plat
and survey of Irvin A. Staton, R.L.S., dated 2-19-96.
For further reference see Deed Book 879,Page 2243, Rockingham County Registry.
<PAGE> 50
EXHIBIT A
RECORD
LEGAL DESCRIPTION
THAT CERTAIN PROPERTY BEING KNOWN AS CHATHAM CREEK, WAKE COUNTY, NORTH
CAROLINA AND DESCRIBED AS FOLLOWS:
BEGINNING at a concrete monument located in the eastern property line of
Chatham Street at its point of intersection with the northern property line of
Bowling Arms Association (Book 3617, Page 100); thence along and with the
eastern margin of Chatham Street N. 29' 12' 00" E. 618.59 feet to an iron stake
in the western property line of Carr Hills Subdivision in the line of property
of L.A. Taylor (Book of maps 1971, Page 255); thence along and with the western
property line of Carr Hills Subdivision and the Vestry of St. Pauls Episcopal
Church of Cary (Deed Book 2623, Page 15) S. 03' 00' 00" E. 874.40 feet to a
concrete monument in the northern property line of Bowling Arms Association
(Book 3617, Page 100); thence along and with the northern property line of
Bowling Arms Association N. 46' 12' 00" W. 481.46 feet to a concrete monument in
the eastern property line of Chatham Street, the point and place of BEGINNING,
containing 3.3078 acres and comprised of Lot 1 (0.3699 acres) and Lot 2 (2.9379
acres) as per plat and survey of Irvin A. Staton, R.L.S., surveyed 11-14-86 and
updated 11-14-95.
<PAGE> 51
EXHIBIT A
JOHNSTON COUNTY (SMITHFIELD)
MEASURED LEGAL DESCRIPTION
THAT CERTAIN TRACT OR PARCEL OF LAND KNOWN AS CHRISTIAN CARE 1 & 2 IN
SMITHFIELD LOCATED IN SMITHFIELD, JOHNSTON COUNTY, NORTH CAROLINA, AND MORE
PARTICULARLY DESCRIBED AS FOLLOWS:
BEGINNING at an existing iron pipe located in the southeastern margin of
the 60 foot right-of-way of Buffalo Road, N.C. State Road 1003, where it
intersects with the northeastern margin of the 60 foot right-of-way of Hospital
Road, and from said beginning along the southeastern margin of the 60 foot
right-of-way of Buffalo Road N. 45' 43' 00" E. 206.20 feet to a point and
continuing N. 41' 29' 00" E. 300.00 feet to an existing iron pipe in the line of
Jean Capps Sibold (D.B. 498, Pg. 190); thence along a traverse line along the
centerline of Buffalo Creek and along the line of Sibold S. 50' 00' 15"E. 35.50
feet to a point in the bend of Buffalo Creek, thence along the center of Buffalo
Creek S.80' 06' 02"E. 69.49 feet to a point in the bend of Buffalo Creek also a
point in the line of Sibold, thence along the center of Buffalo Creek and with
the line of Sibold S.69' 32' 00" E 299.35 to an existing iron pipe in the center
of Buffalo Creek also being a corner with the Town of Smithfield, thence along
the line of the Town of Smithfield, S46' 45' 00"W. 600.55 to a new iron pipe
located in the northern margin of the 60 foot right-of-way of Hospital Road,
thence along the northern margin of Hospital Road N.60' 41' 00"W. 75.80 feet to
an existing iron pipe, thence N.56' 28' 00"W. 262.65 feet to the point and place
of beginning, containing 4.38 net total acres as per plat and survey of Irvin A.
Staton, P.L.S. dated April 27, 1999. For further reference see Deed Book 1424,
Page 172, Johnston County Registry.
<PAGE> 52
EXHIBIT A
FORSYTH COUNTY
RECORD
Legal Description:
Beginning at an existing iron pin located in the southwestern margin of
Reynolds Park Road near the Intersection of Norvista Road with Reynolds Park
Road, said beginning point being in the line of Faith Baptist Church (DP 656,
page 369), and from said beginning point in the line of Faith Baptist Church S
05' 51' 40"E 391.19 feet to an existing iron pin in the line of Service
Distributing Company, Inc. (DB 1433, page 1010 through 1012), thence along the
line of Service Distributing Company, Inc. S 78' 08' 44" W 153.40 feet to an
existing iron pin thence, continuing S 78' 20' 53"W 225.74 feet to an existing
iron pin located in the southern margin of Reid Street, thence N 16' 55' 43"W
39.19 feet to an existing iron pin, thence along the northern margin of Reid
Street S 78' 48' 53"W 149.89 feet to an existing iron pin in the southeast
corner of lot 25 of the C. C. Reid property (PB 3, page 86A(2)), thence along
the eastern margin of lot 25 (PB 3, page 86A(2)) N11' 48' 10"W 200.00 feet to an
existing iron pin, thence along the northern margin of lots 20 through 25 (PB 3,
page 86A(2)) S 77' 50' 18"W 300.00 feet to an existing iron pin, thence crossing
Cole Road and along the northern margin of lots 15 through 19 (PB 3, page
86A(2)) S77' 33' 11"W 289.09 feet to an existing iron pin, thence along the
northern margin of lots 1 through 14 (PB 3, page 86A(2)) S78' 36' 12"W 712.17
feet to an existing iron pin in the line of Rakib Razzak (DB 1652, page 3597),
thence along the line of Razzak N 04' 44' 01"W 53.76 feet to an existing iron
pin in the line of Winfred J. Hauser (DB 1849, page 3606), thence along the line
of Hauser, Ferebee Ansley (DB 1786, page 3794) and Sean D. Sizemore, et ux (DB
1629, page 3417) N 03' 23' 52"E 344.87 feet to an existing iron pin, thence
continuing along the line of Sizemore N 86' 29' 48"W 276.51 feet to an existing
iron pin located in the eastern margin of Salem Lake Road, thence along the
eastern margin of Salem Lake Roak as follows: N 02' 06' 59"E 188.10 feet to a
point, N 01' 22' 35"E 99.95 feet to a point, N 00' 40'54"E 100.00 feet to a
point, N 02' 17' 16"W 100.00 feet to a point, N 09' 48' 17"W 101.33 feet to a
point and N 13' 19' 45"W 121.09 feet to a point located in the intersection of
the southern margin of Rhue Road, thence along the southern margin of Rhue Road
and the southern margin of lands of Robert L. Sanford (DB 822, page 33 and DB
1244, page 167) S 86' 13' 24"E 788.76 feet to an existing iron pin, thence
continuing along the line of Sanford N 06' 13' 00"E 179.64 feet to an existing
iron pin in the line of Barbara Johnson (DB 1699, page 1224), thence along the
line of Barbara Johnson as follows: N 85' 11' 06"E 131.09 feet to an existing
iron pin and N 42' 30' 54"E 184.85 feet of a point located in the southwest
margin of Reynolds Park Road, thence along the southwest margin of Reynolds Park
Road as follows: S 50' 13' 06"E 196.72 feet to a rebar, S 01' 56' 04"W 21.46
feet to a rebar, S 86' 08' 56"E 28.91 feet to an existing iron pin, S 50' 15'
19"E 364.04 feet to a railroad spike, S 50' 15' 29"E 77.16 feet to a railroad
spike and S 50' 15' 19"E 679.36 feet to the point and place of beginning,
containing 48.494 acres as per plat and survey of Larry L. Callahan Surveying
Co., Inc. dated 11-16-95.
<PAGE> 53
EXHIBIT A
CABARRUS COUNTY
RECORD
LEGAL DESCRIPTION
PROPERTY KNOWN AND DESIGNATED AS KANNAPOLIS VILLAGE LOCATED IN TOWNSHIP NO.
4, CABARRUS COUNTY, NORTH CAROLINA.
BEGINNING at an iron pipe located in the new northern right-of-way line of
Pine Street at its point of intersection with the western property line of the
property described in Deed Book 485, Page 55, Caburrus County Registry (said
property being also described as parcel 6037 on Cabarrus County Tax Map Number
9), thence along and with the new northern right-of-way line of Pine Street
North 78' 30' 00" West 338.57 feet to a stake on the east side of Irish Buffalo
Creek; thence North 31' 28' 00" East 483.07 feet to a stake in a ditch; thence
South 86' 03' 00" East 308.82 feet to a stake; thence South 26' 30' 00" West
512.04 feet to an iron pipe in the new northern right-of-way line of Pine
Street, the point and place of BEGINNING, containing 3.44 acres net, as per plat
and survey of Irvin A. Staton, R.L.S., dated 2-22-96.
<PAGE> 54
EXHIBIT A
HARNETT COUNTY
RECORD LEGAL DESCRIPTION
That certain tract or parcel of land lying and being located in Hectors
Creek Township, Harnett County, North Carolina, adjoining the lands of Jones,
Gardner and Sherman, abutting U S Highway #401 and Rawls Club Road (N C State
Highway #1447), containing 5.00 acres, consisting of six lots or tracts as set
forth in Deed Book 975, page 32 through 35 of the Harnett County Registry and
including all the land listed as a proposed road, which proposed road was
intended to serve two of the said six lots and being further described as
follows:
Beginning at a concrete monument in the east right of way line of U S
Highway #401, a corner with Charles F. Jones (formerly Gardner), and runs thence
with the east line of U S Highway #401 N 15' 47' 00" W 250.00 feet, N 15' 02'
00" W 50.00 feet and N 14' 18' 01" W 27.09 feet to a concrete right-of-way
marker, which marker is located S 25' 55' 59" E 126.50 feet from a gear shaft in
the intersection of the center of Rawls Club Road with the center of U.S.
Highway #401, continuing with the right of way sight distance lines N 36' 38'
18" E 116.55 feet to another concrete right of way marker, thence with the south
line of Rawls Club Road N 83' 41' 23" E 518.11 feet to an iron pipe, thence with
the line of J.F. Sherman and Mary P. Sherman S 05' 34' 38" W 198.63 feet, N 81'
41' 26" E 20.14 feet and S 00' 29' 59" E 200.15 feet, S 81' 56' 40" W 504.20
feet to the point of beginning, the property described herein being shown on a
map by Irvin A Staton, Registered Land Surveyor, entitled "Senters Rest Home",
dated Sept. 24, 1997.
<PAGE> 55
EXHIBIT A
RECORD LEGAL DESCRIPTION
That certain tract or parcel of land lying and being located in Saulston
Township, Wayne County, North Carolina, fronting on U.S. Highway # 13 and
bordering Gene R. Lancaster, being the same land described in deed book 1430,
page 7, of the Wayne County Registry, containing 2.539 acres net and being
further described as follows:
Beginning a point in the south line of U.S. Highway # 13, which point is
located N. 89' 38' 58" E. 692.39 feet from the intersection of the centerlines
of U.S. Highway # 13 and N.C. State Road # 1568, running thence with the south
line of U.S. Highway # 13, N. 87' 35' 00" E. 114.00 feet, N. 89' 05' 00" E.
122.30 feet, S. 85' 41' 00" E. 99.50 feet, S. 82' 22' 00" E. 99.50 feet and S.
79' 14' 15" E. 30.07 feet to a point in a ditch, running thence with the line of
Gene R. Lancaster to the point of beginning as follows, thence along said ditch
S. 10' 53' 00" W. 289.26 feet and N. 78' 10' 00" W. 372.65 feet to an iron pipe,
continuing N. 10' 53' 00" E. 90.00 feet to another ditch, thence along said
ditch N. 78' 10' 00" W. 61.59 feet, thence along a fence N. 00' 25' 11" W.
126.16 feet to the point of beginning, the property described herein being shown
on a map by Irvin A. Staton, Registered Land Surveyor, entitled "Suttons Rest
Home", dated Sept. 24, 1997.
<PAGE> 56
EXHIBIT "B"
LOCATION OF CHIEF EXECUTIVE OFFICES
Principal Place of Business
- ---------------------------
8829 Goodwill Church Road
Kernersville, North Carolina 27285
Chief Executive Office
- ----------------------
277 Mallory Station Road, Suite 130
Franklin, Tennessee 37067
<PAGE> 57
EXHIBIT "C"
OWNERSHIP
Diversicare Assisted Living Services NC, LLC, a Tennessee limited liability
company, is the sole member of Borrower and owns 100% of the membership interest
of Borrower.
<PAGE> 58
EXHIBIT "D"
SUMMARY OF FINANCIAL STATEMENTS
AND CENSUS DATA
Facility Name: _________________________________________________
Report Date: ___________________________________________________
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER 12 MONTH
ENDING ENDING ENDING ENDING
(DATE) (DATE) (DATE) (DATE)
<S> <C> <C> <C> <C>
CENSUS DATA
Total Number
of Beds [UNITS]: _______ _______ _______ _______
Number of Days in
Period: _______ _______ _______ _______
Total Patient Days
Available: _______ _______ _______ _______
Patient Utilization
Days:
Medicaid _______ _______ _______ _______
Private _______ _______ _______ _______
Medicare _______ _______ _______ _______
Other _______ _______ _______ _______
Total Utilization
Days: _______ _______ _______ _______
CASH FLOW ANALYSIS
Total Routine Patient
Revenue: _______ _______ _______ _______
Total Net
Revenues: _______ _______ _______ _______
Total
Expenses: _______ _______ _______ _______
Pre-Tax
Income: _______ _______ _______ _______
</TABLE>
<PAGE> 59
<TABLE>
<S> <C> <C> <C> <C>
ADD BACK
Depreciation and
Amortization: _______ _______ _______ _______
Interest on
Mortgage: _______ _______ _______ _______
Facility Lease
Expense (if
applicable): _______ _______ _______ _______
Management
Fees: _______ _______ _______ _______
Extraordinary
Items: _______ _______ _______ _______
Net Operating
Income: _______ _______ _______ _______
</TABLE>
I hereby certify the above to be true and correct. Dated this ____ day of
________________, 199_.
By: _______________________________
Its: ______________________________
<PAGE> 60
EXHIBIT "E"
COMPLIANCE CERTIFICATE
GMAC Commercial Mortgage Corporation
2200 Woodcrest Place, Suite 305
Birmingham, Alabama 35209
RE: Loan Agreement dated __________, 1999 (together with
amendments, if any, the "Loan Agreement") by and between GMAC
Commercial Mortgage Corporation, as Lender, and Diversicare
Assisted Living Services NC II, LLC, as Borrower
The undersigned officer of the above named Borrower, does hereby certify that
for the quarterly financial period ending ____________________:
1. No Default or Event of Default has occurred or exists except
--------------------.
2. The Debt Service Coverage for each Facility after deduction of Actual
Management Fees for the preceding twelve (12) months (or such lesser period
as shall have elapsed following the closing of the Loan) through the end of
such period was:
Required: 1.0 to 1.0
Actual: _____ to 1.0
The manner of calculation is attached.
3. The Debt Service Coverage for each Facility after deduction of Assumed
Management Fees for the preceding twelve (12) months (or such lesser period
as shall have elapsed following the closing of the Loan) through the end of
such period was:
Required: 1.1 to 1.0
Actual: _____ to 1.0
The manner of calculation is attached.
4. The Debt Service Coverage for the Facilities, combined, after deduction of
Assumed Management Fees for the preceding twelve (12) months (as such
lesser period as shall have elapsed following the closing of the Loan)
through the end of such period was:
Required: 1.25 to 1.0
Actual: _____ to 1.0
<PAGE> 61
The manner of calculation is attached.
5. The fiscal year to date average annual occupancy for the Facilities
combined:
Required: Not less than 80%
Actual: __________
6. The capital expenditures per licensed bed [UNIT] was: [ANNUAL COMPLIANCE
CERTIFICATE ONLY]
Required: $250 per licensed bed [UNIT].
Actual: $______ per licensed bed [UNIT].
Evidence of such capital expenditures is attached.
7. All representations and warranties contained in the Loan Agreement and
other Loan Documents are true and correct in all material respects as
though given on the date hereof, except ___________________________________
____________________________________________________.
8. All information provided herein is true and correct.
9. Capitalized terms not defined herein shall have the meanings given to such
terms in the Loan Agreement.
By:
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
Dated this the _____ day of ________________, ____.
<PAGE> 62
EXHIBIT "F"
LICENSED BEDS FOR EACH
FACILITY
<TABLE>
<CAPTION>
Facility Number of Beds
-------- --------------
<S> <C>
Branchwood Rest Home 43
Chatham Creek 80
Christian Care of Smithfield--I 60
Christian Care of Smithfield--II 79
Christian Care of Winston-Salem 121
Kennapolis Village 60
Senters Rest Home 50
Suttons Rest Home 41
</TABLE>
<PAGE> 63
SCHEDULE 4.22
[REPAIRS]
<PAGE> 1
EXHIBIT 10.5
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is made as of the 4th day of
June, 1999, by and between DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a
Delaware limited liability company (together with its successors and assigns,
the "Borrower"), and GMAC COMMERCIAL MORTGAGE CORPORATION, a California
corporation (together with its successors and assigns, the "Lender").
R E C I T A L S:
1. Borrower has requested that the Lender make a loan to Borrower in
the principal sum of $12,770,000 (the "Loan").
2. Lender has agreed to make the Loan on the terms and conditions
hereinafter set forth.
A G R E E M E N T:
NOW, THEREFORE, it is hereby agreed as follows:
ARTICLE I
DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS.
1.1 As used in this Agreement, the following terms shall have the
following meanings unless the context hereof shall otherwise indicate:
"Accounts" means any rights of Borrower arising from the
operation of the Facilities to payment for goods sold or leased or for services
rendered, not evidenced by an Instrument, including, without limitation, (i) all
accounts arising from the operation of the Facilities, (ii) all moneys and
accounts held by Lender pursuant to Section 4.12 of this Agreement, and (iii)
all rights to payment from 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
Facilities, including rights to payment pursuant to Reimbursement Contracts.
Accounts shall include the proceeds thereof (whether cash or noncash, moveable
or immoveable, tangible or intangible) received from the sale, exchange,
transfer, collection or other disposition or substitution thereof.
"Acquisition Line" means the $40,000,000 non-revolving line of
credit extended by the Lender to Advocat for the sole purpose of acquisitions of
healthcare related facilities, pursuant to a Commitment Letter accepted October
22, 1996.
1
<PAGE> 2
"Actual Management Fees" means actual management fees paid or
incurred in connection with operation of a Facility.
"Advocat" means Advocat, Inc., a Delaware corporation.
"Affiliate" means, with respect to any Person, (i) each Person
that controls, is controlled by or is under common control with such Person,
(ii) each Person that, directly or indirectly, owns or controls, whether
beneficially or as a trustee, guardian or other fiduciary, any of the Stock of
such Person, and (iii) each of such Person's officers, directors, members, joint
venturers and partners.
"Allocated Loan Amount" means, with respect to a Facility, the
portion of the Loan allocated to such Facility, as set forth on Schedule A
attached hereto.
"Assignment of Leases and Rents" means that certain Assignment
of Leases and Rents of even date herewith by and between Lender and Borrower.
"Assignment of Licenses" means that certain Assignment of
Licenses, Permits and Contracts executed by the Borrower in favor of the Lender.
"Assumed Management Fees" means assumed management fees of
five percent (5%) of net patient revenues of a Facility (after Medicaid
contractual adjustments).
"Bridge Loan" means the loan to Diversicare Assisted Living
Services NC, LLC extended by the Working Capital Lender and AmSouth Bank.
"Business Day" means a day on which commercial banks are not
authorized or required by law to close in New York, New York.
"Closing Date" means the date on which all or any part of the
Loan is disbursed by the Lender to or for the benefit of Borrower.
"Collateral" means, collectively, the Property, Improvements,
Equipment, Rents, Accounts, General Intangibles, Instruments, Inventory, Money,
Permits (to the full extent assignable), Reimbursement Contracts, and all
Proceeds, all whether now owned or hereafter acquired, and including
replacements, additions, accessions, substitutions, and products thereof and
thereto, and all other property which is or hereafter may become subject to a
Lien in favor of Lender as security for any of the Loan Obligations.
"Commitment Letter" means the commitment letter issued by
Lender to Borrower dated February 19, 1999.
"Debt Service Coverage" means a ratio in which the first
number is the sum of net pre-tax income of the Borrower from the normal
operations of a Facility as set forth in the quarterly statements provided to
Lender (without deduction for Actual Management Fees paid or incurred),
2
<PAGE> 3
calculated based upon the preceding twelve (12) months (or such lesser period as
shall have elapsed following the closing of the Loan), plus interest expense, to
the extent deducted in determining net income, plus non-cash expenses or
allowances for depreciation and amortization of the Facility for said period,
less either Assumed Management Fees or Actual Management Fees, as applicable,
and the second number is the sum of the scheduled principal amounts due (even if
not paid) on such Facility's Allocated Loan Amount (excluding the amount of any
prepayment made during such period) for the applicable period plus the interest
expense on such Facility's Allocated Loan Amount 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" shall have the meaning given to that term in
the Note.
"Environmental Permit" means any permit, license, or other
authorization issued under any Hazardous Materials Law with respect to any
activities or businesses conducted on or in relation to the Property and/or the
Improvements.
"Environmental Reserve Agreement" means that certain
Environmental Reserve Escrow and Security Agreement of even date herewith
between Lender and Borrower.
"Equipment" means all beds, linen, televisions, carpeting,
telephones, cash registers, computers, lamps, glassware, rehabilitation
equipment, restaurant and kitchen equipment, and other fixtures and equipment
owned by Borrower located on, attached to or used or useful in connection with
any of the Property or the Facilities 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 Facility and not owned by Borrower, the
Equipment shall include the leasehold interest only of Borrower together with
any options to purchase any of said items and any additional or greater rights
with respect to such items which Borrower may hereafter acquire, but the
foregoing shall not be construed to mean that such leasing shall be permitted
hereunder and under the other Loan Documents.
"Event of Default" means any "Event of Default" as defined
in Article VII hereof.
"Extraordinary Income and Extraordinary Expenses" means
material items of a character significantly different from the typical or
customary business activities of Borrower which would not be expected to recur
frequently and which would not be considered as recurring factors in any
evaluation of the ordinary operating processes of Borrower's business, and which
would be treated as extraordinary income or extraordinary expenses under GAAP.
"Exhibit" means an Exhibit to this Agreement, unless the
context refers to another document, and each such Exhibit shall be deemed a part
of this Agreement to the same extent as if it were set forth in its entirety
wherever reference is made thereto.
3
<PAGE> 4
"Facilities" means the six (6) adult care facilities described
on Schedule A attached hereto, as they may now or hereafter exist, together with
any other general or specialized care facilities, if any (including any
Alzheimer's care unit, subacute, and any skilled care facilities), now or
hereafter operated on the Property; each of the Facilities, individually, is
herein called a "Facility".
"GAAP" means, as in effect from time to time, generally
accepted accounting principles consistently applied as promulgated by the
American Institute of Certified Public Accountants.
"General Intangibles" means all intangible personal property
of Borrower arising out of or connected with the Property or the Facilities and
all renewals and replacements thereof and substitutions therefor (other than
Accounts, Rents, Instruments, Inventory, Money, Permits, and Reimbursement
Contracts), including, without limitation, things in action, contract rights and
other rights to payment of money.
"Governmental Authority" means any board, commission,
department or body of any municipal, county, state or federal governmental unit,
or any subdivision of any of them, that has or acquires jurisdiction over the
Property and/or the Improvements or the use, operation or improvement of the
Property.
"Guarantors" mean Advocat, Diversified Management Services
Co., Advocat Finance, Inc., Diversicare Assisted Living Services, Inc.,
Diversicare Assisted Living Services NC, LLC and Diversicare Assisted Living
Services NC II, LLC.
"Guaranty Agreements" means those certain Guaranty Agreements
of even date herewith from Guarantors to Lender.
"Hazardous Materials" means petroleum and petroleum products
and compounds containing them, including gasoline, diesel fuel and oil;
explosives; flammable materials; radioactive materials; polychlorinated
biphenyls ("PCBs") and compounds containing them; lead and lead-based paint;
asbestos or asbestos-containing materials in any form that is or-could become
friable; underground storage tanks, whether empty or containing any substance;
any substance the presence of which on the Property is prohibited by any
federal, state or local authority; any substance that requires special handling;
and any other material or substance now or in the future defined as a "hazardous
substance," "hazardous material," "hazardous waste," "toxic substance," "toxic
pollutant," "contaminant," or "pollutant" within the meaning of any Hazardous
Materials Law.
"Hazardous Materials Laws" means all federal, state, and local
laws, ordinances and regulations and standards, rules, policies and other
governmental requirements, administrative rulings and court judgments and
decrees in effect now or in the future and including all amendments, that relate
to Hazardous Materials and apply to Borrower or to the Property and/or the
Improvements. Hazardous Materials Laws include, but are not limited to, the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et seq., the Toxic Substance
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Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C.
Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, and their state analogs.
"Improvements" means all buildings, structures and
improvements of every nature whatsoever now or hereafter situated on the
Property, including, but not limited to, all gas and electric fixtures,
radiators, heaters, engines and machinery, boilers, ranges, elevators and
motors, plumbing and heating fixtures, carpeting and other floor coverings,
water heaters, awnings and storm sashes, and cleaning apparatus which are or
shall be attached to the Property or said buildings, structures or improvements.
"Indebtedness" means any (i) obligations for borrowed money,
(ii) obligations, payment for which is being deferred by more than thirty (30)
days, representing the deferred purchase price of property other than accounts
payable arising in connection with the purchase of inventory customary in the
trade and in the ordinary course of Borrower's business, (iii) obligations,
whether or not assumed, secured by Liens or payable out of the proceeds or
production from the Accounts and/or property now or hereafter owned or acquired,
and (iv) the amount of any other obligation (including obligations under
financing leases) which would be shown as a liability on a balance sheet
prepared in accordance with GAAP.
"Instruments" means all instruments, chattel paper, documents
or other writings obtained from or in connection with the operation of the
Property or the Facilities (including, without limitation, all ledger sheets,
computer records and printouts, data bases, programs, books of account and files
relating thereto).
"Inventory" means all inventories of food, beverages and other
comestibles held by Borrower for sale or use at or from the Property or the
Facilities, and soap, paper supplies, medical supplies, drugs and all other such
goods, wares and merchandise held by Borrower for sale to or for consumption by
guests, patients or residents of the Property or the Facilities and all such
other goods returned to or repossessed by Borrower.
"Lien" means any voluntary or involuntary mortgage, security
deed, deed of trust, lien, pledge, assignment, security interest, title
retention agreement, financing lease, levy, execution, seizure, judgment,
attachment, garnishment, charge, lien or other encumbrance of any kind,
including those contemplated by or permitted in this Agreement and the other
Loan Documents.
"Loan" means the Loan in the principal sum of $12,770,000 made
by Lender to Borrower as of the date hereof.
"Loan Documents" means, collectively, this Agreement, the
Assignment of Leases and Rents, the Note, the Environmental Reserve Agreement,
the Assignment of Licenses, the Guaranty Agreements, the Mortgage, and the
Subordination Agreement, together with any and all other documents executed by
Borrower or others, evidencing, securing or otherwise relating to the Loan.
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"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, together with the Borrower's obligations, as a Guarantor,
for the Related Loan, and all covenants, agreements and other obligations of
Borrower from time to time owing to, or for the benefit of, Lender pursuant to
the Loan Documents.
"Management Agreement" means that certain Management Agreement
dated as of May 26, 1999, by and between Manager and Borrower, obligating the
Manager to operate and manage the Facilities.
"Manager" means Diversicare Management Services Co., a
Tennessee corporation, and any successor manager of the Facilities approved by
Lender in writing.
"Maturity Date" means July 1, 2002.
"Medicaid" means that certain program of medical assistance,
funded jointly by the federal government and the States, for impoverished
individuals who are aged, blind and/or disabled, and/or members of families with
dependent children, which program is more fully described in Title XIX of the
Social Security Act (42 U.S.C. ss.ss. 1396 et seq.) and the regulations
promulgated thereunder.
"Money" means all monies, cash, rights to deposit or savings
accounts or other items of legal tender obtained from or for use in connection
with the operation of the Facility.
"Mortgage" means collectively those certain Deeds of Trust and
Security Agreements, of even date herewith, from the Borrower in favor of or for
the benefit of Lender and covering the Property.
"Note" means the Promissory Note of even date herewith in the
principal amount of the Loan payable by Borrower to the order of Lender.
"O&M Program" means a written program of operations and
maintenance established or approved in writing by Lender relating to any
Hazardous Materials in, on or under the Property or Improvements.
"Overline Facility" means the $10,000,000 temporary working
capital loan extended by the Working Capital Lender to Advocat.
"Permits" means all licenses, permits and certificates used or
necessary in connection with the ownership, operation, use or occupancy of the
Property and/or the Facility, including, without limitation, business licenses,
state health department licenses, food service licenses, licenses to conduct
business, certificates of need and all such other permits, licenses and rights,
obtained from any governmental, quasi-governmental or private person or entity
whatsoever concerning ownership, operation, use or occupancy.
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"Permitted Encumbrances" has the meaning given to that term
in Section 5.2 hereof.
"Person" means any natural person, firm, trust, corporation,
partnership, limited liability company, trust and any other form of legal
entity.
"Proceeds" means all proceeds (including proceeds of insurance
and condemnation) from the sale, exchange, transfer, collection, loss, damage,
disposition, substitution or replacement of any of the Collateral.
"Property" means the tracts of real estate located in North
Carolina, which are more particularly described in Exhibit "A" hereto, upon
which the Facilities are located.
"Reimbursement Contracts" means all third party reimbursement
contracts for the Facility which are now or hereafter in effect with respect to
residents or patients qualifying for coverage under the same, including Medicaid
and private insurance agreements, and any successor program or other similar
reimbursement program and/or private insurance agreements.
"Related Loan" means that certain loan in the principal amount
of $12,480,000 extended by the Lender to Diversicare Assisted Living Services NC
II, LLC, an Affiliate of the Borrower.
"Rents" means all rent and other payments of whatever nature
from time to time payable pursuant to leases of the Property or the Facilities,
or for retail space or other space at the Property (including, without
limitation, rights to payment earned under leases for space in the Improvements
for the operation of ongoing retail businesses such as newsstands, barbershops,
beauty shops, physicians' offices, pharmacies and specialty shops).
Single-Purpose Entity" means a Person which owns no interest
or property other than the Property and the Improvements.
"Stock" means all shares, options, warrants, general or
limited partnership interests, membership interests, participating or other
equivalents (regardless of how designated) in a corporation, limited liability
company, partnership or any equivalent entity, whether voting or nonvoting,
including, without limitation, common stock, preferred stock, or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended).
"Subordination Agreement" means that certain Subordination of
Management Agreement of even date herewith by and among Borrower, Manager, and
Lender.
"Working Capital Lender" means First American National Bank, a
national banking association with a principal place of business in Nashville,
Tennessee.
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"Working Capital Loan" means the $10,000,000 line of credit
extended by the Working Capital Lender to Advocat and certain of the Guarantors,
secured by, among other collateral, a first lien on the Borrower's Accounts.
1.2 Singular terms shall include the plural forms and vice versa, as
applicable, of the terms defined.
1.3 Terms contained in this Agreement shall, unless otherwise defined
herein or unless the context otherwise indicates, have the meanings, if any,
assigned to them by the Uniform Commercial Code in effect in the State of North
Carolina.
1.4 All accounting terms used in this Agreement shall be construed in
accordance with GAAP, except as otherwise specified.
1.5 All references to other documents or instruments shall be deemed to
refer to such documents or instruments as they may hereafter be extended,
renewed, modified, or amended and all replacements and substitutions therefor.
1.6 All references herein to "Medicaid" shall be deemed to include any
successor program thereto.
ARTICLE II
TERMS OF THE LOAN
2.1 THE LOAN. Borrower has agreed to borrow the Loan from Lender, and
Lender has agreed to make the Loan to Borrower, subject to Borrower's compliance
with and observance of the terms, conditions, covenants, and provisions of this
Agreement and the other Loan Documents, and Borrower has made the covenants,
representations, and warranties herein and therein as a material inducement to
Lender to make the Loan.
2.2 SECURITY FOR THE LOAN. The Loan will be evidenced, secured and
guaranteed by the Loan Documents.
2.3 RELEASE OF A FACILITY. So long as no Event of Default has occurred
and is continuing, a Facility may be released from the lien and security
interest of the Mortgage and the other Loan Documents if, after giving effect to
such release, the Facilities remaining subject to the Mortgage and the other
Loan Documents would have a combined Debt Service Coverage equal to the greater
of (a) 1.25 to 1.0 or (b) the Debt Service Coverage for all Facilities
(including the to-be-released Facility) for the testing period immediately
preceding such proposed release. The provisions of this Section 2.3 may be
utilized by the Borrower in the event of a sale or refinancing of a Facility,
and the damage, destruction or condemnation of a Facility.
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ARTICLE III
BORROWER'S REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into this Agreement, and to make the Loan to
Borrower, Borrower represents and warrants to Lender as follows:
3.1 EXISTENCE, POWER AND QUALIFICATION. Borrower is a duly organized
and validly existing limited liability company, organized under the laws of the
State of Delaware, has the power to own its properties and to carry on its
business as is now being conducted, and is duly qualified to do business and is
in good standing in every jurisdiction in which the character of the properties
owned by it or in which the transaction of its business makes its qualification
necessary, specifically including, without limitation, the State of North
Carolina.
3.2 POWER AND AUTHORITY. Borrower has full power and authority to
borrow the indebtedness evidenced by the Note and to incur the Loan Obligations
provided for herein, all of which have been authorized by all proper and
necessary limited liability company action on the part of the Borrower. All
consents, approvals, authorizations, orders or filings of or with any court or
governmental agency or body, if any, required for the execution, delivery and
performance of the Loan Documents by the Borrower have been obtained or made.
3.3 DUE EXECUTION AND ENFORCEMENT. Each of the Loan Documents to which
Borrower is a party constitutes a valid and legally binding obligation of
Borrower, enforceable in accordance with its respective terms (except as such
enforcement may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium, or other laws relating to the rights of creditors
generally and by general principles of equity) and does not violate, conflict
with, or constitute any default under any law, government regulation, decree,
judgment, Borrower's articles of organization or operating agreement, or any
other agreement or instrument binding upon Borrower.
3.4 SINGLE PURPOSE ENTITY. Borrower is a Single Purpose Entity.
3.5 PENDING MATTERS.
a. Operations; Financial Condition. No action or investigation is
pending or, to the best of Borrower's knowledge, threatened before or by any
court or administrative agency which might result in any material adverse change
in the financial condition, operations or prospects of Borrower or any lower
reimbursement rate under the Reimbursement Contracts. The Borrower is not in
violation of any agreement, the violation of which might reasonably be expected
to have a material adverse effect on its business or assets, and the Borrower is
not in violation of any order, judgment, or decree of any court, or any material
violation of statute or governmental regulation to which it is subject.
b. Condemnation or Casualty. There are no proceedings pending, or,
to the best of Borrower's knowledge, threatened, to acquire through the exercise
of any power of condemnation, eminent domain or similar proceeding any part of
the Property, the Improvements or any interest
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therein, or to enjoin or similarly prevent or restrict the use of the Property
or the operation of any Facility in any manner. None of the Improvements is
subject to any unrepaired casualty or other damage.
3.6 FINANCIAL STATEMENTS ACCURATE. All financial statements heretofore
or hereafter provided by Borrower are and will be true and complete in all
material respects as of their respective dates and fairly present the respective
financial condition of Borrower, and there are no material liabilities, direct
or indirect, fixed or contingent, as of the respective dates of such statements
which are not reflected therein or in the notes thereto or in a written
certificate delivered with such statements. The financial statements of the
Borrower have been prepared in accordance with GAAP. There has been no material
adverse change in the financial condition, operations, or prospects of Borrower
since the dates of such statements except as fully disclosed in writing with the
delivery of such statements. All financial statements of the operations of each
Facility heretofore or hereafter provided to Lender are and will be true and
complete in all material respects as of their respective dates.
3.7 COMPLIANCE WITH FACILITY LAWS. Each Facility is duly licensed and
is currently operated at the unit and/or bed level shown on Exhibit "F" attached
hereto, under the applicable laws of the state where the Property is located.
Borrower is the lawful owner of all Permits for each Facility, including,
without limitation, the Adult Care Home License issued by the North Carolina
Department of Health and Human Services (the "Adult Care Home License"), which
(a) are in full force and effect, (b) constitute all of the permits, licenses
and certificates required for the use, operation and occupancy thereof, (c) have
not been pledged as collateral for any other loan or Indebtedness, (d) are held
free from restrictions or any encumbrance which would materially adversely
affect the use or operation of any Facility, and (e) are not provisional,
probationary or restricted in any way. The Borrower and Manager as well as the
operation of each Facility are in compliance in all material respects with the
applicable provisions of assisted living facility laws, rules, regulations and
published interpretations to which the Facility is subject. No waivers of any
laws, rules, regulations, or requirements (including, but not limited to,
minimum foot requirements per bed) are required for a Facility to operate at the
current licensed bed or unit capacity. All Reimbursement Contracts, if any, are
in full force and effect with respect to each Facility, and Borrower and Manager
are in good standing with all the respective agencies governing such applicable
licenses, program certification, and Reimbursement Contracts. Borrower and
Manager are current in the payment of all so-called provider specific taxes or
other assessments with respect to such Reimbursement Contracts. Borrower will
maintain or cause Manager to maintain (without allowing to lapse) the Adult Care
Home License, and any required Permits. In the event Lender acquires a Facility
through foreclosure or otherwise, neither Lender nor a subsequent manager, a
subsequent lessee or any subsequent purchaser (through foreclosure or otherwise)
is currently required to obtain a certificate of need prior to applying for and
receiving an Adult Care Home License to operate such Facility and certification
to receive Medicaid payments (and its successor programs) for patients having
coverage thereunder provided that no service or bed or unit complement is
changed.
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3.8 MAINTAIN CAPACITY. Neither Borrower nor the Manager has granted to
any third party the right to reduce the number of licensed beds or units in any
Facility or to apply for approval to transfer the right to any and all of the
licensed beds or units to any other location.
3.9 COMPLIANCE. Each Facility is in compliance with all requirements
for participation in Medicaid. Each Facility is in conformance in all material
respects with all insurance, reimbursement and cost reporting requirements and
has a current provider agreement which is in full force and effect under
Medicaid.
3.10 THIRD-PARTY PAYORS. There is no threatened or pending revocation,
suspension, termination, probation, restriction, limitation, or nonrenewal
affecting Borrower, Manager or any Facility or any participation or provider
agreement with any third-party payor, including Medicaid, Blue Cross and/or Blue
Shield, and any other private commercial insurance managed care and employee
assistance program (such programs, the "Third-Party Payors' Programs") to which
Borrower or Manager presently is subject. All Medicaid and private insurance
cost reports and financial reports submitted by Borrower or Manager are and will
be materially accurate and complete and have not been and will not be misleading
in any material respects. No cost reports for the Facility remain "open" or
unsettled, except as otherwise disclosed.
3.11 GOVERNMENTAL PROCEEDINGS AND NOTICES. Neither Borrower nor Manager
nor any Facility is currently the subject of any proceeding by any governmental
agency, and no notice of any violation has been received by Borrower or Manager
from a governmental agency that would, directly or indirectly, or with the
passage of time:
a. Have a material adverse impact on Borrower's ability to accept
and/or retain residents or result in the imposition of a fine, a sanction, a
lower rate certification or a lower reimbursement rate for services rendered to
eligible residents;
b. Modify, limit or annul or result in the transfer, suspension,
revocation or imposition of probationary use of any of the Permits; or
c. Affect Borrower's continued participation in the Medicaid
programs or any other Third-Party Payors' Programs, or any successor programs
thereto, at current rate certifications.
3.12 PHYSICAL PLANT STANDARDS. To the best of Borrower's knowledge,
each Facility and the use thereof complies in all material respects with all
applicable local, state and federal building codes, fire codes, zoning codes,
use restrictions, health care, health care facility and other similar regulatory
requirements (the "Physical Plant Standards"), and no waivers of Physical Plant
Standards exist at any Facility.
3.13 PLEDGES OF RECEIVABLES. Except to secure the Working Capital Loan,
the Borrower has not pledged its Accounts as collateral security for any loan or
indebtedness other than the Loan.
3.14 PAYMENT OF TAXES AND PROPERTY IMPOSITIONS. Borrower has filed all
federal, state, and local tax returns which it is required to file and has paid,
or made adequate provision for the
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payment of, all taxes which are shown pursuant to such returns or are required
to be shown thereon or to assessments received by Borrower, including, without
limitation, provider taxes. All such returns are complete and accurate in all
respects. Borrower has paid or made adequate provision for the payment of all
applicable water and sewer charges, government assessments, ground rents (if
applicable) and Taxes (as defined in the Mortgage) with respect to the Property.
3.15 TITLE TO COLLATERAL. Borrower has good and marketable title to all
of the Collateral, subject to no lien, mortgage, pledge, encroachment, zoning
violation, or encumbrance, except Permitted Encumbrances, which Permitted
Encumbrances do not and will not materially interfere with the security intended
to be provided by the Mortgage or the current use or operation of the Property
and or the current ability of the Facility to generate net operating income
sufficient to service the Loan. Except as shown on the current as-built survey
for each Facility provided by Borrower to Lender in connection with the Loan,
all Improvements situated on the Property are situated wholly within the
boundaries of the Property.
3.16 PRIORITY OF MORTGAGE. The Mortgage constitutes a valid first lien
against the real and personal property described therein, prior to all other
liens or encumbrances, including those which may hereafter accrue, excepting
only "Permitted Encumbrances", which Permitted Encumbrances do not and will not
materially and adversely affect (a) the ability of the Borrower to pay in full
the principal of and interest on the Note when due, (b) the security (and its
value) intended to be provided by the Mortgage or (c) the current use of the
Property and the Improvements.
3.17 LOCATION OF CHIEF EXECUTIVE OFFICES. The location of Borrower's
principal place of business and chief executive office is set forth on Exhibit
"B" hereto.
3.18 DISCLOSURE. All information furnished or to be furnished by
Borrower to Lender in connection with the Loan or any of the Loan Documents, is,
or will be at the time the same is furnished, accurate and correct in all
material respects and complete insofar as completeness may be necessary to
provide Lender with true and accurate knowledge of the subject matter.
3.19 TRADE NAMES. Neither Borrower nor any Facility has changed its
name, been known by any other name, or been a party to a merger, reorganization
or similar transaction within the last five (5) years.
3.20 ERISA. Borrower is in compliance with all applicable provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
3.21 OWNERSHIP. The ownership interests of the Persons comprising the
Borrower and each of the respective interests in the Borrower are correctly and
accurately set forth on Exhibit "C" hereto.
3.22 COMPLIANCE WITH APPLICABLE LAWS. Each Facility and its operations
and the Property comply in all material respects with all covenants and
restrictions of record and applicable laws, ordinances, rules and regulations,
including, without limitation, the Americans with Disabilities Act (to the
extent required) and the regulations thereunder, and all laws, ordinances,
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rules and regulations relating to zoning, setback requirements and building
codes and there are no waivers of any building codes currently in existence for
any Facility.
3.23 SOLVENCY. Borrower is solvent for purposes of 11 U.S.C. ss.548,
and the borrowing of the Loan will not render Borrower insolvent for purposes of
11 U.S.C. ss.548.
3.24 OTHER INDEBTEDNESS. Borrower has no outstanding Indebtedness,
secured or unsecured, direct or contingent (including any guaranties), other
than (a) the Loan, (b) the Related Loan, (c) the Working Capital Loan, (d) the
Overline Facility and (e) indebtedness which represents trade payables or
accrued expenses incurred in the ordinary course of business of owning and
operating the Property; no other debt will be secured (senior, subordinate or
pari passu) by the Property.
3.25 OTHER OBLIGATIONS. Except as disclosed in Section 3.24, Borrower
has no material financial obligation under any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which Borrower is a
party or by which Borrower or the Property is otherwise bound, other than
obligations incurred in the ordinary course of the operation of the Property and
other than obligations under the Mortgage and the other Loan Documents.
3.26 FRAUDULENT CONVEYANCES. Borrower (1) has not entered into this
Agreement or any of the other Loan Documents with the actual intent to hinder,
delay, or defraud any creditor and (2) has received reasonably equivalent value
in exchange for its obligations under the Loan Documents. Giving effect to the
transactions contemplated by the Loan Documents, to the best of Borrower's
knowledge, the fair saleable value of Borrower's assets exceeds and will,
immediately following the execution and delivery of the Loan Documents, be
greater than Borrower's probable liabilities, including the maximum amount of
its contingent liabilities or its debts as such debts become absolute and
mature. Borrower's assets do not and, immediately following the execution and
delivery of the Loan Documents will not, constitute unreasonably small capital
to carry out its business as conducted or as proposed to be conducted. Borrower
does not intend to, and does not believe that it will, incur debts and
liabilities (including, without limitation, contingent liabilities and other
commitments) beyond its ability to pay such debts as they mature (taking into
account the timing and amounts to be payable on or in respect of obligations of
Borrower).
3.27 MANAGEMENT AGREEMENT. The Management Agreement is in full force
and effect and there are no defaults (either monetary or nonmonetary) by the
Manager thereunder.
3.28 REPRESENTATIONS AND WARRANTIES. Borrower agrees that its
representations and warranties and covenants contained herein are true and
correct as of the date hereof and shall survive closing of the Loan.
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ARTICLE IV
AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees with and covenants unto the Lender that until the Loan
Obligations have been paid in full, Borrower shall:
4.1 PAYMENT OF LOAN/PERFORMANCE OF LOAN OBLIGATIONS. Duly and
punctually pay or cause to be paid the principal and interest of the Note in
accordance with its terms and duly and punctually pay and perform or cause to be
paid or performed all Loan Obligations hereunder and under the other Loan
Documents.
4.2 MAINTENANCE OF EXISTENCE. Maintain its existence as a Delaware
limited liability company, and, in each jurisdiction in which the character of
the property owned by it or in which the transaction of its business makes
qualification necessary, maintain good standing.
4.3 ACCRUAL AND PAYMENT OF TAXES. During each fiscal year, make
accurate provision for the payment of all current tax liabilities of all kinds
(including, without limitation, federal and state income taxes, franchise taxes,
payroll taxes, provider taxes (to the extent necessary to participate in and
receive maximum funding pursuant to Reimbursement Contracts) and Taxes (as
defined in the Mortgage)), all required withholding of income taxes of
employees, all required old age and unemployment contributions, and all required
payments to employee benefit plans, and pay the same when they become due.
4.4 INSURANCE. Maintain the following insurance coverages with respect
to the Property and each Facility:
a. Insurance against loss or damage by fire, casualty and other
hazards as now are or subsequently may be covered by a "special risk" policy or
a policy covering "special" causes of loss, with such endorsements as Lender may
from time to time reasonably require and which are customarily required by
institutional lenders of similar properties similarly situated, including,
without limitation, building ordinance law, lightning, windstorm, civil
commotion, hail, riot, strike, water damage, sprinkler leakage, collapse,
malicious mischief, explosion, smoke, aircraft, vehicles, vandalism, falling
objects and weight of snow, ice or sleet, and covering the Facility in an amount
equal to 100% of the full insurable replacement value of the Facility (exclusive
of footings and foundations below the lowest basement floor) without deduction
for depreciation. The determination of the replacement cost amount shall be
adjusted annually to comply with the requirements of the insurer issuing the
coverage or, at Lender's election, by reference to such indexes, appraisals or
information as Lender determines in its reasonable discretion, and, unless the
insurance required by this paragraph shall be effected by blanket and/or
umbrella policies in accordance with the requirements of this Agreement, the
policy shall include inflation guard coverage that ensures that the policy
limits will be increased over time to reflect the effect of inflation. Each
policy shall, subject to Lender's approval, contain (i) a replacement cost
endorsement, without deduction for depreciation, (ii) either an agreed amount
endorsement or a waiver of any co-insurance provisions, and (iii) an ordinance
or law coverage or enforcement endorsement if the Improvements or the use
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of the Property constitutes any legal nonconforming structures or uses, and
shall provide for deductibles in such amounts as Lender may permit in its sole
discretion.
b. Commercial general liability insurance under a policy containing
"Comprehensive General Liability Form" of coverage (or a comparably worded form
of coverage) and the "Broad Form CGL" endorsement (or a policy which otherwise
incorporates the language of such endorsement), providing coverage on an
occurrence (not "claims made") basis, which policy shall include, without
limitation, coverage against claims for personal injury, bodily injury, death
and property damage liability with respect to the Facility and the operations
related thereto, whether on or off the Property, and the following coverages:
Employee as Additional Insured, Product Liability/Completed Operations; Broad
Form Contractual Liability, Independent Contractor, Personal Injury and
Advertising Injury Protection, Medical Payment (with a minimum limit of $5,000
per person), Broad Form Cross Suits Liability Endorsement, where applicable,
hired and non-owned automobile coverage (including rented and leased vehicles),
and, if any alcoholic beverages shall be sold, manufactured or distributed in
the Facility, liquor liability coverage, all of which shall be in such amounts
as Lender may from time to time reasonably require, but not less than One
Million Dollars ($1,000,000) per occurrence, Two Million Dollars ($2,000,000) in
the aggregate and with umbrella coverage not less than Three Million Dollars
($3,000,000). If such policy shall cover more than one property, such limits
shall apply on a "per location" basis. If any health club facilities or swimming
pools are located at a Facility, the foregoing amounts shall be increased to
Three Million Dollars ($3,000,000), Six Million Dollars ($6,000,000) and Fifteen
Million Dollars ($15,000,000), respectively. Such liability policy shall delete
the contractual exclusion under the personal injury coverage, if possible, and
if available, shall include the following endorsements: Notice of Accident,
Knowledge of Occurrence, and Unintentional Error and Omission.
c. Professional liability insurance coverage in an amount equal to
not less than One Million Dollars ($1,000,000) per occurrence and Three Million
Dollars ($3,000,000) in the aggregate and insuring Borrower for acts occurring
prior to the date of the Loan.
d. Business interruption insurance, which may be in the form of
Blanket Earnings and Extra Expense coverage (i) covering the same perils of loss
as are required to be covered by the property insurance required under Section
4.4(a) above, (ii) in an amount equal to the projected annual net income from
the Facility plus carrying costs and extraordinary expenses of the Property for
a period of twelve (12) months, based upon Borrower's reasonable estimate
thereof as approved by Lender, (iii) including either an agreed amount
endorsement or a waiver of any co-insurance provisions, so as to prevent
Borrower, Lender and any other insured thereunder from being a co-insurer, and
(iv) providing that any covered loss thereunder shall be payable to Lender.
e. During the period of any new construction on the Property,
a so-called "Builder's All-Risk Completed Value" or "Course of Construction"
insurance policy in non-reporting form for any improvements under construction,
including, without limitation, for demolition and increased cost of construction
or renovation, in an amount equal to 100% of the estimated replacement cost
value on the date of completion, including "soft cost" coverage, and Workers'
Compensation Insurance covering all persons engaged in such construction, in an
amount at least equal to the minimum required by law. In addition, each
contractor and subcontractor shall be
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required to provide Lender with a certificate of insurance for (i) workers'
compensation insurance covering all persons engaged by such contractor or
subcontractor in such construction in an amount at least equal to the minimum
required by law, and (ii) general liability insurance showing minimum limits of
at least $5,000,000, including coverage for products and completed operations.
Each contractor and subcontractor also shall cover Borrower and Lender as an
additional insured under such liability policy and shall indemnify and hold
Borrower and Lender harmless from and against any and all claims, damages,
liabilities, costs and expenses arising out of, relating to or otherwise in
connection with its performance of such construction.
f. If a Facility contains steam boilers, steam pipes, steam
engines, steam turbines or other high pressure vessels, insurance covering the
major components of the central heating, air conditioning and ventilating
systems, boilers, other pressure vessels, high pressure piping and machinery,
elevators and escalators, if any, and other similar equipment installed in the
Improvements, in an amount equal to one hundred percent (100%) of the full
replacement cost of the Facility, which policies shall insure against physical
damage to and loss of occupancy and use of the Improvements arising out of an
accident or breakdown covered thereunder.
g. Flood insurance with a deductible not to exceed Three Thousand
Dollars ($3,000), or such greater amount as may be satisfactory to Lender in its
sole discretion, and in an amount equal to the full insurable value of the
Facility or the maximum amount available, whichever is less, from the "flood
pool", if the Facility is located in an area designated by the Secretary of
Housing and Urban Development or the Federal Emergency Management Agency as
having special flood hazards.
h. Workers' compensation insurance or other similar insurance
which may be required by governmental authorities or applicable legal
requirements in an amount at least equal to the minimum required by law, and
employer's liability insurance with a limit of Five Hundred Thousand Dollars
($500,000) per accident and per disease per employee, and Five Hundred Thousand
Dollars ($500,000) in the aggregate for disease arising in connection with the
operation of the Property.
i. Such other insurance coverages, in such amounts, and such other
forms and endorsements, as may from time to time be required by Lender and which
are customarily required by institutional lenders to similar properties,
similarly situated, including, without limitation, coverages against other
insurable hazards (including, by way of example only, earthquake, sinkhole and
mine subsidence), which at the time are commonly insured against and generally
available.
All insurance required under this Section 4.4 shall have a term of
not less than one year and shall be in the form and amount and with deductibles
as, from time to time, shall be reasonably acceptable to Lender, under valid and
enforceable policies issued by financially responsible insurers either licensed
to transact business in the State where the Facility is located, or obtained
through a duly authorized surplus lines insurance agent or otherwise in
conformity with the laws of such State, with (a) a rating of not less than the
third (3rd) highest rating category by either Standard & Poor's Ratings Group,
Duff & Phelps Credit Rating Co., Moody's Investors Service, Inc., Fitch
Investors Service, Inc. or any successors thereto, or (b) an A:V rating in
Best's Key Rating
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<PAGE> 17
Guide; provided, however, that if the initial principal balance of the Loan is
greater than Seven Million Five Hundred Thousand Dollars ($7,500,000.00), such
insurer must, in lieu of such Best's rating, have a long term senior debt rating
of at least "A" by Standard & Poor's Ratings Group. On the date hereof, the
Borrower's professional liability insurance carrier does not meet the above
requirements, and the Borrower acknowledges that it shall have one hundred
twenty (120) days from the date hereof to provide either a carrier meeting such
requirements or a "cut-through" endorsement satisfactory in all respects to the
Lender. Originals or certified copies of all insurance policies shall be
delivered to and held by Lender. All such policies shall name Lender as an
additional insured, shall provide for loss payable solely to Lender and shall
contain: (i) standard "non-contributory mortgagee" endorsement or its equivalent
relating, inter alia, to recovery by Lender notwithstanding the negligent or
willful acts or omissions of Borrower and notwithstanding (a) occupancy or use
of the Facility for purposes more hazardous than those permitted by the terms of
such policy, (b) any foreclosure or other action taken by Lender pursuant to the
Mortgage upon the occurrence of an Event of Default, or (c) any change in title
or ownership of the Facility; and (ii) a provision that such policies shall not
be canceled or amended, including, without limitation, any amendment reducing
the scope or limits of coverage, or failed to be renewed, without at least
thirty (30) days prior written notice to Lender in each instance. With respect
to insurance policies which require payment of premiums annually, not less than
thirty (30) days prior to the expiration dates of the insurance policies
obtained pursuant to this Agreement, Borrower shall pay such amount, except to
the extent Lender is escrowing sums therefor pursuant to the Loan Documents. Not
less than thirty (30) days prior to the expiration dates of the insurance
policies obtained pursuant to this Agreement, originals or certified copies of
renewals of such policies (or certificates evidencing such renewals) bearing
notations evidencing the payment of premiums or accompanied by other evidence
satisfactory to Lender of such payment, which premiums shall not be paid by
Borrower through or by any financing arrangement, shall be delivered by Borrower
to Lender. Borrower shall not carry separate insurance, concurrent in kind or
form or contributing in the event of loss, with any insurance required under
this Section 4.4. If the limits of any policy required hereunder are reduced or
eliminated due to a covered loss, Borrower shall pay the additional premium, if
any, in order to have the original limits of insurance reinstated, or Borrower
shall purchase new insurance in the same type and amount that existed
immediately prior to the loss.
If Borrower fails to maintain and deliver to Lender the
original policies or certificates of insurance required by this Agreement,
Lender may, at its option, procure such insurance and Borrower shall pay or, as
the case may be, reimburse Lender for, all premiums thereon promptly, upon
demand by Lender, with interest thereon at the Default Rate from the date paid
by Lender to the date of repayment and such sum shall constitute a part of the
Loan Obligations.
The insurance required by this Agreement may, at the option of
Borrower, be effected by blanket and/or umbrella policies issued to Borrower or
to an Affiliate of Borrower covering the Facility and the properties of such
Affiliate; provided that, in each case, the policies otherwise comply with the
provisions of this Agreement and allocate to the Facility, from time to time,
the coverage specified by this Agreement, without possibility of reduction or
coinsurance by reason of, or damage to, any other property (real or personal)
named therein. If the insurance required by this Agreement shall be effected by
any such blanket or umbrella policies, Borrower shall furnish to
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<PAGE> 18
Lender original policies or certified copies thereof, with schedules attached
thereto showing the amount of the insurance provided under such policies which
is applicable to the Facility.
Neither Lender nor its agents or employees shall be liable for
any loss or damage insured by the insurance policies required to be maintained
under this Agreement; it being understood that (i) Borrower shall look solely to
its insurance company for the recovery of such loss or damage, (ii) such
insurance company shall have no rights of subrogation against Lender, its agents
or employees, and (iii) Borrower shall use its best efforts to procure from such
insurance company a waiver of subrogation rights against Lender. If, however,
such insurance policies do not provide for a waiver of subrogation rights
against Lender (whether because such a waiver is unavailable or otherwise), then
Borrower hereby agrees, to the extent permitted by law and to the extent not
prohibited by such insurance policies, to waive its rights of recovery, if any,
against Lender, its agents and employees, whether resulting from any damage to
the Facility, any liability claim in connection with the Facility or otherwise.
If any such insurance policy shall prohibit Borrower from waiving such claims,
then Borrower must obtain from such insurance company a waiver of subrogation
rights against Lender.
If loss or damage to a Facility is equal to or less than
$25,000 and there shall exist no Default or Event of Default at the time, the
insurance proceeds shall be made available to the Borrower for the sole purpose
of the repair and restoration of the Facility, to the same quality and condition
as existed prior to such loss or damage.
If the loss or damage insured by the casualty insurance
policies required to be maintained under this Agreement exceeds $25,000, Lender
may make the net proceeds of insurance or condemnation (after payment of
Lender's reasonable costs and expenses) available to Borrower for Borrower's
repair, restoration and replacement of the Improvements, Equipment and Inventory
damaged or taken on the following terms and subject to Borrower's satisfaction
of the following conditions:
a. The aggregate amount of all such proceeds shall not exceed
the aggregate amount of all such Loan Obligations.
b. At the time of such loss or damage and at all times
thereafter while Lender is holding any portion of such proceeds, there shall
exist no Default or Event of Default;
c. The Improvements, Equipment, and Inventory for which loss
or damage has resulted shall be capable of being restored to its preexisting
condition and utility in all material respects with a value equal to or greater
than that which existed prior to such loss or damage and such restoration shall
be capable of being completed prior to the earlier to occur of (i) the
expiration of business interruption insurance as determined by an independent
inspector or (ii) the Maturity Date;
d. Within thirty (30) days from the date of such loss or
damage Borrower shall have given Lender a written notice electing to have the
proceeds applied for such purpose;
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e. Within sixty (60) days following the date of notice under
the preceding subparagraph (c) and prior to any proceeds being disbursed to
Borrower, Borrower shall have provided to Lender all of the following:
(i) complete plans and specifications for restoration,
repair and replacement of the Improvements, Equipment,
and Inventory damaged to the condition, utility and
value required by (b) above,
(ii) if loss or damage exceeds $100,000, fixed-price or
guaranteed maximum cost bonded construction contracts
for completion of the repair and restoration work in
accordance with such plans and specifications,
(iii) builder's risk insurance for the full cost of
construction with Lender named under a standard
mortgagee loss-payable clause,
(iv) such additional funds as in Lender's reasonable
opinion are necessary to complete such repair,
restoration and replacement, and
(v) copies of all permits and licenses necessary to
complete the work in accordance with the plans and
specifications;
f. Lender may, at Borrower's expense, retain an independent
inspector to review and approve plans and specifications and completed
construction and to approve all requests for disbursement, which approvals shall
be conditions precedent to release of proceeds as work progresses;
g. No portion of such proceeds shall be made available by
Lender for architectural reviews or for any other purposes which are not
directly attributable to the cost of repairing, restoring or replacing the
Improvements, Equipment and Inventory for which a loss or damage has occurred
unless the same are covered by such insurance;
h. Borrower shall diligently pursue such work and shall
complete such work prior to the earlier to occur of the expiration of business
interruption insurance or the Maturity Date;
i. The damaged Facility continues to achieve the Debt Service
Coverage requirements set forth in Section 4.12 below;
j. Each disbursement by Lender of such proceeds and deposits
shall be funded subject to conditions and in accordance with disbursement
procedures which a commercial construction lender would typically establish in
the exercise of sound banking practices and shall be made only upon receipt of
disbursement requests on an AIA G702/703 form (or similar form approved by
Lender) signed and certified by Borrower and, if required by the Lender, its
architect and general contractor with appropriate invoices and lien waivers as
required by Lender;
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<PAGE> 20
k. Lender shall have a first lien security interest in all
building materials and completed repair and restoration work and in all fixtures
and equipment acquired with such proceeds, and Borrower shall execute and
deliver such mortgages, deeds of trust, security agreements, financing
statements and other instruments as Lender shall request to create, evidence, or
perfect such lien and security interest; and
l. In the event and to the extent such proceeds are not
required or used for the repair, restoration and replacement of the
Improvements, Equipment and Inventory for which a loss or damage has occurred,
or in the event Borrower fails to timely make the election to have insurance
proceeds applied to the restoration of the Improvements, Equipment, or
Inventory, or, having made such election, fails to timely comply with the terms
and conditions set forth herein, or, if the conditions set forth herein for such
application are otherwise not satisfied, then Lender shall be entitled without
notice to or consent from Borrower to apply such proceeds, or the balance
thereof, at Lender's option either (i) to the full or partial payment or
prepayment of the Loan Obligations (without premium) in the manner aforesaid, or
(ii) to the repair, restoration and/or replacement of all or any part of such
Improvements, Equipment and Inventory for which a loss or damage has occurred.
Borrower appoints Lender as Borrower's attorney-in-fact to
cause the issuance of or an endorsement of any insurance policy to bring
Borrower into compliance herewith and, as limited above, at Lender's sole
option, to make any claim for, receive payment for, and execute and endorse any
documents, checks or other instruments in payment for loss, theft, or damage
covered under any such insurance policy; however, in no event will Lender be
liable for failure to collect any amounts payable under any insurance policy.
4.5 FINANCIAL AND OTHER INFORMATION. Provide Lender, or cause the
Manager or Guarantors to provide to Lender, at its address set forth in Section
8.7 and at GMAC Commercial Mortgage Corporation, 2200 Woodcrest Place, Suite
305, Birmingham, Alabama 35209, the following financial statements and
information on a continuing basis during the term of the Loan:
a. Within one hundred twenty (120) days after the end of each
fiscal year of Advocat, audited financial statements of Advocat 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 Advocat to be true
and correct.
b. Within one hundred twenty (120) days after the end of each
fiscal year of the Borrower, unaudited and consolidating financial statements of
the Borrower prepared by a nationally recognized accounting firm or independent
certified public accountant acceptable to Lender, which statements shall be
prepared in accordance with GAAP, and shall include a balance sheet and a
statement of income and expenses for the year then ended, and, shall be
certified as true and correct in all material respects by a financial officer of
the Borrower.
c. Within forty-five (45) days after the end of each fiscal
quarter of each Facility and Borrower, unaudited financial statements of the
operations of such Facility and Borrower
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<PAGE> 21
prepared in accordance with GAAP, which statements shall include a balance sheet
and statement of income and expenses for the quarter then ended, and shall be
certified as true and correct in all material respects by a financial officer of
Borrower to be true and correct.
d. Within forty-five (45) days after the end of each fiscal
quarter of Advocat, unaudited financial statements of Advocat, prepared in
accordance with GAAP, which shall include a balance sheet and statement of
income and expenses for the quarter then ended, and shall be certified as true
and correct in all material respects by a financial officer of Advocat to be
true and correct.
e. Within forty-five (45) days of the end of each calendar
quarter, a statement of the number of bed days available and the actual patient
days incurred for the quarter, together with quarterly census information of
each Facility as of the end of such quarter in sufficient detail to show
patient-mix (i.e., private, Medicaid) 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 Facility shall be
accompanied by the Summary of Financial Statements and Census Data attached
hereto as Exhibit "D".
f. Upon request by Lender, as soon as available, but in no
event more than thirty (30) days after the filing deadline, as may be extended
from time to time, copies of all federal, state and local tax returns of
Borrower and federal income tax returns for each Guarantor, together with all
supporting documentation and required schedules.
g. Within twenty (20) days of filing or receipt, all Medicaid
cost reports and any amendments thereto filed with respect to each Facility, and
all responses, audit reports, or other inquiries with respect to such cost
reports.
h. Within twenty (20) days of receipt, a copy of the Medicaid
Rate Calculation Worksheet (or the equivalent thereof) issued by the appropriate
Medicaid Agency for the Facility.
i. Within six (6) business days of receipt, any and all
notices (regardless of form) from any and all licensing and/or certifying
agencies that any Facility license and/or the Medicaid certification of a
Facility is being downgraded to a substandard category, revoked, or suspended or
that any such action is pending or being considered.
j. Upon Lender's request, evidence of payment by Borrower of
any applicable provider bed taxes or similar taxes.
k. Within one hundred twenty (120) days of the Borrower's
fiscal year end, and more frequently if reasonably requested by Lender, an aged
accounts receivable report of the Facility in sufficient detail to show amounts
due from each class of patient-mix (i.e., private and Medicaid) by the account
age classifications of 30 days, 60 days, 90 days, 120 days, and over 120 days.
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l. Within ten (10) business days of receipt, copies of all
licensure and certification survey reports and statements of deficiencies (with,
if determined at the time, plans of correction attached thereto or as soon
thereafter as reasonably possible).
m. Within forty-five (45) days of the end of each calendar
quarter, a certificate of the chief financial officer of the Borrower 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 be audited and prepared by a nationally
recognized accounting firm or independent certified public accountant acceptable
to Lender if (i) an Event of Default exists, (ii) if required by internal policy
or by any investor in any securities backed in whole or in part by the Loan or
any rating agency rating such securities, or (iii) if Lender has reasonable
grounds to believe that the unaudited financial statements do not accurately
represent the financial condition of the Borrower.
The Lender further reserves the right to require such other
financial information of Borrower, any Guarantor, Manager and/or any Facility,
in such form and at such other times (including monthly or more frequently, but
not more frequently than reasonable) as Lender shall reasonably 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.
4.6 COMPLIANCE CERTIFICATE. (a) At the time of furnishing the
quarterly operating statements required under the foregoing Section, furnish to
Lender a compliance certificate in the form attached hereto as Exhibit "E"
executed by the chief financial officer, of the Borrower; and
(b) Upon Lender's written request, furnish Lender with a
certificate stating that Borrower has complied with and is in compliance with
all terms, covenants and conditions of the Loan Documents to which Borrower is a
party and that there exists no Default or Event of Default or, if such is not
the case, that one or more specified events have occurred, and that the
representations and warranties contained herein are true and correct with the
same effect as though made on the date of such certificate.
4.7 BOOKS AND RECORDS. Keep and maintain at all times at
Kernersville, North Carolina, and upon Lender's request shall make available at
each Facility, complete and accurate books of account and records (including
copies of supporting bills and invoices) adequate to reflect correctly the
results of the operation of each Facility, and copies of all written contracts,
leases (if any), and other instruments which affect the Property, which books,
records, contracts, leases (if any) and other instruments shall be subject to
examination and inspection at any reasonable time by Lender (upon reasonable
advance notice, which for such purposes only may be given orally, except in the
case of an emergency or following an Event of Default, in which case no advance
notice shall be required) provided, however, that if an Event of Default has
occurred and is continuing, Borrower shall deliver to Lender upon written demand
all books, records, contracts, leases (if any) and other instruments relating to
a Facility or its operation and Borrower authorizes Lender to obtain a credit
report on Borrower at any time.
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4.8 PAYMENT OF INDEBTEDNESS. Duly and punctually pay or cause to be
paid all other Indebtedness now owing or hereafter incurred by Borrower in
accordance with the terms of such Indebtedness, except such Indebtedness owing
to those other than Lender which is being contested in good faith and with
respect to which any execution against properties of Borrower has been
effectively stayed and for which reserves and collateral for the payment and
security thereof have been established as determined by Lender in its sole
discretion.
4.9 RECORDS OF ACCOUNTS. Maintain all records, including records
pertaining to the Accounts of Borrower, at the chief executive office of
Borrower as set forth in this Agreement.
4.10 CONDUCT OF BUSINESS. Conduct, or cause the Manager to conduct,
the operation of each Facility at all times in a manner consistent with the
level of operation of such Facility as of the date hereof, including without
limitation, the following:
(i) to maintain the standard of care for the residents of
the Facility at all times at a level necessary to
ensure quality care for the residents of the Facility
in accordance with customary and prudent industry
standards;
(ii) to operate the Facility in a prudent manner and in
compliance with applicable laws and regulations
relating thereto and cause all Permits, Reimbursement
Contracts, and any other agreements necessary for the
use and operation of the Facility or as may be
necessary for participation in the Medicaid or other
applicable reimbursement programs to remain in effect
without reduction in the number of licensed beds or
units authorized for use in the Medicaid or other
applicable reimbursement programs;
(iii) to maintain sufficient Inventory and Equipment of
types and quantities at the Facility to enable Borrower
adequately to perform operations of the Facility;
(iv) to keep all Improvements and Equipment located on or
used or useful in connection with the Facility in good
repair, working order and condition, reasonable wear
and tear excepted, and from time to time make all
needed and proper repairs, renewals, replacements,
additions, and improvements thereto to keep the same in
good operating condition;
(v) to maintain sufficient cash in the operating accounts
of the Facility in order to satisfy the working capital
needs of the Facility; and
(vi) to keep all required Permits current and in full force
and effect.
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4.11 PERIODIC SURVEYS. Furnish or cause Manager to furnish to
Lender within six (6) business days of receipt a copy of any 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 any Facility to a substandard category, and within the time period
required by the particular agency for furnishing a plan of correction also
furnish or cause to be furnished to Lender a copy of the plan of correction
generated from such survey or report for the Facility, and correct or cause to
be corrected any deficiency, the curing of which is a condition of continued
licensure or for full participation in Medicaid or other reimbursement program
pursuant to any Reimbursement Contract for existing patients or for new patients
to be admitted with Medicaid coverage, by the date required for cure by such
agency (plus extensions granted by such agency).
4.12 DEBT SERVICE COVERAGE REQUIREMENTS.
a. Achieve (commencing with the closing of the Loan), and,
within forty-five (45) days after the end of each fiscal quarter of Borrower,
provide evidence satisfactory to the Lender of the achievement of, the following
Debt Service Coverage ratios:
(i) a Debt Service Coverage for each Facility,
individually, after deduction of Actual Management
Fees, of not less than 1.0 to 1.0, to be tested
quarterly based on the operation of the individual
Facility for the prior twelve (12) months;
(ii) a Debt Service Coverage for each Facility,
individually, after deduction of Assumed Management
Fees, of not less than 1.10 to 1.0, to be tested
quarterly based on the operation of the individual
Facility for the prior twelve (12) months ; and
(iii) a Debt Service Coverage for the Facilities, combined,
after deduction of Assumed Management Fees, of not less
than 1.25 to 1.0, to be tested quarterly based on the
combined operations of the Facilities for the prior
twelve (12) months.
b. If Borrower fails to achieve or provide evidence of
achievement of the Debt Service Coverage, upon fifteen (15) days written notice
to Borrower, Borrower will deposit with Lender additional cash or other liquid
collateral in an amount which, when added to the first number of the Debt
Service Coverage calculation, would have resulted in the noncomplying Debt
Service Coverage requirement having been satisfied. If such failure continues
for two (2) consecutive quarters, upon fifteen (15) days written notice to
Borrower, Borrower will deposit with Lender additional cash or other liquid
collateral (with credit for amounts currently being held by Lender pursuant to
the foregoing sentence), in an amount which, if the same had been applied on the
first day of the prior twelve (12) month period to reduce the outstanding
principal indebtedness of the Loan Obligations, would have resulted in the
noncomplying Debt Service Coverage requirement having been satisfied, Borrower
agrees promptly to provide such additional cash or other liquid collateral,
which shall be held for an additional two (2) consecutive quarters. Such
additional Collateral will be held by the Lender in a standard custodial
account, and shall constitute additional
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<PAGE> 25
collateral for the Loan Obligations and an "Account" as defined in this
Agreement, and, upon the occurrence of an Event of Default, may be applied by
the Lender, in such order and manner as the Lender may elect, to the reduction
of the Loan Obligations. Borrower shall not be entitled to any interest earned
on such additional Collateral. Provided that there is no outstanding Default or
Event of Default, such additional Collateral which has not been applied to the
Loan Obligations will be released by the Lender at such time as Borrower
provides the Lender with evidence that the required Debt Service Coverage
requirements outlined above have been achieved and maintained (without regard to
any cash deposited pursuant to this Section 4.12) as of the end of each of two
(2) consecutive quarters. Notwithstanding the foregoing, Lender will agree to
forbear from requiring Borrower to post such cash or additional collateral if
any one Facility fails to meet the required individual Debt Service Coverage as
long as (i) there is no other outstanding Event of Default and (ii) the Debt
Service Coverage on a combined basis for all Facilities is at least 1.4 to 1.0.
However, Lender shall have the right to terminate its forbearance and to require
that the Borrower post such additional collateral if said Facility fails to meet
its required individual Debt Service Coverage ratios for more than four (4)
consecutive quarters.
4.13 OCCUPANCY. Maintain or cause to be maintained an average
annual occupancy for the Facilities, combined, of eighty percent (80%) or
higher, based on the number of licensed beds or units shown on Exhibit "F".
4.14 CAPITAL EXPENDITURES. Maintain each Facility in good condition
and make minimum capital expenditures for each Facility in each fiscal year in
the amount of $250 per licensed bed or unit (which capital expenditures may
include those necessary for ordinary repairs and routine maintenance), and,
within forty-five (45) days of the end of such fiscal year, provide evidence
thereof satisfactory to Lender. In the event that Borrower shall fail to do so,
Borrower shall, upon Lender's written request, immediately establish and
maintain a capital expenditures reserve fund with Lender equal to the difference
between the required amount per licensed bed or unit and the amount per licensed
bed or unit actually spent by the Borrower. Borrower grants 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 monthly upon Lender's
receipt of satisfactory evidence that Borrower has made the required capital
expenditures. Upon Borrower's failure to adequately maintain any Facility in
good condition, ordinary and reasonable wear and tear excepted, Lender may, but
shall not be obligated to, make such capital expenditures and may apply the
moneys in the capital expenditures reserve fund for such purpose. To the extent
there are insufficient moneys in the capital expenditures reserve fund for such
purposes, all funds advanced by Lender to make such capital expenditures shall
constitute a portion of the Loan Obligations, shall be secured by the Mortgage
and shall accrue interest at the Default Rate until paid. Upon an Event of
Default, Lender may apply any moneys in the capital expenditures reserve fund to
the Loan Obligations, in such order and manner as Lender may elect. For any
partial fiscal year during which the Loan is outstanding, the required
expenditure amount shall be prorated by multiplying the total of the required
amount per licensed bed or unit by a fraction, the numerator of which is the
number of days during such year for which all or part of the Loan is outstanding
and the denominator of which is the number of days in such year.
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<PAGE> 26
4.15 MANAGEMENT AGREEMENT. Maintain the Management Agreement in
full force and effect and timely perform all of Borrower's obligations
thereunder and enforce performance of all obligations of the Manager thereunder
and not permit the termination, amendment or assignment of the Management
Agreement unless the prior written consent of Lender is first obtained, which
consent shall not be unreasonably withheld. Borrower will enter and cause the
Manager to enter into the Subordination Agreement. Borrower will not enter into
any other management agreement without Lender's prior written consent, which
consent shall not be unreasonably withheld.
4.16 UPDATED APPRAISALS. For so long as the Loan remains
outstanding, if any Event of Default shall occur hereunder, or if, in Lender's
reasonable business judgment, a material depreciation in the value of the
Property shall have occurred, then in any such event, Lender may cause the
Property to be appraised by an appraiser selected by Lender, and in accordance
with Lender's appraisal guidelines and procedures then in effect, and Borrower
agrees to cooperate in all respects with such appraisals and furnish to the
appraisers all requested information regarding the Property and the Facilities.
Borrower agrees to pay all reasonable costs incurred by Lender in connection
with such appraisal which costs shall be secured by the Mortgage and shall
accrue interest at the Default Rate until paid.
4.17 COMPLY WITH COVENANTS AND LAWS. Comply, in all material
respects, with all applicable covenants and restrictions of record and all laws,
ordinances, rules and regulations and keep the Facilities and the Property in
compliance with all applicable laws, ordinances, rules and regulations,
including, without limitation, the Americans with Disabilities Act and
regulations promulgated thereunder, and laws, ordinances, rules and regulations
relating to zoning, health, building codes, setback requirements, Medicaid laws
and keep the Permits for the Facilities in full force and effect.
4.18 TAXES AND OTHER CHARGES. Subject to Borrower's right to
contest the same as set forth in Section 9(c) of the Mortgage, pay all taxes,
assessments, charges, claims for labor, supplies, rent, and other obligations
which, if unpaid, might give rise to a Lien against property of Borrower, except
Liens to the extent permitted by this Agreement.
4.19 COMMITMENT LETTER. Provide all items and pay all amounts
required by the Commitment Letter. If any term of the Commitment Letter shall
conflict with the terms of this Agreement, this Agreement shall govern and
control. As to any matter contained in the Commitment Letter, and as to which no
mention is made in this Agreement or the other Loan Documents, the Commitment
Letter shall continue to be in effect and shall survive the execution of this
Agreement and all other Loan Documents.
4.20 NOTICE OF FEES OR PENALTIES. Immediately notify Lender, upon
Borrower's knowledge thereof, of the assessment by any state or any Medicaid,
health or licensing agency of any fines or penalties against Borrower, Manager
or any Facility.
4.21 INTENTIONALLY DELETED.
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4.22 CAPITAL IMPROVEMENTS AND REPAIRS. Commence immediately and
complete within 180 days from the date hereof the repairs listed on Schedule
4.22 attached hereto.
4.23 LOAN CLOSING CERTIFICATION. Immediately notify Lender, in
writing, in the event any representation, warranty or covenant contained herein
or in that certain Loan Closing Certification, executed by Borrower for the
benefit of Lender of even date herewith, becomes untrue or there shall have been
any material adverse change in any such representation, warranty or covenant.
4.24 ADVOCAT FINANCIAL COVENANTS. Borrower, and Advocat, by the
execution and delivery of its Guaranty Agreement, agree to cause compliance with
the following:
a. Advocat shall maintain a current ratio of not less
than 1.25 to 1.00 at all times.
For purposes of calculating the "current ratio", the
following debt will be excluded from current maturities of long term debt:
(i) the principal balance outstanding under the
Acquisition Line;
(ii) the principal balance outstanding under the
Working Capital Loan or the Overline
Facility; and
(iii) the outstanding principal balance on the
Bridge Loan, which remains outstanding
following the closing of the Loan and the
Related Loan.
Current maturities of long term debt shall include an
assumed amortization of five percent (5%) of the principal outstanding balance
under the Acquisition Line.
b. Advocat shall maintain a ratio of "Adjusted Funded
Debt" (defined below) to "EBITDAR" (defined below) of not more than 8.0 to 1.0
through December 30, 1999, and 7.5 to 1.0 on December 31, 1999, and thereafter.
For purposes of this Section 4.24, "Adjusted Funded
Debt" means the sum of (i) "Funded Debt" (defined below) plus (ii) the product
of (A) 8 multiplied by (B) lease expense for the preceding four (4) quarters.
For purposes hereof, EBITDAR shall mean the sum of earnings before interest,
taxes, depreciation, amortization and rent/lease expense (excluding accounts
receivable of Texas Diversicare Limited Partnership), calculated for the
immediately preceding twelve (12) month period. In addition, for purposes of
calculating EBITDAR, EBITDAR will include non-recurring charges as quantified in
the December 31, 1998 audited statement of operations and defined in Note 16 of
the December 31, 1998 audit report. EBITDAR will also add back the non-recurring
charge of $433,440 taken in the first quarter of fiscal year 1999 relating to an
accounting change (SOP 98-5).
For purposes of this Section 4.24, "Funded Debt"
means all indebtedness for money borrowed, deferred purchase money obligations
(other than accounts payable arising in the
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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 the Borrower, or supported by a letter of credit issued for the
account of the Borrower. Funded Debt shall also include the redemption amount
with respect to any stock of the Borrower required to be redeemed within the
twelve months following the date of determination.
c. Advocat shall maintain a minimum fixed charge
coverage ratio of not less than 1.0 to 1.0 through December 31, 1999, and 1.05
to 1.0 at all times thereafter (measured quarterly on a rolling four (4) quarter
basis). The fixed charge coverage ratio shall mean EBITDAR divided by the sum of
current maturities of long-term debt plus interest expenses plus lease expenses.
Current maturities will include five percent (5%) of the then outstanding
principal balance under the Acquisition Line. Current maturities shall exclude:
(i) the principal balance outstanding under the
Acquisition Line;
(ii) the principal balance outstanding under the
Working Capital Loan or the Overline
Facility; and
(iii) the outstanding principal balance on the
Bridge Loan, which remains outstanding
following the closing of the Loan and the
Related Loan.
d. Advocat shall maintain a minimum "Tangible Net Worth"
(defined below) of $24,000,000 as of the date hereof. Such minimum Tangible Net
Worth shall increase (but shall not decrease) on a quarterly basis by a minimum
of 75% of Advocat's calendar quarterly net income (but not loss) beginning with
the fiscal quarter ended June 30, 1999 plus 100% of additions to capital.
e. Advocat shall provide to the Lender a certificate no
later than 45 days after the end of each fiscal quarter, certifying compliance
with the covenants in this Section 4.24.
ARTICLE V
NEGATIVE COVENANTS OF BORROWER
Until the Loan Obligations have been paid in full, Borrower shall not:
5.1 ASSIGNMENT OF LICENSES AND PERMITS. Assign or transfer any of its
interest in the Permits, or Reimbursement Contracts (including rights to payment
thereunder) pertaining to any Facility, or assign, transfer, or remove or permit
any other person to assign, transfer, or remove any records pertaining to a
Facility including, without limitation, patient records, medical and clinical
records (except for removal of such patient records as directed by the residents
owning such records or by governmental or judicial direction or order), without
Lender's prior written consent, which consent may be granted or refused in
Lender's sole discretion.
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5.2 NO LIENS; EXCEPTIONS. Create, incur, assume or suffer to exist
any Lien upon or with respect to any Facility or any of its properties, rights,
income or other assets relating thereto, including, without limitation, the
Collateral, whether now owned or hereafter acquired, other than the following
permitted Liens ("Permitted Encumbrances"):
a. Liens at any time existing in favor of the Lender;
b. Liens which are permitted under the terms of the Lender's
title insurance policies insuring the Mortgage;
c. Inchoate Liens arising by operation of law for the purchase
of labor, services, materials, equipment or supplies, provided payment shall not
be delinquent and, if such Lien is a lien upon any of the Property or
Improvements, such Lien must be fully disclosed to Lender and bonded off and
removed from the Property and Improvements within thirty (30) days of its
creation in a manner satisfactory to Lender;
d. Liens incurred in the ordinary course of business in
connection with workers' compensation, unemployment insurance or other forms of
governmental insurance or benefits, or to secure performance of tenders,
statutory obligations, leases and contracts (other than for money borrowed or
for credit received with respect to property acquired) entered into in the
ordinary course of business as presently conducted or to secure obligations for
surety or appeal bonds;
e. Liens for current year's taxes, assessments or governmental
charges or levies not yet due and payable;
f. Liens on Accounts securing the Working Capital Loan and the
Overline Facility; and
g. Liens securing purchase money loans not to exceed $300,000
in the aggregate at any one time outstanding.
5.3 MERGER, CONSOLIDATION, ETC. Consummate any merger,
consolidation or similar transaction, or sell, assign, lease or otherwise
dispose of (whether in one transaction or in a series of transactions), all or
substantially all of its assets (whether now or hereafter acquired), without the
prior written consent of the Lender, which consent may be granted or refused in
Lender's sole discretion.
5.4 MAINTAIN SINGLE-PURPOSE ENTITY STATUS.
a. Dissolve or terminate or materially amend the terms of its
articles of organization or operating agreement, the terms of which require
Borrower to be a Single-Purpose Entity;
b. enter into any transaction of merger or consolidation, or
liquidate or dissolve itself (or suffer any liquidation or dissolution), or
acquire by purchase or otherwise all or
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substantially all the business or assets of, or any Stock or other evidence of
beneficial ownership of, any Person;
c. guarantee or otherwise become liable on or in connection
with any obligation of any other Person, except for the Related Loan, the
Working Capital Loan and the Overline Facility;
d. at any time own any encumbered asset other than (i) the
Property, and (ii) incidental personal property necessary for the operation of
the Property;
e. at any time be engaged directly or indirectly, in any
business other than the ownership, management and operation of the Property;
f. enter into any contract or agreement with any general
partner, principal, member or Affiliate of Borrower or any Affiliate of any
general partner, principal or member of Borrower (other than the Management
Agreement) except upon terms and conditions that are intrinsically fair and
substantially similar to those that would be available on an arm's-length basis
with third parties other than an Affiliate;
g. incur, create or assume any indebtedness, secured or
unsecured, direct or contingent (including guaranteeing any obligation), other
than (i) the Loan, (ii) the Working Capital Loan, (iii) the Overline Facility,
(iv) the Related Loan, and (v) indebtedness which represents trade payables or
accrued expenses incurred in the ordinary course of business of owning and
operating the Property; no other debt will be secured (senior, subordinate or
pari passu) by the Property;
h. make any loans or advances for borrowed money to any third
party (including any Affiliate);
i. become insolvent or fail to pay its debts from its assets
as the same shall become due;
j. fail to do all things necessary to preserve its existence
as a Single-Purpose Entity, and will not, nor will any member thereof, amend,
modify or otherwise change its articles of organization or operating agreement
in a manner which adversely affects Borrower's existence as a Single-Purpose
Entity;
k. fail to conduct and operate its business as presently
conducted and operated;
l. fail to maintain books and records and bank accounts
separate from those of its Affiliates, including its members, general partners
or shareholders, as applicable;
m. fail to at all times hold itself out to the public as a
legal entity separate and distinct from any other entity (including any
Affiliate thereof, including any member of Borrower or any Affiliate of the
general partner or any member or shareholder of Borrower, as applicable);
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n. fail to maintain adequate capital for the normal
obligations reasonably foreseeable in a business of its size and character and
in light of its contemplated business operations;
o. seek the dissolution or winding up, in whole or in part,
of Borrower;
p. commingle the funds and other assets of Borrower with those
of any general partner, any member, any shareholder, any Affiliate or any other
Person except for daily sweeps to a master account for Borrower and its
Affiliates from which necessary operating funds will be disbursed to a control
account in the name of Borrower;
q. fail to maintain its assets in such a manner that it is not
costly or difficult to segregate, ascertain or identify its individual assets
from those of any Affiliate or any other Person; and
r. hold itself out to be responsible for the debts or
obligations of any other Person, except for the Related Loan, the Working
Capital Loan and the Overline Facility.
5.5 CHANGE OF BUSINESS. Make any material change in the nature of
its business as it is being conducted as of the date hereof.
5.6 CHANGES IN ACCOUNTING. Change its methods of accounting,
unless such change is permitted by GAAP, and provided such change does not have
the effect of curing or preventing what would otherwise be an Event of Default
or Default had such change not taken place.
5.7 ERISA FUNDING AND TERMINATION. Permit (a) the funding
requirements of ERISA with respect to any employee plan to be less than the
minimum required by ERISA at any time, or (b) any employee plan to be subject to
involuntary termination proceedings at any time.
5.8 TRANSACTIONS WITH AFFILIATES. Enter into any transaction
(other than the Management Agreement) with any Affiliate of Borrower other than
in the ordinary course of its business and on fair and reasonable terms no less
favorable to Borrower than those it could obtain in a comparable arms-length
transaction with a Person not an Affiliate.
5.9 TRANSFER OF OWNERSHIP INTERESTS. Except for the pledge of
membership interests to secure the Working Capital Loan, permit a change in the
ownership interests of the Persons comprising the Borrower unless the written
consent of the Lender is first obtained, which consent may be granted or refused
in Lender's sole discretion.
5.10 CHANGE OF USE. Alter or change the use of any Facility or
permit any management agreement other than the Management Agreement or enter
into any operating lease for a Facility, unless Borrower first notifies Lender
and provides Lender a copy of the proposed lease agreement or management
agreement, obtains Lender's written consent thereto, which consent may be
withheld in Lender's sole discretion, and obtains and provides Lender with a
subordination agreement in form
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satisfactory to Lender, as determined by Lender in its sole discretion, from
such manager or lessee subordinating to all rights of Lender.
5.11 PLACE OF BUSINESS. Change its chief executive office or its
principal place of business without first giving Lender at least thirty (30)
days prior written notice thereof and promptly providing Lender such information
and amendatory financing statements as Lender may request in connection
therewith.
5.12 ACQUISITIONS. Directly or indirectly, purchase, lease, manage,
own, operate, or otherwise acquire any property or other assets (or any interest
therein) which are not used in connection with the operation of the Facilities.
ARTICLE VI
ENVIRONMENTAL HAZARDS
6.1 PROHIBITED ACTIVITIES AND CONDITIONS. Except for matters
covered by a written program of operations and maintenance approved in writing
by Lender (an "O&M Program") or matters described in Section 6.2, Borrower shall
not cause or permit any of the following:
a. The presence, use, generation, release, treatment,
processing, storage, handling, or disposal-of any Hazardous Materials in, on or
under the Property or any Improvements;
b. The transportation of any Hazardous Materials to, from, or
across the Property;
c. Any occurrence or condition on the Property or in the
Improvements or any other property of Borrower that is adjacent to the Property,
which occurrence or condition is or may be in violation of Hazardous Materials
Laws; or
d. Any violation of or noncompliance with the terms of any
Environmental Permit with respect to the Property, the Improvements or any
property of Borrower that is adjacent to the Property.
The matters described in clauses (a) through (d) above are referred to
collectively in this Article VI as "Prohibited Activities and Conditions" and
individually as a "Prohibited Activity and Condition."
6.2 EXCLUSIONS. Notwithstanding any other provision of Article
VI to the contrary, "Prohibited Activities and Conditions" shall not include the
safe and lawful use and storage of quantities of (i) pre-packaged supplies,
medical waste, cleaning materials and petroleum products customarily used in the
operation and maintenance of comparable Facilities, (ii) cleaning materials,
personal grooming items and other items sold in pre-packaged containers for
consumer use and used by occupants of the Facility; (iii) petroleum products
used in the operation and maintenance of motor vehicles from time to time
located on the Property's parking areas, or stored in underground
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or above ground storage tanks used in the operation of any Facility; and (iv)
nonfriable asbestos or asbestos-containing materials currently located at any
Facility as shown in the Phase I Environmental Reports prepared by Bhate
Engineering for Lender in connection with the Loan, so long as all of the
foregoing are used, stored, handled, transported and disposed of in compliance
with Hazardous Materials Laws.
6.3 PREVENTIVE ACTION. Borrower shall take all appropriate
steps (including the inclusion of appropriate provisions in any Leases approved
by Lender which are executed after the date of this Agreement) to prevent its
employees, agents, contractors, tenants and occupants of the Facility from
causing or permitting any Prohibited Activities and Conditions.
6.4 O & M PROGRAM COMPLIANCE. If an O&M Program has been
established with respect to Hazardous Materials, Borrower shall comply in a
timely manner with, and cause all employees, agents, and contractors of Borrower
and any other persons present on the Property to comply with the O&M Program.
All costs of performance of Borrower's obligations under any O&M Program shall
be paid by Borrower, and Lender's out-of-pocket costs incurred in connection
with the monitoring and review of the O&M Program and Borrower's performance
shall be paid by Borrower upon demand by Lender. Any such out-of-pocket costs of
Lender which Borrower fails to pay promptly shall become an additional part of
the Loan Obligations.
6.5 BORROWER'S ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Lender that, except as previously disclosed
by Borrower to Lender in writing or in the Phase I Environmental Reports
prepared for Lender by Bhate Engineering (the "Environmental Reports"):
a. Borrower has not at any time caused or permitted any
Prohibited Activities and Conditions.
b. No Prohibited Activities and Conditions exist or, to the
best knowledge of Borrower, have existed.
c. The Property and the Improvements do not now contain any
underground storage tanks, and, to the best of Borrower's knowledge after
reasonable and diligent inquiry, the Property and the Improvements have not
contained any underground storage tanks in the past. If there is an underground
storage tank located on the Property or the Improvements which has been
previously disclosed by Borrower to Lender in writing or in the Environmental
Reports, that tank complies with all requirements of Hazardous Materials Laws,
except as disclosed in the Environmental Reports.
d. Borrower has complied with all Hazardous Materials Laws,
including all requirements for notification regarding releases of Hazardous
Materials. Without limiting the generality of the foregoing, Borrower has
obtained all Environmental Permits required for the operation of the Property
and the Improvements in accordance with Hazardous Materials Laws now in effect
and all such Environmental Permits are in full force and effect. No event has
occurred with
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respect to the Property and/or Improvements that constitutes, or with the
passing of time or the giving of notice would constitute, noncompliance with the
terms of any Environmental Permit.
e. There are no actions, suits, claims or proceedings pending
or, to the best of Borrower's knowledge after reasonable and diligent inquiry,
threatened that involve the Property and/or the Improvements and allege, arise
out of, or relate to any Prohibited Activity and Condition.
f. Borrower has not received any complaint, order, notice of
violation or other communication from any Governmental Authority with regard to
air emissions, water discharges, noise emissions or Hazardous Materials, or any
other environmental, health or safety matters affecting the Property, the
Improvements or any other property of Borrower that is adjacent to the Property.
The representations and warranties in this Article VI shall be continuing
representations and warranties that shall be deemed to be made by Borrower
throughout the term of the Loan evidenced by the Note, until the Loan
Obligations have been paid in full.
6.6 NOTICE OF CERTAIN EVENTS. Borrower shall promptly notify
Lender in writing of any and all of the following that may occur:
a. Borrower's discovery of any Prohibited Activity and
Condition.
b. Borrower's receipt of or knowledge of any complaint, order,
notice of violation or other communication from any Governmental Authority or
other person with regard to present, or future alleged Prohibited Activities and
Conditions or any other environmental, health or safety matters affecting the
Property, the Improvements or any other property of Borrower that is adjacent to
the Property.
c. Any representation or warranty in this Article VI which
becomes untrue at any time after the date of this Agreement.
Any such notice given by Borrower shall not relieve Borrower
of, or result in a waiver of, any obligation under this Agreement, the Note, or
any of the other Loan Documents.
6.7 COSTS OF INSPECTION. Borrower shall pay promptly the costs of
any environmental inspections, tests or audits required by Lender in connection
with any foreclosure or deed in lieu of foreclosure, or, if required by Lender,
as a condition of Lender's consent to any "Transfer" (as defined in the
Mortgage), or required by Lender following a reasonable determination by Lender
that Prohibited Activities and Conditions may exist. Any such costs incurred by
Lender (including the fees and out-of-pocket costs of attorneys and technical
consultants whether incurred in connection with any judicial or administrative
process or otherwise) which Borrower fails to pay promptly shall become an
additional part of the Loan Obligations.
6.8 REMEDIAL WORK. If any investigation, site monitoring,
containment, clean-up, restoration or other remedial work ("Remedial Work") is
necessary to comply with any Hazardous Materials Laws or order of any
Governmental Authority that has or acquires jurisdiction over the Property, the
Improvements or the use, operation or improvement of the Property under any
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Hazardous Materials Laws, Borrower shall, by the earlier of (1) the applicable
deadline required by Hazardous Materials Laws or (2) 30 days after notice from
Lender demanding such action, begin performing the Remedial Work, and thereafter
diligently prosecute it to completion, and shall in any event complete such work
by the time required by applicable Hazardous Materials Laws. If Borrower fails
to begin on a timely basis or diligently prosecute any required Remedial Work,
Lender may, at its option, cause the Remedial Work to be completed, in which
case Borrower shall reimburse Lender on demand for the cost of doing so. Any
reimbursement due from Borrower to Lender shall become part of the Loan
Obligations.
6.9 COOPERATION WITH GOVERNMENTAL AUTHORITIES. Borrower shall
cooperate with any inquiry by any Governmental Authority and shall comply with
any governmental or judicial order which arises from any alleged Prohibited
Activity and Condition.
6.10 INDEMNITY.
a. Borrower shall hold harmless, defend and indemnify (i)
Lender, (ii) any successor owner or holder of the Note, (iii) the officers,
directors, partners, agents, shareholders, employees and trustees of any of the
foregoing, and (iv) the heirs, legal representatives, successors and assigns of
each of the foregoing (together, the "Indemnitees") against all proceedings,
claims, damages, losses, expenses, penalties and costs (whether initiated or
sought by any Governmental Authority or private parties), including fees and out
of pocket expenses of attorneys and expert witnesses, investigatory fees, and
remediation costs, whether incurred in connection with any judicial or
administrative process or otherwise, arising directly or indirectly from any of
the following except to the extent the same relate solely to Hazardous Materials
first introduced to the Property or any part thereof by anyone other than
Borrower following foreclosure of the Mortgage (or the delivery and acceptance
of a deed in lieu of such foreclosure) or the sale or transfer of the Property
or part thereof by Borrower with Lender's consent subject to the Mortgage):
1. Any breach of any representation or warranty of Borrower
in this Article VI.
2. Any failure by Borrower to perform any of its
obligations under this Article VI.
3. The existence or alleged existence of any Prohibited
Activity and Condition.
4. The presence or alleged presence of Hazardous Materials
in, on, or around under the Property, the Improvements or any property of
Borrower that is adjacent to the Property, or
5. Actual or alleged violation of any Hazardous Materials
Laws.
b. Counsel selected by Borrower to defend Indemnitees shall be
subject to the approval of those Indemnitees. Notwithstanding anything contained
herein, any Indemnitee may
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elect to defend any claim or legal or administrative proceeding at the
Borrower's expense if such Indemnitee has reason to believe that its interests
are not being adequately represented or diverge from other interests being
represented by such counsel (but Borrower shall be obligated to bear the expense
of at most only one such separate counsel). Nothing contained herein shall
prevent an Indemnitee from employing separate counsel in any such action at any
time and participating in the defense thereof at its own expense.
c. Borrower shall not, without the prior written consent of
those Indemnitees who are named as parties to a claim or legal or administrative
proceeding (a "Claim") settle or compromise the Claim if the settlement (1)
results in the entry of any judgment that does not include as an unconditional
term the delivery by the claimant or plaintiff to Lender of a written release of
those Indemnitees, satisfactory in form and substance to Lender or (2) may
materially and adversely affect any Indemnitee, as determined by such Indemnitee
in its sole discretion.
d. The liability of Borrower to indemnify the Indemnitees
shall not be limited or impaired by any of the following, or by any failure of
Borrower or any Guarantor to receive notice of or consideration for any of the
following:
1. Any amendment or modification of any Loan Document.
2. Any extensions of time for performance required by any
of the Loan Documents.
3. The accuracy or inaccuracy of any representations and
warranties made by Borrower under this Agreement or any other Loan Document.
4. The release of Borrower or any other person, by Lender
or by operation of law, from performance of any obligation under any of the
Loan Documents.
5. The release or substitution in whole or in part of any
security for the Loan Obligations.
6. Lender's failure to properly perfect any lien or
security interest given as security for the Loan Obligations.
e. Borrower shall, at its own cost and expense, do all of the
following:
1. Pay or satisfy any judgment or decree that may be
entered against any Indemnitee or Indemnitees in any legal or administrative
proceeding incident to any matters against which Indemnitees are entitled to be
indemnified under this Article VI.
2. Reimburse Indemnitees for any expenses paid or incurred
in connection with any matters against which Indemnitees are entitled to be
indemnified under this Article VI.
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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
Article VI, or in monitoring and participating in any legal or administrative
proceeding.
f. In any circumstances in which the indemnity under this
Article VI applies, Lender may employ its own legal counsel and consultants to
prosecute, defend or negotiate any claim or legal or administrative proceeding
and Lender, with the prior written consent of Borrower (which shall not be
unreasonably withheld, delayed or conditioned) may settle or compromise any
action or legal or administrative proceeding. Borrower shall reimburse Lender
upon demand for all costs and expenses incurred by Lender, including all costs
of settlements entered into in good faith, and the fees and out of pocket
expenses of such attorneys and consultants.
g. The provisions of this Article VI shall be in addition to
any and all other obligations and liabilities that Borrower may have under the
applicable law or under the other Loan Documents, and each Indemnitee shall be
entitled to indemnification under this Article VI without regard to whether
Lender or that Indemnitee has exercised any rights against the Property and/or
the Improvements or any other security, pursued any rights against any
guarantor, or pursued any other rights available under the Loan Documents or
applicable law. If Borrower consists of more than one person or entity, the
obligation of those persons or entities to indemnify the Indemnitees under this
Article VI shall be joint and several. The obligations of Borrower to indemnify
the Indemnitees under this Article VI shall survive any repayment or discharge
of the Loan Obligations, any foreclosure proceeding, any foreclosure sale, any
delivery of any deed in lieu of foreclosure, and any release of record of the
lien of the Mortgage.
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall constitute an "Event of Default" hereunder:
a. The failure by Borrower to pay any installment of
principal, interest, or other payments required under the Note, within five (5)
business days after the same becomes due; or
b. Borrower's violation of any covenant set forth in Article V
hereof; or
c. Borrower's failure to deliver or cause to be delivered the
financial statements and information set forth in Section 4.5 above within the
times required and such failure is not cured within thirty (30) days following
Lender's written notice to Borrower thereof; or
d. The failure of Borrower properly and timely to perform or
observe any covenant or condition set forth in this Agreement (other than those
specified in (a), (b) and (c) of this Section) or any other Loan Documents which
is not cured within any applicable cure period as set
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forth herein or in such other Loan Document, or, if no cure period is specified
therefor, is not cured within thirty (30) days of Lender's notice to Borrower of
such Default; provided, however, that if such default cannot be cured within
such thirty (30) day period, such cure period shall be extended for an
additional sixty (60) days, as long as Borrower is diligently and in good faith
prosecuting said cure to completion.
e. The filing by Borrower or any Guarantor or Manager of a
voluntary petition, or the adjudication of any of the aforesaid Persons, or the
filing by any of the aforesaid Persons of any petition or answer seeking or
acquiescing, in any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief for itself under any present or
future federal, state or other statute, law or regulation relating to
bankruptcy, insolvency or other relief for debtors, or if any of the aforesaid
Persons should seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator for itself or of all or any substantial part of
its property or of any or all of the rents, revenues, issues, earnings, profits
or income thereof, or the mailing of any general assignment for the benefit of
creditors or the admission in writing by any of the aforesaid Persons of its
inability to pay its debts generally as they become due; or
f. The entry by a court of competent jurisdiction of an order,
judgment, or decree approving a petition filed against Borrower or any Guarantor
or Manager which petition seeks any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future federal, state or other statute, law or regulation relating to
bankruptcy, insolvency, or other relief for debtors, which order, judgment or
decree remains unvacated and unstayed for an aggregate of sixty (60) days
(whether or not consecutive) from the date of entry thereof, or the appointment
of any trustee, receiver or liquidator of any of the aforesaid Persons or of all
or any substantial part of its properties or of any or all of the rents,
revenues, issues, earnings, profits or income thereof, which appointment shall
remain unvacated and unstayed for an aggregate of sixty (60) days (whether or
not consecutive); or
g. Unless otherwise permitted hereunder or under any other
Loan Documents, the sale, transfer, lease, assignment, or other disposition,
voluntarily or involuntarily, of the Collateral, or any part thereof, or, except
for Permitted Encumbrances, any further encumbrance of the Collateral, unless
the prior written consent of Lender is obtained; or
h. The failure of Borrower to take the corrective measures
required in this Agreement within the time periods specified following Lender's
demand because a Debt Service Coverage has not been met; or
i. Any certificate, statement, representation, warranty or
audit heretofore or hereafter furnished by or on behalf of Borrower or any
Guarantor or Manager pursuant to or in connection with this Agreement
(including, without limitation, representations and warranties contained herein
or in any Loan Documents) or as an inducement to Lender to make the Loan to
Borrower, (i) proves to have been false in any material respect at the time when
the facts therein set forth were stated or certified, or (ii) proves to have
omitted any substantial contingent or unliquidated liability or claim against
Borrower, or (iii) on the date of execution of this Agreement there shall have
been any material adverse change in any of the facts previously disclosed by any
38
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such certificate, statement, representation, warranty or audit, which change
shall not have been disclosed to Lender in writing at or prior to the time of
such execution; or
j. The failure of Borrower to correct or cause the Manager to
correct, within the time deadlines set by any applicable Medicaid or licensing
agency, any deficiency which would result in the following actions by such
agency with respect to the Facility:
1. a termination of any Reimbursement Contract or any
Permit; or
2. a ban on new admissions generally or on admission of
patients otherwise qualifying for Medicaid coverage; or
k. The Borrower, Manager or any Facility should be assessed
fines or penalties by any state or any Medicaid, health or licensing agency
having jurisdiction over such Persons or Facility in excess of $50,000; or
l. A final judgment shall be rendered by a court of law or
equity against Borrower, or Manager or any Guarantor in excess of $100,000, and
the same shall remain undischarged for a period of thirty (30) days, unless such
judgment is either (i) fully covered by collectible insurance and such insurer
has within such period acknowledged such coverage in writing, or (ii) although
not fully covered by insurance, enforcement of such judgment has been
effectively stayed, such judgment is being contested or appealed by appropriate
proceedings and Borrower or any Guarantor or Manager, as the case may be, has
established reserves adequate for payment in the event such Person is ultimately
unsuccessful in such contest or appeal and evidence thereof is provided to
Lender; or
m. The occurrence of any material adverse change in the
financial condition or prospects of Borrower or any Guarantor or Manager, or the
existence of any other condition which, in Lender's reasonable determination,
constitutes a material impairment of any such Person's ability to operate the
Facility or of such Person's ability to perform their respective obligations
under the Loan Documents, and is not remedied within thirty (30) days after
written notice; or
n. The occurrence of any Event of Default under (and as
defined in the loan documents relating to) the Related Loan.
Notwithstanding anything in this Section, all requirements
of notice shall be deemed eliminated if Lender is prevented from declaring an
Event of Default by bankruptcy or other applicable law. The cure period, if any,
shall then run from the occurrence of the event or condition of Default rather
than from the date of notice.
7.2 REMEDIES. Upon the occurrence of any one or more of the foregoing
Events of Default, the Lender may, at its option:
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a. Declare the entire unpaid principal of the Loan Obligations
to be, and the same shall thereupon become, immediately due and payable, without
presentment, protest or further demand or notice of any kind, all of which are
hereby expressly waived.
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 the rights and remedies of setoff and/or banker's
lien against the interest of Borrower in and to every account and other property
of Borrower which is in the possession of the Lender or any person who then owns
a participating interest in the Loan, to the extent of the full amount of the
Loan.
e. Exercise its rights and remedies pursuant to any other Loan
Documents.
ARTICLE VIII
MISCELLANEOUS
8.1 WAIVER. No remedy conferred upon, or reserved to, the Lender
in this Agreement or any of the other Loan Documents is intended to be exclusive
of any other remedy or remedies, and each and every remedy shall be cumulative
and shall be in addition to every other remedy given hereunder or now or
hereafter existing in law or in equity. Exercise of or omission to exercise any
right of the Lender shall not affect any subsequent right of Lender to exercise
the same. No course of dealing between Borrower and Lender or any delay on the
Lender's part in exercising any rights shall operate as a waiver of any of the
Lender's rights. No waiver of any Default under this Agreement or any of the
other Loan Documents shall extend to or shall affect any subsequent or other
then existing Default or shall impair any rights, remedies or powers of Lender.
8.2 COSTS AND EXPENSES. Borrower will bear all taxes, fees and
expenses (including actual and reasonable attorneys' fees and expenses of
counsel for Lender) in connection with the Loan, the Note, the preparation of
this Agreement and the other Loan Documents (including any amendments hereafter
made), and in connection with any modifications thereto and the recording of any
of the Loan Documents. If, at any time, a Default occurs or Lender becomes a
party to any suit or proceeding in order to protect its interests or priority in
any Collateral for any of the Loan Obligations or its rights under this
Agreement or any of the Loan Documents, or if Lender is made a party to any suit
or proceeding by virtue of the Loan, this Agreement or any Collateral and as a
result of any of the foregoing, the Lender employs counsel to advise or provide
other representation
40
<PAGE> 41
with respect to this Agreement, or to collect the balance of the Loan
Obligations, or to take any action in or with respect to any suit or proceeding
relating to this Agreement, any of the other Loan Documents, any Collateral,
Borrower, Manager, or any Guarantor or to protect, collect, or liquidate any of
the security for the Loan Obligations, or attempt to enforce any security
interest or lien granted to the Lender by any of the Loan Documents, then in any
such events, all of the actual and reasonable attorney's fees arising from such
services, including attorneys' fees for preparation of litigation and in any
appellate or bankruptcy proceedings, and any expenses, costs and charges
relating thereto shall constitute additional obligations of Borrower to the
Lender payable on demand of the Lender. Without limiting the foregoing, Borrower
has undertaken the obligation for payment of, and shall pay, all recording and
filing fees, revenue or documentary stamps or taxes, intangibles taxes, and
other taxes, expenses and charges payable in connection with this Agreement, any
of the Loan Documents, the Loan Obligations, or the filing of any financing
statements or other instruments required to effectuate the purposes of this
Agreement, and should Borrower fail to do so, Borrower agrees to reimburse
Lender for the amounts paid by Lender, together with penalties or interest, if
any, incurred by Lender as a result of underpayment or nonpayment. Such amounts
shall constitute a portion of the Loan Obligations, shall be secured by the
Mortgage and shall bear interest at the Default Rate from the date advanced
until repaid.
8.3 PERFORMANCE OF LENDER. At its option, upon Borrower's failure
to do so, the Lender may make any payment or do any act on Borrower's behalf
that Borrower or others are inquired to do to remain in compliance with this
Agreement or any of the other Loan Documents, and Borrower agrees to reimburse
the Lender, on demand, for any payment made or expense incurred by Lender
pursuant to the foregoing authorization, including, without limitation,
attorneys' fees, and until so repaid any sums advanced by Lender shall
constitute a portion of the Loan Obligations, shall be secured by the Mortgage
and shall bear interest at the Default Rate from the date advanced until repaid.
8.4 INDEMNIFICATION. Except to the extent caused solely by the
gross negligence or willful misconduct or illegal activity of Lender or its
agents, Borrower shall, at its sole cost and expense, protect, defend, indemnify
and hold harmless the Indemnified Parties from and against any and all claims,
suits, liabilities (including, without limitation, strict liabilities), actions,
proceedings, obligations, debts, damages, losses, costs, expenses, diminutions
in value, fines, penalties, charges, fees, judgments, awards, amounts paid in
settlement, punitive damages, foreseeable and unforeseeable consequential
damages, of whatever kind or nature (including but not limited to reasonable
attorneys' fees and other costs of defense) imposed upon or incurred by or
asserted against Lender by reason of (a) ownership of the Note, the Mortgage,
the Property or any interest therein or receipt of any Rents; (b) any amendment
to, or restructuring of, the Loan Obligations and/or any of the Loan Documents;
(c) any and all lawful action that may be taken by Lender in connection with the
enforcement of the provisions of the Mortgage or the Note or any of the other
Loan Documents, whether or not suit is filed in connection with same, or in
connection with Borrower, any Guarantor and/or any member 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
41
<PAGE> 42
any part thereof or on the adjoining sidewalks, curbs, adjacent property or
adjacent parking areas, streets or ways; (f) any failure on the part of
Borrower, or any Guarantor to perform or comply with any of the terms of this
Agreement or any of the other Loan Documents; (g) any claims by any broker,
person or entity claiming to have participated on behalf of Borrower in
arranging the making of the Loan evidenced by the Note; (h) any failure of the
Property to be in compliance with any applicable laws; (i) performance of any
labor or services or the furnishing of any materials or other property with
respect to the Property, the Improvements or any part thereof; (j) the failure
of any person to file timely with the Internal Revenue Service an accurate Form
1099-b, statement for recipients of proceeds from real estate, broker and barter
exchange transactions, which may be required in connection with the Mortgage, or
to supply a copy thereof in a timely fashion to the recipient of the proceeds of
the transaction in connection with which the Loan is made; (k) any
misrepresentation made to Lender in this Agreement or in any of the other Loan
Documents; (l) any tax on the making and/or recording of the Mortgage, the Note
or any of the other Loan Documents; (m) the violation of any requirements of the
Employee Retirement Income Security Act of 1974, as amended; (n) any fines or
penalties assessed or any corrective costs incurred by Lender if the Facility or
any part of the Property is determined to be in violation of any covenants,
restrictions of record, or any applicable laws, ordinances, rules or
regulations; or (o) the enforcement by any of the Indemnified Parties of the
provisions of this Section 8.4. Any amounts payable to Lender by reason of the
application of this Section 8.4 shall become immediately due and payable and
shall constitute a portion of the Loan Obligations, shall be secured by the
Mortgage and shall accrue interest at the Default Rate. The obligations and
liabilities of Borrower under this Section 8.4 shall survive any termination,
satisfaction, assignment, entry of a judgment of foreclosure or exercise of a
power of sale or delivery of a deed in lieu of foreclosure of the Mortgage
except to the extent such obligations and liabilities arise solely out of events
or circumstances first occurring after any termination, satisfaction,
foreclosure, or delivery of a deed in lieu of foreclosure of the Mortgage or the
transfer or sale of the Property by the Borrower with Lender's consent subject
to the Mortgage. For purposes of this Section 8.4, the term "Indemnified
Parties" means Lender and any Person who is or will have been involved in the
origination of the Loan, any Person who is or will have been involved in the
servicing of the Loan, any Person in whose name the encumbrance created by the
Mortgage is or will have been recorded, any Person who may hold or acquire or
will have held a full or partial interest in the Loan (including, without
limitation, any investor in any securities backed in whole or in part by the
Loan) as well as the respective directors, officers, shareholder, partners,
members, employees, agents, servants, representatives, contractors,
subcontractors, affiliates, subsidiaries, participants, successors and assigns
of any and all of the foregoing (including, without limitation, any other Person
who holds or acquires or will have held a participation or other full or partial
interest in the Loan or the Property, whether during the term of the Mortgage or
as a part of or following a foreclosure of the Loan and including, without
limitation, any successors by merger, consolidation or acquisition of all or a
substantial portion of Lender's assets and business).
8.5 HEADINGS. The headings of the Sections of this Agreement are
for convenience of reference only, are not to be considered a part hereof, and
shall not limit or otherwise affect any of the terms hereof.
8.6 SURVIVAL OF COVENANTS. All covenants, agreements,
representations and warranties made herein and in certificates or reports
delivered pursuant hereto shall be deemed to have been
42
<PAGE> 43
material and relied on by Lender, notwithstanding any investigation made by or
on behalf of Lender, and shall survive the execution and delivery to Lender of
the Note and this Agreement.
8.7 NOTICES, ETC. Any notice or other communication required or
permitted to be given by this Agreement or the other Loan Documents or by
applicable law shall be in writing and shall be deemed received (a) on the date
delivered, if sent by hand delivery (to the person or department if one is
specified below) with receipt acknowledged by the recipient thereof, (b) three
(3) Business Days following the date deposited in the U.S. mail, certified or
registered, with return receipt requested, or (c) one (1) Business Day following
the date deposited with Federal Express or other national overnight carrier, and
in each case addressed as follows:
If to Borrower:
277 Mallory Station Road
Suite 130
Franklin, Tennessee 37067
with a copy to:
John N. Popham, IV, Esq.
Harwell, Howard, Hyne, Gabbert & Manner, PC
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238-1800
If to Lender:
GMAC Commercial Mortgage Corporation
650 Dresher Road
P.O. Box 1015
Horsham, Pennsylvania 19044-8015
ATTN: Servicing Department
with a copy to:
Kay K. Bains, Esq.
Walston, Wells, Anderson & Bains, LLP
505 20th Street North, Suite 500
Birmingham, Alabama 35203
Either party may change its address to another single address by notice given as
herein provided, except any change of address notice must be actually received
in order to be effective.
8.8 BENEFITS. All of the terms and provisions of this Agreement shall
bind and inure to the benefit of the parties hereto and their respective
successors and assigns. No Person other than
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<PAGE> 44
Borrower or Lender shall be entitled to rely upon this Agreement or be entitled
to the benefits of this Agreement.
8.9 PARTICIPATION. Borrower acknowledges that Lender may, at its
option, sell participation interests in the Loan or to other participating banks
or Lender may (but shall not be obligated to) assign its interest in the Loan to
its affiliates or to other assignees (the "Assignee") to be included as a pool
of properties to be financed in a proposed Real Estate Mortgage Investment
Conduit (REMIC). Borrower agrees with each present and future participant in the
Loan or Assignee of the Loan that if an Event of Default should occur, each
present and future participant or Assignee shall have all of the rights and
remedies of Lender with respect to any deposit due from the Borrower. The
execution by a participant of a participation agreement with Lender, and the
execution by the Borrower of this Agreement, regardless of the order of
execution, shall evidence an agreement between Borrower and said participant in
accordance with the terms of this Section. If the Loan is assigned to the
Assignee, the Assignee will engage an underwriter (the "Underwriter"), who will
be responsible for the due diligence, documentation, preparation and execution
of certain documents required in connection with the offering of interests in
the REMIC. Borrower agrees that Lender may, at its sole option and without
notice to or consent of the Borrower, assign its interest in the Loan to the
Assignee for inclusion in the REMIC and, in such event, Borrower agrees to
provide the Assignee with such information as may be reasonably required by the
Underwriter in connection therewith or by an investor in any securities backed
in whole or in part by the Loan or any rating agency rating such securities.
Borrower irrevocably waives any and all right it may have under applicable law
to prohibit such disclosure, including, but not limited to, any right of privacy
(except as to the rights of any patients or residents of any Facility), and
consents to the disclosure of such information to the Underwriter, to potential
investors in the REMIC, and to such rating agencies.
8.10 SUPERSEDES PRIOR AGREEMENTS; COUNTERPARTS. This Agreement and
the instruments referred to herein supersede and incorporate all
representations, promises, and statements, oral or written, made by Lender in
connection with the Loan. This Agreement may not be varied, altered, or amended
except by a written instrument executed by an authorized officer of the Lender.
This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered, shall be an original, but such counterparts shall
together constitute one and the same instrument.
8.11 LOAN AGREEMENT GOVERNS. The Loan is governed by terms and
provisions set forth in this Loan Agreement and the other Loan Documents and in
the event of any irreconcilable conflict between the terms of the other Loan
Documents and the terms of this Loan Agreement, the terms of this Loan Agreement
shall control; provided, however, that in the event there is any apparent
conflict between any particular term or provision which appears in both this
Loan Agreement and the other Loan Documents, and it is possible and reasonable
for the terms of both this Loan Agreement and the Loan Documents to be performed
or complied with, then, notwithstanding the foregoing, both the terms of this
Loan Agreement and the other Loan Documents shall be performed and complied
with.
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<PAGE> 45
8.12 CONTROLLING LAW. THE PARTIES HERETO AGREE THAT THE VALIDITY,
INTERPRETATION, ENFORCEMENT AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NORTH CAROLINA AND
THE PARTIES HERETO SUBMIT (AND WAIVE ALL RIGHTS TO OBJECT) TO NON-EXCLUSIVE
PERSONAL JURISDICTION IN THE STATE OF NORTH CAROLINA, 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 NORTH
CAROLINA OR ANY SUCCESSOR FEDERAL COURT HAVING ORIGINAL JURISDICTION.
8.13 WAIVER OF JURY TRIAL. TO THE EXTENT ENFORCEABLE UNDER
APPLICABLE LAW, BORROWER AND LENDER HEREBY WAIVE ANY RIGHT THAT THEY MAY HAVE TO
A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF
ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE LOAN OR
(B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY
DEALINGS OF LENDER AND/OR BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR IN
CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF EITHER PARTY'S RIGHTS AND
REMEDIES UNDER THIS AGREEMENT OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP
OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR
HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. BORROWER
AND LENDER AGREE THAT EITHER PARTY MAY FILE A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF
EITHER PARTY HERETO TO IRREVOCABLY WAIVE THEIR RIGHTS TO TRIAL BY JURY AS AN
INDUCEMENT OF LENDER TO MAKE THE LOAN AND THAT, TO THE EXTENT PERMITTED BY
APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED
HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF
COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.
8.14 INTEREST LIMITATION. Notwithstanding anything to the contrary
contained herein or in the Mortgage or in any other of the Loan Documents, the
effective rate of interest on the obligation evidenced by the Note shall not
exceed the lawful maximum rate of interest permitted to be paid. Without
limiting the generality of the foregoing, in the event that the interest charged
under the Note results in an effective rate of interest higher than that
lawfully permitted to be paid, then such charges shall be reduced by the sum
sufficient to result in an effective rate of interest permitted and any amount
which would exceed the highest lawful rate already received and held by the
Lender shall be applied to a reduction of principal and not to the payment of
interest. Borrower agrees that
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<PAGE> 46
for the purpose of determining highest rate permitted by law, any non-principal
payment (including, without limitation, late fees and other fees) shall be
deemed, to the extent permitted by law, to be an expense, fee or premium rather
than interest. This provision shall control every other provision of the Note
and the other Loan Documents with respect to the changing, collecting and
payment of interest on the indebtedness evidenced by the Note.
46
<PAGE> 47
WITNESS: BORROWER:
DIVERSICARE ASSISTED LIVING SERVICES
/s/ Brenda Wimsatt NC I, LLC, a Delaware limited liability company
- ------------------------
By: Diversicare Assisted Living Services NC, LLC,
a Tennessee limited liability company
Brenda Wimsatt Its: Sole Member
- ------------------------
[Print Name] By: /s/ Charles W. Birkett, M.D.
-------------------------------
Name: Charles W. Birkett, M.D.
Title: Chief Manager and President
WITNESS: LENDER:
GMAC COMMERCIAL MORTGAGE
CORPORATION, a California
corporation
/s/ Donna C. Phillips By: /s/ Sarah Sumner Duggan (Seal)
- ------------------------ -----------------------------------
Sarah Sumner Duggan
Senior Vice President
<PAGE> 48
EXHIBIT "A"
[LEGAL DESCRIPTION]
<PAGE> 49
EXHIBIT A
CARTERET
COUNTY
RECORD LEGAL DESCRIPTION
Beginning at an existing iron pin located in the eastern margin of
the 260 foot right-of-way of U.S. Highway 70 and the southern margin of the 60
foot right-of-way of Howard Boulevard, and from said beginning along the
southern margin of Howard Boulevard, S 77 degree 07' 01" E 491.54 feet to an
existing iron pin in the western margin of the 60 foot right-of-way of Chapman
Drive; thence along the western margin of the 60 foot right-of-way of Chapman
Drive, S 20 degree 50'52" W 234.24 feet to an existing iron pin in the line of
J & D Properties; thence along the line of J & D Properties, N 65 degree
10'05" W 422.52 feet to an existing concrete monument located in the eastern
margin of the 260 foot right-of-way of U.S. Highway 70; thence with the eastern
margin of U.S. Highway 70, N 11 degree 23'51" W 86.40 feet to an existing
concrete monument, and N 04 degree 04'03" E 66.53 feet to the point and place
of BEGINNING, containing 1.96 acres as per plat and survey of Irvin A. Staton,
R.L.S. dated 2-5-96.
For further reference see Deed Book 693, Page 297, Carteret County Registry.
<PAGE> 50
EXHIBIT A
NEW HANOVER COUNTY
RECORD
LEGAL DESCRIPTION:
Beginning at an existing iron pipe located in the northern margin of
the 50 foot right-of-way of Goldsboro Avenue, said existing iron pipe being near
the intersection of 4th Avenue and Goldsboro Avenue and being the southeast
corner of Martin T. Winner, thence along the line of Winner as follows: N
01'52'00" E 154.93 feet to an existing iron pipe, and N 88' 07'00"W 250.53 feet
to an existing iron pipe in the line of Landmark Organization, Inc., thence
along the line of Landmark Organization, Inc. N. 01' 55' 46"E 302.82 feet to an
existing iron pipe in the southern margin of lot 60, Ocean Ridge Subdivision,
Section 2 (map book 35, page 4), thence along the southern margin of lot 60, 61,
63, 64 and the retention pond of Ocean Ridge Subdivision, Section 2, (map book
35, page 4), S 87' 49' 00"E 550.73 feet to an existing iron pipe in the line of
Allen L. and Lynn C. Masterson, thence along the line of Masterson S 01' 55'
46"W 299.76 feet to an existing iron pipe located in the line of Martin T. and
Elsie H. Winner, thence along a ditch along the line of Winner and Merrill
Frances Winner N 88' 09' 00"W 249.98 feet to an existing iron pipe in the line
of Merrill Frances Winner, thence along the line of Merrill Frances Winner S 01'
54' 44"W 154.93 feet to an existing iron pipe located in the northern margin of
the 50 foot right-of-way of Goldsboro Avenue, thence along the northern margin
of the right-of-way of Goldsboro Avenue N 88' 09' 00"W 49.99 feet to the point
and place of beginning, containing 3.98 total acres, inclusive, of a 50 foot
ingress and egress easement as shown on plat and survey of Irvin A. Staton, R.
L. S. dated 2-22-96.
<PAGE> 51
EXHIBIT A
JOHNSTON COUNTY
RECORD
LEGAL DESCRIPTION
BEGINNING at point located in the Southern half of the right-of-way
of N.C. State Road 1583, said point being the Southeast corner of Herman Arch
Mitchiner, Doris Sue and Bobby Sue (D.B. 1184, Page 69), and from said
beginning along the line of Mitchiner, et al, N. 08' 16' 54" E. 330.16 feet to
an existing iron pipe in the line of Herman Arch Mitchiner (D.B. 1058, Page
585); thence along the line of Mitchiner, S. 86' 12' 03" E 107.22 feet to an
existing iron pipe in the line of Clayton Estates, Section One (P.B. 15, Page
189); thence along Clayton Estates, Section One, Lot 84, S. 19' 31' 09" W.
37.44 feet to an existing iron pipe, S. 08' 15' 12" W. 69.16 feet to an
existing iron pipe and N. 73' 03' 37" E. 54.40 feet to an existing iron pipe
located in the line of Lot 85 of Clayton Estates, Section One; thence along the
line of Lot 85 as follows: S. 14' 02' 40" E. 92.98 feet to an existing iron
pipe and N. 64' 51' 15" E. 164.03 feet to an existing iron pipe located in the
western margin of the 60 foot right-of-way of Lakeview Drive; thence along the
Southern margin of Lakeview Drive, S. 77' 29' 51' E. 88.98 feet to an existing
iron pipe located in the line of Lot 72 of Clayton Estates, Section One; thence
along the line of Lot 72, N. 48' 16' 10' E. 115.00 feet to an existing iron
pipe located in the line of Lewis R. Wilson; thence along the line of Lewis R.
Wilson S. 24' 44' 05' E. 241.96 feet to an existing iron pipe and S. 45' 04'
43' W. 385.18 feet, and crossing an existing iron pipe in the Northeastern
margin of the 60 foot right-of-way of N.C. State Road 1583 (Dairy Road) to a
point located within the right-of-way of said N.C. State Road 1583; thence
along the line located within the right-of-way of N.C. State Road 1583 as
follows; N. 44' 54' 49' W. 30.00 feet to a point, N. 47' 17' 49' W. 100.00 feet
to point, N. 51' 56' 49' W. 100.00 feet to a point, N. 59' 50' 34' W. 98.93
feet to a point, N. 08' 15' 11' E. 16.38 feet to a point, and N. 86' 12' 03' W.
100.00 feet to the point and place of the BEGINNING, containing 4.23 total
acres as per plat and survey of Irvin A. Staton, R.L.S., dated 2-21-96.
For further reference see Deed book 1159, Page 809 and Deed
Book 1173, Page 536 Johnston County Registry.
<PAGE> 52
RECORD
LEGAL DESCRIPTION
MOORE COUNTY
BEING KNOWN AS HERITAGE CARE AND SEVEN LAKES,
MOORE COUNTY, SEVEN LAKES, NORTH CAROLINA.
Beginning at a concrete monument in the Southeastern right-of-way of
McDougal street, said monument being North 36' 18' 06" East 1,437.55 feet from
North Carolina grid monument "PIT", N.C. grid coordinates-552,447.798,
E-1,824,067.841; running thence North 61' 17' 30" West 67.13 feet to a stake;
thence North 34' 37' 45" West 198.23 feet to a stake in line of Cecil Caudill;
thence with Caudill line North 55' 10' 05" East 499.97 feet to a concrete
monument, corner of Caudill; thence with line North 55' 22' 11" East 364.96 feet
to a concrete monument; thence South 34' 37' 30" East 452.45 feet to a stake;
thence South 47' 07' 45" West 298.59 feet to a stake; thence South 42' 52' 15"
East 40.99 feet to a stake; thence South 47' 07' 45" West 500.00 feet to a stake
in the Eastern line of said proposed street; thence with said line of said
proposed street North 42' 52' 15" West 351.23 feet to the Beginning. Containing
10.29 acres and being a portion of the property conveyed to Commercial Lands
Company by deed from MacDuffie Clark, Sr., et ex, et al recorded in Book 467,
page 706, Moore County Registry.
<PAGE> 53
EXHIBIT A
SAMPSON COUNTY
RECORD
LEGAL DESCRIPTION:
That certain tract or parcel of land lying and being located in North
Clinton Township, Sampson County, North Carolina, fronting on Martha Lane,
(formerly listed in chain of title deeds as Pine Ridge Drive), adjoining Sampson
Broadcasting Company, Grace Vann and Mayo Smith, being the same land described
in Deed Book 1198, page 925, of the Sampson County Registry, containing 8,229
acres Acres and being further described as follows;
Beginning at a point in the south line of Martha Lane, said point being
located 861.52 feet from the center of U S Highway #421, running thence with the
line of Sampson Broadcasting Company S 04' 46' 54"E 499.90 feet, thence with the
line of Grace Vann S 85' 52' 59"W 423.85 feet and N 73' 47' 02"W 505.12 feet,
thence with the line of Mayo Smith N 03' 44' 39"E 179.68 feet to the south line
of Martha Lane, running thence with the south line of Martha Lane a curve having
a chord of N 72' 34' 36"E 238.34 feet, a radius of 395.39 feet and an arc of
242.10 feet; and another curve having a chord of N 70' 06' 53" E 322.35 feet, a
radius of 619.52 feet and an arc of 326.10 feet, and N 85' 11' 39"E 324.99 feet
to the point of beginning, the property described herein being shown on map by
Irvin A. Staton, Registered Land Surveyor, entitled "Heritage Care of Clinton",
dated Sept. 24, 1997.
<PAGE> 54
EXHIBIT A
WILSON COUNTY
RECORD
LEGAL DESCRIPTION
THAT CERTAIN PROPERTY BEING KNOWN AS HERITAGE RETIREMENT CENTER, WILSON
TOWNSHIP, WILSON COUNTY, NORTH CAROLINA AND DESCRIBED AS FOLLOWS;
BEGINNING at an existing iron pipe being the northwest corner of the
herein described tract and being approximately 0.3 miles from the intersection
of U.S. Highway 264 and U.S. Highway 301 and from said beginning along the
southern margin of U.S. Highway 264 East Nash Street S. 64' 44' 29" E. 558.00
feet to an existing iron pipe in the line now, or formerly Mattie B. Young,
thence along the line now or formerly Mattie B. Young S. 19' 40' 40" W. 155.97
feet and S. 18' 27' 41" W. 337.14 feet to an existing iron pipe in the line now
or formerly Richard T. Smith, et al; thence along the line of Richard T. Smith,
et al, as follows; N. 64' 44' 29" W. 555.07 feet to an existing iron pipe, N.
25' 15' 31" E. 72.00 feet to an existing iron pipe, N. 64' 44' 29" W. 58.00 feet
to an existing iron pipe, and N. 25' 15' 31" E. 418.00 feet to the point and
place of BEGINNING, containing 6.478 acres total, as per plat and survey of
Joyner - Keeny & Associates dated August 1, 1995.
<PAGE> 55
EXHIBIT "B"
LOCATION OF CHIEF EXECUTIVE OFFICES
Principal Place of Business
8829 Goodwill Church Road
Kernersville, North Carolina 27285
Chief Executive Office
277 Mallory Station Road, Suite 130
Franklin, Tennessee 37067
<PAGE> 56
EXHIBIT "C"
OWNERSHIP
Diversicare Assisted Living Services NC, LLC, a Tennessee
limited liability company, is the sole member of Borrower and
owns 100% of the membership interest of Borrower.
<PAGE> 57
EXHIBIT "D"
SUMMARY OF FINANCIAL STATEMENTS
AND CENSUS DATA
Facility Name: _________________________________________________
Report Date: ___________________________________________________
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER 12 MONTH
ENDING ENDING ENDING ENDING
(DATE) (DATE) (DATE) (DATE)
<S> <C> <C> <C> <C>
CENSUS DATA
Total Number
of Beds [UNITS]: _______ _______ _______ _______
Number of Days in
Period: _______ _______ _______ _______
Total Patient Days
Available: _______ _______ _______ _______
Patient Utilization
Days:
Medicaid _______ _______ _______ _______
Private _______ _______ _______ _______
Medicare _______ _______ _______ _______
Other _______ _______ _______ _______
Total Utilization
Days: _______ _______ _______ _______
CASH FLOW ANALYSIS
Total Routine Patient
Revenue: _______ _______ _______ _______
Total Net
Revenues: _______ _______ _______ _______
Total
Expenses: _______ _______ _______ _______
Pre-Tax
</TABLE>
<PAGE> 58
<TABLE>
<S> <C> <C> <C> <C>
Income: _______ _______ _______ _______
ADD BACK
Depreciation and
Amortization: _______ _______ _______ _______
Interest on
Mortgage: _______ _______ _______ _______
Facility Lease
Expense (if
applicable): _______ _______ _______ _______
Management
Fees: _______ _______ _______ _______
Extraordinary
Items: _______ _______ _______ _______
Net Operating
Income: _______ _______ _______ _______
</TABLE>
I hereby certify the above to be true and correct. Dated this ____ day of
________________, 199_.
By: _______________________________
Its: ______________________________
<PAGE> 59
EXHIBIT "E"
COMPLIANCE CERTIFICATE
GMAC Commercial Mortgage Corporation
2200 Woodcrest Place, Suite 305
Birmingham, Alabama 35209
RE: Loan Agreement dated __________, 1999 (together with amendments, if
any, the "Loan Agreement") by and between GMAC Commercial Mortgage
Corporation, as Lender, and Diversicare Assisted Living Services NC
I, LLC, as Borrower
The undersigned officer of the above named Borrower, does hereby certify that
for the quarterly financial period ending ____________________:
1. No Default or Event of Default has occurred or exists except
--------------------.
2. The Debt Service Coverage for each Facility after deduction of Actual
Management Fees for the preceding twelve (12) months (or such lesser period
as shall have elapsed following the closing of the Loan) through the end of
such period was:
Required: 1.0 to 1.0
Actual: _____ to 1.0
The manner of calculation is attached.
3. The Debt Service Coverage for each Facility after deduction of Assumed
Management Fees for the preceding twelve (12) months (or such lesser period
as shall have elapsed following the closing of the Loan) through the end of
such period was:
Required: 1.1 to 1.0
Actual: _____ to 1.0
The manner of calculation is attached.
4. The Debt Service Coverage for the Facilities, combined, after deduction of
Assumed Management Fees for the preceding twelve (12) months (as such
lesser period as shall have elapsed following the closing of the Loan)
through the end of such period was:
Required: 1.25 to 1.0
Actual: _____ to 1.0
<PAGE> 60
The manner of calculation is attached.
5. The fiscal year to date average annual occupancy for the Facilities
combined:
Required: Not less than 80%
Actual: __________
6. The capital expenditures per licensed bed [UNIT] was: [ANNUAL COMPLIANCE
CERTIFICATE ONLY]
Required: $250 per licensed bed [UNIT].
Actual: $______ per licensed bed [UNIT].
Evidence of such capital expenditures is attached.
7. All representations and warranties contained in the Loan Agreement and
other Loan Documents are true and correct in all material respects as
though given on the date hereof, except
_______________________________________________________
___________________________________________________.
8. All information provided herein is true and correct.
9. Capitalized terms not defined herein shall have the meanings given to such
terms in the Loan Agreement.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Dated this the _____ day of ________________, ____.
<PAGE> 61
EXHIBIT "F"
LICENSED BEDS FOR EACH
FACILITY
<TABLE>
<CAPTION>
Facility Number of Beds
<S> <C>
Broman Rest Home 61
Neilsen's Rest Home 61
Clayton Restful Manor 60
Heritage Care of Seven Lakes 60
Heritage Care of Clinton 60
Heritage Retirement Center of Wilson 142
</TABLE>
<PAGE> 62
SCHEDULE 4.22
[REPAIRS]
<PAGE> 1
EXHIBIT 10.6
FOURTH AMENDMENT TO MASTER
CREDIT
AND SECURITY AGREEMENT
This Fourth Amendment to Master Credit and Security Agreement is made
and entered into as of April 14, 1999, by and 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 Commercial Mortgage Corporation, with offices
for purposes of this Agreement at 2200 Woodcrest Place, Suite 305, Birmingham,
Alabama, 35209 (hereinafter referred to as "GMAC"), in its capacity as the
lender under the Acquisition Line (First American and GMAC 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 a Master Credit and Security Agreement
dated as of December 27, 1996 (the "Loan Agreement"), by and between the
Lenders, Advocat, the Borrower and the Subsidiaries, the Lenders agreed to loan
to the Borrower, Advocat and the Subsidiaries sums not to exceed $50,000,000,
including a $10,000,000 Working Capital Line to be funded by First American
(capitalized terms not otherwise defined herein shall have meanings ascribed to
such terms in the Loan Agreement); and,
WHEREAS, at Borrower's request First American has provided a temporary
increase in the Working Capital Line in the amount of $4,000,000 (the "Overline
Facility"); and,
WHEREAS, First American has agreed to extend the maturity date of the
Overline Facility to July 1, 1999, provided the Borrower, Advocat and the
Subsidiaries execute documentation, including this Agreement, confirming that
the Overline Facility continues to be administered in accordance with the terms
of the Loan Agreement for advances under the Working Capital Line and that the
Overline Facility shall be secured by the Collateral securing the Working
Capital Line, as defined in the Loan Agreement,
1
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing premises, and other
good and valuable consideration, the receipt and legal sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Overline Facility First American agrees to temporarily increase
the amount available under the Working Capital Line from $10,000,000 to
$14,000,000, The temporary increase shall be evidenced by a Line of Credit Note
(Overline Facility) of even date herewith, in the principal amount of $4,000,000
(the, "Overline Facility Note"). Advances under the Overline Facility shall be
treated as advances under the Working Capital Line and shall be administered by
First American in accordance with the provisions of the Loan Agreement for
advances under the Working Capital Line, except that the Overline Facility shall
be fully funded at the execution of this Agreement and shall not be repaid from
monies paid by the Borrower until the $10,000,000 portion of the Working Capital
Line has been fully paid, The Overline Facility shall be available until July 1,
1999, at which time, the Overline Facility shall be due and payable in full.
Interest accruing under the Overline Facility shall be paid in the same fashion
as interest accruing under the Working Capital Line in accordance with the terms
of the Loan Agreement.
2. Default. The parties agree that in the event the existing
$25,250,000 commitment of GMAC does not close and fund on or before May 31,
1999, such failure to close and fund shall be deemed to be a Default.
3. Collateral. The Collateral securing the Working Capital Line shall
also secure the Overline Facility, The Borrower, Advocat and the Subsidiaries
agree to execute such additional documents and instruments as First American
deems necessary in order to evidence that the Collateral securing the Working
Capital Line shall also secure the Overline Facility.
4. Guarantors. The Guarantors have joined in this Agreement for
purposes of confirming that the Obligations (as defined in the Guaranty
Agreements) guaranteed by the Guarantors under the Guaranty Agreements, shall
include the indebtedness evidenced by the Overline Facility. To the extent
requested, the Guarantors each agree to execute such additional documents and
instruments as First American may deem necessary in order to confirm that the
Obligations (as defined in the Guaranty Agreements) shall include, without
limitation, all obligations evidenced by the Overline Facility Note, together
with all amendments, renewals and modifications thereof.
5. Consent of GMAC. To the extent required by the Loan Agreement, GMAC
has executed this Agreement for purposes of consenting to the Overline Facility
and the terms of this Fourth Amendment.
6. Restatement and Ratification. The Borrower, Advocat and the
Subsidiaries hereby restate and ratify all of the representations and warranties
contained in the Loan Agreement, as of the date hereof, and each hereby
acknowledge and confirm that the terms and conditions of the Loan Agreement, as
amended hereby, remain in full force and effect.
(Remainder of Page Intentionally Left Blank)
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment as of the day and date first above written.
FIRST AMERICAN NATIONAL BANK, a DIVERSICARE MANAGEMENT
national banking association SERVICES CO., a Tennessee corporation
BY: /s/ Wallace Carter III BY: Mary Margaret Hamlett
------------------------------ ---------------------------------
Sr. Vice President TITLE: Executive Vice President
"FIRST AMERICAN" "BORROWER"
GMAC-COMMERCIAL MORTGAGE ADVOCAT INC., a Delaware corporation
CORPORATION, a California corporation
BY: BY: Mary Margaret Hamlett
---------------------------------- ---------------------------------
TITLE: TITLE: Executive Vice President
------------------------------- ------------------------------
"GMAC" "ADVOCAT"
DIVERSICARE LEASING CORP.,
a Tennessee corporation
BY: /s/ Mary Margaret Hamlett
---------------------------------
TITLE: Executive Vice President
------------------------------
3
<PAGE> 4
(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
--------------------------
4
<PAGE> 5
(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"
5
<PAGE> 6
LINE OF CREDIT NOTE
(OVERLINE Facility)
$4,000,000.00 Nashville, Tennessee
As of April 14,1999
FOR VALUE RECEIVED, the undersigned, Diversicare Management Services
Co., a Tennessee corporation (the "Borrower") promises to pay to the order of
First American National Bank (the "Bank"), the sum of Four Million and 00/100
Dollars ($4,000,000.00), or so much thereof as may be advanced hereunder in
accordance with the terms of a Master Credit and Security Agreement dated as of
December 27, 1996, as amended from time to time (the "Loan Agreement"). between
Bank, GMAC-CM Commercial Mortgage Corporation, the undersigned, and the
Guarantors (as defined in the Loan Agreement). Capitalized terms not otherwise
defined herein shall have the meanings ascribed to such terms in the Loan
Agreement, Interest shall accrue on the principal balance outstanding from time
to time at a fixed rate of fourteen percent 14% per annum, In no event shall the
interest rate charged herein exceed the Maximum Rate.
Interest shall be computed for the actual number of days elapsed on
the basis of a year consisting of 360 days, interest shall be due and payable on
the principal balance outstanding hereunder from time to time in accordance with
Section 2.5 of the Loan Agreement, The outstanding principal balance, together
with all accrued and unpaid interest, shall be due and payable in full on July
1, 1999 (the "Maturity Date").
Both principal and interest due on this Note are payable in Nashville,
Tennessee, at par in lawful money of the United States of America, in the Main
Office of Bank, or at such other place as Bank may designate in writing from
time to time. Interest shall continue to accrue when payments are submitted by
instruments representing funds not immediately available and until such funds
are, in fact, collected.
This Note represents a temporary increase in the Working Capital Line
and, as such (i) shall be advanced in accordance with the provisions of the Loan
Agreement for advances under the Working Capital Line, and (ii) is secured by
the Collateral described or referred to in the Loan Agreement and the other Loan
Documents, as the same may be amended from time to time.
Time is of the essence of this Note. It is hereby expressly agreed that
in the event of an Event of Default (which is not cured within the notice and
cure period set forth in the Loan Agreement); then, in such case, the entire
unpaid principal sum evidenced by this Note, together with all accrued interest,
shall, at the option of any holder, without further notice, become due and
payable forthwith, regardless of the stipulated Maturity Date. Upon the
occurrence of any Default, at the option of holder and without further notice to
obligor, all accrued and unpaid interest, if any, shall be added to the
outstanding principal balance hereof, and the entire outstanding principal
balance, as so adjusted, shall bear interest thereafter until paid at an annual
rate equal to Maximum Rate, regardless of whether or not there has been an
acceleration of the payment of principal as set forth herein. All such interest
shall be paid at the time of and as a condition precedent to the curing
PAGE 1 OF A 3 PAGE NOTE
<PAGE> 7
of any such Default. Failure of the holder to exercise this right of
accelerating the maturity of the debt, or indulgence granted from time to time,
shall in no event be considered as a waiver of said right of acceleration or
stop the holder from exercising said right.
To the extent permitted by applicable law, in addition to all other
rights and remedies available to Bank, obligor shall pay to Bank a late charge
equal to four percent (4%) of any payment hereunder that is more than fifteen
(15) days past due, in order to cover the additional expenses incident to the
handling and processing of delinquent payments.
All persons or corporations now or at any time liable, whether
primarily or secondarily, for the payment of the indebtedness hereby evidenced,
for themselves, their heirs, legal representatives and assigns, waive demand,
presentment for payment, notice of dishonor, protest, notice of protest, and
diligence in collection and all other notices or demands whatsoever with respect
to this Note or the enforcement hereof, and consent that the time of said
payments or any part thereof may be extended by the holder hereof and assent to
any substitution, exchange, or release of collateral permitted by the holder
hereof, all without in any wise modifying, altering, releasing, affecting or
limiting their respective liability. This Note may not be changed orally, but
only by an agreement in writing signed by the party against whom enforcement of
any waiver, change, modification or discharge is sought.
The term obligor, as used in this Note, shall mean all parties, and
each of them, directly or indirectly obligated for the indebtedness that this
Note evidences, whether as principal, maker, endorser, surety, guarantor or
otherwise.
It is expressly understood and agreed by all parties hereto, including
obligors, that if it is necessary to enforce payment of this Note through an
attorney or by suit, undersigned or any obligors shall pay reasonable attorney's
fees, court costs and all costs of collection.
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 this provision. 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 Bank 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 Bank in its sole discretion
or as required by applicable law. The Bank does not intend to charge or receive
unearned interest on acceleration. All interest paid or agreed to be paid to the
Bank in connection with the Credit Facility, or any portion thereof, shall be
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.
PAGE 2 OF A 3 PAGE NOTE
<PAGE> 8
This obligation is made and intended as a Tennessee contract and is to
be so construed.
IN WITNESS WHEREOF, this Note his been duly executed by the undersigned
the day and year first above written.
DIVERSICARE MANAGEMENT SERVICES
CO., a Tennessee corporation
BY: /s/ Mary Margaret Hamlett
-----------------------------
TITLE: Executive Vice President
--------------------------
RECEIVED AND ACKNOWLEDGED:
FIRST AMERICAN NATIONAL BANK
BY: /s/ Wallace Carter III
-------------------------
TITLE: Sr. Vice President
----------------------
PAGE 3 OF A 3 PAGE NOTE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS OF ADVOCAT INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q FROM THE QUARTERLY
PERIOD ENDED JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 998
<SECURITIES> 0
<RECEIVABLES> 24,471
<ALLOWANCES> 1,360
<INVENTORY> 1,234
<CURRENT-ASSETS> 28,636
<PP&E> 83,741
<DEPRECIATION> 16,253
<TOTAL-ASSETS> 116,709
<CURRENT-LIABILITIES> 45,687
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 27,677
<TOTAL-LIABILITY-AND-EQUITY> 116,709
<SALES> 0
<TOTAL-REVENUES> 45,260
<CGS> 0
<TOTAL-COSTS> 45,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 268
<INTEREST-EXPENSE> 2,622
<INCOME-PRETAX> 152
<INCOME-TAX> 55
<INCOME-CONTINUING> 256
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
