-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BVsPBY0CZs4XebBPxSS8aF+p90HS/mTkAP1W+qFD7YRx4mcpWEL0iIWubZpsoeJR Lth7paXPaS7eeZyfFVxpPQ== 0000893220-99-001116.txt : 19991227 0000893220-99-001116.hdr.sgml : 19991227 ACCESSION NUMBER: 0000893220-99-001116 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALANCED CARE CORP CENTRAL INDEX KEY: 0001024096 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 251761898 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13845 FILM NUMBER: 99719179 BUSINESS ADDRESS: STREET 1: 5021 LOUISE DR STREET 2: SUITE 200 CITY: MECHANICSBURG STATE: PA ZIP: 17055 BUSINESS PHONE: 7177966100 MAIL ADDRESS: STREET 1: 5021 LOUISE DR SUITE 200 STREET 2: 5021 LOUISE DR SUITE 200 CITY: MECHANICSBURG STATE: PA ZIP: 17055 10-K 1 FORM 10-K BALANCED CARE CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-13845 BALANCED CARE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 25-1761898 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1215 MANOR DRIVE MECHANICSBURG, PENNSYLVANIA 17055 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- COMMON STOCK $.001 PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 22, 1999 was approximately $18,241,458 based on the last reported sales price of $1.25 as reported by the American Stock Exchange. Shares of common stock known by the registrant to be beneficially owned by executive officers or directors of the registrant are not included in the computation; however, shares of common stock reported to be beneficially owned by holders of 5% or more of the common stock are included in the computation. The registrant has made no determination whether any of such persons are "affiliates" within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934. The number of shares of common stock outstanding on September 22, 1999 was 16,722,846 shares. DOCUMENTS INCORPORATED BY REFERENCE: Selected portions of the 1999 Proxy Statement are incorporated into Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1--BUSINESS THE COMPANY Balanced Care Corporation (the "Company") was formed in April 1995 to develop senior care continuums which meet the needs of upper middle, middle and moderate income populations in non-urban, secondary markets. The Company considers upper middle, middle and moderate income populations to consist of those individuals whose income and assets enable them to afford senior living and care services at average daily rates of $85, $75 and $65, respectively. The Company utilizes assisted living facilities in selected markets as the primary entry point and service platform and has developed a care continuum (the "Balanced Care Continuum") consisting of various health care and hospitality services, including, where appropriate, physical, occupational and speech therapy, personal and health care services on an intermittent basis, dementia and Alzheimer's services and skilled/subacute care delivered in a skilled nursing setting, which enables residents to age in place. The Company believes that non-urban, secondary markets are underserved, highly fragmented and less prone to intense competition from larger providers. The Company believes that these factors will enable it to establish a leading position as a provider of a market differentiated, consumer preferred continuum of senior care services in such markets. To achieve its goals, the Company intends to: (i) provide a range of high quality, individualized senior care services and programs; (ii) focus on non-urban, secondary markets; (iii) pursue growth through selective acquisitions; (iv) achieve the benefits of regional density by clustering; (v) expand referral networks and strategic alliances; and (vi) become the operator of choice in its selected markets. The Company has grown primarily through acquisitions and by designing, developing, operating and managing its Outlook Pointe(R) signature series assisted living facilities. The following table summarizes the Company's operating facilities at June 30, 1999 and 1998:
JUNE 30, ------------------------------------------------------------------- 1999 1998 -------------------------------- -------------------------------- OWNED LEASED MANAGED TOTAL OWNED LEASED MANAGED TOTAL ----- ------ ------- ----- ----- ------ ------- ----- Developed Assisted Living Facilities......................... -- 6 28 34 -- 1 11 12 Acquired Assisted Living Facilities......................... 5 13 -- 18 13 12 -- 25 Skilled Nursing Facilities........... 2 11 -- 13 2 11 -- 13 Independent Living Facilities........ -- 4 -- 4 -- 4 -- 4 -- -- -- -- -- -- -- -- 7 34 28 69 15 28 11 54 == == == == == == == ==
As of June 30, 1999, the Company had operations in Pennsylvania, Missouri, Arkansas, Ohio, Virginia, North Carolina, Tennessee, West Virginia and Florida. These operating facilities have a capacity for 3,266 assisted living residents, 1,294 skilled nursing patients and 117 independent living residents. The Company also operates a home health care agency in Missouri and rehabilitation therapy operations in Pennsylvania and Arkansas. In December 1998, the Company sold its seven owned assisted living facilities in Wisconsin, which had been carried as an asset held for sale since June 30, 1997. In addition to the 34 Outlook Pointe(R) signature series assisted living facilities opened as of June 30, 1999, the Company has signed agreements to develop and manage 18 assisted living facilities currently under construction, which are scheduled to open at various times through April 2000. These facilities will increase the depth of the Company's operations in Pennsylvania, Missouri, Arkansas, Ohio, Virginia, North Carolina, Tennessee, West Virginia and Florida and will add operations in Indiana and Maryland. The Balanced Care continuum delivers consumer-focused health care and hospitality services that balance seniors' desire for independence with their evolving health care needs. The Company's philosophy includes the belief that providing health care services, coupled with wellness and preventative therapy will strengthen residents, improve their health and forestall the deterioration that generally accompanies aging, thus extending their lives and lengths of stay in assisted living facilities. Balanced Gold(R), the Company's 2 3 wellness-oriented program, has been developed to predict and proactively address resident care needs, including stabilizing and improving residents' cognitive, emotional and physical well-being. Preventative, restorative and rehabilitative services are also available to residents through outpatient medical rehabilitation, home health care, programs for residents with Alzheimer's and other services provided by the Company or by an alliance partner or other third party. By offering services and programs that are intended to enable residents to stay healthier longer and prolong their stay at assisted living facilities, the Company believes that its services and programs address the preferences and needs of seniors, while at the same time forestalling the need for residents to move to a more costly long-term care setting, such as a skilled nursing facility. As resident needs mandate migration into a skilled nursing or subacute program, the Company believes that skilled nursing facilities will provide a transition for the resident with a focus on demonstrated outcomes and cost effective care. In north central Pennsylvania and Missouri the Company owns and/or operates skilled nursing facilities. In other regions where the Company does not own or manage skilled nursing operations, the Company has formed alliances with skilled nursing facility providers to transition residents that require skilled care. The Company believes that its approach to senior care will enable it to be a leading provider of a continuum of senior care services in targeted non-urban, secondary markets. THE SENIOR CARE INDUSTRY The senior care industry is characterized by a wide range of living accommodations and health care services. For those who are able to live in a home setting, home health care and other limited services can be provided. Community housing or retirement centers, which are commonly referred to as independent living facilities, are also available to persons who need limited assistance, such as with meal preparation, housekeeping and laundry. Assisted living facilities are typically for those persons whose physical or cognitive frailties have reached a state where other living accommodations can no longer provide the level of care required but who do not yet need the continuous medical attention provided in a skilled nursing facility. Generally, assisted living facilities provide a combination of housing and 24-hour personal support services designed to assist seniors with activities of daily living ("ADLs"), which include bathing, eating, personal hygiene, grooming, ambulating and dressing. Certain assisted living facilities also offer higher levels of personal assistance for residents with physical needs, Alzheimer's disease or other forms of dementia. Skilled nursing facilities provide care for those who need non-schedulable nursing care on a daily basis. The senior care industry, including assisted living, is highly fragmented and characterized by numerous providers whose services, experience and capital resources vary widely. The Company believes that few operators of assisted living facilities, particularly those in secondary markets, focus on providing a range of senior living and health care services that have been designed to enable residents to stay in a preferred setting longer. The Company believes that the assisted living industry is evolving as the preferred alternative to meet the growing demand for a cost effective setting for those seniors who cannot live independently due to physical or cognitive frailties, but who do not require the more intensive medical attention provided by a skilled nursing facility. According to the United States Bureau of the Census, approximately 45% of persons aged 85 years and older, approximately 24% of persons aged 80 to 84 and approximately 20% of persons aged 75 to 79 need assistance with ADLs. In 1998, according to industry estimates, there were an estimated 300,000 assisted living units in the United States, with a need for an additional 1,500,000 units. The Company believes that a number of factors will contribute to the continued growth of the assisted living industry, including: Consumer Preference. The Company believes that assisted living is increasingly becoming the preferred setting for prospective residents as well as their families, who are often the decision makers for seniors. Assisted living is generally a more attractive, service-oriented and lower-cost alternative to other types of senior care facilities, offering seniors greater independence and allowing them to age in place in a residential setting. Cost Effectiveness. Assisted living facilities provide a cost-effective alternative to other types of facilities that may provide more care than a senior needs. The average annual cost for a patient in a skilled nursing 3 4 facility approaches $40,000 and, in the case of a private pay patient, can exceed $75,000 per year in certain markets. In contrast, the average annual cost for a resident of an assisted living facility is generally 30% to 50% lower than skilled nursing facilities located in the same region. Additionally, the Company also believes that the cost of assisted living services compares favorably with home health care, particularly when costs associated with housing, meals and personal care assistance are taken into consideration. Changing Income and Family Dynamics. The Company believes that the increasing income of seniors, as well as changing family dynamics, will increase the demand for assisted living and health care services. According to the United States Bureau of the Census, the median income of the elderly population has been increasing. Accordingly, the Company believes that the number of seniors who are able to afford high-quality senior residential services such as those offered by the Company will also increase. Additionally, the number of two-income households has increased over the last decade and the geographical separation of senior family members from their adult children has become more common. As a result, many families that traditionally would have provided the care and services offered by the Company to senior family members are less able to do so. The Company believes that assisted living facilities represent an attractive and independent environment for senior family members. Demographics. The target market for the Company's services are persons 83 years and older, one of the fastest growing segments of the United States population. According to the United States Bureau of the Census, the portion of the United States population aged 80 and older is expected to increase by approximately 29%, from approximately 13.0 million in 1990 to approximately 16.8 million by the year 2000, and the number of persons aged 85 and older, as a segment of the United States population, is expected to increase by approximately 43%, from approximately 3.0 million in 1990 to over 4.3 million by the year 2000. Furthermore, the number of persons requiring memory care assistance is also expected to increase in the coming years. According to data published by the American Psychiatric Association, Alzheimer's disease affects approximately 5% to 8% of individuals over the age 65, 15% to 20% of individuals over the age of 75 and 25% to 50% of individuals over the age of 85. Supply/Demand Imbalance. The Company believes that non-urban secondary markets are often underserved with respect to assisted living facilities. Based on bed-need analyses performed by the Company in connection with the development of its assisted living facilities, the need for the Company's services in its target markets is typically three times the number of beds developed. When combined with its market-differentiated services package, the Company believes that it is well-positioned to be the preferred provider of senior care services in its targeted markets. While the senior population is growing significantly, the supply of skilled nursing beds per thousand persons for those aged 85 years and older is declining. This imbalance may be attributed to a number of factors in addition to the aging of the population. Many states, in an effort to maintain controls of Medicaid expenditures on long-term care, have implemented more restrictive certificate-of-need regulations or similar legislation that restricts the supply of licensed skilled nursing facility beds. Additionally, acuity-based reimbursement systems have encouraged skilled nursing facilities to focus on higher-acuity patients. The Company also believes that high construction costs and limits on government reimbursement for the full cost of construction and start-up expenses will also contain the growth and supply of traditional skilled nursing beds. These factors, taken in combination, result in relatively fewer skilled nursing beds available for the increasing number of seniors who require assistance with ADLs but do who not require 24 hour per day medical attention. CARE AND SERVICES PROGRAMS The Company offers a continuum of services to seniors that includes assisted living, intermittent healthcare service, rehabilitation, social and activity programs, home health care, memory care and Alzheimer's services, skilled nursing, subacute care and independent living services. ASSISTED LIVING SERVICES Admission; Resident Care Plan. The assisted living admission process is crucial to the proper placement of residents and the development of tailored resident care plans. A lifestyle assessment is conducted in 4 5 consultation with the resident, as well as his or her family and medical consultants, to determine the resident's care and services preferences. An individualized care plan is developed to ensure that all staff members rendering services meet the resident's specific needs and preferences whenever possible. Each resident's care plan is reviewed, at a minimum, quarterly to determine when a change in services is needed. The Company seeks to provide assisted living services that allow a resident to maintain a dignified, independent lifestyle. Residents and their families are encouraged to be partners in their care and to take as much responsibility as possible for their well being. Care and Services. The Company offers a range of assisted living care and services which are available 24 hours per day at each of its assisted living facilities. The core services package offered by the Company includes personal care, support and certain health care services. Personal care services include assistance with ADLs, such as ambulating, bathing, dressing, eating, grooming, personal hygiene, monitoring or assistance with medications and confusion management. Support services include meal preparation, assistance with social and recreational activities, laundry services, general housekeeping, maintenance services and transportation services. Additional services, which are offered at an extra charge, include extra transportation services, beauty and barber services, extra laundry services and non-routine care services. All or part of the Balanced Gold(R) program is included in the Company's core services package at each of its signature series assisted living facilities, depending on the facility's pricing structure. To the extent permitted by state regulatory requirements, the Company's facilities have been designed to accommodate special programs including those for residents with Alzheimer's and other forms of dementia, as well as medical rehabilitation and home health care services. Medical rehabilitation services are provided by certified physical, occupational and speech therapists and psychologists, with physician oversight. Through June 30, 1999 the Company utilized a mix of its own rehabilitation services companies and contracts with independent providers to deliver therapy services to residents. By June 30, 2000, the Company will have discontinued its own rehabilitation services and will exclusively utilize independent providers to deliver therapy services. Home health care services are provided through the Company's licensed home health agency in Missouri or by a third party. Balanced Gold(R). The Company's Balanced Gold(R) program is a wellness oriented program that is designed to address a variety of factors that adversely affect the health of assisted living residents, including balance and gait difficulties, incontinence, cognitive impairment, stress due to pain and chronic conditions and grieving due to multiple losses in the resident's life. Depending on the pricing structure for the facility, all or part of the Balanced Gold(R) program is included in the Company's core services package. Company staff and the residents determine which activities are best suited to each resident's needs. "TreasuresSM" Memory Care. The Company has developed, with the assistance of its Health Care Advisory Board, an approach to Alzheimer's and other forms of dementia that includes specialized assessments and clinical approaches for early and accurate detection, placement and intervention. To meet the needs of residents with memory care needs and other related forms of dementia, the Company has developed its "TreasuresSM" memory care program, formerly, the "Keepsakes" program to maintain familiarity, reduce confusion, and still provide a pleasant and appropriate living environment for these residents. The Company's Outlook Pointe(R) signature series assisted living facilities are all designed to deliver these specialized services to the extent permitted by state regulatory requirements. The Company also has implemented this program at three of its acquired assisted living facilities. The Company currently operates a TreasuresSM Memory Care program at seven of its assisted living facilities and at one dedicated unit in its skilled nursing facilities. The Company plans to develop its TreasuresSM program at each of its existing assisted living facilities and in all facilities under construction. These units feature areas specifically designed to provide attention, care and services needed to help residents with Alzheimer's maintain a higher quality of life. The Alzheimer's team members are specially trained to understand behavior, maximize function, promote safety and encourage resident independence. Medication Management. Each assisted living facility contracts with a pharmacy to provide prescription drugs to those residents who desire to utilize the service. Residents are free to use a pharmacy of their choice, but are required to comply with a pre-designated method of packaging the pharmaceuticals. Additionally, subject to state regulatory requirements, at the resident's request, and based on the facility's assessment of the 5 6 resident's needs, the assisted living facility may manage a resident's medications by storing prescription drugs within the facility, delivering the drugs to the resident and reminding the resident when the medications need to be taken. Assisted Living Charges. Monthly assisted living resident charges are based, in part, on the type of living suite selected and are set at rates designed to be within the means of seniors in the secondary markets served by the Company. In addition to its core services package, at certain facilities, including all newly developed Outlook Pointe(R) facilities, the Company offers additional levels of services to residents whose frailties or medical condition are more acute. The pricing structure utilized by Balanced Care is driven by local market characteristics and competition. A competitive analysis is done of each market, prices are established and based on the results of that study. In most cases, base rates are established reflecting the size of the unit, the view, access to the dining room etc. These base rates include three meals, basic housekeeping, basic laundry services, help with one, ADL (activity of daily living) and access to the Balanced Gold program and basic transportation services. Based on the results of the initial lifestyle assessment, a point value is assessed for each resident and additional care needs are determined. Each assessment is individual and the plan of care is unique to that individual. Charges for these extra services are categorized into four levels of care, all contingent upon the total number of points scored on the lifestyle assessment. This assessment is reviewed and re-assessed each quarter, at a minimum. These extra costs, which can vary from building to building, generally amount to $400/month for Level II, $800/month for Level III and $1,200/month for Level IV. As of June 30, 1999, approximately 50% of the Company's assisted living residents received services at levels offering additional services. Substantially all of the Company's current revenues from the provision of assisted living services are attributable to private payors. MEDICAL REHABILITATION SERVICES The Company's philosophy for addressing seniors' living and care needs includes the belief that preventative therapy will strengthen residents, improve their overall health and forestall the deterioration that generally accompanies aging, thus extending their lives and lengths of stay in assisted living facilities. The Company has developed specialized medical rehabilitation programs to address the needs of seniors, including programs to specifically address balance and gait difficulties, incontinence, lymphodema, pain and osteoarthritis, as well as specific preventative therapy programs for seniors. For residents in the Company's Outlook Pointe(R) signature series assisted living facilities, each rehabilitation program is followed up with specialized regimens offered as part of the Balanced Gold(R) activities program. Should a resident's condition warrant additional rehabilitation, on-staff and contracted therapists are available. The Company currently provides medical rehabilitation services, including physical and occupational therapy, on an outpatient basis to residents at ten of its assisted living facilities as well as to patients in a surrounding community. These outpatient services are currently provided through the Company's licensed rehabilitation agencies in Pennsylvania and Arkansas or certain of its skilled nursing facilities. Rehabilitation services are provided at the Company's other facilities through contract services, outpatient rehabilitation facilities or home health agencies. As previously discussed, by June 30, 2000 ("Fiscal 2000") the Company plans to discontinue its own rehabilitation agencies and exclusively utilize independent agencies to provide therapy services. Substantially all of the Company's current revenues from provision of medical rehabilitation services are attributable to federal government reimbursement programs. HOME HEALTH CARE SERVICES The Company provides home health care services through its licensed home health agency in Missouri to residents of its assisted and independent living facilities and patients from the surrounding areas. The services the Company provides include: (i) general and specialty nursing services to individuals with acute illness, long-term chronic health conditions, permanent disabilities, terminal illnesses or post-procedural needs; (ii) therapy services consisting of, among other things, physical, occupational and speech therapies; (iii) personal care services and assistance with ADLs; (iv) hospice care for persons in the final phases of incurable diseases; (v) respiratory, monitoring, medical equipment and supplies; and (vi) a comprehensive 6 7 range of home infusion and enteral therapies. Assisted living residents receiving home health care services may require skilled nursing services as their medical conditions warrant. Substantially all of the Company's current revenues from provision of home health care services are attributable to federal government reimbursement programs. SKILLED NURSING SERVICES The Company currently provides skilled nursing services at three facilities in Pennsylvania (169 licensed beds) and ten facilities in southwest Missouri (1,125 licensed beds). The Company's skilled nursing facilities provide traditional long-term care through 24-hour per day skilled nursing care by registered nurses, licensed practical nurses and certified nursing aides. The Company also offers physical rehabilitation at its skilled nursing facilities, including physical, occupational and speech therapies. Board certified physicians direct the skilled nursing services offered at these facilities. For the fiscal year ended June 30, 1999 ("Fiscal 1999"), approximately 74% of the Company's patient services revenues were attributable to federal and state government reimbursement programs. INDEPENDENT LIVING SERVICES The Company operates four independent living facilities in Missouri located adjacent to skilled nursing facilities operated by the Company. Services provided at such facilities include: meal preparation, housekeeping, laundry and transportation. These facilities are licensed as assisted living facilities and may be converted from independent living facilities at the option of the Company. All of the Company's current revenues from the provision of independent living services are attributable to private payors. THE OUTLOOK POINTE(R) SIGNATURE SERIES ASSISTED LIVING FACILITY MODELS The architectural and interior design concepts of the Outlook Pointe(R) signature series assisted living facility models incorporate the Company's operating philosophy of protecting resident privacy, enabling freedom of choice, encouraging independence and fostering individuality in a home-like setting. The buildings are residential in appearance, designed as "neighborhoods" within a "community." All are constructed to meet institutional health care facility standards. The building designs incorporate the Company's mission and dedication to providing a new outlook for seniors, encouraging choice, wellness, and vitality. The Company believes that its residential environment accomplishes: (i) lessening the trauma of change for residents and their families; (ii) achieving operational efficiencies; (iii) facilitating resident mobility and ease of access by caregivers; and (iv) differentiating the Company from other assisted living and long-term care operators. The models are freestanding buildings that range in size from 48 units to 106 units and are designed to accommodate the full range of assisted living services offered by the Company, including the Company's Balanced Gold(R) and "Treasures(SM)" Memory Care programs. The buildings are usually one to two stories and of incombustible construction, and are designed to accommodate future expansion. The design of the facilities allows specialized grouping of residents, including residents receiving care in the "Treasures(SM)" program, and a central core for resident interaction. In addition, the buildings are designed with fully-equipped therapy gyms and treatment rooms for provision of medical rehabilitation services. Resident units, including studio, privacy, companion and one bedroom suites, are functionally grouped as "neighborhoods" within a "community" and are configured internally to provide private bath, living area and sleeping area with emergency call systems and cable television service. Porches, terraces, gardens and activity areas are designed to fulfill outdoor interests of residents. The Company has three basic building plan design prototypes which provide it with flexibility in adapting the model to a particular site and to accommodate the various income and care levels demanded in a particular market. 7 8 OPERATING FACILITIES The following table sets forth certain information as of June 30, 1999 with respect to the senior living and care facilities operated by the Company.
RESIDENT CAPACITY OWNED(O)/ BY CARE LEVEL(1) DATE LEASED(L)/ --------------------- ------------------ FACILITY LOCATION MANAGED(M) ALF SNF ILF OPENED ACQUIRED - ----------------- ---------- ----- ----- --- ------ -------- Currently Operated: PENNSYLVANIA Allison Park Outlook Pointe(R) at Allison Park.................... L 79 -- -- -- 3/96 State College Outlook Pointe(R) at State College................... L 54 -- -- 5/97 -- Altoona Outlook Pointe(R) at Altoona......................... L 54 -- -- 10/97 5/99(2) Harrisburg Outlook Pointe(R) at Harrisburg...................... L 57 -- -- 12/97 3/99(2) Reading Outlook Pointe(R) at Reading......................... L 56 -- -- 1/98 5/99(2) Bloomsburg Outlook Pointe(R) Commons at Bloomsburg(4)........ L 65 -- -- -- 1/97 Darlington Outlook Pointe(R) Commons at South Beaver(4)...... O 89 -- -- -- 10/97 Kingston Outlook Pointe(R) Commons at Kingston(4).................. L 78 -- -- -- 1/97 Balanced Care, Kingston(4)...... L -- 65 -- -- 1/97 Peckville Outlook Pointe(R) Commons at Mid Valley(4)................ L 71 -- -- -- 1/97 Balanced Care, Mid Valley(4).... L -- 38 -- -- 1/97 Old Forge Outlook Pointe(R) Commons at Old Forge(4)................. L 49 -- -- -- 1/97 Wyoming Outlook Pointe(R) Commons at Wyoming(4)................... L 50 -- -- -- 1/97 Butler Outlook Pointe(R) at Butler(4)....................... O 36 -- -- -- 10/97 Sarver Outlook Pointe(R) Commons at Sarver(4)....................... O 36 -- 4 -- 10/97 Saxonburg Outlook Pointe(R) Commons at Saxonburg(4)(5).............. L 107 -- 16 -- 10/97 Bloomsburg Balanced Care, Eyers Grove(4)(5)..................... L -- 66 -- -- 1/98 Millville Outlook Pointe(R) Commons at Eyers Grove(4)............... O 51 -- -- -- 1/98
8 9
RESIDENT CAPACITY OWNED(O)/ BY CARE LEVEL(1) DATE LEASED(L)/ --------------------- ------------------ FACILITY LOCATION MANAGED(M) ALF SNF ILF OPENED ACQUIRED - ----------------- ---------- ----- ----- --- ------ -------- Peckville Outlook Pointe(R) at Mid Valley(3)....................... M 40 -- -- 8/98 -- Scranton Outlook Pointe(R) Commons at Scranton(3).................. M 72 -- -- 10/98 -- Berwick Outlook Pointe(R) Commons at Berwick(3)................... M 72 -- -- 10/98 -- Reedsville Outlook Pointe(R) Commons at Lewistown(3)......... M 72 -- -- 11/98 -- Lewisburg Outlook Pointe(R) Commons at Lewisburg(3)................. M 73 -- -- 11/98 -- Mechanicsburg Outlook Pointe(R) at Creekview(3).................... M 103 -- -- 11/98 -- Dillsburg Outlook Pointe(R) at Logan Meadows(3)................ M 62 -- -- 12/98 -- Beaver Falls Outlook Pointe(R) at Chippewa(3)..................... M 69 -- -- 2/99 -- York Outlook Pointe(R) at York(3)......................... M 66 -- -- 2/99 -- Bridgeville Outlook Pointe(R) at Lakemont Farms(3)............... M 106 -- -- 6/99 -- ----- ----- --- SUBTOTAL................... 1,667 169 20 ARKANSAS Sherwood Outlook Pointe(R) at Sherwood........................ L 41 -- 16 9/97 4/99(2) Mountain Home Outlook Pointe(R) at Mountain Home................... L 41 -- 16 10/97 4/99(2) Maumelle Outlook Pointe(R) at Maumelle(3)..................... M 41 -- 16 10/97 -- Pocohontas Outlook Pointe(R) at Pocahontas(3)................... M 41 -- 16 10/97 -- Blytheville Outlook Pointe(R) at Blytheville(3).................. M 55 -- 2 11/97 -- ----- ----- --- SUBTOTAL................... 219 0 66 VIRGINIA Harrisonburg Outlook Pointe(R) at Harrisonburg(3)................. M 57 -- -- 5/98 -- Roanoke Outlook Pointe(R) at Roanoke(3)...................... M 65 -- -- 5/98 --
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RESIDENT CAPACITY OWNED(O)/ BY CARE LEVEL(1) DATE LEASED(L)/ --------------------- ------------------ FACILITY LOCATION MANAGED(M) ALF SNF ILF OPENED ACQUIRED - ----------------- ---------- ----- ----- --- ------ -------- Stafford Outlook Pointe(R) at Stafford(4)..................... L 41 -- -- -- 6/98 Danville Outlook Pointe(R) at Danville(3)..................... M 66 -- -- 7/98 -- ----- ----- --- SUBTOTAL................... 229 0 0 OHIO Ravenna Outlook Pointe(R) at Ravenna(3)...................... M 57 -- -- 2/98 -- Mansfield Outlook Pointe(R) at Ontario(3)...................... M 66 -- -- 8/98 -- Lima Outlook Pointe(R) at Lima(3)......................... M 66 -- -- 9/98 -- Xenia Outlook Pointe(R) at Xenia(3)........................ M 102 -- -- 1/99 -- Medina Outlook Pointe(R) at Medina(3)....................... M 80 -- -- 2/99 -- ----- ----- --- SUBTOTAL...................... 371 0 0 NORTH CAROLINA Raleigh Outlook Pointe(R) at Northridge(4)................... O 116 -- -- -- 12/97 Greensboro Outlook Pointe(R) at Greensboro(3)................... M 47 -- -- 10/98 -- ----- ----- --- SUBTOTAL...................... 163 0 0 MISSOURI Dixon Balanced Care, Dixon......... L -- 60 -- -- 8/96 Hermitage Balanced Care, Hermitage....................... L -- 120 -- -- 8/96 Lebanon Balanced Care, Lebanon North........................... L -- 180 -- -- 8/96 Balanced Care, Lebanon South.... L 12 106 -- -- 8/96 The Terraces at Lebanon South... L 31 -- -- -- 8/96 Nixa Balanced Care, Nixa............. L -- 82 -- -- 8/96 The Terraces at Nixa............ L 30 -- -- -- 8/96 Republic Balanced Care, Republic... O -- 127 -- -- 8/96 Springfield Balanced Care, Springfield East.......................... L -- 120 -- -- 8/96 The Terraces at Springfield East.......................... L -- -- 31 -- 8/96 Balanced Care, Springfield West I............................. L -- 90 -- -- 8/96 Balanced Care, Springfield West II............................ L -- 180 -- -- 8/96 The Terraces at Springfield..... L 28 -- -- -- 1/97
10 11
RESIDENT CAPACITY OWNED(O)/ BY CARE LEVEL(1) DATE LEASED(L)/ --------------------- ------------------ FACILITY LOCATION MANAGED(M) ALF SNF ILF OPENED ACQUIRED - ----------------- ---------- ----- ----- --- ------ -------- Nevada Balanced Care, Nevada........... O -- 60 -- -- 8/96 The Terraces at Nevada.......... L 30 -- -- -- 1/97 The Terraces of Balanced Care... L 22 -- -- -- 5/97 The Terraces of Balanced Care... L 24 -- -- -- 5/97 Butler The Terraces of Balanced Care............................ L 23 -- -- -- 5/97 Lamar The Terraces of Balanced Care............................ L 24 -- -- -- 8/97 ----- ----- --- SUBTOTAL...................... 224 1,125 31 WEST VIRGINIA Martinsburg Outlook Pointe(R) at Martinsburg(3).................. M 63 -- -- 1/99 -- TENNESSEE Jackson Outlook Pointe(R) at Jackson(3)...................... M 66 -- -- 1/99 -- Bristol Outlook Pointe(R) at Bristol(3)...................... M 66 -- -- 2/99 -- Murfreesboro Outlook Pointe(R) at Murfreesboro(3)................. M 66 -- -- 3/99 -- Johnson City Outlook Pointe(R) at Johnson City(3)................. M 66 -- -- 6/99 -- ----- ----- --- SUBTOTAL................... 264 0 0 FLORIDA Pensacola Outlook Pointe(R) at Pensacola(3).................... M 66 -- -- 6/99 -- ----- ----- --- TOTAL...................... 3,266 1,294 117 ----- ----- ---
- --------------- (1) "ALF" means assisted living facility, "SNF" means skilled nursing facility and "ILF" means independent living facility. The Company's ILFs in Missouri are licensed as ALFs and may be converted to ALFs as the needs of its residents so require. (2) During Fiscal 1999, the Company exercised its option to acquire the stock of the Operator/Lessee of the facilities. As a result, the Company acquired the leasehold interest in the named facility. See "Business -- Development." (3) The Company manages the facility for the Operator/Lessee and has an option to acquire the stock of the Operator/Lessee. See "Business -- Development." (4) Denotes a name change. (5) In the third quarter of Fiscal 1999, the Company completed the sale and subsequent leaseback of two of its facilities to an unrelated third party. 11 12 DEVELOPMENT An integral element of the Company's growth to date has been the design, development and opening of the Outlook Pointe(R) signature series assisted living facilities which are owned by independent Operators/ Lessees and managed by the Company. The Company believes that the signature series assisted living facilities meet the needs of the upper middle, middle and moderate income populations in its markets and are designed to provide the broad range of services contemplated by its Balanced Care Continuum strategy over a range of pricing options. The Company has opened 34 of its Outlook Pointe(R) signature series assisted living facilities as of June 30, 1999. The Company's development projects have generally involved entering into development agreements with third party owners, which are typically Real Estate Investment Trusts or REITs (each, an "Owner"). An independent third party company (the "Operator/Lessee") leases the assisted living facility from the Owner when construction has been completed and provides funding for the working capital during the initial occupancy period. The Company manages the assisted living facility pursuant to a management agreement for a term of two to nine years in return for a management fee approximating 6% of the net revenue of the facility. The foregoing off-balance sheet financing structure is referred to as the "Black-Box Structure". The Company's development activities are significantly affected by volatility in the capital markets and specific transaction terms which affect the Company's ability to utilize non-binding financing commitments from REIT's and other lenders. More specifically, there was a significant reduction in the amount of REIT financing available for new assisted living construction in Fiscal 1999. Furthermore, the ability of the Company to negotiate acceptable transaction terms and to currently recognize income on development fees has become increasingly difficult due to accounting pronouncements and guidance issued by the Emerging Issues Task Force ("EITF") and the Securities and Exchange Commission staff. Finally, the Company's leverage (i.e. debt and other financial commitments in relation to equity) has increased due to its extensive use of operating leases to finance the construction of its Outlook Pointe(R) assisted living facilities. As a direct result of the foregoing, the Company has been unable to obtain financing on acceptable terms to continue development of its Outlook Pointe(R)signature series assisted living facilities. As a result, in Fiscal 1999, management focused the Company's efforts on the operations of existing facilities, and facilities which are now under construction, and substantially reduced its development activities with respect to new sites and projects. The Company has terminated, or allowed the expiration of, most of its land options on previously secured sites. Management has taken these steps to focus on building market share in existing markets, to channel its financial and human resources into meeting facility occupancy goals, and to build brand recognition throughout the Balanced Care system. The Company had 18 assisted living facilities under construction at June 30, 1999, which the Company will continue to develop. If, and when, capital becomes available to the Company on acceptable terms, the Company expects to implement a program of limited development consisting of approximately four to five projects per quarter that meet the Company's development standards. The following table sets forth certain information as of June 30, 1999 regarding the 18 Outlook Pointe(R) signature series assisted living facilities for which the construction process has commenced and which the Company is developing for other independent Operators/Lessees. The Company has an agreement to manage each facility for an Operator/Lessee under the Black-Box Structure.
ESTIMATED CONSTRUCTION ESTIMATED RESIDENT START DATE COMPLETION DATE ASSISTED LIVING FACILITY LOCATION CAPACITY (QUARTER END) (QUARTER END) - --------------------------------- -------- ------------- --------------- PENNSYLVANIA Shippensburg....................................... 66 Commenced Sept. 1999 Loyalsock.......................................... 66 Commenced Dec. 1999 Lebanon............................................ 66 Commenced Sept. 1999 ----- Subtotal................................... 198
12 13
ESTIMATED CONSTRUCTION ESTIMATED RESIDENT START DATE COMPLETION DATE ASSISTED LIVING FACILITY LOCATION CAPACITY (QUARTER END) (QUARTER END) - --------------------------------- -------- ------------- --------------- OHIO Hilliard........................................... 106 Commenced Dec. 1999 Centerville........................................ 106 Commenced Dec. 1999 Westerville........................................ 106 Commenced June 2000 Sagamore Hills..................................... 105 Commenced Dec. 1999 ----- Subtotal................................... 423 TENNESSEE Hendersonville..................................... 66 Commenced Dec. 1999 Kingsport.......................................... 66 Commenced Sept. 1999 Knoxville.......................................... 106 Commenced Dec. 1999 Morristown......................................... 66 Commenced Dec. 1999 Oak Ridge.......................................... 66 Commenced Dec. 1999 ----- Subtotal................................... 370 FLORIDA Tallahassee........................................ 106 Commenced Dec. 1999 VIRGINIA Chesterfield....................................... 80 Commenced Dec. 1999 WEST VIRGINIA Teay's Valley...................................... 66 Commenced Dec. 1999 INDIANA Anderson........................................... 66 Commenced Sept. 1999 Evansville......................................... 106 Commenced Dec. 1999 ----- Subtotal................................... 172 MARYLAND Hagerstown......................................... 66 Commenced Sept. 1999 ----- TOTAL...................................... 1,481
ACQUISITIONS AND STRATEGIC ALLIANCES Since its inception, the Company has acquired 18 assisted living facilities, five Outlook Pointe(R) signature series assisted living facilities from Operator/Lessees, 13 skilled nursing facilities, and four independent living facilities, as well as a home health care agency. While the Company is focusing management's efforts on the operations of existing facilities and facilities now under construction, it may consider selective acquisitions in the future through joint ventures, or other alliances when, and if, capital becomes available to the Company on acceptable terms. For development projects which utilized the Black-Box Structure, the Company has the option to purchase the equity or assets of the Operator/Lessee pursuant to a formula set forth in an Option Agreement and a Shortfall Funding Agreement respectively. As consideration for the option, which is exercisable by the Company at any time during the term of the Option Agreement, the Company pays option payments to the Operator/Lessee. Without the Owner's prior consent, the Operator/Lessee may not sell its equity or assets to any third party other than the Company. During Fiscal 1999, the Company exercised its option to purchase the Operator/Lessees equity interests on five projects which were managed by the Company located in Harrisburg, Altoona, and Reading, Pennsylvania and in Sherwood and Mountain Home, Arkansas. Based on capital availability, the Company plans to exercise its options to purchase the equity interests on approximately 16 of its managed operations during Fiscal 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital resources." 13 14 OPERATIONS CENTRALIZED CORPORATE MANAGEMENT The Company's corporate and other administrative functions are centralized so that the facility-based management and staff can focus on resident care. The Company's corporate office, located in Mechanicsburg, Pennsylvania, is generally responsible for: (i) establishing Company-wide policies and procedures relating to, among other things, resident care and operations; (ii) performing accounting and finance functions; (iii) developing and implementing employee training programs and materials; (iv) coordinating human resources; (v) food services and environmental functions; (vi) designing marketing programs and coordinating marketing functions; and (vii) providing strategic direction. The Company manages the operations of each of its facilities through standardized management reporting and centralized control of capital expenditures and the purchase of larger and more frequently used supplies. Facility expenditures are monitored by regional operations teams headed by one of the Company's Regional Vice Presidents who are responsible for the financial performance of the facilities in their region. The operational activities of the Company's assisted living facilities are directed by the Company's Chief Operating Officer, its Executive Vice President of Operations, its Senior Vice President -- Operations, and its Vice President -- Missouri Division, who are responsible, with the regional Vice Presidents, for the opening and operation of these facilities. COMMUNITY -- BASED MANAGEMENT An assisted living Community Director or skilled nursing Facility Administrator manages the operations at each assisted living or skilled nursing facility, including oversight of the quality of care, delivery of resident services, and monitoring of financial performance, and is responsible for all personnel, including assisted living, food service, maintenance, activities, security, housekeeping, and, where applicable, nursing. Directors and Administrators are compensated based on attaining certain quality service goals and on the financial goals of the facility. In most cases, each facility also has department managers that direct nursing or care services, dining services, activities, transportation, environmental, housekeeping and marketing functions. In its assisted living communities, the Company has adopted the concept of a multi-task work environment whereby each employee's responsibilities span a number of traditional job descriptions. For example, an employee may, during the course of a day, provide housekeeping, food delivery service, activities, and assistance with ADLs to residents. On-site care managers and residents' assistants provide most of the actual resident care in conjunction with a small support team consisting of a nurse, a housekeeper, a maintenance helper, an administrative coordinator and a small dining service team. The Company actively recruits personnel to maintain adequate staffing levels at its existing facilities, as well as additional staff for new or acquired facilities, prior to opening. The Company has adopted comprehensive recruiting and screening programs for management for positions that utilize personnel profiling, corporate office interviews, and background checks. The Company offers system-wide training and orientation for its resident care employees, department managers, and executive staff at the facility level through Company-sponsored programs. QUALITY ASSURANCE AND TRAINING The Company's quality assurance program is designed to achieve, maintain and enhance high performance in the area of resident and family satisfaction, employee development, Fiscal responsibility and corporate integrity, along with continuous internal quality improvement. Corporate office staff oversee the implementation of the quality assurance program at each of the Company's facilities. Resident and family participation is encouraged and feedback is sought through satisfaction surveys, focus groups, resident councils and discussions with family members. The Company provides intensive training programs to ensure that its quality standards are achieved by its employees at each facility, and strives to meet employees' needs and provide a respectful and cooperative environment. Employees are responsible for handling finances with efficiency and integrity and adhere to an ethical code of conduct. Internal standards for all areas of service have been 14 15 established which the Company believes meet or exceed those of regulatory agencies. Monitoring and improving internal performance in regard to these standards is facilitated by cross-functional performance improvement teams. Additionally, inspections of each facility are conducted regularly by corporate staff who review all aspects of operations, care and services provided. MARKETING The Company's sales and marketing program has been developed by the corporate sales and marketing staff under the direction of the Company's Vice President of Sales and Vice President of Marketing and is modified in accordance with the needs of each community. The Marketing Department focuses on creating awareness of the Company and its services among prospective residents, their families, medical and professional referral sources and other key decision makers. The Sales Department focuses on recruiting, hiring, and training sales personnel, and monitors their performance against census plans. Sales and marketing efforts are implemented on a regional and local level under the supervision of Regional Marketing Directors and facility Community Directors. Before opening a new assisted living facility, the Company contacts referral sources and conducts marketing programs that generate public awareness beginning with the start of construction and intensify several months prior to opening of the facility. An on-site Marketing Coordinator and Community Director are at the facility approximately four and six months, respectively, prior to the opening of the facility and are supported by the Company's corporate marketing department. The Company generally expects occupancy of newly developed assisted living facilities to reach a pre-opening goal of 20%, and expects to add an additional four to five new residents monthly reaching a targeted occupancy of 92% within 10 to 21 months after opening, depending on the size of the facility. Once a facility opens, the Company believes that satisfied residents and their families are its most important referral sources. The Company's emphasis on high quality services and resident satisfaction create a strong referral base in the surrounding community. In addition, the Company focuses on developing the reputation of the facilities for quality care and its full array of excellent service programs among potential referral sources. MANAGEMENT INFORMATION SYSTEMS/YEAR 2000 READINESS DISCLOSURE The Company's Information Systems department, under the direction of the Company's Vice President of Corporate Services, develops, implements and maintains management and financial systems which enable the Company to closely monitor operating costs and quickly distribute financial and operating information to appropriate levels of management in a cost efficient manner. The Company uses flexible input methods and communications to allow for distributed data collection and analysis. As a result of the curtailment of future development plans, the Company has postponed its plans to upgrade the existing financial system to accommodate future growth, which was scheduled to begin during Fiscal 1999. Management believes that its current data systems are adequate for current operations and provide the flexibility to accommodate the planned growth of its operations without disruption or significant modification to existing systems through Fiscal 2000. However, computer software and/or hardware that was designed to define the year with a two digit date field rather than a four digit field may fail or miscalculate data in the year 2000, causing disruption to the operations or business activities of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The health care industry is highly competitive and the Company believes that competition in its current and targeted markets will continue to increase. There are currently few regulatory and other barriers to entry in the assisted living industry. The Company faces competition for residents from numerous local, regional and national providers of facility-based assisted living and long-term care, including skilled nursing facilities, as well as medical rehabilitation and home health care providers. The Company believes the primary competitive factors in the senior care industry are: (i) reputation for, and commitment to, high quality care; (ii) quality of 15 16 support services offered (such as home health care and food services); (iii) price of services; (iv) physical appearance and amenities associated with the facilities; and (v) location. Because seniors tend to choose senior living facilities near their homes, the Company's principal competitors are other senior living and long-term care facilities in the same geographic areas as the Company's facilities. The Company also competes with other health care businesses with respect to attracting and retaining nurses, technicians, aides, and other high quality professional and non-professional employees and managers. GOVERNMENT REGULATION The health care industry is subject to extensive federal, state and local regulation. The various layers of governmental regulation affect the Company's business by controlling its growth, requiring licensure or certification of its facilities, regulating the use of its facilities and controlling reimbursement to the Company for services provided. Licensing, certification and other applicable governmental regulations vary from jurisdiction to jurisdiction and are revised periodically. It is not possible to predict the content or impact of future legislation and regulations affecting the health care industry. Laws and regulations governing skilled nursing facilities are particularly extensive and establish minimum standards in a variety of areas, including physical plant specifications; personnel training and education; the level of nursing, physician, rehabilitation, social, dietary and recreational services to be provided; and safety and evacuation plans. The Omnibus Reconciliation Act of 1987 ("OBRA") significantly redefined the scope and nature of federal regulations governing skilled nursing facilities certified to participate in the Medicare and Medicaid programs, with an emphasis on resident rights and quality of care. Skilled nursing facilities are also generally subject to and must comply with state and/or local building and fire codes. In addition, some states, including Missouri, have certificate of need laws applicable to skilled nursing facilities. Certificate of need laws require that a state agency determine that a sufficient need exists for a facility before it may be opened. These laws may also regulate permitted capital expenditures and expansion of services and beds. Skilled nursing facilities, like other health care providers, are periodically inspected by governmental agencies with authority over licensing and certification for participation in the Medicare and Medicaid programs. New survey and certification requirements under OBRA for participation in the Medicare and Medicaid programs became effective in 1995, significantly changing the process of surveying long term care facilities. These requirements established a graduated system of penalties and remedies to match the severity of the deficiency. Facility deficiencies may result in the imposition of fines and penalties, a need to undertake corrective actions, a temporary moratorium on admissions pending correction of deficiencies, and could result in decertification from the Medicare and Medicaid programs or loss of licensure and closure of the facility. To date, these regulations have not had a material adverse effect on the Company's operations. On March 25, 1999, President Clinton signed the Nursing Home Resident Protections Amendments of 1999, which require nursing facilities that voluntarily withdraw from the Medicaid program to continue to accept Medicaid reimbursement and remain subject to Medicaid requirements with respect to residents who were eligible for Medicaid immediately preceding the voluntary withdrawal. In addition, the federal government, through the Health Care Financing Administration has issued new instructions to state agencies that are responsible for surveys of nursing facilities. In March 1999, the Health Care Financing Administration, sent a letter to state survey agencies regarding the need to timely and comprehensively investigate complaints in nursing facilities and take appropriate action where warranted. In July 1999, the Health Care Financing Administration substantially revised survey procedures in nursing facilities to include a presurvey analysis of the facility's compliance record based upon resident and facility data that facilities must report to the federal government on a continual basis. The Company believes it is in substantial compliance with applicable federal and state laws, rules and regulations governing nursing facilities, but it is unable to predict the extent to which these changes in procedure will have an impact on the Company's business. In March 1997, the federal government, through the Health Care Financing Administration, proposed revisions to the conditions for participation in the Medicare program applicable to home health care providers. These revised conditions, as proposed, focused on matters such as patient rights, outcomes of care, patient assessment, care planning, and quality assessment. In January 1999, the Health Care Financing Administration published final rules to implement proposed changes regarding comprehensive assessments of patients and 16 17 reporting requirements associated with such assessments, known as Outcome and Assessment Information Set ("OASIS"). These final rules were effective on February 24, 1999, but other portions of the proposed 1997 rules have not been finalized. The Company is not able to predict at this time what the content of the outstanding proposed rules, if finalized, will be and it is too soon to quantify the impact that the February 1999 final rules may have on the Company's home health care services. The Company's assisted living facilities are subject to regulation by various state and local agencies. There are currently no federal laws or regulations specifically governing assisted living facilities. State requirements relating to the licensing and operation of assisted living facilities vary from state to state; however, most states regulate many aspects of a facility's operations, including physical plant requirements; resident rights; personnel training and education; requisite levels of resident independence; administration of medications; safety and evacuation plans; and the level and nature of services to be provided, including dietary and housekeeping. In most states, assisted living facilities must also comply with state and local building and fire codes and certain other licenses or certifications, such as a food service license, may be required. In addition, in several states, including Arkansas, Missouri, Kentucky and New Jersey certificate of need laws apply to assisted living facilities. Assisted living facilities are subject to periodic survey by governmental agencies with licensing authority. In certain circumstances, failure to satisfy survey standards could result in a loss of licensure and closure of a facility. Because assisted living facilities historically have not been considered as traditional health care entities and government and private insurers generally have not reimbursed providers for assisted living services, these facilities have not been subject to the degree of regulation which governs nursing homes and other health care providers. As assisted living emerges as a cost-effective alternative to nursing facility care, it is anticipated that assisted living facilities could become subject to more extensive regulation, particularly in the areas of licensure and reimbursement. The content of such regulations, the extent of any increased regulation and the impact of any such regulation on the Company cannot be predicted at this time and there can be no assurance that such regulations will not adversely affect the Company's business. Assisted living facilities may be eligible to participate as Medicaid providers and receive reimbursement through Medicaid waiver programs and managed care plans. The Company has elected to participate in Medicaid programs in Arkansas and North Carolina. As a Medicare and Medicaid provider with respect to its skilled nursing facilities and rehabilitation and home health care operations, the Company is subject to a variety of laws regulating relationships among health care facilities, providers and physicians. Among these laws is the federal "Stark Act" legislation which prohibits, with some exceptions, a physician from referring patients for certain designated health care services, including home health care and certain rehabilitation services, to entities in which the physician or a member of his or her family has a financial interest. In early 1998, proposed regulations relating to the Stark Act were issued. In addition, several legislative reforms of the Stark Act have been introduced in Congress in 1999. The Company is not able to predict at this time what the content of final regulations may be or whether the Stark Act will be revised. Therefore, the Company also cannot predict the impact revised legislation or final regulations may have on the Company's business and operations. The Company, is also subject to federal anti-kickback laws which prohibit the payment or receipt of any remuneration in return for, or to induce, the referral of patients for items or services that are paid for, in whole or in part, by Medicare or Medicaid. Violation of these provisions could result in civil or criminal penalties, as well as exclusion from participation in the Medicare and Medicaid programs. There are currently a number of federal initiatives being undertaken to increase enforcement of the federal anti-kickback law and other antifraud and abuse provisions. The federal government, through the Office of Inspector General, recently released a model compliance plan for home health agencies. The model plan identifies a number of risk areas where home health agencies need to pay particular attention to their practices and further requires the home health agency to exercise oversight over parties with which it does business. The Company has established a corporate compliance code of conduct relating to, among other things, resident and patient care, and fraud and abuse/legal policy and procedures. Additionally, the Balanced Budget Act of 1997 (the "Budget Act"), signed into law on August 5, 1997, contains a number of antifraud provisions designed to further fight abuse and enhance program integrity. Certain states have also enacted anti-kickback laws patterned on the federal law. The Company believes that 17 18 its operations are in substantial compliance with the laws applicable to Medicare and Medicaid providers, including antifraud and abuse provisions; however, there can be no assurance that the administrative or judicial interpretation of such laws or the regulations promulgated thereunder will not in the future have a material adverse impact on the Company's operations or that the Company will not be subject to an investigation which would require a significant investment of time and manpower by the Company. The Company derives a significant portion of its revenues from federal and state reimbursement programs. All of the skilled nursing facilities operated by the Company are certified to receive benefits under Medicare and Medicaid, and the Company's home health care agency is certified under Medicare. The reimbursement methodology for a variety of health care providers has changed significantly as a result of provisions contained in the Budget Act, which provisions materially impacted the Company's operations and financial condition. The Budget Act provides for the establishment of a prospective payment system ("PPS") for skilled nursing services (rather than the retrospective cost-based methodology in place prior to July 1, 1998). The PPS for skilled nursing facilities is being phased in over three cost reporting periods, commencing on or after July 1, 1998. During the transition period, the payment rate is based on a percentage blend of a facility-specific rate and a federal per diem rate. Once the PPS is fully implemented, skilled nursing facilities will be paid a federal per diem rate for covered services, which include routine and ancillary services and most capital-related costs. In conjunction with PPS, consolidated billing for Medicare Part A Services is required for skilled nursing facilities. Under consolidated billing for Medicare Part A Services, facilities must bill Medicare for all of the services residents receive, including all therapy services. The Company's skilled nursing facilities began utilizing this new rate methodology on July 1, 1998. The Company expects Fiscal 2000 results at the skilled nursing facilities to be similar to Fiscal 1999. To maximize operating results under the new regulations the Company has embarked upon a program to reduce costs and manage acuity levels. These steps included: (i) a renegotiation of therapy service contracts; (ii) a reduction of nursing costs through managing hours worked to patient acuity; (iii) evaluation of the need for high-cost programs; and (iv) consolidating and eliminating certain non-patient related services. The financial impact of these operational changes and the new Medicare reimbursement rates are reflected in the Fiscal 1999 operating results and further discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Result of Operations." The Budget Act additionally establishes a PPS for home health care services pursuant to which all services which are currently paid on a reasonable cost basis will be paid on a prospective basis. The PPS for home health care services has been delayed until at least February 2000 to allow for Medicare Y2K systems transition. When home health PPS is implemented, there is to be a transition period not to exceed four years. Until such time as there is full implementation of the PPS for home health care services, the Budget Act imposes a number of interim modifications on reimbursement, including a reduction in per visit cost limits. The interim payment system implemented by the Health Care Financing Administration is effective retroactive to October 1997 and has resulted in required repayments to the federal government by a number of home health agencies. Reimbursement of these provider overpayments and the imposition of per visit cost limits have created significant financial hardship for providers, with a number of home health providers having ceased operations. In an effort to offset the hardship caused by the repayment obligation, the Health Care Financing Administration has authorized repayments over a 12-month period, rather than requiring a lump sum payment. The Budget Act also modifies reimbursement rates for rehabilitation agencies and outpatient therapy providers. It is not possible to predict at this time the impact that any or all these changes in reimbursement methodology may have on the business, results of operations or financial condition of the Company, though the reform measures are intended to reduce the amounts paid by the government for these services. State Medicaid programs currently apply to all of the Company's skilled nursing facilities. In some of the states where the Company has assisted living facilities, Medicaid programs apply to the facilities through Medicaid waiver programs or other Medicaid rules. While these programs differ in certain aspects from state to state, they are all subject to requirements imposed by the federal government, which provides approximately 50% of the funds available under these programs. In Missouri, where the Company operates skilled nursing facilities, payments are based upon specific cost reimbursement formulas established by that state, 18 19 which are generally based on historical costs with adjustment for inflation. Pennsylvania instituted a case mix reimbursement system in 1996 which reimburses skilled nursing facilities based upon a combination of resident acuity and cost data. For Fiscal 1999, the Company derived approximately 26% of its gross patient revenues from Medicare and approximately 48% of its gross patient revenues from Medicaid. For the years ended June 30, 1998 and 1997, the Company derived approximately 43% and 38% of its gross patient revenues from Medicare, respectively, and approximately 37% and 38% of its gross patient revenues from Medicaid, respectively. Both governmental and private-payor sources have instituted cost containment measures designed to limit payments made to long-term health which adversely affect reimbursements to the Company. Furthermore, although federal regulations do not recognize state budget deficiencies as a legitimate ground to curtail funding of their Medicaid cost reimbursement programs, states have nevertheless curtailed such funding in the past. No assurance can be given that states will not do so in the future or that the future funding of Medicaid programs will remain at levels comparable to present levels. Government reimbursement programs are also subject to statutory and regulatory changes, administrative rulings and interpretations, determinations by reimbursement intermediaries, and governmental funding restrictions, all of which may materially increase or decrease the rate of program payments to health care providers operated by the Company. In addition, there can be no assurance that facilities or other providers owned, leased or managed by the Company, now or in the future, will initially meet or continue to meet the requirements for participation in such programs. The Company believes the structure and composition of government regulation of health care will continue to change and, as a result, it regularly monitors developments in the law. The Company expects to modify its agreements and operations from time to time as the business and regulatory environment changes. While the Company believes it will be able to structure all its agreements and operations in accordance with applicable law, there can be no assurance that its arrangements will not be successfully challenged. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist which also may require modifications to existing and planned properties to create access by disabled persons. While the Company believes that its properties are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the Company. Further, legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. The Company is subject to various federal, state and local environmental laws and regulations. Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial and the liability of an owner or operator as to any property is generally not limited under such laws and regulations and could exceed the property's value and the aggregate assets of the owner or operator. The presence of these substances, or failure to remediate such contamination properly, may also affect adversely the owner's ability to sell or rent the property, or to borrow using the property as collateral. Under these laws and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances, such as asbestos-containing materials, at the disposal site, may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of its properties, the Company could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties. The Company is also evaluating the impact of the recent report issued by the United States General Accounting Office in April 1999 entitled "Assisted Living Quality-of-Care and Consumer Protection Issues in Four States" (the "GOA Report") on its methods of delivery. Generally, the GAO Report found that assisted living facilities do not routinely provide prospective residents with key information they need so they can compare what several facilities offer and determine whether a facility is appropriate for their needs. The GAO 19 20 Report also found that some assisted living residents are encountering quality of care and consumer protection problems. Due to the recent nature of the GAO Report, the Company cannot predict the impact on its methods of delivery. The Company will continue to evaluate the issues raised by the GAO Report and will take what actions, if any, are required to provide adequate quality of care and consumer protections to its residents. LIABILITY AND INSURANCE Providing health care services involves an inherent risk of liability. Participants in the senior living and health care services industry are subject to lawsuits alleging negligence or related legal theories, many of which may involve large claims and result in the incurrence of significant defense costs. The Company currently maintains property, liability and professional medical malpractice insurance policies for the Company's owned, leased and managed facilities with such coverages and deductibles which management believes are prudent, adequate and in keeping with industry practice. The Company also has an umbrella excess liability protection policy in the amount of $5.0 million to $10.0 million per location. In addition, the Company maintains policies for employee practices and officers and directors liability in the amounts of $1.0 million and $10.0 million respectively. There can be no assurance that a claim in excess of the Company's insurance will not be asserted. A claim against the Company not covered by, or in excess of, the Company's insurance, could have a material adverse affect on the Company. The Company's insurance policies are reviewed annually. There can be no assurance that the Company will be able to obtain liability insurance in the future or that, if such insurance is available, it will be available on acceptable terms. EMPLOYEES As of June 30, 1999, the Company had approximately 2,900 employees. None of the Company's employees is represented by a union. The Company considers its employee relations to be good. Although the Company believes it is able to employ sufficient skilled personnel to staff the facilities it operates or manages, a shortage of skilled personnel in any of the geographic areas in which it operates could affect adversely the Company's ability to recruit and retain qualified employees and its operating expenses. RISK FACTORS This Annual Report on Form 10-K contains various "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which represent the Company's expectations or beliefs concerning various future events, include the following: statements concerning anticipated effects on earnings, cost savings and operations of the Company; net cash flow; industry trends; certain expected capital expenditures; computer software modification and replacement; the outcome of any government inquiries, litigation or other proceedings; the impact of government regulation; and future environmental costs. These statements are based on current expectations that involve a number of risks and uncertainties, including the following: Limited Operating History. The Company was formed in April 1995 and has a limited operating history. The Company had net income (loss) of ($909,000), ($4,492,000) and $3,575,000 for its Fiscal years ended June 30, 1996, 1997 and 1998, respectively, and had a net loss of $23,637,000 for Fiscal 1999. As of June 30, 1999, the Company had an accumulated deficit of $25,473,000. The Company's newly developed assisted living facilities are expected to incur operating losses until they achieve break-even occupancy levels of approximately 78%. The Company expects to achieve targeted stabilized occupancy levels of approximately 92% approximately 10 to 21 months after opening, depending on the size of the facility. In addition, the Company's acquired operations, even if profitable when acquired, may incur operating losses pending their integration into the Company's business. Several of the facilities that have been acquired by the Company experienced operating losses in the Fiscal years ended June 30, 1997, 1998 and 1999. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Accordingly, there can be no assurance that the Company will not continue to incur losses. Failure to achieve profitability could have a material adverse effect on the Company's business, results of operations and financial condition. 20 21 Implementation of Strategies. To date, the Company's growth has been primarily attributable to development of assisted living facilities and acquisitions of assisted living and skilled nursing facilities. The Company's first Outlook Pointe(R) signature series assisted living facility opened in May 1997. The Company has opened 34 additional Outlook Pointe(R) signature series assisted living facilities through June 30, 1999. As discussed previously, the Company has decided to emphasize the focus of management's efforts on the operations of existing facilities and facilities which are now under construction and to substantially reduce its development activities with respect to new sites and projects. Management is focused on building market share in existing markets, channeling its financial and human resources into meeting facility occupancy goals and building brand recognition throughout the Balanced Care system. If, and when, capital becomes available to the Company on acceptable terms, the Company expects to begin incremental development of its signature series assisted living facilities on a limited basis of approximately four to five projects per quarter that meets the Company's development standards. Any future growth strategies may place a significant burden on the Company's management resources and require the development, implementation and continual enhancement of sufficient operational, resident care, financial and management information systems. Successful implementation of the Company's strategies will also depend on its ability to raise capital and carry out its strategic plans and to attract, motivate and retain management, professional, marketing and other key personnel. There can be no assurance that its strategies can be implemented successfully or that sufficient management resources and operational, resident or patient care, financial and management information systems will be available. If the Company is unable to manage its growth or to implement its strategies effectively, its business, results of operations and financial condition could be materially and adversely affected. Need for Additional Capital. The Company has financing to fund the 18 projects under construction at June 30, 1999. The Company will need additional capital resources to fund any new development projects or acquisitions, including the working capital required to fund any new development projects during the start-up phase until a break-even point is attained. For the 28 communities managed and 18 projects under construction at June 30, 1999, the Company estimates that it will be required to make future working capital shortfall contributions of $3 million in connection with certain of these projects through Fiscal 2000. The Company also estimates that it will require approximately $14 million in cash if it exercises its options to purchase the stock or assets of Operators/Lessees for all projects currently managed (28) or to be managed (the 18 under construction). The Company expects to exercise these options for all of these facilities over the next two to three years. The Company's future growth will depend on its ability to obtain capital financing on acceptable terms to exercise its purchase options and to fund any future development and acquisition transactions. The Company may seek additional financing through public or private financing sources, including equity, debt or lease financing, or through the sale of certain assets. Financing transactions effected through the issuance of securities could result in substantial dilution to holders of Common Stock. There can be no assurance that adequate funding will be available as needed or on terms acceptable to the Company. Insufficient financial resources could result in the Company delaying or eliminating its plans to exercise purchase options, thereby slowing the growth of its operations, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Assisted Living Facility Construction and Occupancy Risks. To date, the Company has developed, built and opened 34 of its Outlook Pointe(R) signature series assisted living facilities. By June 30, 2000, the Company plans to open an additional 18 Company-designed assisted living facilities under construction at June 30, 1999 with an aggregate capacity of 1,481 residents. This will bring the total of developed Outlook Pointe(R) facilities to 52, with a capacity of 3,655 residents. Achievement of this goal will depend upon a number of factors, including the Company's ability to obtain adequate occupancy, licensing and other required governmental permits on a timely basis, and to control construction costs and project completion schedules for the projects currently under construction. In addition, numerous factors outside the Company's control will impact the successful completion of its development projects, including shortages of, or the inability to obtain, labor or materials, changes in applicable laws or regulations or in the method of applying such laws and regulations, the failure of general contractors or subcontractors to perform under their contracts, strikes and adverse weather. There can be no assurance that the Company will not encounter delays in completing its existing development program or that it will be successful in developing and constructing any other assisted living facilities. Also, 21 22 there can be no assurance that completed facilities will achieve targeted occupancy rates or otherwise be economically successful. The Company's inability to complete its existing development plans or the delay of those plans could have a material adverse effect on its business, results of operations and financial condition. Acquisition Risks; Difficulties of Integration. To date, the Company's growth rate has been significantly increased by acquisitions. Based on capital availability, the Company may continue to expand its business through strategic acquisitions. Pursuit of an acquisition strategy entails the risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities and potential profitability of acquisition candidates and in integrating the operations of acquired businesses. The Company's success in effecting acquisitions will depend on numerous factors, including its ability to identify suitable acquisition candidates and negotiate acceptable purchase terms, the competition for acquisitions, the Company's ability to finance acquisitions, and the availability of appropriate government licenses and approvals. Successful integration of acquired businesses will depend on the Company's ability to effect any required changes in operations or personnel, and may require renovation or other capital expenditures or the funding of unforeseen liabilities. There can be no assurance that the Company will consummate future acquisitions, that operations of acquired facilities can be successfully integrated or that acquired operations will be profitable. Substantial Fixed Charges; Pledge of Assets. The Company leases most of its facilities under long-term operating leases. Lease and debt service obligations of the Company for Fiscal 1999 aggregated approximately $11,500,000. Leases generally provide for rent increases and require the Company to pay taxes, utilities and insurance obligations. All of the Company's managed facilities (including the 18 under construction) are financed by operating leases. The Company intends to continue to acquire the leasehold interests of facilities financed under the Black-Box Structure and thus expects that the amount of its lease-related obligations will increase as the Company pursues this strategy. As a result, an increasing portion of the Company's cash flow will be devoted to lease payments and debt service, which will reduce the amount of cash flow otherwise available to support the Company's growth. Such leases and mortgages also typically contain rent coverage and other financial covenants. There can be no assurance that the Company will generate sufficient cash flow from operations to cover required lease and debt service payments or that the financial performance of the Company or of particular subsidiaries or facilities will be adequate to meet applicable financial covenants. Any payment or other default could cause a lender to foreclose upon any collateral securing the indebtedness or, in the case of an operating lease, could terminate the lease, resulting in a loss of revenue and asset value to the Company. In certain cases, indebtedness secured by real estate of a facility is also secured by a pledge of the Company's operating interest in the facility and, in certain other cases, indebtedness and facility leases are secured by a pledge of stock of certain of the Company's subsidiaries. Since most of the Company's leases and financing agreements contain cross-default and cross-collateralization provisions, a default by the Company on one of its payment obligations could adversely affect a significant number of the Company's other obligations and properties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Government Regulation. The health care industry is subject to extensive federal and state regulation and frequent regulatory change. Federal, state and local laws governing long-term care and other services provided to seniors address, among other things, adequacy of medical care, distribution of pharmaceuticals, operating policies, licensing and certificate of need requirements. Long-term care facilities are also periodically inspected to assure continued compliance with various standards and licensing requirements under state law. There are currently no federal laws or regulations specifically defining or regulating assisted living facilities. However, while many states have not yet enacted specific assisted living laws or regulations, the Company's assisted living facilities are subject to state regulation, licensing, approvals by state and local health, welfare and social service agencies and other regulatory authorities and compliance with building codes and environmental laws. In addition, in several states, including Arkansas, Missouri, New Jersey, Kentucky and North Carolina, certificate of need laws apply to assisted living facilities. Certificate of need or similar laws require that a state agency approve certain acquisitions and determine that a need exists for certain services, the addition of beds and capital expenditure or other changes. When the issuance or renewal of certificates of need or other similar government approvals are required, changes in existing laws or adoption of new laws could adversely affect the Company's development or acquisition strategy and/or its operations if it is unable 22 23 to obtain such certificates of need approvals or renewals thereof. Also, health care providers have been subjected to increasing scrutiny under anti-trust laws as the integration and consolidation of the health care industry increases and affects competition. Regulation of the assisted living industry is evolving. The Company cannot predict the content of new regulations and their effect on its business. There can be no assurance that regulatory or other legal developments will not affect adversely the Company's business, results of operations and financial condition. Federal and state anti-remuneration laws, such as the Medicare/Medicaid anti-kickback law, govern certain financial arrangements (including employment or service contracts) between health care providers and others who may be in a position to refer or recommend patients or services to such providers. These laws prohibit, among other things, certain direct and indirect payments that are intended to induce the referral of patients to, the arranging for services by, or the recommending of a particular provider of health care items or services. The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to certain contractual relationships between health care providers and sources of patient referral. A number of similar state laws exist which often have not been interpreted by courts or regulatory agencies. The Department of Health and Human Services periodically issues "special fraud alerts" which address specific areas of concern. The federal government, through the Office of Inspector General, recently released a model compliance plan for home health agencies. The model plan identifies a number of risk areas and requires the home health agency to exercise oversight over parties with which it does business. Federal "Stark" legislation prohibits, with limited exceptions, the referral of patients for certain services, including home health care services, physical therapy and occupational therapy, by a physician to entities in which they have an ownership or financial interest. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers from participating in the Medicare and Medicaid programs. Additionally, the Balanced Budget Act of 1997 (the "Budget Act"), signed into law on August 5, 1997, contains a number of anti-fraud provisions designed to further fight abuse and enhance program integrity. Furthermore, some states restrict certain business or fee relationships between physicians and other providers of health care services. The Company believes that its operations are in substantial compliance with the laws applicable to Medicare and Medicaid providers, including anti-fraud and abuse provisions; however, there can be no assurance that the administrative or judicial interpretation of such laws or the regulations promulgated thereunder will not in the future have a material adverse impact on the Company's operations or that the Company will not be subject to an investigation which would require a significant investment of time and manpower by the Company. Assisted living facilities may be eligible to participate as Medicaid providers and receive reimbursement through Medicaid waiver programs and managed care plans. The Company has elected to become a Medicaid provider in several states with respect to its assisted living facilities. Such entities are subject to all of the requirements applicable to Medicaid providers, including the anti-fraud and abuse legislation. Although the Company believes that it complies with federal and state anti-remuneration statutes at all times, there can be no assurance that such laws will be interpreted in a manner consistent with the practices of the Company. The Americans with Disabilities Act of 1990 requires all places of public accommodation to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist which also may require modifications to existing and planned properties to create access to the properties by disabled persons. While the Company believes that its properties comply with present requirements or are exempt there from, if required changes involve a greater expenditure than anticipated or must be made more quickly than anticipated, additional costs will be incurred by the Company. Further legislation may impose additional burdens or restrictions relating to access by disabled persons. The costs of complying with any new legislation could be substantial. The Company is also evaluating the impact of the recent report issued by the United States General Accounting Office in April, 1999 entitled "Assisted Living Quality-of-Care and Consumer Protection Issues in Four States" (the "GOA Report") on its methods of delivery. Generally, the GAO Report found that assisted living facilities do not routinely provide prospective residents with key information they need so they can compare what several facilities offer and determine whether a facility is appropriate for their needs. The GAO Report also found that some assisted living residents are encountering quality of care and consumer 23 24 protection problems. Due to the recent nature of the GAO Report, the Company cannot predict the impact on its methods of delivery. The Company will continue to evaluate the issues raised by the GAO Report and will take what actions, if any, are required to provide adequate quality of care and consumer protections to its residents. Health Care Reform. In addition to extensive existing government health care regulation, there are many initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of health care services. It is not clear what proposals, if any, will be adopted, or what effect such proposals would have on the Company's business. Various aspects of these health care proposals, such as reductions in funding of the Medicare and Medicaid programs, potential changes in reimbursement regulations by the Health Care Financing Administration ("HCFA"), enhanced pressure to contain health care costs by Medicare, Medicaid and other payors and permitting greater state flexibility in the administration of Medicaid, could adversely affect the Company's business, results of operations and financial condition. The Company's skilled nursing facilities that participate in applicable state Medicaid programs are subject to the risk of changes in Medicaid reimbursement and payment delays resulting from budgetary shortfalls of state Medicaid programs. The Company's current concentration of skilled nursing facilities in Missouri and Pennsylvania exposes it to the risk of changes in Medicaid reimbursement programs in those states. Medicare and Medicaid certification is a critical factor contributing to the revenues and profitability of long-term care facilities. Changes in certification and participation requirements of the Medicare and Medicaid programs have restricted, and are likely to further restrict, eligibility for reimbursement under those programs. Failure to obtain and maintain Medicare and Medicaid certification at the Company's long-term care facilities could result in a significant loss of revenue. In addition, private payors, including managed care payors, increasingly are demanding that providers accept discounted fees or assume all or a portion of the financial risk for delivery of health care services, including capitated payments where the provider is responsible, for a fixed fee, for providing all services needed by certain patients. Capitated payments can result in significant losses when patients require expensive treatments not adequately covered by the capitated rate. Efforts to impose reduced payments, greater discounts and more stringent cost controls by government and other payors are expected to continue. The Company cannot predict what reform proposals or reimbursement limitations will be adopted in the future or the effect any such changes will have on its operations. There can be no assurance that currently proposed legislation, future health care legislation, reforms or changes in the administration or interpretation of governmental health care programs or regulations will not have a material adverse effect on the Company's business, results of operations and financial condition. Concern about the potential effect of various proposed health care reforms has contributed to volatility of prices of securities of health care companies and could similarly affect the price of the Common Stock in the future. Geographic Concentration of Business. Currently, a substantial portion of the Company's facilities, including facilities under construction for independent Operators/Lessees, are located in Pennsylvania and Missouri. Operating revenues attributable to the Company's business in those two states accounted for approximately 95% , 94% and 92% of the Company's total operating revenues for the years ended June 30, 1997, 1998, and 1999, respectively. Until the Company's operations become more geographically diverse, the Company will be more susceptible to downturns in local and regional economies and changes in state or local regulation because such conditions and events could affect a relatively high percentage of the total number of facilities currently in operation and under development. As a result of such factors, there can be no assurance that such geographic concentration will not have a material adverse effect on the Company's business, results of operations or financial condition. Liability and Insurance. Providing health care services involves an inherent risk of liability. Participants in the senior living and health care industry are subject to lawsuits alleging negligence or related legal theories, many of which may involve large claims and significant legal costs. The Company currently maintains liability insurance intended to cover medical malpractice, wrongful death and other claims which it believes is adequate and in keeping with industry practice. However, claims in excess of the Company's insurance coverage or claims not covered by the Company's insurance (e.g., claims for punitive damages) may arise. A successful claim against the Company not covered by or in excess of the Company's insurance coverage could have a material adverse effect on the Company's business, results of operations and financial condition. Claims 24 25 against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect upon the Company's reputation and its ability to attract residents or expand its business. The Company's insurance policies generally must be renewed annually, and there can be no assurance that the Company will be able to obtain liability insurance coverage in the future on acceptable terms, if at all. See "Business -- Liability and Insurance." Competition. The senior living and health care industry is highly competitive and the Company believes that competition in its current and targeted markets will continue to increase. The Company faces current and prospective competition for residents and patients and for employees from numerous local, regional and national providers of facility-based assisted living and long-term care, as well as rehabilitation therapy and home-based health care providers. Many of the Company's current and potential competitors are significantly larger and have greater financial and marketing resources than the Company. There are currently few regulatory and other barriers to entry into the assisted living industry. If the development of new assisted living facilities surpasses the demand for such facilities in particular markets, such markets could become saturated. Competition could limit the Company's ability to attract residents and patients and expand its business and could have a material adverse effect on the Company's business, results of operations and financial condition. Environmental Risks. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the cost of removal or remediation of certain hazardous or toxic substances that may be located on, in or under the property. These laws and regulations may impose liability regardless of whether the owner or operator was responsible for, or knew of, the presence of the hazardous or toxic substances. The liability of the owner or operator and the cost of any required remediation or removal of hazardous or toxic substances could be substantial and is generally not limited. The presence of hazardous or toxic substances in or under such properties could also subject the Company to lawsuits by or liability to adjacent property owners, residents of the facilities or employees who are injured by contamination. The presence of hazardous or toxic substances at any property held or operated by the Company in the future could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, if contamination is found, it could adversely affect the Company's ability to continue to operate, to lease or to sell the contaminated property or to use that property as collateral for future loans. Change of Control. The acquisition by one or more related persons of 50% or more of the Common Stock of the Company constitutes a default under certain leases pertaining to the facilities leased or managed by the Company and may result in the termination of such leases or the exercise of other remedies thereunder by the lessor. See "Certain Relationships and Related Transactions", which is incorporated by reference from the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders. Other financing arrangements of the Company contain similar change of control provisions which may result in the termination of such arrangements or the exercise of other remedies thereunder upon a change of control of the Company (as defined in such arrangements). Dependence on Key Personnel. The Company's success to date has been significantly dependent on the contributions of Brad E. Hollinger, the Company's Chairman of the Board, President and Chief Executive Officer and one of its founders, and the loss of his services could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's success also depends to a significant extent upon a number of other key employees of the Company. The Company is party to employment agreements with Mr. Hollinger and several other key employees. The loss of the services of one or more other key employees also could have a material adverse effect on the Company. In addition, the Company believes that its future success will depend in part upon its ability to attract and retain additional highly-skilled professional, managerial, sales and marketing personnel. Competition for such personnel is intense. There can be no assurance that the Company will be successful in attracting and retaining the personnel that it requires for its business and planned growth. Labor Costs. The Company competes with various health care providers and other employers for limited qualified and skilled personnel in the markets that it serves. The Company expects that its labor costs will increase over time. The current economic condition, with its resulting low unemployment rates, has also 25 26 created a tremendous challenge for the Company. Finding, training and retaining good personnel is a major objective of the Company. Currently, none of the Company's employees is represented by a labor union. If employees of the Company were to unionize, the Company could incur labor costs higher than those of competitors with non-union employees. The Company's business, results of operations and financial condition could be adversely affected if the Company is unable to control its labor costs. Potential Volatility of Stock Price. The stock market has experienced extreme price and volume fluctuations which have particularly affected the market price for many health care companies and which have often been unrelated to the operating performance of these companies. The trading price of the Common Stock could also be subject to significant fluctuations in response to variations in periodic operating results, changes in management, future announcements concerning the Company, legislative or regulatory changes, general trends in the industry and other events or factors. See "Business -- Competition" and "Business -- Government Regulation." Anti-Takeover Provisions. Certain provisions of the Company's Certificate of Incorporation and Bylaws and Delaware law could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of such provisions allow the Company to issue preferred stock with rights senior to those of the Common Stock and impose various procedural and other requirements which could make it more difficult for stockholders to effect certain corporate actions. Furthermore, the Company has entered into certain leases, and may enter into additional financing arrangements in the future, which provide that the Company will be in default under such leases in the event of a change of control of the Company. See "Change of Control." 26 27 EXECUTIVE OFFICERS The following table sets forth certain information regarding the executive officers of the Company as of September 22, 1999:
NAME AGE POSITION - ---- --- -------- Brad E. Hollinger.................. 45 Chairman of the Board, President and Chief Executive Officer and a Director Clint T. Fegan..................... 41 Chief Financial Officer Stephen G. Marcus.................. 46 Chief Operating Officer Gary W. Anderson................... 49 Executive Vice President -- Operations Robin L. Barber.................... 36 Senior Vice President and Counsel, Assistant Secretary Robert J. Sutton................... 50 Vice President -- Corporate Services, Secretary Diane M. Borger.................... 43 Vice President, Treasurer
Brad E. Hollinger has served as a director and as Chairman of the Board, President and Chief Executive Officer of the Company since its founding in April 1995. Previously he served as Executive Vice President of the Contract Service Group of Continental Medical Systems ("CMS"), a national provider of medical rehabilitation services and contract therapy services from 1992 to 1995. During his eight years with CMS, Mr. Hollinger also served as Senior Vice President/Development from 1987 to 1990, leading the development and financing of eighteen medical rehabilitation hospitals in seven states. From 1985 to 1987, Mr. Hollinger was Vice President of Development of Rehab Hospital Service Corporation. Mr. Hollinger, without admitting or denying the allegations, settled a proposed civil action brought by the Securities and Exchange Commission (the "Commission") contending that he violated certain federal securities laws in connection with trading in the common stock of Continental Medical Systems, Inc. prior to its merger with Horizon Healthcare, Inc. in 1995. The Commission approved the settlement on May 12, 1998, which consisted of the entry of an order enjoining him from future violations of such securities laws and the payment of $21,625, representing profits allegedly realized by him and a family member, plus interest, and a civil money penalty in an amount equal to such payment, plus interest. Clint T. Fegan has served as Chief Financial Officer of the Company since February 1999. Mr. Fegan served as Vice President-Corporate Controller for the Company from July 1998 until February 1999 and as Corporate Controller from July 1997 until June 1998. From 1994 to 1997, he served as Corporate Controller of Wilmac Corporation, a privately owned nursing home and assisted living company. From 1987 to 1994, Mr. Fegan was a senior manager in the KPMG Peat Marwick LLP health care audit practice. Stephen G. Marcus has served as the Chief Operating Officer of the Company since January 1998. Prior to joining the Company, he served as President of SelectRehab, a subsidiary of Horizon/CMS Healthcare corporation, from July 1994 to November 1997 and in various capacities during seven years with CMS, including Senior Vice President -- Unit Management Group from January 1993 through July 1994, as Senior Vice President Development from July 1991 through December 1992 and as Vice President -- Development from August 1987 through July 1991. From April 1986 through July 1987, Mr. Marcus was Regional Vice President -- Operations for the Southeastern Regional Office of Rehab Hospital Services Corporation ("RHSC") and, from January 1985 through March 1986, Executive Director/Chief Executive Officer of Garden State Rehabilitation Hospital, an RHSC facility. Gary W. Anderson has served as the Executive Vice President -- Operations for the Company since July 1999. Prior to joining the Company, Mr. Anderson served as Senior Vice President of Operations for Alterra Healthcare Corporation from April 1995 until July 1999, where he was responsible for over 150 freestanding assisted living and Alzheimer's-focused facilities. From 1992 to 1995, he served as General Manager for Marriott Senior Living Services, a senior care company and division of Marriott International, Inc. Mr. Anderson has more than 25 years of experience in the senior care industry, including post graduate studies, governmental regulation and industry executive positions. 27 28 Robin L. Barber has served the Company as Senior Vice President and Counsel since February 1999, as Vice President -- Legal Services from September 1997 to January 1999, as Director -- Legal Services from February 1996 to August 1997, and as legal consultant from October 1995 to January 1996. Prior to joining the Company, she was in private practice with the law firm of Eckert Seamans Cherin & Mellot LLP from June 1993 until August 1995. Ms. Barber is the sister-in-law of Brad E. Hollinger. Robert J. Sutton has served as Vice President -- Corporate Services and Secretary of the Company since its founding in April 1995. From 1993 to 1995, he was Vice President, Finance and Strategy, of CMS. Mr. Sutton served in a variety of managerial positions at Marriott Corporation from 1987 to 1993, including Vice President of Finance and Strategic Planning for Marriott Management Services and Director of Finance of the Courtyard Hotel Division. Diane M. Borger has served as Vice President -- Treasurer of the Company since May 1998. Ms. Borger was Director of Accounting for the Company from November 1995 until May 1998. Prior to joining the Company, she served in various capacities during four years with Continental Medical Systems, Inc., including Accounting Manager -- Rehab Hospital Group from July 1993 to November 1995, as Manager of Corporate Financial Planning from March 1992 to July 1993, and as Corporate Financial Analyst from July 1991 to March 1992. From August 1987 to July 1991 she was employed by KPMG Peat Marwick LLP and served in both the audit practice and the healthcare consulting services practice. ITEM 2--PROPERTIES The Company's corporate office is located in Mechanicsburg, Pennsylvania. In addition to its corporate office, as of June 30, 1999, the Company operated a total of 52 assisted living facilities, 13 skilled nursing facilities and four independent living facilities in Pennsylvania, Missouri, Arkansas, North Carolina, Virginia, Ohio, West Virginia, Tennessee, and Florida, as well as a home health care agency in Missouri and ten rehabilitation therapy operations located in Pennsylvania and Arkansas. The buildings range in size from 27,000 square feet to 68,000 square feet and are adaptable to construction on sites ranging from two to five acres. The Company owns seven, leases 34 and manages 28 senior living and health care facilities in these states. A more detailed outline of information with regard to the various properties that the Company owns, manages and leases can be found at "Operating Facilities" in Part I. ITEM 3--LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising in the ordinary course of business. However, the Company is not involved in any legal proceedings that it believes would have a materially adverse effect on its business, financial condition or results of operations. In addition, lawsuits may be brought against the Company, including those involving environmental and safety and health matters. While the amounts claimed may be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that exist. Therefore, it is possible that the Company's course of business and its liquidity within a particular period may be materially affected by unforeseen circumstances. Based on facts currently available, management believes that the disposition of these matters will not have a material adverse effect on the financial position of the Company. ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None. 28 29 PART II ITEM 5-- MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER'S MATTERS PRICE RANGE AND HOLDERS OF COMMON STOCK The Common Stock of the Company has been listed on the American Stock Exchange and traded under the symbol "BAL" since February 12, 1998. The following table sets forth for the Fiscal periods indicated the high and low sales prices of the Common Stock as reported on the American Stock Exchange. No cash dividends were paid on the Common Stock during such periods.
HIGH LOW ---- --- Fiscal year ended June 30, 1999: 1st Quarter............................................... $ 7 3/4 $4 3/8 2nd Quarter............................................... 8 1/4 4 3/4 3rd Quarter............................................... 8 1/2 2 4th Quarter............................................... 2 3/4 1 7/8 Fiscal year ended June 30, 1998: 3rd Quarter (from February 12, 1998)...................... 10 5/8 6 3/4 4th Quarter............................................... 10 6 3/4
On September 22, 1999, the last reported sales price for the Common Stock as reported on the American Stock Exchange was $1.25 per share. The number of holders of record of the Common Stock on September 22, 1999 was approximately 100 (approximately 2,209 beneficial owners). DIVIDENDS The Company has not paid or declared any dividends on its capital stock since its inception. The Company intends to retain earnings for support of its operations and future development of its business and will not distribute them to stockholders as dividends. The declaration and payment by the Company of any future dividends and the amount thereof will depend upon the Company's results of operations, financial condition, cash requirements, future prospects, limitations imposed by credit agreements or senior securities and other factors deemed relevant by the Board of Directors. See "Management's Discussion and Analysis of Financial Condition an Results of Operations Liquidity and Capital Resources." PRIVATELY PLACED SECURITIES The Company issued warrants to purchase shares of Common Stock, as follows, in transactions intended to be exempt from the registration requirements of the Securities Act of 1993, as amended (the "Securities Act"), by virtue of Section 4(2) thereof. The warrants were issued in consideration for certain services and financing arrangements with the Company.
WARRANT NUMBER OF EXERCISE DATE OF ISSUANCE HOLDER WARRANTS PRICE TERM EXERCISABLE - ---------------- ------------ --------- -------- ------- ------------------------ August 17, 1998 Hakman & Co 3,000 $5.56 3 years 1 yr. from date of grant September 1, 1998 Dale Cordial 23,750 $4.00 5 years Vested Immediately September 15, 1998 Hakman & Co 3,000 $4.94 3 years 1 yr. from date of grant November 3, 1998 Hakman & Co 3,500 $7.19 3 years 1 yr. from date of grant December 23, 1998 Hakman & Co 500 $6.81 3 years 1 yr. from date of grant
29 30 ITEM 6--SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, ---------------------------------------- 1999 1998 1997 1996 -------- ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues............................................ $ 78,446 $88,888 $49,480 $ 811 Operating Income (Loss)............................. $(24,023) $ 2,480 $(3,787) $ (814) Net Income (Loss)................................... $(23,637) $ 3,575 $(4,492) $ (909) Net Income (Loss) Per Diluted Share................. $ (1.41) $ 0.28 $ (0.66) $ (.34) Weighted Average Shares -- Diluted.................. 16,713 12,928 6,763 2,696 Cash & Cash Equivalents............................. $ 8,160 $15,481 $ 7,908 $ 567 Total Assets........................................ $ 71,055 $85,972 $33,017 $7,292 Long-term Obligations............................... $ 16,535 $ 8,847 $12,117 $5,121 Redeemable Preferred Stock.......................... $ -- $ -- $13,249 $ -- Stockholders' Equity (Deficit)...................... $ 38,358 $61,859 $(1,444) $1,124
ITEM 7-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis addresses the Company's results of operations on a historical basis for the years ended June 30, 1999, 1998 and 1997, and liquidity and capital resources of the Company. This information should be read in conjunction with the Company's consolidated financial statements, and related notes thereto, contained elsewhere in this report. This report contains, in addition to historical information, forward looking statements that involve risks and uncertainties. The Company's actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those disclosed in the "Risk Factors," section in Part I of this report. OVERVIEW The Company was formed in April 1995 to develop senior care continuums which meet the needs of upper middle, middle and moderate income populations in non-urban, secondary markets. The Company utilizes assisted living facilities in selected markets as the primary entry point and service platform and has developed the balanced care continuums consisting of various health care and hospitality services, including, where appropriate, rehabilitation therapies, physical, occupational and speech therapy, home health care services on an intermittent basis, dementia and Alzheimer's services and skilled care delivered in a skilled nursing setting. On February 18, 1998, the Company completed its initial public offering for 7,000,000 shares of its common stock, par value $.001 per share ("Common Stock") at a price of $6.50 per share (the "Offering"). Concurrent with the Offering, the 5,009,750 shares of Series B Preferred Stock and 1,150,958 shares of Series A Preferred Stock were converted into 4,620,532 shares of Common Stock (reflective of the three-for-four reverse split of common stock effective October 14, 1997). In connection with the Offering, the Company granted the underwriters an option to purchase 1,050,000 additional shares of Common Stock at $6.50 per share. The closing for this option was on March 17, 1998. The Offering, including the exercise of the underwriters' option, generated proceeds to the Company of approximately $46,357,000, net of costs and underwriting discounts and commissions. The proceeds were used to repay indebtedness of approximately $29,675,000 incurred to fund the purchase of four acquisitions (seven facilities) completed from October 1997 through January 1998, and to pay off indebtedness of $5,019,000 related to the Company's Wisconsin assisted living facilities in anticipation of their sale. The balance of the Offering was used for general corporate purposes. 30 31 The Company has grown primarily through acquisitions and by designing, developing, operating and managing its Outlook Pointe(R) signature series assisted living facilities. The following table summarizes the Company's operating facilities at June 30, 1999 and 1998:
JUNE 30, ------------------------------------------------------------------- 1999 1998 -------------------------------- -------------------------------- OWNED LEASED MANAGED TOTAL OWNED LEASED MANAGED TOTAL ----- ------ ------- ----- ----- ------ ------- ----- Developed Assisted Living Facilities....... -- 6 28 34 -- 1 11 12 Acquired Assisted Living Facilities........ 5 13 -- 18 13 12 -- 25 Skilled Nursing Facilities................. 2 11 -- 13 2 11 -- 13 Independent Living Facilities.............. -- 4 -- 4 -- 4 -- 4 -- -- -- -- -- -- -- -- 7 34 28 69 15 28 11 54 == == == == == == == ==
As of June 30, 1999, the Company has operations in Pennsylvania, Missouri, Arkansas, Ohio, Virginia, North Carolina, Tennessee, West Virginia and Florida. These operating facilities have a capacity for 3,266 assisted living residents, 1,294 skilled nursing patients and 117 independent living residents. The Company also operates a home health care agency in Missouri and rehabilitation therapy operations in Pennsylvania and Arkansas. In December 1998, the Company sold its seven owned assisted living facilities in Wisconsin, which had been carried as an asset held for sale since June 30, 1997. In addition to the 34 Outlook Pointe(R) signature series assisted living facilities opened as of June 30, 1999, the Company has signed agreements to develop and manage an additional 18 assisted living facilities currently under construction, which are scheduled to open at various dates through April 2000. In addition to increasing the depth of the Company's operations in Pennsylvania, Missouri, Arkansas, Ohio, Virginia, North Carolina, Tennessee, West Virginia and Florida, the construction will add operations in Indiana and Maryland. The Company generates revenue from four primary sources: patient services, resident services, development fees and management fees. Patient services revenues include charges for room and board, rehabilitation therapies, pharmacy, medical supplies, subacute care, homehealth, and other programs provided to patients in skilled nursing facilities as well as rehabilitation and homehealth services provided to assisted living facility residents. Resident services include all revenues earned from services provided to assisted living facility residents except revenues for therapies and home health care services provided by the Company's licensed agencies which are included in patient services revenues. Development fees and management fees are earned for developing and managing assisted living facilities for real estate investment trusts ("REIT") and other owners or lessees. As the Company implements its business plan, management believes that the mix of the Company's revenues will continue to change and that revenues from assisted living resident services will increase as a percentage of total revenues. The Company classifies its operating expenses into the following categories: (i) facility operating expenses which include labor, food, marketing, rehabilitation therapy costs and other direct facility expenses; (ii) development, general and administrative expenses, which primarily include corporate office expenses, regional office expenses, development expenses and other overhead costs; (iii) provisions for losses, which include losses relating to the curtailment of development activities which were previously capitalized, losses relating to working capital advances made under shortfall funding agreements, and losses from severance agreements; (iv) bad debt expense for the skilled nursing, assisted living and therapy services; (v) lease expense which includes rent for the facilities operated by the Company as well as corporate office and other rent; and (vi) depreciation and amortization. In anticipation of its planned growth, the Company made significant investments in its infrastructure during Fiscal 1997 and 1998. These investments included attracting management and regional personnel and installing information systems to support and manage growth. STRATEGIC CHANGES AND CHARGES TO OPERATIONS As discussed in prior reports, the Company's development activities are significantly affected by volatility in the capital markets and specific transaction terms which affect the Company's ability to utilize non-binding 31 32 financing commitments from Real Estate Investment Trusts ("REITs") and other lenders. More specifically, the availability of REIT financing has become substantially limited for new assisted living construction. Furthermore, the ability of the Company to negotiate acceptable transaction terms and to currently recognize income on development fees has become increasingly difficult due to accounting pronouncements and guidance issued by the Emerging Issues Task Force ("EITF") and the Securities and Exchange Commission staff. Finally, the Company's leverage (i.e. debt and other financial commitments in relation to equity) has increased due to its extensive use of operating leases to finance the construction of its Outlook Pointe(R) assisted living facilities. As a direct result of the foregoing, the Company has been unable to obtain financing on acceptable terms to continue development of its Outlook Pointe(R) signature series assisted living facilities. In recognition of these events and circumstances, in Fiscal 1999, the Company (i) concluded that development fees on new projects would not qualify for income recognition under contract terms considered acceptable by management; (ii) decided to emphasize the focus of management's efforts on the operations of existing facilities and/or facilities which are under construction; (iii) decided to substantially reduce its development activities with respect to new sites and projects; and (iv) recorded a provision for losses on development activities of $13,050,000. This provision is based on management's evaluation of capitalized costs, including land option payments and includes substantially all of the previously capitalized costs relating to the precontract phase of development activities. Management has taken these steps to focus on building market share in existing markets, to channel its financial and human resources into meeting facility occupancy goals, and to build brand recognition throughout the Balanced Care continuum of services. The Company had 18 assisted living facilities under construction at June 30, 1999, all with financing agreements. If and when, capital becomes available to the Company on acceptable terms, the Company expects to implement a program of limited development consisting of approximately four to five projects per quarter that meet the Company's development standards. Due to the downscaling of development activity of the Company's Outlook Pointe(R) facilities, management adopted a corporate restructuring plan in Fiscal 1999 affecting certain departments and staff positions. This restructuring plan resulted in non-recurring charges of approximately $1,600,000, representing the estimated costs of employee terminations and related costs to exit these activities. The Company expects these actions to reduce development, general and administrative expenses by approximately $2,000,000 annually. The cost savings will be partially offset by incremental increases in development general and administrative expenses related to the Company's increased investment in marketing and regional operating positions. In addition to the charge of $13,050,000 related to the reduction of development activities, certain of the Outlook Pointe(R) signature series assisted living facilities had experienced slower than budgeted census ramp ups and, as a result, incurred greater than budgeted negative cash flows from start up operations. During Fiscal 1999, the Company incurred losses related to obligations under the shortfall funding agreements (discussed in more detail under "Business-Development" in Part I of this report) in the amount of $4,660,000 to fund the additional working capital needs of these managed facilities. This amount has been charged to operations as a provision for losses under the shortfall funding agreements and recorded as an allowance against receivables on advances to Operator/Lessees. Of the 52 Outlook Pointe(R) facilities open (34) or under construction (18) and managed by the Company at June 30, 1999, the Company estimates it may be required to make future working capital shortfall contributions in connection with 28 managed projects. The Company estimates that it may be required to make additional funding advances of $3,000,000 through June 30, 2000. The additional working capital needs relate primarily to projects that closed on construction financing on or before March 31, 1998. CENSUS TRENDS Operationally, the Company has begun to see the results of the Company's emphasis on operations and marketing implemented in February 1999. By the end of the Fiscal year, the Company improved its average census absorption rate at the Outlook Pointe(R) signature series assisted living communities from 6.28 residents per building for the September 30, 1998 quarter to 11.4 residents per building for the last three months. The 32 33 Company attributes this improvement to the Company's increased investment in marketing, a new professionally trained and managed sales team, and a focused community outreach initiative over the past 9 months. We believe the positive effects of the marketing and sales training program and the refined positioning of the product in the marketplace will continue to increase the Company's average quarterly census absorption rate. SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual and interim financial statements issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. In Fiscal 1999, the Company had three primary reportable segments: (i) Resident Services which includes all assisted living and independent living services, and the management of assisted living facilities, (ii) Patient Services which includes skilled nursing services, home health services, and medical rehabilitation services, and (iii) Development. No other individual business segment exceeds the 10% quantitative thresholds of SFAS No. 131. See Note 20 to the Consolidated Financial Statements for financial data for each of the Company's operating segments. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain data as a percentage of total revenue:
1999 1998 1997 ----- ----- ----- STATEMENT OF OPERATIONS DATA: Total revenue............................................... 100.0% 100.0% 100.0% Operating expenses: Facility operating expenses............................... 70.7 70.0 80.6 Development, general and administrative expenses.......... 16.3 13.4 11.4 Provision for losses on development activities............ 16.6 -- -- Provision for losses under shortfall funding agreements... 6.0 -- -- Provision for losses under severance agreements........... 2.0 -- -- Bad debt expense.......................................... 2.6 0.8 0.1 Lease expense............................................. 13.7 10.6 11.0 Depreciation and amortization............................. 2.7 2.4 1.4 Write-down of long-lived assets........................... -- -- 3.2 ----- ----- ----- Income (loss) from operations............................... (30.6) 2.8 (7.7) Other income (expense): Interest and other income................................. 1.0 0.8 0.5 Interest expense.......................................... (0.8) (2.0) (1.8) Gain (loss) on sale of assets............................. (0.4) 3.2 -- ----- ----- ----- Income (loss) before income taxes........................... (30.8) 4.8 (9.0) Provision for income taxes.................................. (0.7) 0.8 0.1 ----- ----- ----- Net income (loss)........................................... (30.1) 4.0 (9.1) ===== ===== =====
YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998 Total Revenue. Total revenue for Fiscal 1999 decreased by $10,442,000 to $78,446,000 compared to $88,888,000 for Fiscal 1998. This decrease was the result of: (i) decrease in patient service revenues of $10,195,000, which was primarily the result of PPS and a lower census at the Company's skilled nursing 33 34 facilities, offset by a $1,393,000 increase due to a skilled nursing facility acquisition on January 1, 1998; and (ii) decreased development fees of $5,486,000 related to the Company's decision to reduce development activities. These decreases were partially offset by additional resident service revenues of $4,509,000, primarily from facilities acquired during, or subsequent to, Fiscal 1998. Patient services comprised 61% and 65% of total revenues for Fiscal 1999 and for Fiscal 1998, respectively. The decrease in this percentage of total revenues was due to the Company's implementation of its business plan, which focuses on assisted living development and operations, and the decrease due to PPS. Operating Expenses. Total operating expenses increased by $16,061,000 to $102,469,000 for Fiscal 1999 from $86,408,000 for Fiscal 1998. This increase was primarily attributable to: (i) the provision for losses on termination of development activities of $13,050,000; (ii) increased expenses of $6,224,000 at facilities acquired during or after the year ended June 30, 1998; (iii) the provision for losses under shortfall funding agreements of $4,660,000; (iv) the $1,600,000 provision for severance losses; and (v) a $904,000 increase in development, general and administrative expenses. These increases were partially offset by the decreased operating expenses of $10,531,000 at the Company's skilled nursing facilities as a result of cost reduction efforts primarily in the area of therapy delivery. Facility operating expenses for Fiscal 1999 decreased by $6,724,000 to $55,474,000 from $62,198,000 for Fiscal 1998. The decrease is the result of a cost reduction program and a patient acuity management system put in place at the Company's skilled nursing facilities, which resulted in a reduction in costs of approximately $11,089,000, primarily in the area of therapy delivery. These cost savings were offset by increased costs of $4,674,000 at new assisted living facilities which were acquired during, or after, the December 1997 quarter. As a percentage of total revenue, facility operating expenses were 70.7% for Fiscal 1999, and 70.0% for Fiscal 1998. Development, general and administrative expenses increased by $904,000 to $12,781,000 for Fiscal 1999 from $11,877,000 for Fiscal 1998. As a percentage of total revenue, these expenses increased to 16.3% for Fiscal 1999 from 13.4% for Fiscal 1998. The increase was attributable to the growth in the number of facilities owned, leased or managed. Information concerning the provision for losses on termination of development activities of $13,050,000, the provision for losses under shortfall funding agreements of $4,660,000 and the provision for severance losses of $1,600,000 are discussed above under "Strategic Changes" and "Charges to Operations". Bad debt expense increased by $1,322,000 to $2,044,000 in Fiscal 1999 from $722,000 in Fiscal 1998. The additional expense primarily relates to the therapy receivables, at the Company's skilled nursing facilities and rehabilitation services agencies. Lease expense increased by $1,273,000 to $10,715,000 for Fiscal 1999 from $9,442,000 for Fiscal 1998. This increase was primarily the result of rents at acquired facilities and as a result of the sale/leaseback of two owned assisted living facilities, as well as rental increases under lease agreements at existing facilities. As a percentage of total revenue, these expenses totaled 13.7% for Fiscal 1999 and 10.6% for Fiscal 1998. Depreciation and amortization decreased by $24,000 to $2,145,000 for Fiscal 1999 from $2,169,000 for Fiscal 1998. The decrease resulted from the sale of the Wisconsin facilities and the sale/leaseback of two facilities. Other Income (Expense). Interest and other income for Fiscal 1999 increased by $65,000 to $780,000 from $715,000 in the Fiscal 1998. The increase is primarily attributable to the higher level of invested funds from the proceeds of the Offering in February 1998. Interest expense for Fiscal 1999 decreased by $1,151,000 to $647,000 from $1,798,000 for Fiscal 1998. This was primarily due to the repayment of $29,675,000 in bridge financing borrowed for the purchase of six assisted living facilities and one nursing home between October 1997 and January 1998, and the repayment of $5,019,000 in debt on the Company's Wisconsin assisted living facilities in June 1998. Both loans were repaid from proceeds of the Offering. In Fiscal 1999, the Company sold all the fixed assets including land and buildings of two of its facilities: a skilled nursing facility in Bloomsburg, Pennsylvania and an assisted living facility located in Saxonburg, 34 35 Pennsylvania for net proceeds of approximately $8,901,000 under a sale/leaseback transaction. Also in Fiscal 1999, the Company completed the sale of the assets of its Wisconsin assisted living facilities for net proceeds of approximately $2,726,000. The Wisconsin facilities had been classified as an asset held for sale since June 30, 1997. The sale of the above assets resulted in a loss of $302,000. The gain on sale of assets in Fiscal 1998 was the result of the company's sale of principal assets and operations of a pharmacy in October 1997 for approximately $4,700,000, net of transactions costs. This resulted in a non-recurring gain of $2,858,000. Provision for Income Taxes. The provision for income taxes includes an income tax benefit of $555,000 for Fiscal 1999. The Company established a valuation allowance of approximately $8,933,000 for Fiscal 1999. For Fiscal 1998, income tax expense of $680,000 is based on the company's estimated effective tax rate of 16%. The effective rate is lower than the statutory rate due to the reversal of a valuation allowance on deferred tax asset from net operating losses. Net Income (Loss). The Company's net loss of $23,637,000 for Fiscal 1999 from a net income of $3,575,000 for Fiscal 1998, is a decrease of $27,212,000. This decrease in net income resulted primarily from: (i) the provisions for losses on termination of development activities, under shortfall funding arrangements and severance of $19,310,000, (ii) reduced profitability from development activities of $6,569,000, (iii) decreased gain on sale of assets of $3,160,000, and (iv) reduced profitability in the Company's skilled nursing facilities of approximately $1,570,000, primarily due to the implementation of PPS and a lower census. These amounts were partially offset by (i) the contribution of $1,994,000 from the assisted living facilities and (ii) reduced income taxes of $1,235,000. YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997 Total Revenue. Total revenue for Fiscal 1998 increased by $39,408,000 to $88,888,000 compared to $49,480,000 for Fiscal 1997. This increase was the result of: (i) patient and resident service revenues of $28,039,000 primarily from facilities acquired or opened, during or subsequent to the 1997 Fiscal year; and (ii) increased development and management fee revenues of $10,759,000 due to the Company's expanded development and management efforts. Patient services comprised 65% and 84% of total revenues for Fiscal 1998 and Fiscal 1997, respectively. The decrease in the percentage of total revenues was due to the Company's focus on assisted living operations and development. The high percentage of patient services revenues to total revenues in relation to the number of skilled nursing facilities to total facilities is due to the significantly higher rate and cost structures of the skilled nursing facilities. Operating Expenses. Total operating expenses increased by $33,141,000 to $86,408,000 for Fiscal 1998 from $53,267,000 for Fiscal 1997. The increase in total operating expenses in 1998 is attributable primarily to: (i) increases in facility operating expenses as a result of new facilities which were developed and acquired; and (ii) increases in development, general and administrative expenditures related to building the Company's infrastructure to support and manage its development and growth. Facility operating expenses for Fiscal 1998 increased by $22,325,000 to $62,198,000 from $39,873,000 for Fiscal 1997. The increase in 1998 is the result of new facilities which were developed or acquired, during or after the 1997 Fiscal year. As a percentage of total revenue, facility operating expenses were 70.0% for 1998 and 80.6% for 1997. The percentage decreased due to the change in the revenue mix including the increase in development and management fees. Development, general and administrative expenses increased by $6,224,000 to $11,877,000 for Fiscal 1998 from $5,653,000 for Fiscal 1997. As a percentage of total revenue, these expenses increased to 13.4% for 1998 from 11.4% for 1997. Of the $6,224,000 increase in 1998, approximately $3,629,000 resulted from labor costs relating to the addition of new corporate and regional office staff to plan and manage the Company's actual and anticipated development and growth. The remaining $2,595,000 was attributable to other marketing, consulting, development, travel and other general expenses related to the Company's growth. Bad debt expense increased by $682,000 to $722,000 for Fiscal 1998 from $40,000 for Fiscal 1997. This increase was attributable to additional reserves at the Company's skilled nursing facilities. 35 36 Lease expense increased to $9,442,000 for Fiscal 1998 from $5,417,000 for Fiscal 1997, an increase of $4,025,000. This increase is the result of new facilities which were developed or acquired, during or after the 1997 Fiscal year. As a percentage of total revenue, these expenses totaled 10.6% for 1998 and 10.9% for 1997. Depreciation and amortization increased by $1,476,000 to $2,169,000 for Fiscal 1998 from $693,000 for Fiscal 1997. This increase resulted from the additional depreciation and amortization on assets acquired and goodwill recorded as a result of acquisitions. In June 1997, management determined that the Wisconsin market did not provide adequate opportunity to achieve the operational efficiencies necessary to operate profitably. At June 30, 1997, the Company committed to a plan for the disposal of its Wisconsin assisted living facilities. A non-recurring non-cash charge of $1,591,000 was recorded in Fiscal 1997 to write these assets down to their estimated fair value. Other Income (Expense). Interest and other income for Fiscal 1998 increased by $450,000 to $715,000 from $265,000 in Fiscal 1997. The increase is attributable to the higher level of invested funds due to receipt of proceeds from the sale of shares of Series B Convertible Preferred Stock in Fiscal 1997 and the Offering in Fiscal 1998. Interest expense for Fiscal 1998 increased by $881,000 to $1,798,00 from $917,000 in Fiscal 1997. This was primarily due to the interest on the $29,675,000 of bridge financing borrowed for the purchase of six assisted living facilities and one skilled nursing facility from October 1997 through January 1998. The acquisition bridge financing was repaid on February 26, 1998 with proceeds of the Offering. The gain on sale of assets in Fiscal 1998 was the result of the Company's sale of the principal assets and the operation of a pharmacy in October 1997 for approximately $4,700,000, net of transaction costs. This resulted in a non-recurring gain of $2,858,000. Provision for Income Taxes. Income tax expense of $680,000 for 1998 is based on the Company's estimated effective tax rate of 16% for the 1998 Fiscal year. The effective rate is lower than the statutory rate due to the reversal of a valuation allowance on deferred tax assets from net operating losses. Income tax expense of $53,000 for Fiscal 1997 resulted from taxable income reported on individual state corporate tax returns in states that do not permit consolidated filings. Net Income (Loss). The Company's net income increased to $3,575,000 for Fiscal 1998 from a net loss of $(4,492,000) for Fiscal 1997, an increase of $8,067,000. This increase in net income resulted primarily from: (i) the pretax contribution of $6,530,000 from increased development activities; (ii) the pharmacy gain of $2,858,000 ; (iii) the pretax contribution of the 11 assisted living and three skilled nursing facilities acquired in Pennsylvania from May 1996 through January 1998 of $782,000; and (iv) the writedown of the Wisconsin facilities in the 1997 Fiscal year of $1,591,000. These amounts were partially offset by (i) start-up operating losses of $1,376,000 from the Company's Outlook Pointe facilities prior to the sale of the leasehold interests to an operator/lessee on January 1, 1998; (ii) reduced profitability at the Company's Missouri skilled nursing facilities of $1,098,000; (iii) increased losses at the Wisconsin assisted living facilities held for sale of $318,000; and (iv) increase income tax expense of $627,000. Medicare Reimbursement Changes. The Balanced Budget Act of 1997 (the "Budget Act") enacted sweeping changes in reimbursement methodology for skilled nursing facilities. Beginning July 1, 1998, skilled nursing providers with year ends of June 30, were reimbursed under a fixed payment methodology based upon the patient's level of care as opposed to a cost-based methodology. The new methodology assigns patients into Resource Utilization Groupings ("RUG") that have corresponding fixed per diem rates. The new methodology has a three (3) year phase-in-program whereby providers will receive a blending of historical facility-specific cost and national average rates. The facility-specific costs are based on 1995 audited cost reports. The national average rates are the Health Care Financing Administration's ("HCFA's") compilation of all skilled nursing cost reports with adjustments made to reduce or eliminate certain data. The Company's skilled nursing facilities began utilizing this new rate methodology on July 1, 1998. To maximize operating results under the new regulations the Company embarked upon a program to reduce costs and manage acuity levels. These steps included: (i) a re-negotiation of therapy service contracts; (ii) a reduction of nursing costs through managing hours worked to patient acuity; (iii) evaluation of the need for high-cost programs; and (iv) consolidating and eliminating certain non-patient related services. The financial 36 37 impact of these operational changes and the new Medicare reimbursement rates are reflected in the Fiscal 1999 operating results. LIQUIDITY AND CAPITAL RESOURCES As the Company changed its focus to operations from development, the Company's capital requirements and sources also changed. Historically the Company primarily sought development and acquisition capital, using development fees to support operating losses and corporate overhead. With the increased emphasis on operations the Company entered into financing transactions to access liquidity to provide the funds to support the operating team's efforts. In March 1999, the Company received approximately $9 million in cash through the sale/leaseback of two of its owned facilities located in Bloomsburg and Saxonburg, Pennsylvania with an independent third party (the "Sale/Leaseback Transaction") under a fifteen-year lease agreement at an annual lease rate of 10.25%. In April 1999, the Company entered into a $15 million revolving Line of Credit. The Line of Credit is secured by the real estate owned by five of the Company's subsidiaries (BCC at Darlington, Inc., Balanced Care at Eyers Grove, Inc., Balanced Care at Butler, Inc., Balanced Care at Sarver, Inc. and Balanced Care at North Ridge, Inc. (collectively, the "Real Estate Borrowers")) and the eligible accounts receivable of the Company's 10 Missouri skilled nursing facilities. The Line of Credit is for a term of three years, and outstanding borrowings will bear interest at a rate per annum of prime plus 2.75%. In July 1999, the terms of the Line of Credit Agreement were amended. The first amendment modified certain definitions and provisions and the borrowing base calculation. The second amendment increased the Line of Credit to $20 million and added to the lender's secured interest the real estate of two of the Company's subsidiaries: BCC at Republic Park Care Center, Inc. and BCC at Nevada Park Care Center, Inc. (together, the "Skilled Nursing Facility Borrowers"). The primary component of the borrowing base for the amended and restated Line of Credit that the Company is utilizing consists of 85% of the product of 8.0 to 8.5 times EBITDA of the Real Estate Borrowers plus 85% of the product of 6 times EBITDA of the Skilled Nursing Facility Borrowers. Including the amendments to the Line of Credit Agreement, the borrowing base available (calculated as of June 30, 1999) was approximately $14 million. At June 30, 1999, $7.4 million was borrowed under the Line of Credit. In a simultaneous transaction with the Second Amendment to the Line of Credit, the Company repaid the outstanding debt of $3.1 million for the real estate of two of its nursing home subsidiaries located in Republic and Nevada, Missouri. As a result of this transaction, the Company expects to report a loss on the early extinguishment of debt of approximately $740,000 in the first quarter of Fiscal 2000. The Company has opened 34 of its Outlook Pointe(R) signature series assisted living facilities as of June 30, 1999. As previously discussed, the Company has stopped seeking additional sites for Outlook Pointe(R) facilities. The Company has adequate financing to complete construction on the 18 facilities under construction at June 30, 1999. These facilities are expected to open on various dates through April 2000. The Company has terminated, or allowed the expiration of, significantly all of its land options on previously secured sites. The Company's costs associated with these cancelled land options are reflected in the provision for estimated losses from development activities. The Company had previously disclosed its expectations to develop more than 40 facilities during Fiscal 1999. As a result of the Company's revised development strategy, and the ongoing difficulty in obtaining development capital on acceptable terms, the Company closed on construction financing for six development projects during Fiscal 1999. If, and when, capital becomes available to the Company on acceptable terms, the Company will implement a program of limited development consisting of approximately four to five projects per quarter that meet the Company's development standards. The Company's development projects have generally involved entering into development agreements with third party owners, which are typically REITs (each, an "Owner"). A third party Operator/Lessee leases the assisted living facility from the Owner when construction has been completed and provides funding for the working capital during the initial occupancy period. The Company manages the assisted living facility pursuant to a management agreement for a term of two to nine years in return for a management fee 37 38 approximating 6% of the net revenue of the facility. The foregoing off-balance sheet financing structure is referred to as the "Black-Box Structure". For development projects utilizing the Black-Box Structure, the Company has the option to purchase the equity or assets of the Operator/Lessee at a purchase price based on a formula set forth in an Option Agreement and a Shortfall Funding Agreement, respectively. As consideration for the option, which is exercisable by the Company at any time during the term of the Option Agreement, the Company pays option payments to the Operator/Lessee. Without the Owner's prior consent, the Operator/lessee may not sell its equity or assets to any third party other than the Company. The Company has closed 51 development projects for which the Company holds the foregoing type of option. Between March and June 1999, the Company exercised its option to purchase the Operator/Lessee's equity interests in five projects financed under the Black Box Structure for a total purchase price of approximately $2.9 million. In conjunction with the purchase transactions, the Company increased the lease base of the five facilities by $3.8 million. These projects are located in Harrisburg, Altoona and Reading, Pennsylvania and in Sherwood and Mountain Home, Arkansas. The Company estimates it will require approximately $40 -- 45 million to buy the equity of the 47 Outlook Pointe facilities that remain under the Black Box Structure over the next three years. The Company has obtained commitments from certain REITs that currently own developed properties under the Black Box Structure to finance the Company's capital requirements to exercise its purchase options under the aforementioned option agreements. Generally, this take-out financing will be structured as an increase to the existing facility lease base at a blended annual lease rate. This financing structure will provide approximately $30 million of the estimated $40 -- 45 million capital requirement. The balance will be funded with cash raised from financing transactions discussed above, possible asset divestitures and cash to be provided from operations. The Company plans to exercise its options to purchase the equity interests on approximately 16 of its managed operations during Fiscal 2000. As reported in the section titled "Charges to Operations," the Company has incurred a cumulative charge of $4.7 million representing advances made for the operations of facilities financed under the Black Box Structure under existing Shortfall Funding Agreements. The Company estimates additional shortfall funding requirements through June 30, 2000 to be approximately $3 million as the result of additional black box working capital financing. The Company currently is using more than $1 million each month to support corporate overhead and fund facility operating shortfalls. This amount is generally decreasing each month as facilities become more profitable as a result of increased census and cost reduction measures. The Company's other significant cash need is the $10-$15 million required to make option payments and buy back black box operations over the next two to three years. The Company will endeavor to make all option payments to preserve its purchase option, but may delay the purchase of black box operations, depending on capital availability. By continuing to make option payments the Company can preserve its right to acquire profitable assisted living facilities it currently manages. However, the profitable results will not be consolidated in the Company's financial statements until the purchase option is exercised. The Company would continue to receive management fees under the scenario. At August 31, 1999, the Company had a borrowing base under the Line of Credit of approximately $14 million and had borrowed $12.7 million. Between existing cash balances, remaining borrowing base, anticipated formula increases to the borrowing base of $3-$4 million and refinancing or selling non-core assets of $3.0 million, the Company expects to have adequate sources of liquidity to finance operations through Fiscal 2000. The Company believes that in order to satisfy its current and future capital needs, it will be necessary to: (i) increase the borrowing base availability on the Line of Credit through improved performance of The Real Estate Borrowers and negotiation of an increased EBITDA multiple in the borrowing base calculation for the Skilled Nursing Facility Borrowers; (ii) obtain additional equity to meet working capital needs; and (iii) divest certain non-core assets. The Company believes with its current financing arrangements in place or currently under negotiation that it will generate the cash needed to (i) maintain existing operations; (ii) make the required purchase option payments under these commitments and (iii) acquire all Black Box Operations 38 39 upon breakeven. Notwithstanding the foregoing, there can be no assurance that any additional financing needed to fund the Company's liquidity and growth will be available. Most of the facilities operated by the Company are leased under long-term operating leases. Facility obligations for the next 12 months are approximately $13,355,000. The lease documents contain financial covenants and other restrictions which: (i) require the Company to meet certain financial tests and maintain certain escrow funds, (ii) limit, among other things, the ability of the Company and certain of its subsidiaries to borrow additional funds, dispose of assets or engage in mergers or other business combinations, and (iii) prohibit the Company from operating competing facilities within a designated radius of existing facilities. Management believes the Company is in compliance with these lease covenants. The Company's lease arrangements are generally for initial terms of 9 to 15 years with aggregate renewal terms ranging from 15 to 25 years and provide for contractually fixed rent plus additional rent, subject to certain limits. The additional rent is capped at 2% to 3% of the prior year's total rent and is based on either the annual increase in gross revenues of the facility or the increase in the consumer price index. The Company's lease arrangements generally contain an option to purchase the facility at its fair market value at the end of the initial lease term and each renewal term. In September 1998, the Company entered into management agreements, option agreements and other transaction documents with six Operator/Lessees that are owned by Financial Care Investors, LLC, a Delaware limited liability Company ("FCI"). FCI is owned by Brad E. Hollinger, Chairman of the Board, President and Chief Executive Officer of the Company. FCI and its six wholly owned Operator/Lessees also entered into lease agreements with a REIT. The terms of the agreements among the parties are similar to the terms of the agreements the Company has entered into with independent third party Operator/Lessees. In October 1999, Mr. Hollinger expects to redeem his investment interest in FCI for nominal consideration. OPERATING ACTIVITIES Cash used by operations increased by $4,319,000 to $10,411,000 for Fiscal 1999 from cash used by operations of $6,092,000 for Fiscal 1998. The increase in the cash used was due to increased operating losses and an increase in development contracts in process offset by a decrease in receivables and an increase in accounts payable, accrued payroll and accrued expenses. INVESTING AND FINANCING ACTIVITIES Cash used for investing activities decreased by $23,065,000 to $4,530,000 for Fiscal 1999 from $27,595,000 for Fiscal 1998. The decrease related predominantly to acquisitions transacted. Cash provided by financing activities decreased by $33,640,000 to $7,620,000 for Fiscal 1999 from $41,260,000 for Fiscal 1998. The decrease was a result of the Offering in Fiscal 1998 offset by the issuance of long term debt in Fiscal 1999. During Fiscal 1999, the Company used the cash remaining from the Offering for general corporate purposes. YEAR 2000 READINESS DISCLOSURE Computer software and/or hardware that was designed to define the year with a two digit date field rather than a four digit field may fail or miscalculate data in the year 2000, causing disruption to the operations or business activities of the Company. State of Readiness. The Company uses high quality hardware and operating systems from current and proven technologies to ensure reliability and optimum system performance. In order to evaluate these systems and other electronic systems not related to information technology ("Non-IT Systems"), the Company formed an oversight committee comprised of information systems, operations, legal and accounting professionals. Phases. The committee has performed an inventory and risk assessment of the Company's internal operations systems, as well as an inventory of third party relationships and their impact on the Company. In response to requests, the committee has already received certification of year 2000 readiness from key hardware and software providers, including suppliers of critical data processing and financial systems. Internal 39 40 testing of critical information systems will continue throughout 1999. No material deficiencies have been identified to date. Notwithstanding vendor certification of compliance, the Company has tested, and continues to test key hardware and software systems. For non-critical systems, and those that cannot be readily tested, the Company will rely on vendor certification. Material Third Parties. Based on the committee's review, the Company has determined that third party relationships provide the highest risk related to year 2000 issues. The third party relationships deemed most critical are the Company's banking relationships, its relationships with third party intermediaries for skilled nursing facility reimbursement under Medicare and Medicaid programs, and suppliers of basic utilities and food service to the Company's operating communities. The Company's third party reimbursement intermediaries and the Health Care Financing Administration have been proactive in testing for year 2000 compliance. Some intermediaries have required the submission of test billings that demonstrate year 2000 compatibility with their payment software. Where required, the Company completed these tests by December 31, 1998. Since April 1999, the Company has used Y2K compliant formats for Medicare claims processing. The risk of local infrastructure failure is mitigated by the Company's contingency planning addressed below. The committee is continuing to evaluate the year 2000 compliance of the Company's financial institutions to gain assurance regarding their year 2000 readiness. Costs. Based upon the Company's progress to date in addressing year 2000 issues, management does not expect these issues to have a material impact on financial position, results of operations or cash flows in future periods, including the cost of remediation. Costs incurred to date are internal staff costs of salary, benefits and nominal administrative expenses associated with the activities of the oversight committee. The Company expects future costs to be of a similar nature. Risks and Contingency Plans. Based on its survey and testing, the Company believes the greatest risks to its ongoing operations are isolated local failures of utilities and food supplies. Accordingly, the Company has established contingency plans for its facilities that include the accumulation of two to three weeks of food and water and provision of back-up power sources. ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company did not have any investment securities subject to market risk at June 30, 1999. ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES Consolidated Balance Sheets as of June 30, 1999 and June 30, 1998 Consolidated Statements of Operations for the Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Independent Auditors' Report Schedule II -- Valuation and Qualifying Accounts for the Years Ended June 30, 1999, 1998 and 1997 40 41 BALANCED CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, JUNE 30, 1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 8,160 $15,481 Receivables (net of allowance for doubtful receivables) (Note 4)............................................... 11,912 19,630 Development contracts in process (Note 3)................. 2,559 2,534 Prepaid expenses and other current assets................. 973 1,203 Assets held for sale...................................... -- 2,800 -------- ------- Total current assets.............................. 23,604 41,648 Restricted investments...................................... 2,714 1,596 Property and equipment, net (Note 7)........................ 24,075 27,862 Goodwill, net (Note 2)...................................... 15,293 13,466 Purchase option deposits (Note 17).......................... 2,974 322 Other assets................................................ 2,395 1,078 -------- ------- Total assets...................................... $ 71,055 $85,972 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Note 8)................ $ 450 $ 177 Accounts payable.......................................... 10,016 9,132 Accrued payroll........................................... 1,339 2,243 Accrued expenses.......................................... 4,357 3,714 -------- ------- Total current liabilities......................... 16,162 15,266 Deferred income taxes (Note 13)............................. -- 638 Long-term debt, net of current portion (Note 8)............. 11,773 3,376 Straight-line lease liability............................... 3,537 3,053 Deferred revenue and other liabilities...................... 1,225 1,780 -------- ------- Total liabilities................................. 32,697 24,113 -------- ------- Commitments and contingencies (Notes 2, 3, 10, 11, 14 and 17) Stockholders' equity (Notes 9 and 15): Preferred stock, $.001 par value; 5,000,000 authorized; none outstanding....................................... -- -- Preferred stock, Series A; authorized -- 1,150,958 shares; none outstanding....................................... -- -- Common stock, $.001 par value; authorized -- 50,000,000 shares; issued and outstanding -- 16,722,847 shares in 1999 and 16,695,343 shares in 1998..................... 17 17 Additional paid-in capital................................ 63,814 63,678 Accumulated deficit....................................... (25,473) (1,836) -------- ------- Total stockholders' equity........................ 38,358 61,859 -------- ------- Total liabilities and stockholders equity......... $ 71,055 $85,972 ======== =======
See accompanying notes to consolidated financial statements. 41 42 BALANCED CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE DATA)
YEARS ENDED JUNE 30, ---------------------------- 1999 1998 1997 -------- ------ ------ Revenues: Patient services.......................................... $ 47,999 58,194 41,616 Resident services......................................... 22,748 18,239 6,778 Development fees.......................................... 6,288 11,774 1,015 Management fees........................................... 1,117 392 -- Other revenues............................................ 294 289 71 -------- ------ ------ Total revenues.................................... 78,446 88,888 49,480 -------- ------ ------ Operating expenses: Facility operating expenses: Salaries, wages and benefits........................... 32,994 30,756 19,186 Other operating expenses............................... 22,480 31,442 20,687 Development, general and administrative expenses.......... 12,781 11,877 5,653 Provision for losses on development activities (Note 10).................................................... 13,050 -- -- Provision for losses under shortfall funding agreements (Note 11).............................................. 4,660 -- -- Provision for losses under severance agreements (Note 12).................................................... 1,600 -- -- Bad debt expense.......................................... 2,044 722 40 Lease expense (including related parties of $435 in 1999, $5,042 in 1998 and $4,030 in 1997)..................... 10,715 9,442 5,417 Depreciation and amortization............................. 2,145 2,169 693 Write-down of long-lived assets (Notes 5 and 6)........... -- -- 1,591 -------- ------ ------ Total operating expenses.......................... 102,469 86,408 53,267 -------- ------ ------ Income (loss) from operations.......................... (24,023) 2,480 (3,787) Other income (expense): Interest and other income................................. 780 715 265 Interest expense.......................................... (647) (1,798) (917) Gain (loss) on sale of assets (Notes 5 and 6)............. (302) 2,858 -- -------- ------ ------ Income (loss) before income taxes...................... (24,192) 4,255 (4,439) Provision for income taxes (benefit) (Note 13).............. (555) 680 53 -------- ------ ------ Net income (loss)...................................... $(23,637) 3,575 (4,492) ======== ====== ====== Basic earnings (loss) per share........................... $ (1.41) 0.31 (0.66) ======== ====== ====== Diluted earnings (loss) per share......................... $ (1.41) 0.28 (0.66) ======== ====== ====== Weighted average shares -- basic.......................... 16,713 11,616 6,763 ======== ====== ====== Weighted average shares -- diluted........................ 16,713 12,928 6,763 ======== ====== ======
See accompanying notes to consolidated financial statements. 42 43 BALANCED CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
PREFERRED A STOCK COMMON STOCK --------------------------------- ------------------ ADDITIONAL ISSUED SUBSCRIPTION ISSUED PAID-IN ACCUMULATED SHARES PAR VALUE RIGHTS SHARES PAR VALUE CAPITAL DEFICIT TOTAL ------ --------- ------------ ------ --------- ---------- ----------- -------- Balance at June 30, 1996.... 1,000 $1 $ 451 2,583 $ 3 $ 1,588 $ (919) $ 1,124 Stock dividend.............. 151 -- -- -- -- -- -- -- Accretion of redemption value attributable to redeemable preferred stock..................... -- -- -- -- -- (1,267) -- (1,267) Issuance of common stock.... -- -- -- 1,442 2 2,172 -- 2,174 Issuance of preferred stock..................... -- -- (451) -- -- 451 -- -- Issuance of common stock purchase warrants......... -- -- -- -- -- 1,017 -- 1,017 Net loss.................... -- -- -- -- -- -- (4,492) (4,492) ------ -- ----- ------ --- ------- -------- -------- Balance at June 30, 1997.... 1,151 1 -- 4,025 5 3,961 (5,411) (1,444) Issuance of common stock.... -- -- -- 8,050 8 46,349 -- 46,357 Conversion of series A preferred stock........... (1,151) (1) -- 863 1 -- -- -- Accretion of redemption value attributable to redeemable preferred stock..................... -- -- -- -- -- (1,253) -- (1,253) Conversion of series B preferred stock........... -- -- -- 3,757 3 14,498 -- 14,501 Issuance of common stock purchase warrants......... -- -- -- -- -- 123 -- 123 Net income.................. -- -- -- -- -- -- 3,575 3,575 ------ -- ----- ------ --- ------- -------- -------- Balance at June 30, 1998.... -- -- -- 16,695 17 63,678 (1,836) 61,859 Issuance of common stock purchase warrants......... -- -- -- -- -- 45 -- 45 Options exercised........... -- -- -- 28 -- 91 -- 91 Net loss.................... -- -- -- -- -- -- (23,637) (23,637) ------ -- ----- ------ --- ------- -------- -------- Balance at June 30, 1999.... -- $-- $ -- 16,723 $17 $63,814 $(25,473) $ 38,358 ====== == ===== ====== === ======= ======== ========
See accompanying notes to consolidated financial statements. 43 44 BALANCED CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, JUNE 30, JUNE 30, 1999 1998 1997 -------- -------- -------- Cash Flows from Operating Activities: Net income (loss)........................................... $(23,637) 3,575 (4,492) Adjustments to reconcile net income (loss) to net cash used for operating activities: Depreciation and amortization............................. 2,145 2,169 693 Deferred income taxes..................................... (638) 638 -- Loss (gain) on sale of assets............................. 302 (2,858) -- Non-cash lease expense.................................... -- -- 1,454 Write-down of long-lived assets........................... -- -- 1,591 Provision for losses on development activities............ 13,050 -- -- Provision for losses under shortfall funding agreements... 4,660 -- -- Provision for losses under severance agreements........... 1,600 -- -- Changes in operating assets and liabilities, excluding effects of acquisitions: Increase in receivables, net............................ (40) (11,175) (4,235) Increase in development contracts in process, net....... (8,605) (2,242) (292) Decrease (increase) in prepaid expenses and other current assets........................................ 341 (516) (674) Increase in accounts payable, accrued payroll and accrued expenses...................................... 411 4,317 5,340 -------- ------- ------ Net cash used for operating activities................ (10,411) (6,092) (615) -------- ------- ------ Cash Flows from Investing Activities: Proceeds from sale of assets.............................. 11,627 7,364 -- Purchases of property and equipment....................... (4,055) (4,111) (1,822) (Increase) decrease in restricted investments............. (147) 229 (1,546) Increase in purchase option deposits and other assets..... (5,229) (464) (1,544) Business acquisitions (Note 2)............................ (6,726) (30,613) (2,287) -------- ------- ------ Net cash used for investing activities................ (4,530) (27,595) (7,199) -------- ------- ------ Cash Flows from Financing Activities: Proceeds from issuance of long-term debt.................. 13,156 159 385 Payments on long-term debt................................ (5,208) (5,133) (142) Proceeds from issuance of common stock.................... 91 46,357 110 Proceeds from issuance of Series A preferred stock........ -- -- 451 Proceeds from issuance of Series B preferred stock........ -- -- 11,982 Issuance of notes payable................................. -- 29,675 1,476 Payments on notes payable................................. -- (29,675) (1,476) Increase (decrease) in straight-line lease liability...... (206) (80) 1,679 Increase (decrease) in other liabilities.................. (213) (43) 690 -------- ------- ------ Net cash provided by financing activities............. 7,620 41,260 15,155 -------- ------- ------ Decrease in cash and cash equivalents................. (7,321) 7,573 7,341 Cash and cash equivalents at beginning of year.............. 15,481 7,908 567 -------- ------- ------ Cash and cash equivalents at end of year.................... $ 8,160 15,481 7,908 ======== ======= ====== Supplemental Cash Flow Information: Cash paid for interest.................................... $ 951 1,843 927 ======== ======= ====== Cash paid for income taxes................................ $ 86 66 35 ======== ======= ====== Supplemental Non-cash Investing and Financing Activities: Assets and lease obligations capitalized.................. $ 722 253 75 ======== ======= ====== Fair value of stock purchase warrants granted............. $ 45 123 1,017 ======== ======= ====== Accretion of redemption value of redeemable preferred stock................................................... $ -- 1,253 1,267 ======== ======= ====== Acquisitions: Fair value of assets acquired........................... (8,345) (32,328) (9,988) Liabilities assumed..................................... 1,619 1,715 5,636 Fair value of stock issued.............................. -- -- 2,065 -------- ------- ------ Consideration paid for acquisitions..................... $ (6,726) (30,613) (2,287) ======== ======= ======
See accompanying notes to consolidated financial statements. 44 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) ORGANIZATION AND BACKGROUND Balanced Care Corporation ("BCC" or the "Company") was incorporated in April 1995 and is engaged in the acquisition, development and operation of assisted living facilities and of other operations which facilitate implementation of the Company's balanced care continuum strategy, such as medical rehabilitation, home health care and skilled nursing. As of June 30, 1999, the Company owned, leased or managed 56 assisted and independent living communities and 13 skilled nursing facilities and had 18 assisted living communities under development contracts (see Note 3). The Company also operated a home health agency and rehabilitation agencies. The Company's operations are located in Pennsylvania, Missouri, Arkansas, Virginia, Ohio, North Carolina, Tennessee, West Virginia and Florida. On February 18, 1998, the Company closed its initial public offering for 7,000,000 shares of its common stock, par value $.001 per share ("Common Stock") at a price of $6.50 per share (the "Offering"). Concurrent with the Offering, 5,009,750 shares of Series B Preferred Stock and 1,150,958 shares of Series A Preferred Stock were converted into 4,620,532 shares of Common Stock (reflective of the three-for-four-reverse split of Common Stock effective October 14, 1997). In connection with the Offering, the Company granted the underwriters an option to purchase 1,050,000 additional shares of Common Stock at $6.50 per share. The closing for this option was on March 17, 1998. After the consummation of the Offering, the conversion of the preferred stock and the exercise of the underwriters' option, the Company had 16,695,343 shares of Common Stock outstanding. (B) BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries from their respective acquisition dates. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. (C) CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid instruments with original maturities of three months or less. The Company maintains its cash and cash equivalents at financial institutions which management believes are of high credit quality. (D) FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, receivables, restricted investments and mortgage notes payable are reflected in the accompanying balance sheet at amounts considered by management to approximate fair value. Management generally estimates fair value of its long-term fixed rate notes payable using discounted cash flow analysis based upon the current borrowing rate for debt with similar maturities. (E) RESTRICTED INVESTMENTS Restricted investments consist of certificates of deposit that have been pledged as collateral for certain of the Company's lease commitments. The amounts are equivalent to three months' lease payments and are generally restricted through the initial lease term. (F) PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation or, where appropriate, the present value of the related capital lease obligations less accumulated amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets (see 45 46 note 7). Expenditures for maintenance and repairs necessary to maintain property and equipment in efficient operating condition are charged to operations. Cost of additions and betterments are capitalized. (G) GOODWILL Goodwill resulting from business acquisitions accounted for as purchases is being amortized on a straight-line basis over lives ranging from 15 to 40 years. Goodwill is reviewed for impairment whenever events or circumstances provide evidence which suggests that the carrying amount of goodwill may not be recoverable. The Company evaluates the recoverability of goodwill by determining whether the amortization of the goodwill balance can be recovered through projected undiscounted cash flows. At June 30, 1999 and 1998, accumulated amortization of goodwill was $766,000 and $334,000, respectively. (H) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company reviews its long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flow expected to be generated by the asset. This comparison is performed on a facility by facility basis. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (I) DEFERRED COSTS Financing and leasing costs have been deferred and are being amortized on a straight-line basis over the term of the related debt or lease. Accumulated amortization of deferred financing and leasing costs was $323,000 and $84,000 at June 30, 1999 and 1998 respectively. (J) REVENUE RECOGNITION Patient service revenues are recorded based on standard charges applicable to all patients, and include charges for room and board, rehabilitation therapies, pharmacy, medical supplies, sub-acute care and other programs provided to patients in skilled nursing facilities. Patient service revenues are adjusted for differences between such standard rates and estimated amounts reimbursable by third-party payors when applicable. Estimated settlements under third-party payor retrospective rate setting programs (primarily Medicare) are accrued in the period the related services are rendered. Settlements receivable and related revenues under such programs are based on annual cost reports prepared in accordance with Federal and state regulations, which reports are subject to audit and retroactive adjustment in future periods. In the opinion of management, adequate provision has been made for such adjustments and final settlements will not have a material effect on financial position or results of operations. The Company derives a significant portion of its revenues from federal and state reimbursement programs. All of the skilled nursing facilities operated by the Company are certified to receive benefits under Medicare and Medicaid. The reimbursement methodology for a variety of health care providers has changed significantly as a result of provisions contained in the Balanced Budget Act of 1997 ("Budget Act"), which provisions materially impacted the Company's operations and financial condition. The Budget Act provides for a prospective payment system ("PPS") for skilled nursing services (rather than the retrospective cost-based methodology in place prior to July 1, 1998). During the transition period, the payment rate is based on a percentage blend of a facility-specific rate and a federal per diem rate. Once the PPS is fully implemented, skilled nursing facilities will be paid a federal per diem rate for covered services, which include routine and ancillary services and most capital-related costs. In conjunction with PPS, consolidated billing for Medicare Part A Services is required for skilled nursing facilities. Under consolidated billing for Medicare Part A Services, facilities must bill Medicare for all of the services residents receive, including all therapy services. The Company's skilled nursing facilities began utilizing this new rate methodology on July 1, 1998. 46 47 Resident service revenues are recognized when services are rendered and consist of resident fees and other ancillary services provided to residents of the Company's assisted living facilities. (K) DEVELOPMENT FEE INCOME RECOGNITION AND RELATED COSTS Development fees are received from facility owners under fixed-price development contracts, which are recognized on the percentage-of-completion method measured by the cost-to-cost method. Such contracts are for managing, supervising and coordinating the activities of other contractors on behalf of the owners of the assisted living facilities, and revenue is recognized only to the extent of the fee revenue. On projects where BCC is the lessee, development fees in excess of related development costs are recorded as deferred revenues and recognized over the lease term (see Note 3). Contract costs include direct development salaries, wages and benefits and related direct costs of development activities, including such costs incurred prior to execution of the development agreement (precontract costs). Precontract costs are recorded as development in process until the contract is executed, whereupon such costs are charged to operations and related development fee revenues are recognized as described above. Precontract costs are reviewed by management to assess recoverability based on the progress of each development project and are charged to operations when a project is abandoned. Changes in project performance, conditions and estimated profitability may result in revisions to cost estimates, related revenue recognition and provisions for estimated losses on uncompleted contracts. Such changes in estimates are reported in the period in which the revisions are determined. Reimbursable costs due from facility owners under development contracts in process represent costs incurred on behalf of the owners of the assisted living facilities during the construction period, which are reimbursed on a monthly basis. Accounts payable include $5,864,000 at June 30, 1999 and $5,435,000 at June 30, 1998 related to such costs. (L) INCOME TAXES The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. (M) STRAIGHT-LINE LEASE LIABILITY Straight-line lease liabilities represent lease deposit funding received from REITs relating to lease transactions. The Company pays rent on these funds and amortizes the related straight-line lease liability over the initial lease term as a reduction of rent expense. (N) CLASSIFICATION OF EXPENSES All expenses associated with development, corporate or support functions are classified as development, general and administrative. (O) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (P) PRO FORMA EARNINGS (LOSS) PER SHARE ("EPS") Pro forma earnings (loss) per share is computed using the weighted average number of common shares and common equivalent shares outstanding (using the treasury stock method) assuming the pro forma conversion of preferred shares into common. For the years ended June 30, 1999 and 1997, common equivalent 47 48 shares from stock options and warrants are excluded from the computation, as their effect is antidilutive. In the computation of earnings (loss) per share, accretion of the redemption value attributable to redeemable preferred stock is not included as an increase to net loss. A reconciliation of the weighted average shares used in the computation of pro forma earnings per share follows (in thousands):
YEAR ENDED JUNE 30, ------------------------- 1999 1998 1997 ------ ------ ----- Weighted average common shares outstanding................ 16,713 6,996 3,758 Pro forma conversion of preferred shares.................. -- 4,620 3,005 ------ ------ ----- Shares used for pro forma basic EPS....................... 16,713 11,616 6,763 Stock options and warrants converted using the Treasury stock method............................................ -- 1,312 -- ------ ------ ----- Shares used for pro forma diluted EPS..................... 16,713 12,928 6,763 ====== ====== =====
(Q) RECLASSIFICATIONS Certain amounts for 1997 and 1998 have been reclassified to conform to the presentation for 1999. 2. BUSINESS ACQUISITIONS Acquisitions and the manner of payment are summarized as follows:
TRANSACTION LEASED CASH COMMON STOCK LIABILITIES TOTAL GOODWILL MONTH DESCRIPTION OR OWNED BUSINESS LOCATION PAID ISSUED(1) INCURRED COST RECORDED - ----- ---------------------- -------- -------- -------- ------- ------------ ----------- ------- -------- YEAR ENDED JUNE 30, 1999: September 1998 Additional transaction Leased ALF VA $ 45 $ -- $ -- $ 45 $ 45 costs -- Potomac Point January 1999 Contingent payment -- Owned ALF PA 2,222 -- -- 2,222 2,222 Butler(3) March 1999 Equity interest of Leased ALF PA 865 -- -- 865 -- Extended Care Ops. at Harrisburg, LLC(4) April 1999 Stock of TC Realty of Leased ALF AR 386 -- -- 386 -- Sherwood, Inc.(4) April 1999 Stock of TC Realty of Leased ALF AR 451 -- -- 451 -- Mt. Home, Inc.(4) May 1999 Stock of TC Realty of Leased ALF PA 627 -- -- 627 -- Reading, Inc.(4) May 1999 Stock of TC Realty of Leased ALF PA 558 -- -- 558 -- Altoona, Inc.(4) Various Cash payments of -- -- -- 1,572 -- (1,572) -- -- acquisition liabilities accrued in 1998 ------- ------ ------- ------- ------- $ 6,726 $ -- $(1,572) $ 5,154 $ 2,267 ======= ====== ======= ======= ======= YEAR ENDED JUNE 30, 1998: August 1997 Leasehold interest of Leased ALF MO $ -- $ -- $ -- $ -- $ -- Clark October 1997 Assets of Feltrop Owned ALF PA 5,875 -- -- 5,875 1,597 October 1997 Assets of Butler(3) Owned ALF PA 9,997 -- 372 10,369 4,046 December 1997 Assets of Northridge Owned ALF NC 8,600 -- -- 8,600 3,349 January 1998 Assets of Gethsemane Owned ALF/ PA 5,600 -- 1,200 6,800 1,824 SNF February 1998 Contingent Payment -- Leased ALF/ PA 500 -- -- 500 500 Keystone(2) SNF June 1998 Leasehold interest of Leased ALF VA 41 -- -- 41 41 Potomac Point ------- ------ ------- ------- ------- $30,613 $ -- $ 1,572 $32,185 $11,357 ======= ====== ======= ======= =======
48 49
TRANSACTION LEASED CASH COMMON STOCK LIABILITIES TOTAL GOODWILL MONTH DESCRIPTION OR OWNED BUSINESS LOCATION PAID ISSUED(1) INCURRED COST RECORDED - ----- ---------------------- -------- -------- -------- ------- ------------ ----------- ------- -------- YEAR ENDED JUNE 30, 1997: August 1996 Operations/assets of Owned/ SNF MO $ 487 $1,600 $ 6,604 $ 8,691 $ 1,851 Foster Health Care Leased January 1997 Operations of Leased ALF/ PA 1,800 250 -- 2,050 1,800 Keystone (2) SNF May 1997 Leasehold interest of Leased ALF MO -- -- -- -- -- Clark ------- ------ ------- ------- ------- $ 2,287 $1,850 $ 6,604 $10,741 $ 3,651 ======= ====== ======= ======= =======
- --------------- (1) Represents 1,200,000 shares of common stock for Foster and 187,500 shares of common stock for Keystone. (2) Purchase of the operations of Keystone included the rights to seven early stage development projects. Additional cash payments of $500,000 were paid in Fiscal 1998 when the first five projects were financed and recorded as additional goodwill. (3) The agreement to purchase the assets of Butler Senior Care provided for an additional payment if an addition (opened in January 1998) attained occupancy of 90% based upon a multiple of net operating income, and a final payment, based upon a multiple of Butler's annualized net operating income for the six months ending December 31, 1998. (4) Represents the acquisition under a purchase option agreement in which the Company had the right to acquire the stock of the Operator/Lessee of managed facilities. All acquisitions were accounted for under the purchase method. The acquisitions that took place from October 1997 through January 1998 were financed with $29,675,000 in bridge financing from a REIT that was repaid with proceeds of the offering. In Fiscal 1999, the Company exercised its purchase options and acquired the equity interests of certain Operator/Lessees, representing primarily the leasehold interests of the special purpose entities formed to lease and operate assisted living facilities located in Harrisburg, Sherwood, Mountain Home, Reading and Altoona. These facilities were developed and previously managed by the Company. The total cost of $2,887,000 (including prior purchase option deposits of $538,000) has been allocated to the assets acquired and liabilities assumed of the acquired entities, based on estimated fair values, as follows: Current assets (less cash acquired of $441)................. $ 780 Property and equipment...................................... 61 Leasehold interests and other intangibles................... 2,583 Other assets................................................ 1,082 Current liabilities......................................... (765) Long term liabilities....................................... (854) ------ $2,887 ======
The following unaudited summary, prepared on a pro forma basis, combines the results of operations of the acquired businesses with those of the Company as if the acquisitions had been consummated as of the beginning of the respective periods and after including the impact of certain adjustments such as: amortization 49 50 of goodwill, depreciation on assets acquired, interest on acquisition financing and lease payments on the leased facility (in thousands except for EPS):
YEAR ENDED JUNE 30, ------------------- 1999 1998 -------- ------- Revenue................................................. $ 82,596 $95,979 Expenses................................................ 107,519 94,282 -------- ------- Net income (loss)....................................... $(24,923) $ 1,697 ======== ======= Pro forma diluted EPS................................... $ (1.49) $ 0.13 ======== =======
The unaudited pro forma results are not necessarily indicative of what actually might have occurred if the acquisitions had been completed as of July 1, 1998 and 1997, respectively. In addition, they are not intended to be a projection of future results of operations. 3. DEVELOPMENT ACTIVITIES The Company is a operator, developer and manager of assisted living facilities. The Company's development projects have generally involved entering into development agreements with third party owners, which are typically real estate investment trusts ("REITs") (each, an "Owner"), and the Company receives development fees for the design and development services provided to the owners. An independent third party company (the "Operator/Lessee") leases the assisted living facility from the Owner when construction has been completed and provides funding for the working capital during the initial occupancy period. The Company manages the assisted living facility pursuant to a management agreement for a term of two to nine years in return for a management fee approximating 6% of the net revenue of the facility. These fees are subordinate to any rent payments made by the operator/lessee to the facility owner. The Company has the option (but not the obligation) to purchase the stock or assets of the operator/lessee pursuant to a related option agreement (see Note 17). The Company incurs substantial development costs prior to executing the development agreement (precontract costs). Such costs relate to market analysis and evaluation, site selection and land control, obtaining architectural and engineering reports, preparing development plans and obtaining zoning and other governmental approvals and permits relating to the building, sewer, water, roads, utilities, etc. Development contracts in process at June 30, 1999 and 1998 are summarized as follows:
1999 1998 ------- ------- Precontract costs........................................ $ 8,084 $ 499 Costs and estimated earnings of development contracts in process............................................. 10,761 11,470 Less billings to-date.................................... (7,706) (9,435) ------- ------- 3,055 2,035 ------- ------- Less allowance for loss on termination of development projects (Note 10)..................................... (8,580) -- ------- ------- $ 2,559 $ 2,534 ======= =======
With respect to 11 facilities that have been developed and then leased by the Company, development fees of $973,000 were deferred and amortized over the initial term of the lease as a reduction of rent expense. In Fiscal 1998, the Company sold certain assets and its leasehold rights related to these 11 facilities to newly formed special purpose entities for $2,645,000 and entered into management agreements with such entities. The Company has options to reacquire the leasehold interests in those facilities. The gain on such sale of $922,000 has also been deferred and is being amortized to operations over five years, the term of the management agreement. In Fiscal 1999, the Company exercised their option to acquire leasehold interest of certain facilities and deferred gains of $436,000 have been applied to reduce the carrying value of such 50 51 interests (see Note 2). At June 30, 1999, and 1998, unamortized development fees and gains were $1,040,000 and $1,702,000, respectively. The estimated total costs of the development contracts in process at June 30, 1999, primarily representing costs reimbursable from facility owners, were $110,000,000, of which $67,800,000 had been incurred through that date. 4. RECEIVABLES AND CONCENTRATION OF CREDIT RISK Receivables consist of the following at June 30, 1999 and 1998:
1999 1998 ------- ------- Accounts receivable -- patients and residents............ $ 8,480 $ 9,015 ------- ------- Contracts receivable: Development fees.................................... 1,200 2,198 Reimbursable costs due from facility owners......... 3,085 6,181 ------- ------- 4,285 8,379 ------- ------- Advances to Operator/Lessees............................. 7,949 3,152 ------- ------- Total receivables.............................. 20,714 20,546 ------- ------- Less: allowance for doubtful receivables................. (2,352) (916) allowance for losses on development activities and shortfall funding agreements (Notes 10 and 11)... (6,450) -- ------- ------- Net receivables................................ $11,912 $19,630 ======= =======
The Company receives payment for a significant portion of services rendered to patients from the Federal government under Medicare and from the states in which its facilities and/or services are located under Medicaid. For Fiscal 1999, the Company derived approximately 26% of its gross patient revenues from Medicare and approximately 48% of its gross patient revenues from Medicaid. For the years ended June 30, 1998 and 1997, the Company derived approximately 43% and 38% of its gross patient revenues from Medicare, respectively, and approximately 37% and 38% of its gross patient revenues from Medicaid, respectively. A substantial portion of the Company's facilities are located in Pennsylvania and Missouri. Operating revenues attributable to the Company's business in those states accounted for approximately 92% and 94% of the Company's total operating revenues for the years ended June 30, 1999 and 1998, respectively. Until the Company's operations become more geographically diverse, the Company will be more susceptible to downturns in local and regional economies and changes in state or local regulation because such conditions and events could affect a relatively high percentage of the total number of facilities currently in operation and under development. As a result of such factors, there can be no assurance that such geographic concentration will not have a material adverse effect on the Company's business, results of operations or financial condition. 5. ASSETS HELD FOR SALE/DIVESTITURES In December 1998, the Company completed the sale of the assets of its Wisconsin assisted living facilities for net proceeds of approximately $2,726,000. The Wisconsin facilities had been classified as an asset held for sale at June 30, 1998. The sale resulted in a loss of $200,000 in Fiscal 1999. In October 1997, the Company completed the sales of its pharmacy operations for net proceeds of approximately $4,700,000. The pharmacy was classified as an asset held for sale at June 30, 1997. The sale resulted in a gain of $2,858,000 in Fiscal 1998. 51 52 6. SALE/LEASE-BACK In March 1999, the Company completed the sale and subsequent leaseback of two of its facilities in Bloomsburg and Saxonburg, Pennsylvania. The net proceeds from the sale of the two facilities was $8,901,000. The leases have an initial term of 15 years with three renewal terms: two of five years and one for four years 11 months. The annual lease rate is 10.25%. The sale resulted in a loss of $102,000 in Fiscal 1999. 7. PROPERTY AND EQUIPMENT Property and equipment are comprised of the following as of June 30 (dollars in thousands).
ESTIMATED USEFUL LIFE 1999 1998 ----------- ------ ------- Land and land improvements............................ 2 - 15 yrs 1,566 $ 2,680 Buildings and improvements............................ 2 - 40 yrs 13,871 19,887 Fixed and moveable equipment.......................... 3 - 20 yrs 9,267 7,307 Leasehold interests................................... 20 yrs 2,149 ------ ------- 26,853 29,874 Less: accumulated depreciation........................ (2,778) (2,012) ------ ------- 24,075 $27,862 ====== =======
Depreciation expense was $1,571,000 in 1999, $1,689,000 in 1998 and $477,000 in 1997. At June 30, 1999 and 1998, property and equipment include approximately $1,090,000 and $368,000 of assets that have been capitalized under capital leases. Amortization of the leased assets is included in depreciation and amortization expense. 8. LONG-TERM DEBT Long-term debt consisted of the following as of June 30 (dollars in thousands):
1999 1998 ------- ------ Mortgage payable, interest at 10.7%; principal and interest due monthly through August 2006 based on 30-year amortization; unpaid principal and interest due August 2006............................................. $ 3,086 $3,103 Revolving line of credit, interest at the prevailing prime rate plus 2.75%; interest due monthly through July 2002.................................................... 7,421 -- Other (including capital lease obligations)............... 1,716 450 ------- ------ 12,223 3,553 Less: current portion..................................... 450 177 ------- ------ $11,773 $3,376 ======= ======
The mortgage payable was incurred for the acquisition of two Missouri nursing homes. The mortgage note is collateralized by the facilities' property and equipment. The Company issued a warrant to purchase approximately 460,000 shares of common stock exercisable at $.001 per share in connection with this financing. The value of the warrant of approximately $613,676 ($1.33 per share) has been recorded as deferred financing cost and a corresponding non-cash increase in additional paid-in capital. In April 1999, the Company entered into a $15 million revolving Line of Credit. The Line of Credit is secured by the real estate owned by five of the Company's subsidiaries (collectively, the "Real Estate Borrowers") and the eligible accounts receivable of the Company's 10 Missouri skilled nursing facilities. The Line of Credit is for a term of three years, and outstanding borrowings will bear interest at a rate per annum of prime plus 2.75% (see Note 19). 52 53 At June 30, 1999, the aggregate maturities of long-term debt for the next five Fiscal years ending June 30 are as follows (dollars in thousands): 2000....................................................... $ 450 2001....................................................... 448 2002....................................................... 7,865 2003....................................................... 281 2004....................................................... 207 Thereafter................................................. 2,972 ------- $12,223 =======
9. STOCKHOLDERS' EQUITY The Company has outstanding warrants to purchase common shares as follows:
NUMBER OF WEIGHTED-AVERAGE SHARES EXERCISE PRICE --------- ---------------- Balance at June 30, 1996......................... 45,928 0.01 Granted.......................................... 891,939 0.65 Exercised........................................ -- -- --------- ----- Balance at June 30, 1997......................... 937,867 0.62 Granted.......................................... 47,750 8.58 Exercised........................................ -- -- --------- ----- Balance at June 30, 1998......................... 985,617 1.00 Granted.......................................... 33,750 4.59 --------- ----- Balance at June 30, 1999......................... 1,019,367 $1.12 ========= =====
10. PROVISION FOR LOSSES ON DEVELOPMENT ACTIVITIES The Company's development activities are significantly affected by volatility in the capital markets and specific transaction terms which affect the Company's ability to utilize non-binding financing commitments from real estate investment trusts ("REITS") and other lenders. More specifically, there was a significant reduction in the amount of REIT financing available for new assisted living construction in Fiscal 1999. Furthermore, the ability of the Company to negotiate acceptable transaction terms and to currently recognize income on development fees became increasingly difficult due to accounting pronouncements and guidance issued by the Emerging Issues Task Force ("EITF") and the Securities and Exchange Commission staff. Finally, the Company's leverage (i.e. debt and other financial commitments in relation to equity) increased, in Fiscal 1999 due to the extensive use of operating leases to finance the construction of its Outlook Pointe(R) signature series assisted living facilities. As a result of the foregoing, in Fiscal 1999 the Company was not able to obtain financing on acceptable terms to continue development of its Outlook Pointe(R) signature series assisted living facilities. In recognition of the aforementioned events and circumstances beginning in the second Fiscal quarter, the Company: (i) concluded that development fees on new projects scheduled to close did not qualify for income recognition under contract terms considered acceptable by management; (ii) decided to emphasize the focus of management's efforts on the operations of existing facilities and facilities under construction; (iii) decided to substantially reduce its development activities with respect to new sites and projects; and (iv) recorded a provision for losses on development activities of $13,050,000. This provision is based on management's evaluation of assets related to various projects that are not now consistent with the Company's future plans. Such provision includes $3,170,000 primarily related to development fees on abandoned projects and $9,880,000 primarily related to termination of development projects in the precontract phase. 53 54 11. PROVISION FOR LOSSES UNDER SHORTFALL FUNDING AGREEMENTS As previously discussed, the Company manages certain assisted living facilities owned by REITs and leased to special purpose entities (the "Operator/Lessees"), which are owned by independent third parties. In connection with these transactions, the Company has entered into shortfall funding agreements, whereby the Company has agreed to make loans to the Operator/Lessees if the funds provided by the equity and working capital loans of the Operator/Lessees are depleted by negative cash flows from start-up operations of the facilities. During the year ended June 30, 1999, the Company recorded losses of $4,660,000 related to its obligations under the shortfall funding agreements to fund the additional working capital needs of these managed facilities. This amount has been charged to operations as a provision for losses under the shortfall funding agreements and recorded as an allowance against the Company's receivables on advances to the Operator/Lessees. The Company records its losses on shortfall funding agreements using the "modified equity accounting" approach. Under this approach, the operating losses of the Operator/Lessees are allocated first to the capital of the investors, and the losses in excess of such capital are allocated to the Company to the extent of the Company's commitment under the shortfall funding agreement. 12. PROVISION FOR SEVERANCE COSTS In connection with the downscaling of development activities related to the Company's Outlook Pointe(R) signature series assisted living facilities discussed above, management adopted a corporate personnel reduction plan affecting certain departments and staff positions. This plan was enacted in February 1999 and resulted in a charge for severance costs of approximately $600,000, representing the estimated costs of employee terminations and related costs. In the fourth quarter, certain additional executive and staff positions were eliminated, which resulted in an increase in such provision of $1,000,000. 13. INCOME TAXES The provision for income taxes for the years ended June 30, 1999, 1998 and 1997 consists of the following (dollars in thousands):
1999 1998 1997 ----- ---- ---- Current Federal................................................... -- -- -- State..................................................... $ 83 $ 42 $53 ----- ---- --- Total Current............................................... $ 83 $ 42 $53 ----- ---- --- Deferred Federal................................................... $(557) $557 -- State..................................................... $ (81) $ 81 -- ----- ---- --- Total Deferred.............................................. $(638) $638 -- ----- ---- --- Total Income Tax Expense.................................... $(555) $680 $53 ===== ==== ===
54 55 A reconciliation of income tax expense at the federal statutory rate of 34% to the Company's effective tax rate is as follows:
1999 1998 1997 ----- ----- ----- Income taxes computed at statutory rate..................... (34.0)% 34.0% (34.0)% State income taxes, net of federal benefit.................. -- 1.9 (6.0) Basis difference on assets sold............................. -- 14.0 -- Other....................................................... (5.2) 15.3 1.3 Valuation allowance adjustment.............................. 36.9 (49.2) 39.9 ----- ----- ----- Effective tax rate.......................................... (2.3)% 16.0% 1.2% ===== ===== =====
Temporary differences giving rise to significant deferred tax assets and liabilities at June 30, 1999 and 1998 are as follows (dollars in thousands):
1999 1998 ------- ------- Excess tax over book basis of fixed assets............... $ 995 $ (125) Development fee income................................... 2 2,439 Lease proceeds........................................... (236) (414) Accrued expenses......................................... (1,554) (351) Net operating loss carryover............................. (6,888) (1,037) Other.................................................... (1,252) 126 ------- ------- Net deferred tax liability (asset)..................... (8,933) 638 Valuation allowance...................................... 8,933 -- ------- ------- Deferred income tax liability............................ $ -- $ 638 ======= =======
The Company has net operating loss carryforwards at June 30, 1999 available to offset future federal and state taxable income, if any, of approximately $17,150,000, expiring from 2003 through 2014. The net operating losses are subject to limits on their future utilization under federal and state tax laws. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company is in a cumulative pretax loss position since inception. Recognition of deferred tax assets will require generation of future taxable income. There can be no assurance that the Company will generate any earnings or any specific level of earnings in future years. Therefore, the Company established a valuation allowance on deferred tax assets of approximately $8,933,000 as of June 30, 1999. The change in the valuation allowance for deferred tax assets was an increase of $8,933,000 in Fiscal 1999 and a decrease of $2,092,000 in Fiscal 1998. 14. RETIREMENT PLAN On January 1, 1998 the Company formed a 401(k) savings plan which covers substantially all employees with one year and more than 1,000 hours of service. The plan allows employees to make tax deferred contributions to the plan. The Company makes matching contribution based on the amount of employee contributions; but in an amount that does not exceed 2% of wages. Matching contributions totaled $166,000 and $64,000 for the years ended June 30, 1999 and 1998, respectively. 15. STOCK OPTIONS The 1996 Stock Option Plan combines the features of an incentive and non-qualified stock option plan, a stock appreciation rights ("SAR") plan and a stock award plan (including restricted stock). The 1996 Plan is a long-term incentive compensation plan and is designed to provide a competitive and balanced incentive and reward program for participants. The Company has authorized 3,025,000 shares of common stock to be reserved for grants under the 1996 Plan. Options generally vest over a four-year period in cumulative increments of 25% each year beginning one 55 56 year after the date of the grant. In Fiscal year 1999, the expiration period was increased from not later than five years to not later than 10 years from the date of grant. The options are granted at an exercise price at least equal to the fair market value of the common stock on the date of the grant. At June 30, 1999, the range of exercise prices, weighted average remaining contractual life of outstanding options and shares exercisable were as follows:
OUTSTANDING WEIGHTED-AVERAGE SHARES EXERCISE PRICE OPTIONS CONTRACTUAL LIFE EXERCISABLE - -------------- ----------- ---------------- ----------- $2.00 - 2.99.. 1,273,051 6.876 yrs 398,196 $3.00 - 4.99.. 37,500 8.01 yrs 37,500 $5.00 - 5.99.. 825,800 7.25 yrs 107,004 $6.00 - 6.99.. 453,897 3.34 yrs 184,550 $7.00 - 8.88.. 133,500 6.29 yrs 34,627 --------- ------- 2,723,748 761,877 ========= =======
STOCK OPTION TRANSACTIONS ARE NUMBER OF WEIGHTED-AVERAGE SUMMARIZED AS FOLLOWS: SHARES EXERCISE PRICE - ----------------------------- --------- ---------------- Balance at June 30, 1996......................... 340,125 2.00 Granted........................................ 673,300 5.16 Exercised...................................... (11,250) (2.00) Forfeited...................................... (15,000) (2.84) --------- ------ Balance at June 30, 1997......................... 987,175 4.15 Granted........................................ 473,554 6.50 Exercised...................................... -- -- Forfeited...................................... (57,581) (6.15) --------- ------ Balance at June 30, 1998......................... 1,403,148 $ 4.85 Granted........................................ 1,560,500 3.75 Exercised...................................... (27,503) (3.32) Forfeited...................................... (212,397) (5.59) --------- ------ Balance at June 30, 1999......................... 2,723,748 $ 4.20 ========= ======
The Company applies APB Opinion No. 25 and related interpretations in accounting for its 1996 Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options as allowed under SFAS No. 123, Accounting for Stock Based Compensation, the Company's net income (loss) and per share amounts would have changed to the pro forma amounts indicated below.
1999 1998 1997 -------- ----- ------ Net Income (Loss) As reported............................................. $(23,637) 3,575 (4,492) Pro forma............................................... (24,931) 3,204 (4,511) Pro forma basic EPS As reported............................................. (1.41) 0.31 (0.66) Pro forma............................................... (1.49) 0.28 (0.67) Pro forma Diluted EPS As reported............................................. (1.41) 0.28 (0.66) Pro forma............................................... $ (1.49) 0.25 (0.67)
56 57 The fair value of employee options for purposes of the above pro forma disclosure was estimated on the date of grant using the Black-Scholes Multiple Pricing Model. Assumptions used for options issued during the year ended June 30, 1999, and all prior options were as follows:
1999 1998 1997 ----------------- ----------------- ----------------- Risk-free interest rate.......... 5.5% to 6.0% 5.5% to 6.0% 5.5% to 6.0% Expected life.................... 1 year after vest 1 year after vest 1 year after vest Expected volatility.............. .65 .42 .30 Expected dividends............... -- -- --
These assumptions produced weighted average fair values per option of a range of $0.88 to $3.20 for options issued in Fiscal 1999 and a range of $0.85 to $3.97 for options issued in 1998 and $0.41 for options issued in Fiscal 1997. All options issued during these periods were granted at an exercise price at, or in excess of, the fair market value on the grant date. 16. RELATED PARTY TRANSACTIONS The Company had the following related party transactions: - In September 1998, the Company entered into management agreements, option agreements and other transaction documents with six Operator/Lessees that are owned by Financial Care Investors, LLC, a Delaware limited liability Company ("FCI"). FCI is owned by Brad E. Hollinger, Chairman of the Board, President and Chief Executive Officer of the Company. FCI and its six wholly owned Operator/ Lessees also entered into lease agreements with a REIT. The terms of the agreements among the parties are similar to the terms of the agreements the Company has entered into with independent third party Operator/Lessees. - Rental payments made to companies owned by a stockholder/director for the lease of two facilities and other items. Management fees paid to a company owned by the same stockholder/director for managing ten skilled nursing facilities owned or leased by the Company. On July 1, 1997, the Company purchased the assets and operations of this management company for approximately $120,000. - Respiratory therapy supplies and management fees paid to a company owned by a stockholder/director. - Legal services provided by a relative of a stockholder/officer and consulting services provided by two stockholders/directors. - Rental payments to a company owned by two minority stockholders for the lease of seven skilled nursing facilities. - Fees paid to an investment banking firm for finding acquisition targets and for raising private equity. A minority stockholder of the Company is an officer of this firm. A summary of those transactions for the periods ended June 30 follows (dollars in thousands):
1999 1998 1997 ---- ---- ------ Rentals..................................................... $435 $415 $ 175 Management fees............................................. -- 15 1,076 Respiratory therapy......................................... -- 152 731 Legal & consulting services................................. 101 227 134 Skilled nursing facility rentals............................ -- 4,627 3,877 Finder's fees............................................... -- -- 250
Accounts payable include approximately $0, $4,000 and $648,000 related to these services at June 30, 1999, 1998 and 1997, respectively. 57 58 17. COMMITMENTS AND CONTINGENCIES LEASES The Company leases 19 assisted living facilities, 11 skilled nursing facilities and four independent living facilities, as well as certain equipment and office space under noncancellable operating and capital leases that expire at various times through 2014. Rental expense on such operating leases for the years ended June 30, 1999, 1998 and 1997 was $10,715,000, $9,442,000 and $5,417,000. Future annual minimum lease payments for the next five years and thereafter under noncancellable operating leases with initial terms of one year or more in effect at June 30, 1999, are as follows (dollars in thousands):
OPERATING FISCAL YEAR LEASES - ----------- --------- 2000........................................................ $ 13,355 2001........................................................ 13,132 2002........................................................ 13,083 2003........................................................ 13,072 2004........................................................ 13,067 Thereafter.................................................. 59,804 -------- Total Minimum Lease Payments................................ $125,513 ========
The operating lease agreements require the payment of additional rent commencing in the second lease year utilizing various contingent factors to calculate the increase. In addition, most of the facility leases have renewal options for periods ranging from 5 years to 24 years after the initial lease period. Contingent lease payments made during the year ended June 30, 1999, 1998 and 1997 were $236,000, $104,000 and none, respectively. MANAGEMENT AGREEMENTS As discussed in note 3, the Company manages certain assisted living facilities owned by REITs and leased to special purpose entities owned by independent third parties. The Company has the option (but not the obligation) to purchase the stock or assets of the operator/lessee pursuant to an option agreement at an exercise price based on formulas set forth in the agreements. Certain option agreements require the Company to make periodic payments to maintain its option. At June 30, 1999, the Company had purchase option deposits of $4,274,000, which expire at various dates during Fiscal 2000. Pursuant to shortfall funding agreements, the Company has agreed to make loans to the operator/lessees if the equity and working capital loans of the operator/lessee are depleted by negative cash flows from start up operations of the facilities. The Company incurred a charge of $4,660,000 in Fiscal 1999 in connection with shortfall funding agreements. No charges were incurred in prior years (See Note 11). LITIGATION The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are without merit or are of such a kind, or involve such amounts, that their unfavorable disposition would not have a material effect on the financial position, results of operations or the liquidity of the Company. 18. NEW ACCOUNTING PRONOUNCEMENTS SOP 98-5 In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 provides guidance as to the definition of 58 59 costs of start-up activities, including organization costs, and provides that these costs should be expensed as incurred. SOP 98-5 is effective for Fiscal years beginning after December 15, 1998: however, earlier application is encouraged for financial statements which have not been issued. The Company wrote off all costs of start-up activities in Fiscal 1998 of approximately $250,000. 19. SUBSEQUENT EVENTS In July 1999, the Line of Credit Agreement was amended. These amendments modify certain definitions and the borrowing base calculation to increase the Line of Credit to $20 million and to add to the lender's secured interest the real estate of two of the Company's subsidiaries located in Missouri. The primary components of the borrowing base consists of 85% of the product of 8.0 to 8.5 times EBITDA of the Real Estate Borrowers plus 85% of the product of 6 times EBITDA of the Skilled Nursing Facility Borrowers. Including the amendments to the Line of Credit Agreement, the borrowing base available (calculated as of June 30, 1999) was approximately $14 million. In a related transaction, the Company repaid the outstanding mortgage debt of $3.1 million. As a result, the Company expects to report a loss on the early extinguishment of debt of approximately $740,000 in the first quarter of Fiscal 2000. 20. SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual and interim financial statements issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. In Fiscal 1999, the Company had three primary reportable segments: (i) Resident Services which includes all assisted living and independent living services, and the management of assisted living facilities, (ii) Patient Services which includes skilled nursing services, home health services, and medical rehabilitation services, and (iii) Development, General and Administrative. No other individual business segment exceeds the 10% quantitative thresholds of SFAS No. 131. Balanced Care Corporation management evaluates the performance of its operating segments on the basis of earnings from continuing operations before non-recurring items (representing provisions for losses on development activities and severance agreements and gains and losses on sales of assets), lease expense, interest (net), taxes, depreciation and amortization.
YEAR ENDED JUNE 30, 1999 ------------------------------------------------------ DEVELOPMENT, RESIDENT PATIENT GENERAL AND SERVICES SERVICES ADMINISTRATIVE CONSOLIDATED -------- -------- -------------- ------------ Revenues...................................... $24,159 $47,999 $ 6,288 $78,446 Operating expenses............................ 15,128 42,390 -- 57,518 General and administrative expenses........... -- -- 12,781 12,781 Provision for losses under shortfall funding agreements.................................. -- -- 4,660 4,660 ------- ------- ------- ------- Income (loss) from continuing operations before non-recurring items, lease expense, interest (net), taxes, depreciation and amortization........ $ 4,371 $ 5,609 $(6,493) $ 3,487 ======= ======= ======= ======= Total Assets.................................. $41,104 $11,764 $18,187 $71,055 ======= ======= ======= =======
59 60
YEAR ENDED JUNE 30, 1998 --------------------------------------------------- RESIDENT PATIENT SERVICES SERVICES DEVELOPMENT CONSOLIDATED -------- -------- ----------- ------------ Revenues....................................... $18,920 $58,194 $11,774 $88,888 Operating, general and administrative expenses..................................... 11,819 51,101 -- 62,920 General and administrative expenses............ -- -- 11,877 11,877 Provisions for losses under shortfall funding agreements................................... -- -- -- -- ------- ------- ------- ------- Income from continuing operations before non- recurring items, lease expense, interest (net), taxes, depreciation and amortization................................. $ 7,101 $ 7093 $ (103) $14,091 ======= ======= ======= ======= Total Assets................................... $36,130 $15,897 $33,945 $85,972 ======= ======= ======= =======
There are no material inter-segment revenues or receivables. The Company does not evaluate its operations on a geographic basis. 21. QUARTERLY FINANCIAL INFORMATION
FIRST SECOND THIRD FOURTH FULL QUARTER QUARTER QUARTER QUARTER YEAR ----------- ----------- ----------- ------------ ------------ (UNAUDITED, IN THOUSANDS EXCEPT FOR DILUTED EARNINGS (LOSS) PER SHARE) YEAR ENDED JUNE 30, 1999: Total revenue.......................... $23,871 $18,682 $16,737 $ 19,156 $ 78,446 ======= ======= ======= ======== ======== Total operating expenses............... $20,797 $24,932 $21,277 $ 35,463 $102,469 ======= ======= ======= ======== ======== Net income (loss)...................... $ 1,940 $(5,163) $(2,769) $(17,645) $(23,637) ======= ======= ======= ======== ======== Pro forma diluted earnings (loss) per share................................ $ 0.11 $ (0.31) $ (0.17) $ (1.06) $ (1.41) ======= ======= ======= ======== ======== YEAR ENDED JUNE 30, 1998: Total revenue.......................... $19,138 $21,255 $24,538 $ 23,957 $ 88,888 ======= ======= ======= ======== ======== Total operating expenses............... $19,664 $22,681 $22,427 $ 21,636 $ 86,408 ======= ======= ======= ======== ======== Net income (loss)...................... $ (657) $ 849 $ 1,347 $ 2,036 $ 3,575 ======= ======= ======= ======== ======== Pro forma diluted earnings (loss) per share................................ $ (0.08) $ 0.09 $ 0.10 $ 0.11 $ 0.28 ======= ======= ======= ======== ========
60 61 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS BALANCED CARE CORPORATION: We have audited the consolidated financial statements of Balanced Care Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Balanced Care Corporation and subsidiaries as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three year period ended June 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Baltimore, Maryland August 20, 1999 61 62 BALANCED CARE CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------- ------------------------ ---------- --------- ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING OPERATING OTHER AT END DESCRIPTION OF PERIOD ACCOUNTS ACCOUNTS DEDUCTIONS OF PERIOD - ----------- ---------- ---------- ---------- ---------- --------- Allowance for Doubtful Accounts Year ended June 30, 1999.......... $916 $ 2,044 $ -- $ (608)(2) $ 2,352 ==== ======= ==== ======= ======= Year ended June 30, 1998.......... $330 $ 722 $ -- $ (136)(2) $ 916 ==== ======= ==== ======= ======= Year ended June 30, 1997.......... $ -- $ 40 $326(1) $ (36)(2) $ 330 ==== ======= ==== ======= ======= Allowance for Loss on Development Activities(3) Year ended June 30, 1999.......... $ -- $13,050 $ -- $(1,380)(2) $11,670 ==== ======= ==== ======= ======= Year ended June 30, 1998.......... $ -- $ -- $ -- $ -- $ -- ==== ======= ==== ======= ======= Year ended June 30, 1997.......... $ -- $ -- $ -- $ -- $ -- ==== ======= ==== ======= ======= Allowance for Losses Under Shortfall Funding Agreements Year ended June 30, 1999.......... $ -- $ 4,660 $ -- $ -- $ 4,660 ==== ======= ==== ======= ======= Year ended June 30, 1998.......... $ -- $ -- $ -- $ -- $ -- ==== ======= ==== ======= ======= Year ended June 30, 1997.......... $ -- $ -- $ -- $ -- $ -- ==== ======= ==== ======= =======
- --------------- (1) Net additions as a result of acquisitions (2) Amount represents bad debt write-offs (3) Consists of allowance for losses on development contracts in process, contracts receivable and purchase option deposits 62 63 ITEM 9-- CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information required by this Item (other than the information regarding executive officers set forth at the end of Item 1 of Part I of this Form 10-K) will be contained in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under the captions "Board of Directors and Election of Directors" and "Security Ownership -- Section 16(a) Beneficial Ownership Reporting Compliance," and is incorporated herein by reference. ITEM 11--EXECUTIVE COMPENSATION The information required by this Item will be contained in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under the captions "Board of Directors and Election of Directors" and "Executive Compensation," and is incorporated herein by reference. ITEM 12-- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be contained in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under the caption "Security Ownership," and is incorporated herein by reference. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item will be contained in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under the caption "Certain Transactions and Relationships with the Company; Legal Proceedings," and is incorporated herein by reference. PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a)(1) Financial Statements: (a)(2) Financial Statement Schedule: See (d) below. (a)(3) Exhibits: The following exhibits are filed herewith or are incorporated by reference herein:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Asset Purchase Agreement among BCC of Wisconsin, Inc., the Company and Urquhart Company dated as of September 30, 1998 (incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the quarter ended December 31, 1998 (No. 001-13845))* 3.1 Amended and Restated Certificate of Incorporation of Balanced Care Corporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (No. 333-37833))
63 64
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.2 Bylaws of Balanced Care Corporation, as amended (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (No. 333-37833)) 4.1 Form of Capital Stock Purchase Warrant, together with schedule (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-1 (No. 333-37833)) 4.2 Form of Capital Stock Purchase Warrant, together with schedule (incorporated by reference to Exhibit 4.10 to the Registration Statement on Form S-1 (No. 333-37833)) 4.3 Form of Capital Stock Purchase Warrant, together with schedule (incorporated by reference to Exhibit 4.11 to the Registration Statement on Form S-1 (No. 333-37833)) 10.1 Loan and Security Agreement among Balanced Care Corporation and certain of its wholly-owned subsidiaries and HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.2 Revolving Credit Note from Balanced Care Corporation and certain of its wholly-owned subsidiaries in favor of HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.3 Environmental Indemnity Agreement by Balanced Care Corporation and certain of its wholly-owned subsidiaries in favor of HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.4 Deed of Trust, Assignment of Rents and Leases and Security Agreement from Balanced Care at North Ridge, Inc. in favor of HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.5 Form of Open-End Mortgage, Assignment of Rents, Leases and Security Agreement in favor of HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.6 Schedule to Form of Open-End Mortgage, Assignment of Rents, Leases and Security Agreement in favor of HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.7 Accounts Receivable Intercreditor Agreement between HCFP Funding, Inc. and Meditrust Mortgage Investments, Inc. dated April 22, 1999 (filed herewith) 10.8 Amendment No. 1 to Loan and Security Agreement among Balanced Care Corporation and certain of its wholly-owned subsidiaries and HCFP Funding, Inc. dated July 1, 1999 (filed herewith) 10.9 Amendment No. 2 to Loan and Security Agreement among Balanced Care Corporation and certain of its wholly-owned subsidiaries and HCFP Funding, Inc. dated July 29, 1999 (filed herewith) 10.10 Balanced Care Corporation 1996 Stock Incentive Plan as Amended and Restated, effective as of August 18, 1998 (incorporated by reference to Annex A to the Proxy Statement on Schedule 14A dated October 6, 1998 (No. 001-13845)) 10.11 Employment Agreement, dated as of August 1, 1996, by and between Balanced Care Corporation and Brad E. Hollinger (incorporated by reference to Exhibit 10.37 to the Registration Statement on Form S-1 (No. 333-37833))** 10.12 Employment Agreement, dated as of September 20, 1995, by and between Balanced Care Corporation and Robert J. Sutton (incorporated by reference to Exhibit 10.39 to the Registration Statement on Form S-1 (No. 333-37833))** 10.13 Separation Agreement, dated as of August 23, 1999, by and between Balanced Care Corporation and Brian L. Barth (filed herewith)** 10.14 Form of HCRI Lease Agreement (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.15 Schedule to Form of HCRI Lease Agreement (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.16 Form of HCRI Construction Disbursing Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845))
64 65
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.17 Schedule to Form of HCRI Construction Disbursing Agreement (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.18 Form of HCRI Option Agreement (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.19 Schedule to Form of HCRI Option Agreement (incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.20 Form of HCRI Shortfall Funding Agreement (incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.21 Schedule to Form of HCRI Shortfall Funding Agreement (incorporated by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.22 Form of HCRI Working Capital Assurance Agreement (incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.23 Schedule to Form of HCRI Working Capital Assurance Agreement (incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.24 Form of HCRI Management Agreement (incorporated by reference to Exhibit 10.11 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.25 Schedule to Form of HCRI Management Agreement (incorporated by reference to Exhibit 10.12 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.26 Form of HCRI Guaranty (incorporated by reference to Exhibit 10.13 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.27 Schedule to Form of HCRI Guaranty (incorporated by reference to Exhibit 10.14 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.28 Form of HCRI Loan Agreement (incorporated by reference to Exhibit 10.15 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.29 Schedule to Form of HCRI Loan Agreement (incorporated by reference to Exhibit 10.16 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.30 Lease Agreement between Pennsylvania BCC Properties, Inc. and Balanced Care at Saxonburg, Inc. (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated March 18, 1999 No. 001-13845) 10.31 Lease Agreement between Pennsylvania BCC Properties, Inc. and Balanced Care at Bloomsburg II, Inc. (incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K dated March 18, 1999 File No. 001-13845) 10.32 Employment Agreement, dated as of November 24, 1997, by and between Balanced Care Corporation and Stephen G. Marcus (incorporated by reference to Exhibit 10.43 to the Registration Statement on Form S-1 (No. 333-37833))** 10.33 Consulting Agreement between Pier C. Borra and Balanced Care Corporation dated March 22, 1999, effective December 8, 1998 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (No. 001-13845)) 10.34 Employment Agreement between Clint T. Fegan and Balanced Care Corporation dated February 11, 1999 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (No. 001-13845))**
65 66
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.35 Separation Agreement, dated as of July 13, 1999, by and between Balanced Care Corporation and Paul A. Kruis (filed herewith)** 10.36 Change in Control Agreement between Balanced Care Corporation and Gary W. Anderson dated July 29, 1999 (filed herewith)** 10.37 First Amended and Restated Change in Control Agreement dated May 26, 1999 between Balanced Care Corporation and Mark S. Moore (filed herewith)** 10.38 Form of Change in Control Agreement (incorporated by reference to Exhibit 99.1 of the Company's Current Report on Form 8-K dated March 29, 1999 (No. 001-13845))** 10.39 Schedule to Form of Change in Control Agreement (incorporated by reference to Exhibit 99.2 of the Company's Current Report on Form 8-K dated March 29, 1999 (No. 001-13845))** 21.1 Schedule of Subsidiaries of Balanced Care Corporation (filed herewith) 27.1 Financial Data Schedule (filed herewith)
- --------------- * Certain exhibits and schedules to the Exhibits attached hereto have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted exhibit of schedule will be furnished to the Commission upon request. ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K. (b) Reports on Form 8-K: No Current Reports on Form 8-K were filed for the quarter ended June 30, 1999. (c) Exhibits: See (a)(3) above. (d) Financial Statement Schedule: Schedule II -- Valuation and Qualifying Accounts. All other schedules for which provision is made in the applicable accounting regulations of the United States Securities and Exchange Commission have been omitted because such schedules are not required under the related instructions or are inapplicable or because the information required is included in the consolidated financial statements or notes thereto. 66 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the United States Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. BALANCED CARE CORPORATION By: /s/ BRAD E. HOLLINGER ------------------------------------ Brad E. Hollinger Chairman of the Board, President and Chief Executive Officer Date: September 28, 1999 Pursuant to the requirements of the United States Securities Exchange Act of 1934, this report has been signed below by the following on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ BRAD E. HOLLINGER Chairman of the Board, President September 28, 1999 - ---------------------------------- and Chief Executive Officer and a Brad E. Hollinger Director (Principal Executive Officer) /s/ CLINT T. FEGAN Chief Financial Officer (Principal September 28, 1999 - ---------------------------------- Financial Officer) Clint T. Fegan /s/ DIANE M. BORGER Vice President, Treasurer September 28, 1999 - ---------------------------------- (Principal Accounting Officer) Diane M. Borger /s/ BILL R. FOSTER Director September 28, 1999 - ---------------------------------- Bill R. Foster /s/ DAVID L. GOLDSMITH Director September 28, 1999 - ---------------------------------- David L. Goldsmith /s/ EDWARD R. STOLMAN Director September 28, 1999 - ---------------------------------- Edward R. Stolman /s/ GEORGE H. STRONG Director September 28, 1999 - ---------------------------------- George H. Strong /s/ RAYMOND E. SCHULTZ Director September 28, 1999 - ---------------------------------- Raymond E. Schultz /s/ PIER C. BORRA Director September 28, 1999 - ---------------------------------- Pier C. Borra
67 68 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Asset Purchase Agreement among BCC of Wisconsin, Inc., the Company and Urquhart Company dated as of September 30, 1998 (incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the quarter ended December 31, 1998 (No. 001-13845))* 3.1 Amended and Restated Certificate of Incorporation of Balanced Care Corporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (No. 333-37833)) 3.2 Bylaws of Balanced Care Corporation, as amended (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (No. 333-37833)) 4.1 Form of Capital Stock Purchase Warrant, together with schedule (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-1 (No. 333-37833)) 4.2 Form of Capital Stock Purchase Warrant, together with schedule (incorporated by reference to Exhibit 4.10 to the Registration Statement on Form S-1 (No. 333-37833)) 4.3 Form of Capital Stock Purchase Warrant, together with schedule (incorporated by reference to Exhibit 4.11 to the Registration Statement on Form S-1 (No. 333-37833)) 10.1 Loan and Security Agreement among Balanced Care Corporation and certain of its wholly-owned subsidiaries and HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.2 Revolving Credit Note from Balanced Care Corporation and certain of its wholly-owned subsidiaries in favor of HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.3 Environmental Indemnity Agreement by Balanced Care Corporation and certain of its wholly-owned subsidiaries in favor of HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.4 Deed of Trust, Assignment of Rents and Leases and Security Agreement from Balanced Care at North Ridge, Inc. in favor of HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.5 Form of Open-End Mortgage, Assignment of Rents, Leases and Security Agreement in favor of HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.6 Schedule to Form of Open-End Mortgage, Assignment of Rents, Leases and Security Agreement in favor of HCFP Funding, Inc. dated April 22, 1999 (filed herewith) 10.7 Accounts Receivable Intercreditor Agreement between HCFP Funding, Inc. and Meditrust Mortgage Investments, Inc. dated April 22, 1999 (filed herewith) 10.8 Amendment No. 1 to Loan and Security Agreement among Balanced Care Corporation and certain of its wholly-owned subsidiaries and HCFP Funding, Inc. dated July 1, 1999 (filed herewith) 10.9 Amendment No. 2 to Loan and Security Agreement among Balanced Care Corporation and certain of its wholly-owned subsidiaries and HCFP Funding, Inc. dated July 29, 1999 (filed herewith) 10.10 Balanced Care Corporation 1996 Stock Incentive Plan as Amended and Restated, effective as of August 18, 1998 (incorporated by reference to Annex A to the Proxy Statement on Schedule 14A dated October 6, 1998 (No. 001-13845)) 10.11 Employment Agreement, dated as of August 1, 1996, by and between Balanced Care Corporation and Brad E. Hollinger (incorporated by reference to Exhibit 10.37 to the Registration Statement on Form S-1 (No. 333-37833))** 10.12 Employment Agreement, dated as of September 20, 1995, by and between Balanced Care Corporation and Robert J. Sutton (incorporated by reference to Exhibit 10.39 to the Registration Statement on Form S-1 (No. 333-37833))** 10.13 Separation Agreement, dated as of August 23, 1999, by and between Balanced Care Corporation and Brian L. Barth (filed herewith)**
68 69
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.14 Form of HCRI Lease Agreement (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.15 Schedule to Form of HCRI Lease Agreement (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.16 Form of HCRI Construction Disbursing Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.17 Schedule to Form of HCRI Construction Disbursing Agreement (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.18 Form of HCRI Option Agreement (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.19 Schedule to Form of HCRI Option Agreement (incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.20 Form of HCRI Shortfall Funding Agreement (incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.21 Schedule to Form of HCRI Shortfall Funding Agreement (incorporated by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.22 Form of HCRI Working Capital Assurance Agreement (incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.23 Schedule to Form of HCRI Working Capital Assurance Agreement (incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.24 Form of HCRI Management Agreement (incorporated by reference to Exhibit 10.11 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.25 Schedule to Form of HCRI Management Agreement (incorporated by reference to Exhibit 10.12 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.26 Form of HCRI Guaranty (incorporated by reference to Exhibit 10.13 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.27 Schedule to Form of HCRI Guaranty (incorporated by reference to Exhibit 10.14 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.28 Form of HCRI Loan Agreement (incorporated by reference to Exhibit 10.15 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.29 Schedule to Form of HCRI Loan Agreement (incorporated by reference to Exhibit 10.16 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (No. 001-13845)) 10.30 Lease Agreement between Pennsylvania BCC Properties, Inc. and Balanced Care at Saxonburg, Inc. (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated March 18, 1999 No. 001-13845) 10.31 Lease Agreement between Pennsylvania BCC Properties, Inc. and Balanced Care at Bloomsburg II, Inc. (incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K dated March 18, 1999 File No. 001-13845) 10.32 Employment Agreement, dated as of November 24, 1997, by and between Balanced Care Corporation and Stephen G. Marcus (incorporated by reference to Exhibit 10.43 to the Registration Statement on Form S-1 (No. 333-37833))**
69 70
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.33 Consulting Agreement between Pier C. Borra and Balanced Care Corporation dated March 22, 1999, effective December 8, 1998 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (No. 001-13845)) 10.34 Employment Agreement between Clint T. Fegan and Balanced Care Corporation dated February 11, 1999 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (No. 001-13845))** 10.35 Separation Agreement, dated as of July 13, 1999, by and between Balanced Care Corporation and Paul A. Kruis (filed herewith)** 10.36 Change in Control Agreement between Balanced Care Corporation and Gary W. Anderson dated July 29, 1999 (filed herewith)** 10.37 First Amended and Restated Change in Control Agreement dated May 26, 1999 between Balanced Care Corporation and Mark S. Moore (filed herewith)** 10.38 Form of Change in Control Agreement (incorporated by reference to Exhibit 99.1 of the Company's Current Report on Form 8-K dated March 29, 1999 (No. 001-13845))** 10.39 Schedule to Form of Change in Control Agreement (incorporated by reference to Exhibit 99.2 of the Company's Current Report on Form 8-K dated March 29, 1999 (No. 001-13845))** 21.1 Schedule of Subsidiaries of Balanced Care Corporation (filed herewith) 27.1 Financial Data Schedule (filed herewith)
- --------------- * Certain exhibits and schedules to the Exhibits attached hereto have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted exhibit of schedule will be furnished to the Commission upon request. ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K. 70 EX-10.1 2 LOAN AND SECURITY AGREEMENT 1 Exhibit 10.1 $15,000,000.00 LOAN AND SECURITY AGREEMENT by and between BALANCED CARE CORPORATION, BCC AT HERMITAGE PARK CARE CENTER, INC., BCC AT LEBANON CARE CENTER, INC., BCC AT LEBANON PARK MANOR, INC., BCC AT MT. VERNON PARK CARE CENTER, INC., BCC AT MT. VERNON PARK CARE CENTER WEST, INC., BCC AT NEVADA PARK CARE CENTER, INC., BCC AT NIXA PARK CENTER, INC., BCC AT REPUBLIC PARK CENTER, INC., BCC AT SPRINGFIELD CARE CENTER, INC., DIXON MANAGEMENT INC., BCC AT DARLINGTON, INC., BALANCED CARE AT EYERS GROVE, INC., BALANCED CARE AT BUTLER, INC., BALANCED CARE AT SARVER, INC., BALANCED CARE AT NORTH RIDGE, INC. and HCFP FUNDING, INC. April 22, 1999 2 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is made as of April 22, 1999, by and among BALANCED CARE CORPORATION, a Delaware corporation, BCC AT HERMITAGE PARK CARE CENTER, INC., a Delaware corporation, BCC AT LEBANON CARE CENTER, INC., a Delaware corporation, BCC AT LEBANON PARK MANOR, INC., a Delaware corporation, BCC AT MT. VERNON PARK CARE CENTER, INC., a Delaware corporation, BCC AT MT. VERNON PARK CARE CENTER WEST, INC., a Delaware corporation, BCC AT NEVADA PARK CARE CENTER, INC., a Delaware corporation, BCC AT NIXA PARK CENTER, INC., a Delaware corporation, BCC AT REPUBLIC PARK CENTER, INC., a Delaware corporation, BCC AT SPRINGFIELD CARE CENTER, INC., a Delaware corporation, DIXON MANAGEMENT INC., a Missouri corporation, BCC AT DARLINGTON, INC., a Delaware corporation, BALANCED CARE AT EYERS GROVE, INC., a Delaware corporation, BALANCED CARE AT BUTLER, INC., a Delaware corporation, BALANCED CARE AT SARVER, INC., a Delaware corporation, BALANCED CARE AT NORTH RIDGE, INC., a Delaware corporation (collectively and individually, the "Borrower"), and HCFP FUNDING, INC., a Delaware corporation (the "Lender"). RECITALS The Borrower has requested that the Lender make available to the Borrower a revolving credit facility in the maximum principal amount of Fifteen Million Dollars ($15,000,000) at any one time outstanding (the "Loan"), and the Lender has agreed to make the Loan on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the promises and covenants contained in this Agreement, and for other consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS Section 1.1 As used in this Agreement, the following terms shall have the following meanings: Account. "Account" means any and all of the Borrower's now-owned and hereafter acquired or arising accounts, accounts receivable and rights to payment for goods sold or leased or services rendered, of every kind and description, whether or not 3 evidenced by an instrument or chattel paper, and whether or not earned by performance, and all of the Borrower's contract rights, chattel paper, documents and instruments with respect thereto, and all of Borrower's rights, remedies, security and liens, in, to and in respect of the Accounts, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, guaranties or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligation of any Account Debtor, and credit and other insurance. Account Debtor. "Account Debtor" means any Person obligated on any Account of Borrower. 1.1 Accounts Receivable Advance. "Accounts Receivable Advance" means, collectively and individually, any and all advances made hereunder based on Qualified Accounts. Accounts Receivable Borrower. "Accounts Receivable Borrower" means, collectively, all of the borrowers listed on Exhibit F attached hereto and made a part hereof, and each of such borrowers individually, together with their respective permitted successors and assigns. Accounts Receivable Facilities. "Accounts Receivable Facilities" means the facilities listed and described in Exhibit F attached hereto and made a part hereof. Affiliate. "Affiliate" means, with respect to a specified Person, any Person directly or indirectly controlling, controlled by, or under common control with the specified Person, including without limitation their stockholders and any Affiliates thereof. A Person shall be deemed to control a corporation or other entity if the Person possesses, directly or indirectly, the power to direct or cause the direction of the management and business of the corporation or other entity, whether through the ownership of voting securities, by contract, or otherwise. Agreement. "Agreement" means this Loan and Security Agreement, as it may be amended, modified, supplemented or restated from time to time. Applicable Environmental Law. "Applicable Environmental Law" shall mean any applicable federal, state or local laws, rules or regulations pertaining to health or the environment, or petroleum products, or radon radiation, or oil or hazardous substances, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 4 as amended ("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended ("RCRA") and the Federal Emergency Planning and Community Right-To-Know Act of 1986, as amended. The terms "hazardous substance" and "release" shall have the meanings specified in CERCLA, and the terms "solid waste," "disposal," "dispose," and "disposed" shall have the meanings specified in RCRA, except that if such acts are amended to broaden the meanings thereof, the broader meaning shall apply herein prospectively from and after the date of such amendments; notwithstanding the foregoing, to the extent that any state in which any portion of the Property is located establishes a meaning for "hazardous substance" or "release" which is broader than that specified in CERCLA, as CERCLA may be amended from time to time, or a meaning for "solid waste", "disposal" and "disposed" which is broader than specified in RCRA, as RCRA may be amended from time to time, such broader meanings under such state law shall apply in all matters relating to the laws of such state. Base Rate. "Base Rate" means a rate of interest equal to two and three quarters of one percent (2.75%) above the Prime Rate of Interest. Borrowed Money. "Borrowed Money" means any obligation to repay borrowed money, any indebtedness evidenced by notes, bonds, debentures or similar obligations, any obligation under a conditional sale or other title retention agreement and the net aggregate rentals under any lease which under GAAP would be capitalized on the books of the Borrower or which is the substantial equivalent of the financing of the property so leased. Borrower. "Borrower" means, individually, each the Accounts Receivable Borrowers and each of the Real Estate Borrowers, and all of such parties collectively. Borrowing Base. "Borrowing Base" has the meaning set forth in Section 2.1(d) hereof. Borrowing Base Certificate. "Borrowing Base Certificate" means each borrowing base certificate submitted by Borrower to Lender pursuant to the requirements hereof. 5 Business Day. "Business Day" means any day on which financial institutions are open for business in the State of Maryland, excluding Saturdays and Sundays. Closing Date. "Closing Date" means the date of execution and delivery of this Agreement. Collateral. "Collateral" means, collectively, the Pledgor Collateral and the Accounts Receivable Collateral, as such capitalized terms are defined in Sections 3.1A and 3.1B hereof. Commitment Fee. "Commitment Fee" means a commitment fee payable by the Borrower to the Lender in an amount equal to $100,000.00. Concentration Account. "Concentration Account" has the meaning set forth in Section 2.3 hereof. Conditions to Real Estate Advance. "Conditions to Real Estate Advances" means all of those Conditions to Real Estate Advances set forth in Exhibit E attached hereto and made a part hereof by this reference. Conditions for Closing. "Conditions for Closing" means all of those conditions for closing set forth and described in Article V hereof. Controlled Group. "Controlled Group" means a "controlled group" within the meaning of Section 4001(b) of ERISA. Cost Report Settlement Account. "Cost Report Settlement Account" means an Account owed to the Accounts Receivable Borrower by a Medicaid/Medicare Account Debtor pursuant to any cost report, either interim, filed or audited, as the context may require. Default Rate. "Default Rate" means a rate per annum equal to three percent (3%) above the then applicable Base Rate. Depository Account. "Depository Account" shall have the meaning assigned to such term in Section 2.3 hereof. Depository Account Bank. "Depository Account Bank" shall have the meaning assigned to such term in Section 2.3 hereof. 6 EBITDA. "EBITDA" means, the sum of the following, calculated individually with respect to each Real Estate Borrower, and then added together for all Real Estate Borrowers, as determined in accordance with GAAP and reflected in Borrower's most current consolidated financial statements: (a) net income (after rental expense with respect to each Leasehold Facility), plus (b) interest expense, plus (c) depreciation and amortization, plus (d) income tax expense, plus (e) fifty percent (50%) of the management fee expense, for (i) at all times during the period starting on the Closing Date and ending on October 31, 1999 the twelve (12) most recently completed calendar months, and (ii) at all times during the period starting on November 1, 1999 and ending on the last day of the Term, the six (6) most recently completed calendar months on annualized basis. If any Property has a negative EBITDA for any period, then for purposes of this definition, EBITDA for that period for such Property shall equal zero. For purposes of this definition, management fee expense shall be limited as described in Section 7.6 hereof. Exhibit. "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. ERISA. "ERISA" has the meaning set forth in Section 4.12. Event of Default. "Event of Default" and "Events of Default" have the meanings set forth in Section 8.1 hereof. Eyers Grove Property. "Eyers Grove Property" means that portion of the Property owned by BCC at Eyers Grove, Inc. Facility. "Facility" means collectively, all of the Accounts Receivable Facilities, and each of such facilities individually. GAAP. "GAAP" means generally accepted accounting principles applied in a manner consistent with the financial statements referred to in Section 4.7. 7 Governmental Authority. "Governmental Authority" means and includes any federal, state, District of Columbia, county, municipal, or other government and any department, commission, board, bureau, agency or instrumentality thereof, whether domestic or foreign. Hazardous Material. "Hazardous Material" means any substances defined or designated as hazardous or toxic waste, hazardous or toxic material, hazardous or toxic substance, or similar term, by any environmental statute, rule or regulation or any Governmental Authority. Highest Lawful Rate. "Highest Lawful Rate" means the maximum lawful rate of interest referred to in Section 2.7 that may accrue pursuant to this Agreement. Indebtedness. "Indebtedness" means any (i) obligations for borrowed money, or obligations of any Person, (ii) obligations representing the deferred purchase price of property other than accounts payable arising in connection with the purchase of inventory customary in the trade, (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from property now or hereafter owned or acquired, (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 or (v) all or any portion of the Obligations. Indemnity Agreement. "Indemnity Agreement" means, collectively, (i) that certain Environmental Indemnity Agreement of even date herewith from each Real Estate Borrower and the Parent in favor of Lender, and (ii) any and all other Environmental Indemnity Agreements that may hereafter be executed and delivered by any Real Estate Borrower and the Parent in favor of the Lender, as the same may be amended, modified and restated from time to time. Insurer. "Insurer" means a Person that insures a Patient against certain of the costs incurred in the receipt by such Patient of Medical Services, or that has an agreement with Borrower to compensate Borrower for providing services to a Patient. 8 Instruments. "Instruments" means all instruments, chattel paper, documents or other writings obtained from or used in connection with the Accounts (including, without limitation, all ledger sheets, computer records and printouts, data bases, programs, books of account and files relating thereto). Leasehold Borrower. "Leasehold Borrower" means, collectively and individually, those borrowers described in Exhibit I attached hereto and made a part hereof, as the same may be amended from time to time; provided, however, any such borrower shall not constitute a "Borrower" or "Real Estate Borrower" hereunder, or be subject to any terms and conditions hereof, unless and until such borrower becomes a "Borrower" and joins in this Agreement, as contemplated herein. Leasehold Facility. "Leasehold Facility" means, individually and collectively, each Property covered by a Leasehold Mortgage, as described in Exhibit I attached hereto. Leasehold Mortgage. "Leasehold Mortgage" means, individually and collectively, each leasehold mortgage, deed of trust or other real estate security instrument granting the leasehold interest of the Grantor thereunder executed and delivered by the Leasehold Borrower to secure the Obligations, as amended, modified and restated. Leases. "Leases" means each existing or future lease, any sublease, tenancy, use, occupancy or other agreements under the terms of which any person or entity has or acquires any right to occupy or use the Property or any portion thereof, or interest therein, and each existing or future guaranty of payment or performance thereunder, and all extensions, renewals, modifications and replacements of each such lease, sublease, guaranty or other agreement. Lender's Affiliate. "Lender's Affiliate" means any parent, subsidiary or other affiliate of the Lender, and their respective successors and assigns. Lien. "Lien" means any voluntary or involuntary mortgage, security deed, deed of trust, deed to secure debt, lien, pledge, assignment, security interest, title retention agreement, financing lease, levy, execution, seizure, judgment, attachment, garnishment, charge, lien or other encumbrance of any kind, 9 including those contemplated by or permitted in this Agreement and the other Loan Documents. Lender. "Lender" has the meaning set forth in the Preamble of this Agreement. Loan. "Loan" has the meaning set forth in the Preamble of this Agreement. Loan Documents. "Loan Documents" means and includes this Agreement, the Note, the Mortgage (including the Leasehold Mortgage), the Indemnity Agreement, the Subordination Agreement, together with all other notes, security agreements, deeds of trust, mortgages, collateral assignments, assignments of rents, depository agreements, financing statements, letter agreements or other documents now or hereafter executed and delivered to evidence, secure, guaranty, or in connection with, the Loan or the Obligations, as the same may be amended, modified, supplemented, restated or replaced from time to time. Maturity Date. "Maturity Date" means the date which all of the Obligations are due and payable, which date is three (3) years after the date of this Agreement, unless earlier accelerated following an Event of Default, or unless extended pursuant to a written agreement between the Borrower and the Lender. Maximum Loan Amount. "Maximum Loan Amount" shall have the meaning set forth in Section 2.1 hereof. Medicaid/Medicare Account Debtor. "Medicaid/ Medicare Account Debtor" means any Account Debtor which is (i) the United States of America acting under the Medicaid/Medicare program established pursuant to the Social Security Act, (ii) any state or the District of Columbia acting pursuant to a health plan adopted pursuant to Title XIX of the Social Security Act, or (iii) any agent, carrier, administrator or intermediary for any of the foregoing. Medical Services. Medical and health care services provided to a Patient, including, but not limited to, medical and health care services provided to a Patient and performed by Borrower which are covered by a policy of insurance issued by an Insurer, and includes physician services, nurse and therapist 10 services, dental services, hospital services, skilled nursing facility services, comprehensive outpatient rehabilitation services, home health care services, residential and out-patient behavioral healthcare services, and medicine or health care equipment provided by Borrower to a Patient for a necessary or specifically requested valid and proper medical or health purpose. Meditrust. "Meditrust" means Meditrust Mortgage Investments, Inc., a Delaware corporation, and its successors and assigns. Mortgage. "Mortgage" means, individually, each of the mortgages, deeds of trust, amendments to mortgages and amendments to deeds of trust listed and described in Exhibit G attached hereto and made a part hereof by this reference, and all of such mortgages collectively, as the same may be amended, modified, supplemented, restated and replaced from time to time, together with any and all other mortgages, deeds of trust and leasehold mortgages and deeds of trust which may hereafter be executed and delivered by any Borrower (whether now existing as a Borrower hereunder or hereafter added as a Borrower hereunder pursuant to an amendment hereto) in favor of Lender to secure the Obligations. "Mortgage" includes the Leasehold Mortgage. Note. "Note" means that certain Revolving Credit of even date herewith in the principal amount of the Loan made by the Borrower payable to the Lender, as the same may be amended, modified, restated and replaced from time to time. Obligations. "Obligations" has the meaning set forth in Section 3.1 hereof. Parent. "Parent" means Balanced Care Corporation, a Delaware corporation, together with its permitted successors and assigns. Patient. "Patient" means any Person receiving Medical Services from Borrower and all Persons legally liable to pay Borrower for such Medical Services other than Insurers. Permits. "Permits" means all licenses, permits, certificates, approvals, authorizations and registrations obtained from any governmental or quasi-governmental authority 11 and required, used or useful in connection with the ownership, operation, use or occupancy of the Property or the Facility, including, without limitation, environmental permits, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need, regulatory approvals and all such other permits, licenses, rights and approvals. Permitted Liens. "Permitted Liens" means: (a) liens for taxes, assessments or governmental charges and levies not delinquent, or which are being contested in good faith and by appropriate proceedings which suspend the collection thereof and in respect of which adequate reserves have been made (provided that such proceedings do not, in Lender's reasonable discretion, involve any substantial danger of the sale, loss or forfeiture of such property or assets or any interest therein); (b) deposits or pledges to secure obligations under workmen's compensation, social security or similar laws, or under unemployment insurance; (c) deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of business; (d) mechanic's, workmen's, materialmen's or other like liens arising in the ordinary course of business with respect to obligations which are not due, or which are being contested in good faith by appropriate proceedings which suspend the collection thereof and in respect of which adequate reserves have been made (provided that such proceedings do not, in Lender's sole discretion, involve any substantial danger of the sale, loss or forfeiture of such property or assets or any interest therein); (e) liens and encumbrances in favor of Lender or Lender's Affiliate; (f) liens granted in connection with the lease or purchase of property or assets financed by borrowings permitted by Section 7.1 (provided, however, that no such borrowings permitted by Section 7.1 may be secured by liens on any of the Collateral except for borrowings permitted under Section 7.1); (vi) which may be secured by a purchase money lien against the equipment acquired); (g) all existing liens and encumbrances against the Property not removed from the Lender's applicable title policy or policies for the Property; and (h) liens set forth on Schedule 1.1 attached hereto and made part hereof; (i) future liens and security interests which replace the existing liens described on Schedule 1.1 provided the 12 principal amount secured by any such new lien does not exceed the principal amount secured by the replaced lien. Person. "Person" means an individual, partnership, corporation, trust, joint venture, joint stock company, limited liability company, association, unincorporated organization, Governmental Authority, or any other entity. Plan. "Plan" has the meaning set forth in Section 4.12. Prime Rate of Interest. "Prime Rate of Interest" means that rate of interest designated as such by Fleet National Bank of Connecticut, N.A., or any successor thereto, as the same may from time to time fluctuate. Proceeds. "Proceeds" means all proceeds (whether cash or non-cash, moveable or immoveable, tangible or intangible), including proceeds of insurance and condemnation, from the sale, exchange, transfer, collection, loss, damage, disposition, substitution or replacement of any of the Collateral. Prohibited Transaction. "Prohibited Transaction" means a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975(C)(1) of the Internal Revenue Code. Property. "Property" means, individually, each of the parcels of real property described in the Mortgages (as described in Exhibit I attached hereto and made a part hereof), and all of such parcels, collectively, together with all other personal property described in the Mortgage. Qualified Account. "Qualified Account" means an Account of the Accounts Receivable Borrower generated in the ordinary course of the Accounts Receivable Borrower's business and which is not excluded from the criteria set forth below. No Account shall be a Qualified Account if: (a) the Account or any portion thereof is payable by an individual beneficiary, recipient or subscriber individually and not directly to Accounts Receivable Borrower by a Medicaid/Medicare Account Debtor, commercial medical insurance carrier, health maintenance organization or other commercial third party payor acceptable to Lender in its sole discretion; (b) the Account remains unpaid more than ninety (90) days past the claim or invoice date (but in no event more than one hundred and five (105) days after the applicable 13 Medical Services have been rendered); (c) the Account is subject to any defense, set-off, counterclaim, deduction, discount, credit, chargeback, freight claim, allowance, or adjustment of any kind; (d) if the Account arises from the sale of goods by Borrower, such sale was not an absolute sale or on consignment or on approval or on a sale-or-return basis or subject to any other repurchase or return agreement, or such goods have not been shipped to the Account Debtor or its designee; (e) if the Account arises from the performance of services, such services have not been actually been performed or were undertaken in violation of any law; (f) the Account is subject to a lien other than a Permitted Lien; (g) the Accounts Receivable Borrower knows of the bankruptcy, receivership, reorganization, or insolvency of the Account Debtor; (h) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; (i) the Account is an Account of an Account Debtor having its principal place of business or executive office outside the United States; (j) the Account Debtor is an Affiliate or Subsidiary of the Accounts Receivable Borrower; (k) more than twenty-five percent (25%) of the aggregate balance of all Accounts owing from the Account Debtor obligated on the Account are outstanding more than one hundred and twenty (120) days past their invoice date; (l) fifty percent (50%) or more of the aggregate unpaid Accounts from any individual Account Debtor are not deemed Qualified Accounts hereunder; (m) any covenant, representation or warranty contained in Section 4.3 of the Loan Agreement with respect to such Account has been breached; or (n) the Account fails to meet such other reasonable specifications and requirements which may from time to time be established by Lender. Real Estate Advance. "Real Estate Advance" means any advance made hereunder based on the Real Estate Borrowing Base described in Section 2.1(d) hereof of any Property covered by the Mortgage. Real Estate Borrowers. "Real Estate Borrowers" means each and all of the grantors of the Mortgages, as described in Exhibit G and Exhibit I (including each Leasehold Borrower) attached hereto and made a part hereof, together with their permitted successors and assigns. Reimbursement Contracts. "Reimbursement Contracts" shall 14 mean all contracts and rights pursuant to reimbursement or third party payor programs and contracts for the Facility which are now or hereafter in effect with respect to patients qualifying for coverage under the same, including, but not limited to, Medicare, Medicaid, any successor program or other similar reimbursement program (whether operated by a governmental or quasi-governmental agency or by a private Person) and private insurance agreements. Rents. "Rents" means all rent and other payments of whatever nature from time to time payable pursuant to any lease of the Property, or any part thereof, including (without limitation) leases of individual apartments or units to residents and leases of retail space for businesses such as pharmacies, stores, beauty shops, barber shops, newsstands, physicians' offices, and specialty shops. Reportable Event. "Reportable Event" means a "reportable event" as defined in Section 4043(b) of ERISA. Revolving Credit Loan. "Revolving Credit Loan" shall have the meaning set forth in Section 2.1(b) hereof, and shall include (without limitation) all Real Estate Advances and all Accounts Receivable Advances. Subordination Agreement. "Subordination Agreement" means that certain Accounts Receivable Intercreditor Agreement by and among the Borrower, the Lender and Meditrust pursuant to which Meditrust shall agree (among other things) to subordinate its lien on and security interest in the Collateral of the Accounts Receivable Borrowers (or some portion thereof) to the lien and security interests granted in favor of Lender in this Agreement and/or in the Mortgage and to such other matters as may be required by Lender, as the same may be amended from time to time. Term. "Term" means the time period commencing on the date of this Agreement and ending on the Maturity Date. Termination Fee. "Termination Fee" means the termination fee described in Section 2.8 hereof. 15 Term Loan. "Term Loan" means the $5,000,000 term loan previously made by Lender to the Borrower, as evidenced by the Term Note. Term Note. "Term Note" means that certain Secured Term Note dated March 15, 1999 in the principal amount of $5,000,000 made by Borrower to Lender. Title Company. "Title Company" means First American Title Insurance Company or such other title insurance company as may be approved by Lender. Section 1.2 Singular terms shall include the plural forms and vice versa, as applicable, of the terms defined. Section 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 in which any Collateral for the Obligations is located. Section 1.4 All accounting terms used in this Agreement shall be construed in accordance with GAAP, except as otherwise defined. Section 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. ARTICLE II TERMS OF THE LOAN Section 2.1 Terms. (a) Subject to the availability under the Borrowing Base, the maximum aggregate principal amount of the Loan which may be extended by Lender to Borrower under this Agreement and remain outstanding at any time is Fifteen Million and No/100 Dollars ($15,000,000.00) (the "Maximum Loan Amount"). 16 Notwithstanding the foregoing, provided no Event of Default has occurred, the Borrower shall be permitted to reduce the Maximum Loan Amount subject to the following conditions: (a) At any time during the period commencing October 1 and ending on October 31 of each year during the Term of the Loan, but no more than once during such period, the Borrower may deliver to Lender a written request to reduce the Maximum Loan Amount (such request being hereinafter referred to as a "Reduction Notice"). (b) Following Lender's receipt of a Reduction Notice, the Maximum Loan Amount shall be reduced as of November 1 of the year in which the Reduction Notice is delivered. (c) The Maximum Loan Amount may be reduced by no more than $5,000,000.00 per year. (d) Once the Maximum Loan Amount is reduced, it may not be increased. (e) Any reduction of the Maximum Loan Amount (i) shall not effect the calculation of the Termination Fee described in Section 2.8(c) hereof (i.e., any Termination Fee shall be calculated based on the original Maximum Loan Amount equal to $15,000,000); and (ii) shall effect the calculation of the Usage Fee (i.e., the Usage Fee shall be calculated on the Maximum Loan Amount in effect from time to time). (b) The Loan shall be in the nature of a revolving line of credit, and shall include sums advanced and other credit extended by Lender to or for the benefit of Borrower from time to time under this Article II (each such advance being hereinafter referred to as a "Revolving Credit Loan"), up to the Maximum Loan Amount and subject to the availability under the Borrowing Base, and the requests of Borrower pursuant to the terms and conditions of Section 2.2 below. The outstanding principal balance of the Loan may fluctuate from time to time, to be reduced by repayments made by Borrower (which may be made without penalty or premium), and to be increased by future Revolving Credit Loans, advances and other extensions of credit to or for the benefit of Borrower, and shall be due and payable in full upon the Maturity Date, unless earlier terminated or accelerated by Lender in accordance with the terms of this 17 Agreement. For purposes of this Agreement, any determination as to whether there is availability under the Borrowing Base for advances shall be made by Lender in its reasonable discretion. (c) On the Closing Date, in addition to satisfying the Conditions for Closing and the Conditions to Real Estate Advances (if any Real Estate Advance shall be made on the Closing Date), Borrower shall execute and deliver to Lender the Promissory Note evidencing Borrower's unconditional obligation to repay Lender for all Revolving Credit Loans, advances, and other extensions of credit made under the Loan, in the form of Exhibit A to this Agreement. The Note shall bear interest from the date of the first advance made hereunder until repaid, with interest payable monthly in arrears on the first Business Day of each month, at a rate per annum (on the basis of the actual number of days elapsed over a year of 360 days) equal to the Base Rate, provided that after an Event of Default the applicable interest rate shall be equal to the Default Rate. Each Revolving Credit Loan, advance and other extension of credit shall be deemed evidenced by the Note, which is deemed incorporated herein and made a part hereof. (d) The maximum aggregate principal balance of all Revolving Credit Loans outstanding at any time hereunder shall not exceed the Borrowing Base. The Borrowing Base shall equal the sum of the following: (i) with respect to each Property covered by a first priority fee simple Mortgage in favor of Lender, an amount not to exceed eighty percent (80%) of the product of 8.0 times EBITDA, plus (ii) with respect to each Leasehold Facility, an amount not to exceed the lesser of eighty percent (80%) of the product of 5.0 times EBITDA, or eighty percent (80%) of the product of the number of years remaining under the applicable lease times EBITDA (such formulas described in subparagraphs (i) and (ii) above being referred to herein as the "Real Estate Borrowing Base"); plus (ii) eighty percent (80%) of the Qualified Accounts due and owing from any Medicaid/Medicare Insurer or other Account Debtor (such formula being referred to herein as the "Accounts Receivable Borrowing Base"). Notwithstanding the foregoing, that portion of the Real Estate Borrowing Base attributable to the Leasehold Borrowers shall not exceed fifteen percent (15%) of the Real Estate Borrowing Base, and any advances made against any of the Leasehold Facilities shall be conditioned upon Lender obtaining a written agreement from the applicable fee owner, which 18 agreement shall provide appropriate consents and lease protection deemed appropriate by Lender in its sole credit judgment. Calculation of the Borrowing Base shall be subject to Lender's reasonable review. (e) Borrower shall deliver a complete and accurate Borrowing Base Certificate, in the form attached hereto as Exhibit H, reflecting its most recent calculation of the Borrowing Base (i) immediately prior to any advance of Loan proceeds provided that such Borrowing Base Certificate shall be based on Borrower's financial data for the latest month which is closed in the Borrower's ordinary course of business which shall in no event be later than 30 days after the end of each month, and (ii) on the 30th day of each month (for the previous month) throughout the Term. Section 2.2 Loan Administration. Borrowings under the Loan shall be as follows: (a) A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in either of the following manners: (i) not later than 2:00 pm Eastern time at least one (1) Business Day prior to the proposed date of advance, Borrower shall give Lender notice of its intention to borrow, which notice shall (A) be in the form of the Borrowing Base Certificate, (B) specify the amount of the proposed Revolving Credit Loan and the proposed borrowing date, and (C) specify whether the advance shall be an Accounts Receivable Advance or a Real Estate Advance, or a combination of both; provided, however, that no such request may be made at a time when there exists an Event of Default; and (ii) in the event that any amount becomes due under the terms of this Agreement which is not paid within any applicable grace or cure period, whether such amount is interest, principal, fees or any other portion of the Obligations, such event shall be deemed to constitute an irrevocable request for a Revolving Credit Loan on the due date in the amount required to pay such Obligation (provided, however, Borrower shall not be liable for an Event of Default arising from the failure of a representation or warranty deemed 19 to have been made at the time any Revolving Credit Loan is made under this Section 2.2(a)(ii). (b) Borrower hereby irrevocably authorizes Lender to disburse the proceeds of each Revolving Credit Loan requested, or deemed to be requested, as follows: (i) the proceeds of each Revolving Credit Loan requested under subsection 2.2(a)(i) shall be disbursed by Lender by wire transfer to such bank account as may be directed by Borrower from time to time or elsewhere if pursuant to written direction from Borrower; and (ii) the proceeds of each Revolving Credit Loan requested under subsection 2.2(a)(ii) shall be disbursed by Lender by way of direct payment by Lender of the relevant interest or other Obligation; provided, however, that Lender agrees that it shall provide Borrower with an invoice specifying the amounts to be disbursed pursuant to this Section 2.2(b)(ii). (c) All Revolving Credit Loans, advances and other extensions of credit to or for the benefit of Borrower (including, without limitation, all Real Estate Advances and all Accounts Receivable Advances) shall constitute one general Obligation of Borrower, and shall be secured by the lien on, and security interest in, the Collateral. (d) Lender shall enter all Revolving Credit Loans as debits to a loan account in the name of Borrower and shall also record in such loan account all payments made by Borrower on any Obligations and all proceeds of Collateral which are paid to Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to Borrower. All collections into the Concentration Account pursuant to Section 2.3 hereof shall be applied first to fees, costs and expenses due and owing under the Loan Documents, then to interest due and owing under the Loan Documents, and then to principal outstanding with respect to Revolving Credit Loans. (e) On a monthly basis, Lender will provide to Borrower a statement of Revolving Credit Loans, charges and payments made pursuant to this Agreement, and such accounting rendered by Lender shall be deemed final, binding and conclusive 20 upon Borrower unless Lender is notified by Borrower in writing to the contrary within thirty (30) days of the date each accounting is received by Borrower (which receipt may be confirmed by Lender either by an overnight delivery service, facsimile confirmation or U.S. mail return receipt). Such notice shall be deemed an objection to those items specifically objected to therein. Section 2.3 Collections, Disbursements, Borrowing Availability, and Depository Account. (a) Each Accounts Receivable Borrower shall maintain a Depository Account (the "Depository Account") with Financial Trust and/or such other institution as may be approved by Lender (the "Depository Bank"), subject to the provisions of this Agreement, and shall execute, together with the Depository Bank, a Depository Agreement in the form attached as Exhibit B (or such other form as may be approved by Lender), and such other agreements related thereto as Lender may require (collectively, the "Depository Agreement"). Each Accounts Receivable Borrower shall direct all Account Debtors to make all payments on the Accounts attributable to Medicaid/Medicare Accounts of such Accounts Receivable Borrower (collectively, the "Depository Receipts") into the Depository Account. (b) Upon (i) the occurrence of an Event of Default, or (ii) Borrower's submission of a request for an Accounts Receivable Advance, Lender shall deliver a copy of a written notice to the Depository Bank and to the Accounts Receivable Borrower, whereupon, as set forth in the Depository Agreement, the Depository Bank will immediately pay over to Lender, as received, all Depository Account Receipts, until (A) the full amount of all outstanding Obligations has been received by Lender and this Loan Agreement has been terminated, or (B) no Accounts Receivable Advances (or any other amounts due in connection therewith pursuant to this Agreement) remain outstanding and Borrower no longer desires any Accounts Receivable Advances. Prior to any such notice being delivered, and prior to any Event of Default, if Borrower has not requested an Accounts Receivable Advance, all Depository Account Receipts shall be transferred automatically by the Depository Bank to the account designated by Borrower. (c) If an Event of Default has occurred, or the 21 Borrower has requested an Accounts Receivable Advance, and Lender has provided the notice described in subsection (b) above, all Depository Account Receipts shall be immediately transferred into a depository account maintained and controlled by Lender (the "Concentration Account"). Lender shall apply, on a daily basis, all funds transferred into the Concentration Account pursuant to this Section 2.3 to reduce the outstanding Obligations. To the extent that any Depository Account Receipts or proceeds thereof are not sent directly to the Depository Account but are received by Borrower, such collections shall be held in trust for the benefit of Lender and immediately remitted, in the form received, to the Depository Account Bank for transfer to the Concentration Account immediately upon receipt by Borrower. Borrower acknowledges and agrees that (i) its compliance with the terms of this Section 2.3 is essential; and (ii) in the event that the Borrower collects in excess of $100,000 of Depository Accounts Receipts and fails to remit such collections to the Collection Account in accordance with this Section 2.3, then upon its failure to comply with any such terms, Lender shall be entitled to assess a non-compliance fee which shall operate to increase the Base Rate by two percent (2%) per annum during any period of non-compliance. All funds transferred from the Concentration Account for application to Borrower's indebtedness to Lender shall be applied to reduce the Loan balance, but for purposes of calculating interest shall be subject to a five (5) Business Day clearance period. (d) Notwithstanding the foregoing provisions of this Section, Lender and Borrower acknowledge and agree that the Account Receivable Collateral is subject to the Subordination Agreement by and among Meditrust, Lender and the Accounts Receivable Borrowers. Section 2.4 Fees. (a) On the Closing Date, the Borrower shall unconditionally pay to Lender the Commitment Fee. (b) For so long as the Loan is available to Borrower, Borrower unconditionally shall pay Lender a monthly usage fee (the "Usage Fee") equal to .15% of the average amount by which the Maximum Loan Amount exceeds the average amount of the outstanding principal balance of the Revolving Credit Loans during the preceding month. The Usage Fee shall be payable 22 monthly in arrears on the first Business Day of each successive calendar month. (c) Subject to the limitations set forth herein and in Section 9.1, Borrower shall pay to Lender all reasonable out-of-pocket costs and expenses incurred in connection with the closing of the Loan, the making of any Revolving Credit Loan, the administration of the Loan, the modification of the Loan or the Loan Documents, including (without limitation) all audit and appraisal fees in connection with audits and appraisals of Borrower's books and records, any Facility or Property, all title premiums, recordation and transfer taxes, recordation fees, search fees, surveys, attorney's fees and disbursements, which amounts shall be due and payable on the first Business Day of the month following the date of issuance by Lender of a request for payment thereof to Borrower. (d) Provided no Event of Default has occurred and is continuing, Borrower and Lender agree that, provided the terms of this Agreement or any other Loan document are not amended, for any twelve (12) month period during the Loan Term, the Lender's expenses and costs for which Borrower shall be responsible (as described in Section 2.4(b) above) and all other pre-default costs and expenses payable to Lender hereunder or under any of the other Loan Documents, shall not exceed $9,500 provided no Accounts Receivable Advances have been made and remain outstanding. In the event that any Loan Document is amended or any additional property is added to the Real Estate Borrowing Base, including any property owned by any Leasehold Borrower, Borrower agrees to pay Lender's reasonable costs and expenses in connection therewith. Section 2.5 Payments. Principal payable on account of Revolving Credit Loans shall be payable by Borrower to Lender immediately upon the earliest of (i) the receipt by Borrower of any payments made on any Qualified Account against which any Accounts Receivable Advance has been made, to the extent of such proceeds, (ii) the occurrence of an Event of Default and the acceleration of the Maturity Date pursuant to the terms of the Loan Documents as a result of such Event of Default, or (iii) the termination of this Agreement pursuant to Section 2.8 hereof; provided, however, that if a Revolving Credit Loan made by Lender in excess of the Borrowing Base shall exist at any time, not later than five (5) Business Days following written 23 notice from the Lender, Borrower shall repay such overadvance by delivering to Lender immediately available funds in the amount of such overadvance. Interest accrued on the Revolving Credit Loans shall be due on the earliest of (i) the first Business Day of each month (for the immediately preceding month), computed on the last calendar day of the preceding month, (ii) the occurrence of an Event of Default in consequence of which the Loan and the Maturity Date is accelerated, or (iii) the termination of this Agreement pursuant to Section 2.8 hereof. Except to the extent otherwise set forth in this Agreement, all payments of principal and of interest on the Loan, all other charges and any other obligations of Borrower hereunder, shall be made to Lender in immediately available funds. Section 2.6 Use of Proceeds. The proceeds of Lender's advances under the Loan shall be used (i) on the Closing Date, to pay off in full all of the obligations of the Borrower to Lender under the Term Note, and (ii) on or after the Closing Date, for any legal purpose, including (without limitation) the acquisition of Facilities, Properties and other assets, for working capital, for other costs of Borrower arising in the ordinary course of Borrower's business, for advances among Borrowers, and for the acquisition of leasehold interests in facilities now or hereafter managed by Borrower or any Affiliate of Borrower. Section 2.7 Interest Rate Limitation. The parties intend to conform strictly to the applicable usury laws in effect from time to time during the term of the Loan. Accordingly, if any transaction contemplated hereby would be usurious under such laws, then notwithstanding any other provision hereof: (i) the aggregate of all interest that is contracted for, charged, or received under this Agreement or under any other Loan Document shall not exceed the maximum amount of interest allowed by applicable law (the "Highest Lawful Rate"), and any excess shall be promptly credited to Borrower by Lender (or, to the extent that such consideration shall have been paid, such excess shall be promptly refunded to Borrower by Lender); (ii) neither Borrower nor any other Person now or hereafter liable hereunder shall be obligated to pay the amount of such interest to the extent that it is in excess of the Highest Lawful Rate; and (iii) the effective rate of interest shall be reduced to the Highest Lawful Rate. All sums paid, or agreed to be paid, to Lender for the use, forbearance, 24 and detention of the debt of Borrower to Lender shall, to the extent permitted by applicable law, be allocated throughout the full term of the Note until payment is made in full so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term thereof. If at any time the rate of interest under the Note exceeds the Highest Lawful Rate, the rate of interest to accrue pursuant to this Agreement shall be limited, notwithstanding anything to the contrary herein, to the Highest Lawful Rate, but any subsequent reductions in the Base Rate shall not reduce the interest to accrue pursuant to this Agreement below the Highest Lawful Rate until the total amount of interest accrued equals the amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had at all times been in effect. Section 2.8 Term. (a) Subject to Lender's right to cease making Revolving Credit Loans to Borrower upon or after any Event of Default, this Agreement shall be effective for a period of three (3) years from the Closing Date, unless earlier terminated as provided in this Section 2.8 hereof. This Agreement shall terminate on the last day of such three (3) year period. (b) Notwithstanding anything herein to the contrary, Lender may terminate this Agreement without notice upon or after the occurrence of an Event of Default. (c) Upon at least thirty (30) days prior written notice to Lender (the "Termination Notice Period"), Borrower may terminate this Agreement prior to the third annual anniversary of the Closing Date, provided that, at the effective date of such termination, Borrower shall pay to Lender (in addition to the then outstanding principal, accrued interest and other Obligations owing under the terms of this Agreement and any other Loan Documents) as liquidated damages for the loss of bargain and not as a penalty, an amount equal to $150,000.00 (the "Termination Fee"). (d) All of the Obligations shall be immediately due and payable upon the termination date stated in any notice of termination of this Agreement delivered by Borrower to Lender as described in Subparagraph (C) above (the "Termination Date"); 25 provided, however, that notwithstanding anything in Section 2.8(C) to the contrary the Termination Date shall be effective no earlier than the first Business Day of the month following the expiration of the Termination Notice Period. All undertakings, agreements, covenants, warranties, and representations of Borrower contained in the Loan Documents shall survive any such termination and Lender shall retain its liens in the Collateral and all of its rights and remedies under the Loan Documents notwithstanding such termination until Borrower has paid the Obligations to Lender, in full, in immediately available funds. (e) Notwithstanding any provision of this Agreement which makes reference to the continuance of an Event of Default, nothing in this Agreement shall be construed to permit Borrower to cure an Event of Default following the lapse of the applicable cure period, and Borrower shall have no such right in any instance unless specifically granted in writing by Lender. (f) Notwithstanding the foregoing, in the event that the Borrower requests Lender's consent to do any act prohibited by the terms of this Agreement, or to do anything which requires Lender's prior consent pursuant to the provisions hereof, except for any of the acts described in Section 7.4 hereof, and Lender fails to provide such consent, then Borrower may terminate this Agreement and no Termination Fee shall be payable by Borrower. Section 2.9 Joint and Several Liability; Binding Obligations. Each entity comprising Borrower and executing this Agreement on behalf of Borrower shall be jointly and severally liable for all of the Obligations. In addition, each entity comprising Borrower hereby acknowledges and agrees that all of the representations, warranties, covenants, obligations, conditions, agreements and other terms contained in this Agreement shall be applicable to and shall be binding upon each individual entity comprising Borrower, and shall be binding upon all such entities when taken together. Section 2.10 Release of Real Estate Borrower and Mortgage. Lender agrees to release the Mortgages, as well the grantors of such Mortgages, subject to the following conditions: (a) No Event of Default shall have occurred and be continuing; 26 (b) No more than one Mortgage shall be released, unless the Borrower indefeasibly repays in full all of the Obligations, in which case the Lender shall release all of the Mortgages; (c) Upon such release, the Borrower shall be in compliance with the Borrowing Base; (d) The proceeds of any sale or refinancing of the Property to be released giving rise to Borrower's request for release are used by the applicable Real Estate Borrower to pay off all outstanding Real Estate Advances made with respect to such Property; and (e) That portion of the Borrowing Base attributable to the Property to be released shall not constitute more than forty percent (40%) of the Real Estate Borrowing Base. Notwithstanding the foregoing, Lender agrees that it will release the Mortgage covering the Eyers Grove Property upon request by Borrower if Lender determines that no Real Estate Advances shall be made against the Eyers Grove Property and such release shall not be considered the one release permitted under this Section. Section 2.11 Release of other Collateral of Parent. Upon request by Borrower, Lender will terminate its security interest covering any portion of the Parent's Collateral, provided (a) no Event of Default has occurred, (b) such release is required in connection with bona fide third party financing permitted pursuant to Section 7.1 hereof which requests a security interest in such Collateral. Section 2.12 Release of Collateral and Accounts Receivable Borrower. Upon request by Borrower, Lender agrees that it shall release its liens and security interests covering all of the Collateral of a particular Accounts Receivable Borrower, as well as the applicable Accounts Receivable Borrowers, from its Obligations hereunder provided (a) no Event of Default has occurred; (b) the Collateral subject to such release (the "Released Collateral") is required to be released in connection with the sale or transfer of the rights to operate the applicable Facility to an unrelated bonafide third party by the applicable Accounts Receivable Borrower; (c) upon release of the Released Collateral, the proceeds of such sale are used 27 immediately to reduce the outstanding principal Obligations attributable to such Accounts Receivable Borrower; and (d) upon release of the Released Collateral, the outstanding principal balance of all Accounts Receivable Advances does not exceed the Borrowing Base. In addition, at any time after the date which is one hundred and twenty (120) days following the date hereof, if the Borrower, Lender and Meditrust have not entered into a satisfactory intercreditor agreement as to the Accounts Receivable Collateral despite the good faith best efforts of Borrower, upon receipt of a request from Borrower, Lender may, in its sole credit judgment, release the Accounts Receivable Borrowers from the Obligations and terminate its liens on, and security interests in, the Accounts Receivable Collateral (it being understood that Lender shall have no obligation to so release). ARTICLE III COLLATERAL Section 3.1A Real Estate Borrower's Pledge. As security for the payment of all liabilities of Borrower to Lender under the Note, this Agreement and all other Loan Documents, including but not limited to any extensions, modifications, substitutions, increases and renewals thereof, (a) the payment of all amounts advanced by Lender to preserve, protect, defend, and enforce its rights hereunder and in the Collateral (as hereinafter defined) in accordance with the terms of this Agreement and all other Loan Documents, including (without limitation) the Mortgage, and (b) the payment of all reasonable expenses incurred by Lender in connection therewith (collectively, the "Obligations"), each Real Estate Borrower and the Parent (collectively, the "Pledgor") hereby assigns and grants to Lender a continuing first priority lien on and security interest in, upon, and to each and every portion of the following property (the "Pledgor Collateral"): (i) All of the Pledgor's now-owned and hereafter acquired or arising Accounts, accounts receivable and rights to payment of every kind and description, and all of Borrower's contract rights, chattel paper, documents and instruments with respect thereto, and all of the Pledgor's rights, remedies, security and liens, in, to and in respect of the Accounts, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and 28 remedies of an unpaid vendor, lienor or secured party, guaranties or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligation of any Account Debtor, and credit and other insurance; (ii) All moneys, securities and other property and the proceeds thereof, now or hereafter held or received by, in transit to, in possession of, or under the control of Lender or a bailee or Affiliate of Lender, from or for the Pledgor, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of the Pledgor's deposits (general or special), balances, sums and credits with Lender at any time existing; (iii) All of the Pledgor's right, title and interest in, to and in respect of all goods relating to, or which by sale have resulted in, Accounts, including, without limitation, all goods described in invoices or other documents or instruments with respect to, or otherwise representing or evidencing, any Account, and all returned, reclaimed or repossessed goods; (iv) All of the Pledgor's now or hereafter acquired deposit accounts into which Accounts are deposited; (v) All of the Pledgor's now owned and hereafter acquired or arising general intangibles and other property of every kind and description with respect to, evidencing or relating to its Accounts, accounts receivable and other rights to payment, including, but not limited to, all existing and future customer lists, choses in action, claims, books, records, ledger cards, contracts, licenses, formulae, tax and other types of refunds, returned and unearned insurance premiums, rights and claims under insurance policies, and computer programs, information, software, records, and data, as the same relates to the Accounts; and (vi) The proceeds (including, without limitation, insurance proceeds) of all of the foregoing. Section 3.1B. As security for the Obligations, each Accounts Receivable Borrower hereby assigns and grants to Lender a continuing first priority lien on and security interest in, 29 upon, and to each and every portion of the following property (the "Accounts Receivable Collateral") (i) All of such Accounts Receivable Borrower's now-owned and hereafter acquired or arising accounts, as such term is defined in the UCC, based on or arising in connection with any obligations for the payment of money arising out of an Accounts Receivable Borrower's sale of goods or rendition of services (for purposes of this Section 3.1B, the "Accounts"), and all of an Accounts Receivable Borrower's rights, remedies, security and liens, in, to and in respect of the Accounts, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, guaranties or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligation of any Account Debtor (hereinafter defined), and credit and other insurance. (ii) With respect to Accounts only, all moneys, securities and other property and the proceeds thereof, now or hereafter held or received by, in transit to, in possession of, or under the control of Lender or a bailee or Affiliate of Lender, from or for such Accounts Receivable Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of such Accounts Receivable Borrower's deposits (general or special), balances, sums and credits with Lender at any time existing. (iii) All of such Accounts Receivable Borrower's now or hereafter acquired deposit accounts into which Accounts are deposited, including the Depository Account. (iv) All of such Accounts Receivable Borrower's now owned and hereafter acquired or arising general intangibles with respect to, evidencing or relating to its Accounts, including, but not limited to, all existing and future choses in action, claims, books, records, ledger cards, contracts, licenses, formulae, tax and other types of refunds, returned and unearned insurance premiums, rights and claims under insurance policies, and computer programs, information, software, records, and data, as the same relates to the Accounts. 30 (v) The proceeds (including, without limitation, insurance proceeds) of all of the foregoing. Section 3.2 Lien Documents With Respect to Personal Property. On the Closing Date, with respect to all Collateral which constitutes personal property, and thereafter as Lender deems necessary in its sole discretion, the Borrower shall execute and deliver to Lender, or have executed and delivered (all in form and substance satisfactory to Lender in its sole discretion) (a) UCC-1 Financing statements pursuant to the Uniform Commercial Code in effect in the jurisdiction(s) in which the Borrower operates, which Lender may file in any jurisdiction where any Collateral is or may be located and in any other jurisdiction that Lender deems appropriate; provided that a carbon, photographic, or other reproduction or other copy of this Agreement or of a financing statement is sufficient as and may be filed in lieu of a financing statement; and (b) Any other agreements, documents, instruments, deeds of trust, mortgages, security agreements, and writings reasonably deemed necessary by Lender or as Lender may otherwise request from time to time in its sole discretion to evidence, perfect, or protect Lender's lien and security interest in the Collateral reasonably required hereunder. Section 3.3 Collateral Administration. (a) All Collateral (except the Depository Account) will at all times be kept by the applicable Borrower at its principal office(s) as set forth on Schedule 4.15 hereto, or at the applicable Facility or Property (as the case may be), and shall not, without the prior written approval of Lender, be moved therefrom. (b) If Qualified Accounts in an aggregate face amount in excess of $50,000.00 become ineligible because they fall within one of the specified categories of ineligibility set forth in the definition of Qualified Accounts or otherwise, the Accounts Receivable Borrower shall notify Lender of such occurrence on the third Business Day following such occurrence and the Borrowing Base shall thereupon be adjusted to reflect such occurrence. 31 (c) Whether or not an Event of Default has occurred, any of Lender's officers, employees or agents shall have the right, at any time or times hereafter, in the name of Lender, any designee of Lender or the Borrower, to verify the validity, amount or any other matter relating to any Accounts of Accounts Receivable Borrowers by mail, telephone, telegraph or otherwise (provided, however, Lender agrees that prior to the occurrence of an Event of Default, Lender agrees to verify any such matter in the name of the Parent or the applicable Accounts Receivable Borrower). Borrower shall cooperate fully with Lender in an effort to facilitate and promptly conclude such verification process. (d) To expedite collection, the Accounts Receivable Borrower shall endeavor in the first instance to make collection of its Accounts for Lender. Lender retains the right at all times after the occurrence of an Event of Default, subject to applicable law regarding Medicaid/Medicare Account Debtors, to notify Account Debtors that Accounts have been assigned to Lender and to collect Accounts directly in its own name and to charge the collection costs and expenses, including attorneys' fees, to the Accounts Receivable Borrower. Notwithstanding the foregoing, Lender and Borrower acknowledge and agree that the Accounts Receivable Collateral is subject to the Subordination Agreement by and among Meditrust, Lender and the Accounts Receivable Borrowers. Section 3.4 Other Actions. In addition to the foregoing, the Accounts Receivable Borrower (i) shall provide written notice to each private indemnity, managed care or other Insurer who either is currently an Account Debtor or becomes an Account Debtor at any time following the date hereof that Lender has been granted a first priority lien and security interest in, upon and to all Accounts applicable to such Insurer, and hereby authorizes Lender to send any and all similar notices to such Insurers by Lender, which notice shall be delivered promptly after any Accounts Receivable Advance is made by Lender to the applicable Accounts Receivable Borrower, and (ii) shall do anything further that may be lawfully and reasonably required by Lender to perfect Lender's security interest and effectuate the intentions and objects of this Agreement, including but not limited to the execution and delivery of depository agreements, continuation statements, amendments to financing statements, and 32 any other documents required hereunder. At Lender's request, the Accounts Receivable Borrower shall also immediately deliver to Lender all items for which Lender must receive possession to obtain a perfected security interest. The Borrower shall, on Lender's demand, deliver to Lender all notes, certificates, and documents of title, chattel paper, warehouse receipts, instruments, and any other similar instruments constituting Collateral. Notwithstanding the foregoing, Lender and Borrower acknowledge and agree that the Accounts Receivable Collateral is subject to the Subordination Agreement by and among Meditrust, Lender and the Accounts Receivable Borrowers. Section 3.5 Searches. As and when requested by Lender in its reasonable discretion, prior to the Closing Date and thereafter, and in addition to any title or other searches which may be required under the Conditions to Real Estate Advances, Lender may obtain the following searches against Borrower (the results of which are to be consistent with Borrower's representations and warranties under this Agreement), all at Borrower's expense (but subject to the limitation set forth in Section 2.4(d) hereof): (e) Uniform Commercial Code searches with the Secretary of State and local filing offices of each jurisdiction (i) in which any portion of the Property is located, and (ii) where Borrower maintains its executive offices, any Facility, place of business, or assets; (f) Judgment, federal tax lien and corporate and partnership (as the case may be) tax lien searches, in each jurisdiction searched under clause (a) above; and (g) Good standing certificates showing each Borrower to be in good standing in its state of formation and in each other state in which it is doing and presently intends to do business for which qualification is required. Section 3.6 Power of Attorney. Each of the officers of Lender is hereby irrevocably made, constituted and appointed the true and lawful attorney for the Borrower (without requiring any of them to act as such) with full power of substitution to do the following at any time following the occurrence of an Event of Default: (i) endorse the name of Borrower upon any and all checks, drafts, money orders, and other instruments for the 33 payment of money that are payable to Borrower and constitute collections on Borrower's Accounts; (ii) execute in the name of Borrower any financing statements, schedules, assignments, instruments, documents, and statements that Borrower is obligated to give Lender hereunder; and (iii) do such other and further acts and deeds in the name of Borrower that Lender may reasonably deem necessary or desirable to enforce any Account or other Collateral or perfect Lender's security interest or lien in any Collateral. Section 3.7 Real Property Collateral. Prior to the first Real Estate Advance against any particular Property, the applicable Real Estate Borrower shall deliver to the Lender the applicable Mortgage, applicable financing statements (if required by Lender), applicable written consents of all holders of any interest in such Property (if applicable), and all other items listed and described in the Conditions to Real Estate Advances with respect to the applicable Property. Section 3.8 Accounts Receivable Collateral. Prior to the first Accounts Receivable Advance, in addition to satisfying the other conditions for advances set forth herein, the Borrower shall cause to be executed and delivered by Meditrust the Subordination Agreement, which shall be in form and substance satisfactory to the Lender (it being understood that the Accounts Receivable Intercreditor Agreement dated March 15, 1999 by and among Meditrust, Lender and certain of the Borrowers is not satisfactory for purposes of Lender making Accounts Receivable Advances hereunder). ARTICLE IV REPRESENTATIONS AND WARRANTIES Each entity comprising Borrower represents and warrants to Lender, and shall be deemed to represent and warrant on each day on which any Obligations shall be outstanding hereunder, that: Section 4.1 Subsidiaries. Except as set forth in Schedule 4.1, Borrower has no subsidiaries. Section 4.2 Organization and Good Standing. Borrower is a corporation duly organized, validly existing, and in good standing under the laws of its state of formation, is in good 34 standing as a foreign corporation in each jurisdiction in which the character of the properties owned or leased by it therein or the nature of its business makes such qualification necessary, has the corporate power and authority to own its assets and transact the business in which it is engaged, and has obtained all certificates, licenses and qualifications required under all applicable laws, regulations, ordinances, or orders of public authorities necessary for the ownership and operation of all of its properties and transaction of all of its business. Section 4.3 Authority. Borrower has full corporate power and authority to enter into, execute, and deliver this Agreement and to perform its obligations hereunder, to borrow the Loan, to execute and deliver the Note, to execute and deliver the Mortgage and grant the liens described therein, and to incur and perform the obligations provided for in the Loan Documents, all of which have been duly authorized by all necessary corporate action. Except for such consents and approvals as have been obtained, and subject to the federal Assignment of Claims Act, no consent or approval of shareholders of, or lenders to, Borrower and no consent, approval, filing or registration with any Governmental Authority is required as a condition to the validity of the Loan Documents or the performance by Borrower of its obligations thereunder. 1.1 Section Binding Agreement. This Agreement and all other Loan Documents constitute, and the Note, when issued and delivered pursuant hereto for value received, will constitute, the valid and legally binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the rights of creditors generally. Section 4.5 Litigation. Except as disclosed in Schedule 4.5, to Borrower's knowledge, there are no actions, suits, proceedings or investigations pending or threatened against Borrower before any court or arbitrator or before or by any Governmental Authority which, in any one case or in the aggregate, if determined adversely to the interests of Borrower, could have a material adverse effect on the business, properties, condition (financial or otherwise) or operations, present or prospective, of Borrower taken as a whole, or upon its ability to perform its obligations under the Loan Documents. To Borrower's knowledge, Borrower is not in default with respect 35 to any order of any court, arbitrator, or Governmental Authority applicable to Borrower or its properties, which default could reasonably be expected to have a material adverse effect on the Borrower's business, assets or financial conditions. Section 4.6 No Conflicts. The execution and delivery by Borrower of this Agreement and the other Loan Documents do not, and the performance of its obligations thereunder will not, violate, conflict with, constitute a default under, or result in the creation of a lien or encumbrance upon the Property of any Borrower under: (i) any provision of Borrower's articles of incorporation or bylaws, (ii) any provision of any law, rule, or regulation applicable to Borrower, or (iii) any of the following: (A) any indenture or other agreement or instrument to which Borrower is a party or by which Borrower or such property is bound; or (B) any judgment, order or decree of any court, arbitrator, or Governmental Authority having jurisdiction over Borrower which is applicable to Borrower. Section 4.7 Financial Condition. The annual consolidated financial statements of Parent and its subsidiaries as of December 31, 1998 certified by the chief financial officer of Parent, which were previously delivered to Lender, fairly present the financial condition of Parent and its subsidiaries and the results of its operations and changes in financial condition as of the dates and for the periods referred to, and have been prepared in accordance with GAAP. There are no material unrealized or anticipated liabilities, direct or indirect, fixed or contingent, of Borrower as of the dates of such financial statements which are not reflected therein or in the notes thereto. There has been no material adverse change in the business, properties, condition (financial or otherwise) or operations (present or prospective) of Borrower since December 31, 1998, except as shown on Schedule 4.7 hereof. Borrower's fiscal year ends on June 30. The federal tax identification number of each entity comprising Borrower is as described on Schedule 4.7. Section 4.8 No Default. To the Borrower's knowledge, Borrower is not in default under or with respect to any obligation in any respect which could be materially adverse to its business, operations, property or financial condition, or which could materially and adversely affect the ability of Borrower to perform its obligations under the Loan Documents. 36 To Borrower's knowledge, no Event of Default or event which, with the giving of notice or lapse of time, or both, could become an Event of Default, has occurred and is continuing. Section 4.9 Title to Properties. Borrower has good and marketable title to the Collateral and the Property, subject to no lien, mortgage, pledge, encumbrance or charge of any kind, other than the Permitted Liens. Borrower has not agreed or consented to cause any of the Collateral whether owned now or hereafter acquired to be subject in the future (upon the happening of a contingency or otherwise) to any lien, mortgage, pledge, encumbrance or charge of any kind other than Permitted Liens. Section 4.10 Taxes. Borrower has filed, or has obtained extensions for the filing of, all federal, state and other tax returns which are required to be filed, and has paid all taxes shown as due on those returns and all assessments, fees and other amounts due as of the date hereof. All tax liabilities of Borrower are now adequately provided for on Borrower's books. To Borrower's knowledge, no tax liability has been asserted by the Internal Revenue Service or other taxing authority against Borrower for taxes in excess of those already paid. Section 4.11 Securities and Banking Laws and Regulations. (a) The use of the proceeds of the Loan and Borrower's issuance of the Note will not directly or indirectly violate or result in a violation of the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including without limitation Regulations U, T, G, or X of the Board of Governors of the Federal Reserve System. Borrower is not engaged in the business of extending credit for the purpose of the purchasing or carrying "margin stock" within the meaning of those regulations. No part of the proceeds of the Loan hereunder will be used to purchase or carry any margin stock or to extend credit to others for such purpose. (b) Borrower is not an investment company within the meaning of the Investment Company Act of 1940, as amended, nor is it, directly or indirectly, controlled by or acting on behalf of any Person which is an investment company within the meaning of that Act. 37 Section 4.12 ERISA. No employee benefit plan (a "Plan") subject to the Employee Retirement Income Security Act of 1974 ("ERISA") and regulations issued pursuant thereto that is maintained by Borrower or under which Borrower could have any liability under ERISA (a) has failed to meet minimum funding standards established in Section 302 of ERISA, (b) has failed to comply with all applicable requirements of ERISA and of the Internal Revenue Code, including all applicable rulings and regulations thereunder, (c) has engaged in or been involved in a prohibited transaction (as defined in ERISA) under ERISA or under the Internal Revenue Code, or (d) has been terminated. Borrower has not assumed, or received notice of a claim asserted against Borrower for, withdrawal liability (as defined in the Multi-Employer Pension Plan Amendments Act of 1980, as amended) with respect to any multi-employer pension plan and is not a member of any Controlled Group (as defined in ERISA). Borrower has timely made when due all contributions with respect to any multi-employer pension plan in which it participates and no event has occurred triggering a claim against Borrower for withdrawal liability with respect to any multi-employer pension plan in which Borrower participates. Section 4.13 Compliance with Law. Except as described in Schedule 4.13, to Borrower's knowledge, Borrower is not in violation of any statute, rule or regulation of any Governmental Authority (including, without limitation, any statute, rule or regulation relating to employment practices or to environmental, occupational and health standards and controls) where such violation could reasonably be expected to have a materially adverse effect on the business, assets or financial condition of the Borrower taken as a whole. Borrower has obtained all licenses, permits, franchises, and other governmental authorizations necessary for the ownership and/or operation of each Facility, each Property and all other of its properties and the conduct of its business. Borrower is current with all reports and documents required to be filed with any state or federal securities commission or similar Governmental Authority and is in full compliance with all applicable rules and regulations of such commissions where such non-compliance could reasonably be expected to have a materially adverse effect on the business, assets or financial condition of Borrower when taken as a whole. 38 Section 4.14 Environmental Matters. The representations and warranties of the Borrower set forth in the Indemnity Agreement are true and correct, the Borrower hereby agrees to comply with the provisions of the Environmental Agreement. Section 4.15 Places of Business. The only places of business of Borrower, and the places where it keeps and intends to keep the Collateral and records concerning the Collateral, are at the addresses set forth in Schedule 4.15. Such Schedule 4.15 also lists the owner of record of each Accounts Receivable Facility. Section 4.16 Intellectual Property. Borrower exclusively owns, licenses, possesses or otherwise has a right to use all the patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, franchises, licenses, and rights with respect to the foregoing necessary for the present and planned future conduct of its business, without any conflict with the rights of others, except as described in Schedule 4.16 hereof. To Borrower's knowledge, Borrower is not in default of any obligation or undertaking with respect to such intellectual property or rights. Section 4.17 SECTION INTENTIONALLY DELETED. Section 4.18 Material Facts. Neither this Agreement nor any other Loan Document nor any other agreement, document, certificate, or statement furnished to Lender by or on behalf of Borrower by a representative of Borrower in connection with the transactions contemplated hereby contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact known to Borrower that materially and adversely affects or in the future may materially adversely affect the business, operations, affairs or financial condition of Borrower, or any of its properties or assets. Section 4.19 Certain Contracts. Borrower is not a party to any contract or agreement, or subject to any corporate restriction, which materially adversely affects its business as a whole. Section 4.20 Business Interruptions. Within five years prior to the date hereof, neither the business, property or 39 assets, or operations of Borrower has been adversely affected in any way by any casualty, strike, lockout, combination of workers, or order of the United States of America or other Governmental Authority, directed against Borrower. To Borrower's knowledge, there are no pending or threatened labor disputes, strikes, lockouts, or similar occurrences or grievances against Borrower or its business which could reasonably be expected to have a material adverse effect on the business, assets or financial condition of the Borrower taken as a whole. Section 4.21 Names. Within five years prior to the date hereof, Borrower has not conducted business, other than through a subsidiary or partnership under or used any other name other than as shown on Schedule 4.21. All Accounts are generated under the names listed on Schedule 4.21. Unless otherwise indicated on such Schedule, each trade name of Borrower represents a division or trading style of Borrower and not a separate Person or independent Affiliate. Section 4.22 Joint Ventures. Borrower is not engaged in any joint venture or partnership with any other Person, except as set forth on Schedule 4.22. Section 4.23 Accounts. Lender may rely, in determining which Accounts are Qualified Accounts, on all statements and representations made by Borrower with respect to any Account or Accounts. Unless otherwise indicated in writing to Lender, with respect to each Account of an Accounts Receivable Borrower: (a) It is genuine and in all respects what it purports to be, and is not evidenced by a judgment; (b) It arises out of a completed, bona fide sale and delivery of goods or rendition of services by Borrower in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts, certification, participation, certificate of need, or other documents relating thereto and forming a part of the contract between Borrower and the Account Debtor; (c) It is for a liquidated amount maturing as stated in a duplicate claim or invoice covering such sale or rendition 40 of services, a copy of which has been furnished or is available to Lender; (d) Subject to compliance with the federal Assignment of Claims Act and other applicable laws, such Account, and Lender's security interest therein, is not, and will not (by voluntary act or omission by Borrower), be in the future, subject to any offset, lien, deduction, defense, dispute, counterclaim or any other adverse condition, and each such Account is absolutely owing to Borrower and is not contingent in any respect or for any reason; (e) There are no facts, events or occurrences known to Borrower and not disclosed to Lender which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the claim or invoice and statements delivered to Lender with respect thereto; (f) To Borrower's knowledge, (i) the Account Debtor thereunder had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (ii) such Account Debtor is solvent; (g) To Borrower's knowledge, there are no proceedings or actions which are threatened or pending against any Account Debtor thereunder which might result in any material adverse change in such Account Debtor's financial condition or the collectibility of such Account; (h) Subject to compliance with the federal Assignment of Claims Act, it has been billed and forwarded to the Account Debtor for payment in accordance with applicable laws and compliance and conformance with any requisite procedures, requirements and regulations governing payment by such Account Debtor with respect to such Account, and such Account if due from a Medicaid/Medicare Account Debtor is properly payable directly to Borrower; and (i) Borrower has obtained and currently has all certificates of need, Medicaid and Medicare provider numbers, licenses, permits and authorizations as necessary in the generation of such Accounts. 41 Notwithstanding the foregoing, the Borrower and Lender agree and acknowledge that the Accounts Receivable Collateral is subject to the provisions of the Subordination Agreement by and among Meditrust, Lender and Borrower. Section 4.24 Solvency. Both before and after giving effect to the transactions contemplated by the terms and provisions of this Agreement, (i) Borrower (taken as a whole) owns property whose fair saleable value is greater than the amount required to pay all of Borrower's Indebtedness, (ii) Borrower (taken as a whole) was and is able to pay all of its Indebtedness as such Indebtedness matures, and (iii) Borrower (taken as a whole) had and has capital sufficient to carry on its business and transactions and all business and transactions in which it about to engage. 1.2 ARTICLE V CLOSING AND CONDITIONS OF LENDING Section 5.1 Conditions Precedent to Agreement. The obligation of Lender to enter into and perform this Agreement is subject to satisfaction of the following conditions precedent: (a) Lender shall have received two (2) originals of this Agreement and all other Loan Documents required to be executed and delivered at or prior to Closing (other than the Note, as to which Lender shall receive only one original, executed by Borrower and any other required Persons, as applicable. (b) Lender shall have received all searches and good standing certificates required by Section 3.5 hereof. (c) If a Real Estate Advance shall be made, the Borrower shall have complied with all Conditions to Real Estate Advances. (d) If an Accounts Receivable Advance shall be made, the Borrower shall have complied with all conditions set forth herein for an Accounts Receivable Advance, including the execution and delivery of the Subordination Agreement. 42 (e) Borrower shall have complied and shall then be in compliance with all the terms, covenants and conditions of the Loan Documents. (f) There shall have occurred no Event of Default and no event which, with the giving of notice or the lapse of time, or both, could constitute such an Event of Default. (g) The representations and warranties contained in Article IV shall be true and correct. (h) Lender shall have received copies of all board of directors resolutions of Borrower, and other corporate action taken by Borrower to authorize the execution, delivery and performance of the Loan Documents and the borrowing of the Loan thereunder, as well as the names and signatures of the officers of Borrower authorized to execute documents on its behalf in connection herewith, all as also certified as of the date hereof by Borrower's chief financial officer, and such other papers as Lender may reasonably require. (i) Lender shall have received copies, certified as true, correct and complete by a corporate officer of each Borrower, of the articles of incorporation of each Borrower, with any amendments to any of the foregoing, and all other documents reasonably necessary for performance of the obligations of Borrower under this Agreement and the other Loan Documents. (j) Lender shall have received a written opinion of counsel for Borrower, dated the date hereof, substantially in the form delivered to Lender in connection with the Term Loan. (k) Lender shall have received such financial statements, reports, certifications, and other operational information required to be delivered hereunder, including without limitation an initial Borrowing Base Certificate calculating the Borrowing Base. (l) Lender shall have received the Commitment Fee. (m) If an Accounts Receivable Advance is requested, Lender shall have received (i) an estoppel certificate substantially in the form of Exhibit D attached hereto from 43 Borrower's landlord or sublandlord, as the case may be, with respect to each of the Accounts Receivable Facilities; and (ii) the Depository Agreement. (n) Lender shall have received a certificate of Borrower's chief financial officer, dated the Closing Date, certifying that to his/her best knowledge all of the conditions specified in this Section have been fulfilled. Section 5.2 Conditions Precedent to Advances. Notwithstanding any other provision of this Agreement, no proceeds of any Revolving Credit Loan under the Loan Documents shall be disbursed hereunder unless the following conditions have been satisfied or waived immediately prior to such disbursement: (a) The representations and warranties on the part of Borrower contained in Article IV (except with respect to Sections 4.1, 4.21 and 4.22) of this Agreement shall be true and correct in all respects at and as of the date of disbursement or advance, as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date and except that the references in Section 4.7 to financial statements shall be deemed to be a reference to the then most recent annual and interim financial statements of Borrower furnished to Lender pursuant to Section 6.1 hereof). (b) No Event of Default or event which, with the giving of notice of the lapse of time, or both, could become an Event of Default shall have occurred and be continuing or would result from the making of the disbursement or advance. (c) No material adverse change in the condition (financial or otherwise), properties, business, or operations of Borrower taken as a whole shall have occurred and be continuing with respect to Borrower since the date hereof. (d) If the advance is an Accounts Receivable Advance, the Subordination Agreement which shall be satisfactory to Lender shall have been executed and delivered to Lender by Meditrust and Borrower. 44 Section 5.3 Closing. Subject to satisfaction of all of the conditions of this Article V, the Loan shall be made available on Closing Date or such other date as is mutually agreed by the parties at such time as may be mutually agreeable to the parties upon the execution hereof at such place as may be requested by Lender (the "Closing"). Section 5.4 Waiver of Rights. By completing the Closing hereunder, or by making advances under the Loan, Lender does not waive a breach of any representation or warranty of Borrower hereunder or under any other Loan Document, and all of Lender's claims and rights resulting from any breach or misrepresentation by Borrower are specifically reserved by Lender. Section 5.5 Depository Agreement. No later than thirty (30) calendar days following the execution and delivery of this Agreement, Borrower shall cause to be executed and delivered to the Lender the Depository Agreement. ARTICLE VI AFFIRMATIVE COVENANTS Each entity constituting Borrower covenants and agrees that for so long as Borrower may borrow hereunder and until payment in full of the Note and performance of all other obligations of Borrower under the Loan Documents: Section 6.1 Financial Statements and Collateral Reports. Borrower will furnish to Lender (i) with a request for the first Accounts Receivable Advance and during any period that any Accounts Receivable Advance remains outstanding, a sales and collections report and accounts receivable aging schedule for each Accounts Receivable Borrower on a form acceptable to Lender within thirty (30) days after the end of each calendar month, which shall include, but not be limited to, a report of sales, credits issued, and collections received; (ii) with a request for the first Accounts Receivable Advance and during any period that any Accounts Receivable Advance remains outstanding, for each Accounts Receivable Borrower, payable aging schedules within thirty (30) days after the end of each calendar month; (iii) internally prepared monthly financial statements for Borrower with respect to each Facility and each Property, certified by the chief financial officer of Borrower, within (A) 45 thirty (30) days of the end of each month, and (B) within forty-five (45) days of the end of each fiscal quarter, accompanied by management analysis and actual vs. budget variance reports for the home division of Borrower and its Affiliates in total; (iv) to the extent prepared by Borrower, annual budgets, profit and loss statements, balance sheets, and cash flow reports (prepared on a monthly basis) for the succeeding fiscal year within thirty (30) days before the end of each of Borrower's fiscal years (which may be in draft form if the final form is not yet available); (v) annual internally prepared financial statements for Borrower within sixty (60) days after the end of each of Borrower's fiscal years; (vi) annual audited consolidated and consolidating financial statements for Borrower prepared by KPMG Peat Marwick LLP, or a firm of independent public accountants satisfactory to Lender, within one hundred thirty-five (135) days after the end of each of Borrower's fiscal years; (vii) promptly upon receipt thereof, copies of any reports submitted to Borrower by the independent accountants in connection with any interim audit of the books of Borrower and copies of each management control letter provided to Borrower by independent accountants; (viii) as soon as available, copies of all financial statements and notices provided by Borrower to all of its stockholders; (ix) copies of all Form 10-Ks and 10-Qs; (x) the Borrowing Base Certificates described in Section 2.1 hereof; and (xi) such additional information, reports or statements as Lender may from time to time reasonably request. Annual financial statements shall set forth in comparative form figures for the corresponding periods in the prior fiscal year. All financial statements shall include a balance sheet and statement of earnings and shall be prepared in accordance with GAAP. Section 6.2 Payments Hereunder. Borrower will make all payments of principal, interest, fees, and all other payments required hereunder, under the Loan, and under any other agreements with Lender to which Borrower is a party, as and when due. Section 6.3 Existence, Good Standing, and Compliance with Laws. Borrower will do or cause to be done all things necessary (a) to obtain and keep in full force and effect all corporate existence, rights, licenses, privileges, and franchises of Borrower necessary to the ownership of its property (including the Property and the Facilities) or the conduct of its business, and comply with all applicable present 46 and future laws, ordinances, rules, regulations, orders and decrees of any Governmental Authority having or claiming jurisdiction over Borrower where such failure to comply with the foregoing would have a material adverse effect on the business, assets or financial condition of Borrower taken as a whole; and (b) to maintain and protect the properties (including the Property and the Facilities) used or useful in the conduct of the operations of Borrower, in a prudent manner, including without limitation the maintenance at all times of such insurance upon its insurable property and operations as required by law or by Section 6.7 hereof. Section 6.4 Legality. The making of the Loan and each disbursement or advance under the Loan shall not be subject to any penalty or special tax, shall not be prohibited by any governmental order or regulation applicable to Borrower, and shall not violate any rule or regulation of any Governmental Authority, and subject to compliance with the federal Assignment of Claims Act, necessary consents, approvals and authorizations of any Governmental Authority to or of any such disbursement or advance shall have been obtained. Section 6.5 SECTION INTENTIONALLY DELETED. Section 6.6 Taxes and Charges. Borrower will timely file all tax reports and pay and discharge all taxes, assessments and governmental charges or levies imposed upon Borrower, or its income or profits or upon its properties or any part thereof (including the Property), before the same shall be in default and prior to the date on which penalties attach thereto, as well as all lawful claims for labor, material, supplies or otherwise which, if unpaid, might become a lien or charge upon the properties or any part thereof of Borrower; provided, however, that Borrower shall not be required to pay and discharge or cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith and by appropriate proceedings by Borrower, and Borrower shall have set aside on their books adequate reserve therefor; and provided further, that such deferment of payment is permissible only so long as Borrower's title to, and its right to use, the Collateral is not adversely affected thereby and Lender's lien and priority on the Collateral are not adversely affected, altered or impaired thereby. 47 Section 6.7 Insurance. At all times during the Term of the Loan, the Borrower shall maintain the following insurance with respect to each Property: (a) Liability insurance (including professional liability) for Borrower in an amount equal to at least $1,000,000 per occurrence, $3,000,000 aggregate, with a $10,000,000 umbrella policy per Property, and all such liability insurance shall be written on an occurrence basis and name the Lender as an additional insured; (b) "All-risk" (including builder's risk) broad form coverage on the Property in an amount not less than the replacement cost thereof, with endorsements insuring against such potential causes of loss as shall be required by Lender, including, but not limited to, loss or damage from flood, unless evidence satisfactory to Lender is provided that all of the Property is located in an area which is designated as not being in a flood hazard area; (c) Workers' compensation insurance for Borrower as required by the laws of the state in which the Property is located. Each of the policies described in 6.7(b) shall name Lender as mortgagee and loss payee under a standard non-contributory mortgagee and lender loss payable clause, and shall provide that Lender shall receive not less than thirty (30) days written notice prior to cancellation. The proceeds of either of the policies described in 6.7(b) shall be payable by check payable to Lender or jointly payable to Borrower and to Lender, and shall be delivered to Lender, and such proceeds (after deducting reasonable Lender's costs and expenses of obtaining such proceeds) shall be applied by Lender, at Lender's sole option, either (i) to the full or partial payment or prepayment of the Loan Obligations (without premium), or (ii) to the repair and/or restoration of the Property damaged, or Lender may release the net proceeds to the Borrower; provided, however, for so long as no Event of Default exists and the insurance proceeds, together with any other sums made available by Borrower for repair and/or restoration of the damaged Property are sufficient to make such repairs/restoration, Lender shall make such insurance proceeds available to the Borrower for such purposes. 48 Borrower appoints Lender as Borrower's attorney-in-fact to cause the issuance of or an endorsement of any 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 for the Collateral; however, in no event will Lender be liable for failure to collect any amounts payable under any insurance policy. Section 6.8 General Information. Borrower will furnish to Lender such information as Lender may from time to time reasonably request with respect to the business or financial affairs of Borrower, and permit any officer, employee or agent of Lender, during normal business hours and after reasonable prior notice to visit and inspect any of the properties, to examine the minute books, books of account and other records, including management letters prepared by Borrower's auditors, of Borrower, and make copies thereof or extracts therefrom, and to discuss its and their business affairs, finances and accounts with, and be advised as to the same by, the accountants and officers of Borrower. Section 6.9 Maintenance of Property. Borrower will maintain, keep and preserve the Property, the Facilities, the Collateral and all of its properties in good repair, working order and condition and from time to time make all needful and proper repairs, renewals, replacements, betterments and improvements thereto, so that the business carried on in connection therewith may be properly conducted at all times. Section 6.10 Notification of Events of Default and Adverse Developments. Borrower promptly will notify Lender upon the occurrence of: (i) any Event of Default; (ii) any event which, with the giving of notice or lapse of time, or both, could constitute an Event of Default; (iii) any event, development or circumstance whereby the financial statements previously furnished to Lender fail in any material respect to present fairly, in accordance with GAAP, the financial condition and operational results of Borrower; (iv) any judicial, administrative or arbitration proceeding pending against Borrower, and any judicial or administrative proceeding known by Borrower to be threatened against it, which in any case, if 49 adversely decided, could materially and adversely affect its condition (financial or otherwise) or operations (present or prospective) or which may expose Borrower to uninsured liability of $500,000.00 or more; (v) any default claimed by any other creditor for Borrowed Money of Borrower other than Lender in excess of $500,000.00; and (vi) any other development in the business or affairs of Borrower which may be adverse in a material respect to the business, assets or financial condition of Borrower; in each case describing the nature thereof and (in the case of notification under clauses (i) and (ii)) the action Borrower proposes to take with respect thereto. Section 6.11 Employee Benefit Plans. Borrower will (i) comply with the funding requirements of ERISA with respect to the Plans for its employees, or will promptly satisfy any accumulated funding deficiency that arises under Section 302 of ERISA; (ii) furnish Lender, promptly after filing the same, with copies of all reports or other statements filed with the United States Department of Labor, the Pension Benefit Guaranty Corporation, or the Internal Revenue Service with respect to all Plans, or which Borrower, or any member of a Controlled Group, may receive from such Governmental Authority with respect to any such Plans, and (iii) promptly advise Lender of the occurrence of any Reportable Event or Prohibited Transaction with respect to any such Plan and the action which Borrower proposes to take with respect thereto. Borrower will make all contributions when due with respect to any multi-employer pension plan in which it participates and will promptly advise Lender: (i) upon its receipt of notice of the assertion against Borrower of a claim for withdrawal liability; (ii) upon the occurrence of any event which could trigger the assertion of a claim for withdrawal liability against Borrower; and (iii) upon the occurrence of any event which would place Borrower in a Controlled Group as a result of which any member (including Borrower) thereof may be subject to a claim for withdrawal liability, whether liquidated or contingent. Section 6.12 Financing Statements. Borrower shall provide to Lender evidence satisfactory to Lender as to the due recording of termination statements, releases of collateral, releases of liens and Forms UCC-3, and shall cause to be recorded financing statements on Form UCC-1, duly executed by Borrower and Lender, in all places necessary to release all existing security interests and other liens in the Collateral 50 (other than as permitted hereby) and to perfect and protect Lender's first priority lien and security interest in the Collateral, as contemplated herein. Section 6.13 Financial Records. Borrower shall keep current and accurate books of records and accounts in which full and correct entries will be made of all of its business transactions, and will reflect in its financial statements adequate accruals and appropriations to reserves, all in accordance with GAAP. Section 6.14 Collection of Accounts. Borrower shall continue to collect its Accounts in the ordinary course of business. Section 6.15 Places of Business. Borrower shall give thirty (30) days' prior written notice to Lender of any change in the location of any of its Facilities, places of business, of the places where its records concerning its Accounts are kept, of the places where the Collateral is kept, or of the establishment of any new, or the discontinuance of any existing, places of business from or at which Accounts are generated. Section 6.16 Business Conducted. Borrower shall continue in the business presently conducted by it using its best efforts to maintain its customers and goodwill. Borrower shall not engage, directly or indirectly, in any line of business substantially different from the business conducted by it immediately prior to the Closing Date, or engage in business or lines of business which are not reasonably related thereto. Section 6.17 SECTION INTENTIONALLY DELETED. Section 6.18 SECTION INTENTIONALLY DELETED. Section 6.19 Submission of Collateral Documents. Borrower will, upon Lender's reasonable request and subject to applicable laws, make available to Lender copies of medical records, insurance verification forms, assignment of benefits, in-take forms or other proof of the satisfactory performance of services that gave rise to an Account, a copy of the claim or invoice for each Account and copies of any written contract or order from which the Account arose. Borrower shall promptly notify Lender if an Account becomes evidenced or secured by an 51 instrument or chattel paper and upon request of Lender, will promptly deliver any such instrument or chattel paper to Lender. Section 6.20 Licensure; Medicaid/Medicare Cost Reports. Borrower will maintain all certificates of need, provider numbers and licenses necessary to conduct its business as presently conducted, and take any steps required to comply with any such new or additional requirements that may be imposed on providers of medical products and services by Account Debtors. If required, all Medicaid/Medicare cost reports will be properly filed. Section 6.21 Officer's Certificates. Together with the monthly financial statements delivered pursuant to clause (iii) of Section 6.1, and together with the audited annual financial statements delivered pursuant to clause (vi) of that Section, Borrower shall deliver to Lender a certificate of its chief financial officer, in form and substance satisfactory to Lender: (a) Setting forth the information (including detailed calculations) required to establish whether Borrower is in compliance with the requirements of Articles VI and VII as of the end of the period covered by the financial statements then being furnished; and (b) Stating that the signer has reviewed the relevant terms of this Agreement, and has made (or caused to be made under his supervision) a review of the transactions and conditions of Borrower from the beginning of the accounting period covered by the income statements being delivered to the date of the certificate, and that such review has not disclosed, to such officer's knowledge the existence during such period of any condition or event which constitutes an Event of Default or which is then, or with the passage of time or giving of notice or both, could become an Event of Default, and if any such condition or event existed during such period or now exists, specifying the nature and period of existence thereof and what action Borrower has taken or proposes to take with respect thereto. Section 6.22 SECTION INTENTIONALLY DELETED. 52 Section 6.23 Net Worth. Borrower will at all times maintain its consolidated net worth, as computed in accordance with GAAP, in an amount equal to at least $30,000,000 Section 6.24 Ownership of Additional Property. In the event that Borrower acquires the fee simple title to any additional real property for the operation of any nursing home or assisted living facility and Borrower desires to obtain a Real Estate Advance with respect thereto, the Borrower shall cause to be delivered to the Lender an amendment to the Mortgage or an additional lien instrument (as appropriate based on the location of such additional real property), pursuant to which the Borrower shall grant to the Lender a first priority lien on such additional real property, together with all improvements and fixtures thereon. In addition, with respect to all such additional real property for which Borrower desires to obtain a Real Estate Advance, the Borrower shall comply with all provisions of this Agreement as if such real property were originally described herein, and satisfy all Conditions to Real Estate Advances with respect thereto. Notwithstanding the foregoing, Lender acknowledges and agrees that, with respect to all Leasehold Borrowers, the interest being granted is a Leasehold Mortgage. Section 6.25 Updated Appraisals. If any Event of Default has occurred, or if in Lender's reasonable judgment, a material depreciation in the value of the Property shall have occurred, then in any such event, Lender may cause the Property or any portion thereof to be appraised by an appraiser selected by Lender and acceptable to Borrower, and in accordance with Lender's appraisal guidelines and procedures then in effect, and Borrower agrees to cooperate in all respects with such appraisers and furnish to the appraisers all requested information regarding the Property. Lender shall pay all costs incurred by Lender in connection with any such appraisal. Section 6.26 Leases. Borrower shall require any lessees of any Property (but not individual residents) to execute a full subordination of its lease, as well as an estoppel certificate with respect to such lease. Borrower shall require any manager to enter into a subordination agreement with Lender in a form generally used in the industry. Borrower must provide copies of any manager's organizational documents, certificates evidencing existence, qualification, and good standing, and appropriate 53 resolutions authorizing the subordination herein described to Lender for its review and approval. ARTICLE VII NEGATIVE COVENANTS Each entity constituting Borrower covenants and agrees that so long as Borrower may borrow hereunder and until payment and performance in full of all of the Obligations: Section 7.1 Borrowing. Borrower will not create, incur, assume or suffer to exist any liability for Borrowed Money except: (i) indebtedness to Lender; (ii) indebtedness of Borrower secured by Permitted Liens and any refinancing thereof as long as the principal amount of such Indebtedness does not exceed the principal amount of the Indebtedness being refinanced or replaced; (iii) accounts payable to trade creditors and current operating expenses (other than for borrowed money) which are not aged more than one hundred twenty (120) days from the billing date or more than thirty (30) days from the due date, in each case incurred in the ordinary course of business and paid within such time period, unless the same are being contested in good faith and by appropriate and lawful proceedings, and Borrower shall have set aside such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by Borrower and its independent accountants; (iv) borrowings incurred in the ordinary course of its business and not exceeding $500,000.00 in the aggregate outstanding at any one time; (v) borrowings incurred by the Parent not exceeding $500,000 in the aggregate and, subject to the Lender's prior written consent which shall not be unreasonably withheld, borrowings of the Parent exceeding $500,000 in the aggregate incurred for working capital, capital expenditures and general corporate purposes in order to finance (A) the development, leasing, management or operation of assisted living facilities, and (B) the development, purchase, leasing, construction or renovation of the Parent's corporate headquarters facility; and (vi) borrowings pursuant to an equipment lease facility pursuant to which Borrower shall lease or purchase equipment for use at the Property or any Facility; and (vii) borrowings secured by the Mortgage. Borrower will not make prepayments on any existing or future indebtedness for Borrowed Money in excess of $500,000.00 to any Person (other than Lender, to the extent 54 permitted by this Agreement or any subsequent agreement between Borrower and Lender). Section 7.2 Borrowing Base Covenant. Borrower will not permit the aggregate outstanding principal balance of all Revolving Credit Loans to exceeds the applicable Accounts Receivable Borrowing Base and the applicable Real Estate Borrowing Base then in effect. Section 7.3 Liens and Encumbrances. Borrower will not create, incur, assume or suffer to exist any mortgage, pledge, lien or other encumbrance of any kind (including the charge upon property purchased under a conditional sale or other title retention agreement) upon, or any security interest in, any of its Collateral or the Property, whether now owned or hereafter acquired, except for the Permitted Liens and liens securing any liability for Borrowed Money permitted under Section 7.1 hereof. Section 7.4 Restriction on Fundamental Changes. Except as described in Sections 7.7 and 7.12 hereof, Borrower will not: (i) enter into any transaction of merger or consolidation except with another Borrower without Lender's consent, which shall not be unreasonably withheld; (ii) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution); or (iii) except between Borrowers, convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, any substantial amount of its assets (and in no event shall any Borrower dispose of the Property or any portion thereof), or the capital stock of any subsidiary of Borrower, whether now owned or hereafter acquired. Consistent with the foregoing, until the Obligations are repaid in full, none of the entities comprising Borrower shall transfer, assign, convey or grant to any other Person the right to operate or control any Property or any Accounts Receivable Facility, whether by lease, sublease, management agreement, joint venture agreement or otherwise except to another Borrower and/or an Affiliate of Borrower; provided, however that Borrower may dispose of any Property (and any collateral associated with such Property) so long as the Borrower complies with the requirements set forth in Section 2.10. Section 7.5 SECTION INTENTIONALLY DELETED. 55 Section 7.6 Dividends, Distributions and Management Fees. Upon notice from Lender to Borrower of the existence of an uncured Event of Default hereunder, Borrower will not declare or pay any dividends or other distributions with respect to, purchase, redeem or otherwise acquire for value any of its outstanding stock now or hereafter outstanding, or return any capital of its stockholders, nor shall Borrower pay management fees or fees of a similar nature to any Affiliate. So long as no Event of Default has occurred and is continuing, each Borrower may pay management fees to any affiliate in an amount not to exceed 6% of the gross revenues of such Borrower. Section 7.7 Loans. No Borrower will make loans or advances to any Person, other than (a) trade credit extended in the ordinary course of its business, (b) advances for business travel and similar temporary advances in the ordinary course of business to officers, stockholders, directors, and employees, (c) loans to other Borrowers, and (d) transactions with Affiliates that are not prohibited by Section 7.12 Section 7.8 SECTION INTENTIONALLY DELETED. Section 7.9 SECTION INTENTIONALLY DELETED. Section 7.10 Compliance with ERISA. Borrower will not permit with respect to any Plan covered by Title IV of ERISA any Prohibited Transaction or any Reportable Event. Section 7.11 Certificates of Need. Borrower will not amend, alter or suspend or terminate or make provisional in any material way, any certificate of need or provider number without the prior written consent of Lender, which shall not be unreasonably withheld. Section 7.12 Transactions with Affiliates. No Borrower other than the Parent will enter into any transaction with any Affiliate, including without limitation the purchase, sale, or exchange of property, except in the ordinary course of business and pursuant to the reasonable requirements of such Borrower's business and upon terms substantially the same and not materially less favorable to such Borrower as it would obtain in a comparable arm's length transaction with any Person not an Affiliate or subsidiary, and so long as the transaction is not 56 otherwise prohibited hereunder. For purposes of the foregoing, Lender consents to the transactions described on Schedule 7.12. Section 7.13 Use of Lender's Name. Borrower will not use Lender's name (or the name of any of Lender's affiliates) in connection with any of its business operations. Borrower may disclose to third parties that Borrower has a borrowing relationship with Lender. Nothing herein contained is intended to permit or authorize Borrower to make any contract on behalf of Lender. Section 7.14 Change in Capital Structure. There shall occur no change in Borrower's capital structure as set forth in Schedule 4.17 which results in the Parent or any other Borrower failing to control or own any Borrower. Section 7.15 Contracts and Agreements. Borrower will not become or be a party to any contract or agreement which would breach this Agreement. Section 7.16 SECTION INTENTIONALLY DELETED. Section 7.17 Truth of Statements and Certificates. Borrower will not knowingly furnish to Lender any certificate or other document that contains any untrue statement of a material fact or that omits to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. Section 7.18 SECTION INTENTIONALLY DELETED. Section 7.19 Change of Use or Entering into Lease or Management Agreement. The Borrower shall not materially alter or change the use of any Property or enter into any management agreement or lease for any Property, unless Borrower first notifies Lender and provides Lender a copy of the proposed management agreement or lease and obtains Lender's written consent thereto, which consent shall not be unreasonably withheld. Lender shall be deemed to have consented to any proposed agreement unless Lender notifies Borrower in writing of its specific objections thereto within 15 days of receipt thereof. 57 ARTICLE VIII EVENTS OF DEFAULT Section 8.1 Events of Default. Each of the following (individually, an "Event of Default" and collectively, the "Events of Default") shall constitute an event of default hereunder: (a) A default in the payment of any installment of principal of, or interest upon, the Note when due and payable, whether at maturity or otherwise, or any breach of Section 2.3 of this Agreement, which default or breach, as applicable, shall have continued unremedied for a period of five (5) days after written notice thereof from Lender to Borrower; (b) A default in the payment of any other charges, fees, or other monetary obligations owing to Lender arising out of or incurred in connection with this Agreement or the Mortgage when such payment is due and payable, which default shall have continued unremedied for a period of five (5) days after written notice from Lender; (c) A default in the due observance or performance by Borrower of any other term, covenant or agreement contained in this Agreement, the Mortgage or any of the other Loan Documents, which default shall have continued unremedied for a period of twenty (20) days after written notice from Lender; provided, however, that no such Event of Default shall occur if Borrower diligently, continuously and in good faith pursues such cure and such cure is capable of cure within 90 days; (d) If any representation or warranty made by Borrower herein or in any of the other Loan Documents, any financial statement, or any statement or representation made in any other certificate, report or opinion delivered by Borrower in connection herewith or therewith proves to have been incorrect or misleading in any material respect when made, which default shall have continued unremedied for a period of twenty (20) days after written notice from Lender; (e) If any obligation of Borrower (other than its Obligations hereunder) for the payment of Borrowed Money in excess of $500,000.00 is not paid when due or within any applicable grace period, or such obligation becomes or is 58 declared to be due and payable prior to the expressed maturity thereof, or there shall have occurred an event which, with the giving of notice or lapse of time, or both, would cause any such obligation to become, or allow any such obligation to be declared to be, due and payable; (f) If Borrower makes an assignment for the benefit of creditors, offers a composition or extension to creditors, or makes or sends notice of an intended bulk sale of any business or assets now or hereafter conducted by Borrower to any Person other than another Borrower; (g) If Borrower files a petition in bankruptcy, is adjudicated insolvent or bankrupt, petitions or applies to any tribunal for any receiver of or any trustee for itself or any substantial part of its property, commences any proceeding relating to itself under any reorganization, arrangement, readjustment or debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or there is commenced against Borrower any such proceeding which remains undismissed for a period of sixty (60) days, or any Borrower by any act indicates its consent to, approval of, or acquiescence in, any such proceeding or the appointment of any receiver of or any trustee for a Borrower or any substantial part of its property, or suffers any such receivership or trusteeship to continue undischarged for a period of sixty (60) days; (h) If one or more final judgments against Borrower in excess of $500,000.00 or attachments against its property not fully and unconditionally covered by insurance shall be rendered by a court of record and shall remain unpaid, unstayed on appeal, undischarged, unbonded and undismissed for a period of twenty (20) days; (i) A Reportable Event which might constitute grounds for termination of any Plan covered by Title IV of ERISA or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan or for the entry of a lien or encumbrance to secure any deficiency, has occurred and is continuing thirty (30) days after its occurrence, or any such Plan is terminated, or a trustee is appointed by an appropriate United States District Court to administer any such Plan, or the Pension Benefit Guaranty Corporation institutes proceedings to 59 terminate any such Plan or to appoint a trustee to administer any such Plan, or a lien or encumbrance is entered to secure any deficiency or claim; (j) If a default or event of default occurs under any mortgage, deed of trust or security instrument granted by any Borrower and covering any Property, which is not cured within the applicable cure or grace period thereunder; (k) If there shall occur any uninsured damage to or loss, theft or destruction of any portion of the Collateral in excess of $500,000.00; (l) An Event of Default occurs under any other existing or future agreement (related or unrelated) between Borrower and Lender, or between Borrower and any Affiliate of Lender and such Event of Default is not cured within any applicable cure or grace period; (m) Upon the issuance of any execution or distraint process against Borrower or a material portion of the Collateral any of its property or assets; (n) If Borrower ceases any material portion of its business operations as presently conducted; (o) Borrower or any Affiliate of Borrower, shall challenge or contest, in any action, suit or proceeding, the validity or enforceability of this Agreement, or any of the other Loan Documents, the legality or the enforceability of any of the Obligations or the perfection or priority of any Lien granted to Lender; (p) Borrower shall be criminally indicted or convicted under any law that could lead to a forfeiture of any Collateral; (q) There shall occur a material adverse change in the financial condition or business prospects of Borrower as a whole, which default shall have continued unremedied for a period of fifteen (15) days after written notice from Lender; or (r) An Event of Default occurs under any other Loan Document. 60 Section 8.2 Acceleration. Upon the occurrence of any of the foregoing Events of Default, the Note shall become and be immediately due and payable upon declaration to that effect delivered by Lender to Borrower; provided that, upon the happening of any event specified in Section 8.1(g) hereof, the Note shall be immediately due and payable without declaration or other notice to Borrower. Section 8.2 Remedies. (a) In addition to all other rights, options, and remedies granted to Lender under this Agreement, upon the occurrence of an Event of Default Lender may (i) terminate the Loan, whereupon all outstanding Obligations shall be immediately due and payable, (ii) exercise all other rights granted to it hereunder and all rights under the Uniform Commercial Code in effect in the applicable jurisdiction(s) and under any other applicable law, and (iii) exercise all rights and remedies under the Mortgage and all other Loan Documents now or hereafter in effect, including the following rights and remedies (which list is given by way of example and is not intended to be an exhaustive list of all such rights and remedies): (i) The right to take possession of, send notices regarding, and collect directly the Collateral, with or without judicial process, and to exercise all rights and remedies available to Lender with respect to the Collateral under the Uniform Commercial Code in effect in the jurisdiction(s) in which such Collateral is located; (ii) The right to (by its own means or with judicial assistance) enter any of Borrower's premises and take possession of the Collateral, or render it unusable, or dispose of the Collateral on such premises in compliance with subsection (b), without any liability for rent, storage, utilities, or other sums, and Borrower shall not resist or interfere with such action; (iii) The right to require Borrower at Borrower's expense to assemble all or any part of the Collateral and make it available to Lender at any place designated by Lender; 61 (iv) The right to reduce the Maximum Loan Amount or to use the Collateral and/or funds in the Depository Account and/or Concentration Account to reduce the Obligations; (v) The right to relinquish or abandon any Collateral or any security interest therein; and (vi) The right to foreclose its lien upon all or any other portion of the Property and otherwise exercise its rights and remedies under the Mortgage and applicable law. (b) Borrower agrees that a notice received by it at least ten (10) days before the time of any intended public sale, or the time after which any private sale or other disposition of the Collateral is to be made, shall be deemed to be reasonable notice of such sale or other disposition. If permitted by applicable law, any perishable Collateral which threatens to speedily decline in value or which is sold on a recognized marked may be sold immediately by Lender without prior notice to Borrower. At any sale or disposition of Collateral, Lender may (to the extent permitted by applicable law) purchase all or any part of the Collateral, free from any right of redemption by Borrower, which right is hereby waived and released. Borrower covenants and agrees not to interfere with or impose any obstacle to Lender's exercise of its rights and remedies with respect to the Collateral in accordance with applicable law. Section 8.4 Nature of Remedies. Lender shall have the right to proceed against all or any portion of the Collateral to satisfy the liabilities and Obligations of Borrower to Lender in any order. All rights and remedies granted Lender hereunder and under any agreement referred to herein, or otherwise available at law or in equity, shall be deemed concurrent and cumulative, and not alternative remedies, and Lender may proceed with any number of remedies at the same time until the Loans, and all other existing and future liabilities and obligations of Borrower to Lender, are satisfied in full. The exercise of any one right or remedy shall not be deemed a waiver or release of any other right or remedy, and Lender, upon the occurrence of an Event of Default, may proceed against Borrower, and/or the Collateral, at any time, under any agreement, with any available remedy and in any order. 62 ARTICLE IX MISCELLANEOUS Section 9.1 Expenses and Taxes. (a) Borrower agrees to pay, whether or not the Closing occurs, a reasonable documentation preparation fee equal to $17,000, together with actual audit and appraisal fees and all other out-of-pocket charges and expenses incurred by Lender in connection with the negotiation, preparation, execution and recordation of the Loan Documents and preparation for Closing, including (without limitation) all title premiums and search charges, recordation and transfer taxes and fees, UCC filing fees, and all other amounts incurred in connection therewith. The maximum amount of such closing costs for which Borrower shall be responsible shall not exceed $17,000, excluding the Commitment Fee and the Structuring Fee (as defined in the Term Note) equal to $50,000, minus $10,000 (i.e., $40,000) credited by Lender, all title premiums, title search costs and other charges of the Title Company, recording fees and recordation and transfer taxes (if any), for which the Borrower shall be responsible. In addition, Borrower shall pay all reasonable fees associated with any amendments to the Loan Documents following Closing. Borrower also agrees to pay all reasonable out-of-pocket charges and expenses incurred by Lender (including the fees and expenses of Lender's counsel) in connection with the enforcement, protection or preservation of any right or claim of Lender and the collection of any amounts due under the Loan Documents. (b) Borrower shall pay all taxes (other than taxes based upon or measured by Lender's income or revenues or any personal property tax), if any, in connection with the issuance of the Note and the recording of the security documents therefor. The obligations of Borrower under this clause (b) shall survive the payment of Borrower's indebtedness hereunder and the termination of this Agreement. Section 9.2 Entire Agreement; Amendments. This Agreement and the other Loan Documents constitute the full and entire understanding and agreement among the parties with regard to their subject matter and supersede all prior written or oral agreements, understandings, representations and warranties made with respect thereto. No amendment, supplement or modification 63 of this Agreement nor any waiver of any provision thereof shall be made except in writing executed by the party against whom enforcement is sought. Section 9.3 No Waiver; Cumulative Rights. No waiver by any party hereto of any one or more defaults by the other party in the performance of any of the provisions of this Agreement shall operate or be construed as a waiver of any future default or defaults, whether of a like or different nature. No failure or delay on the part of any party in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to any party hereto at law, in equity or otherwise. Section 9.4 Notices. Any notice or other communication required or permitted hereunder shall be in writing and personally delivered, mailed by registered or certified mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice hereunder: (a) If to Lender, at: HCFP Funding, Inc. 2 Wisconsin Circle, 4th floor Chevy Chase, Maryland 20815 Attention: Ethan D. Leder, President Telephone: (301) 961-1640 Telecopier: (301) 664-9866 (b) If to Borrower, at: c/o Balanced Care Corporation 5021 Louise Drive Suite 200 Mechanicsburg, PA 17055 Attention: Clint Fegan, Chief Financial Officer 64 Telephone: (717) 796-6187 Telecopier: (717) 796-6150 With a copy to: Wolf, Block, Schorr and Solis-Cohen LLP 12th Floor Packard Building Philadelphia, PA 19102-2678 Attention: John M. Coogan, Jr., Esquire Telephone: (215) 977-2012 Telecopier: (215) 977-2334 If mailed, notice shall be deemed to be given five (5) days after being sent, if sent by personal delivery or telecopier, notice shall be deemed to be given when delivered, and if sent by prepaid courier, notice shall be deemed to be given on the next Business Day following deposit with the courier. Section 9.5 Severability. If any term, covenant or condition of this Agreement, or the application of such term, covenant or condition to any party or circumstance shall be found by a court of competent jurisdiction to be, to any extent, invalid or unenforceable, the remainder of this Agreement and the application of such term, covenant, or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition shall be valid and enforced to the fullest extent permitted by law. Upon determination that any such term is invalid, illegal or unenforceable, the parties hereto shall amend this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner. Section 9.6 Successors and Assigns. This Agreement, the Note, the Mortgage and the other Loan Documents shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns. Notwithstanding the foregoing, Borrower may not assign any of its rights or delegate any of its obligations hereunder without the prior written consent of Lender, which may be withheld in its sole discretion. Lender may sell, assign, transfer, or participate any or all of its rights or obligations hereunder without notice to or consent of Borrower. 65 Section 9.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute but one instrument. Section 9.8 Interpretation. No provision of this Agreement or any other Loan Document shall be interpreted or construed against any party because that party or its legal representative drafted that provision. The titles of the paragraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. Any pronoun used in this Agreement shall be deemed to include singular and plural and masculine, feminine and neuter gender as the case may be. The words "herein," "hereof," and "hereunder" shall be deemed to refer to this entire Agreement, except as the context otherwise requires. Section 9.9 Survival of Terms. All covenants, agreements, representations and warranties made in this Agreement, any other Loan Document, and in any certificates and other instruments delivered in connection therewith shall be considered to have been relied upon by Lender and shall survive the making by Lender of the Loans herein contemplated and the execution and delivery to Lender of the Note, and shall continue in full force and effect until all liabilities and obligations of Borrower to Lender are satisfied in full. Section 9.10 Release of Lender. Borrower releases Lender, its officers, employees, and agents, of and from any claims for loss or damage resulting from acts or conduct of any or all of them, unless caused by Lender's recklessness, gross negligence, or willful misconduct. Section 9.11 Time. Whenever Borrower is required to make any payment or perform any act on a Saturday, Sunday, or a legal holiday under the laws of the State of Maryland (or other jurisdiction where Borrower is required to make the payment or perform the act), the payment may be made or the act performed on the next Business Day. Time is of the essence in Borrower's performance under this Agreement and all other Loan Documents. Section 9.12 Commissions. The transaction contemplated by this Agreement was brought about by Lender and Borrower acting as principals and without any brokers, agents, or finders 66 being the effective procuring cause. Borrower represents that it has not committed Lender to the payment of any brokerage fee, commission, or charge in connection with this transaction. If any such claim is made on Lender by any broker, finder, or agent or other person claiming by or through Borrower, Borrower will indemnify, defend, and hold Lender harmless from and against the claim and will defend any action to recover on that claim, at Borrower's cost and expense, including Lender's counsel fees. Borrower further agrees that until any such claim or demand is adjudicated in Lender's favor, the amount demanded will be deemed a liability of Borrower under this Agreement, secured by the Collateral. Section 9.13 Third Parties. No rights are intended to be created hereunder or under any other Loan Document for the benefit of any third party donee, creditor, or incidental beneficiary of Borrower. Nothing contained in this Agreement shall be construed as a delegation to Lender of Borrower's duty of performance, including without limitation Borrower's duties under any account or contract in which Lender has a security interest. Section 9.14 Discharge of Borrower's Obligations. Lender, in its sole discretion, shall have the right at any time, and from time to time, following prior notice to Borrower if Borrower fails to do so, to: (i) obtain insurance covering any of the Collateral as required hereunder; (ii) pay for the performance of any of Borrower's obligations hereunder; (iii) discharge taxes, liens, security interests, or other encumbrances at any time levied or placed on any of the Collateral in violation of this Agreement unless Borrower is in good faith with due diligence by appropriate proceedings contesting those items; and (iv) pay for the maintenance and preservation of any of the Collateral. Expenses and advances shall be added to the Loan, until reimbursed to Lender and shall be secured by the Collateral. Any such payments and advances by Lender shall not be construed as a waiver by Lender of an Event of Default. Section 9.14 Information to Participants. Lender may divulge to any participant it may obtain in the Loan, or any portion thereof, all information, and furnish to such participant copies of reports, financial statements, certificates, and documents obtained under any provision of this 67 Agreement or any other Loan Document, provided Lender obtains the written consent of such participant to hold such items as confidential and proprietary information of Borrower. Section 9.15 Indemnity. Borrower hereby agrees to indemnify and hold harmless Lender, its partners, officers, agents and employees (collectively, "Indemnitee") from and against any liability, loss, cost, expense, claim, damage, suit, action or proceeding ever suffered or incurred by Lender (including reasonable attorneys' fees and expenses) arising from an Event of Default. In addition, Borrower shall defend Indemnitee against and save it harmless from all claims of any Person with respect to the Collateral. Notwithstanding any contrary provision in this Agreement, the obligation of Borrower under this Section 9.16 shall survive the payment in full of the Obligations and the termination of this Agreement. Section 9.16 Choice of Law; Consent to Jurisdiction. THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. IF ANY ACTION ARISING OUT OF THIS AGREEMENT OR THE NOTE IS COMMENCED BY LENDER IN THE STATE COURTS OF THE STATE OF MARYLAND OR IN THE U.S. DISTRICT COURT FOR THE DISTRICT OF MARYLAND, BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH ACTION AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND. ANY PROCESS IN ANY SUCH ACTION SHALL BE DULY SERVED IF MAILED BY REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS DESCRIBED IN SECTION 9.4 HEREOF. Section 9.17 Waiver of Trial by Jury. BORROWER HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY BORROWER, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF BORROWER'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING LENDER'S COUNSEL) 68 HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO BORROWER THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. [SIGNATURES ON FOLLOWING PAGE] 69 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above. LENDER: ATTEST: HCFP FUNDING, INC. a Delaware corporation By: /s/ Debra M. Van Alstyne By: /s/ Michael Gardullo [SEAL] Name: Debra M. Van Alstyne Name: Michael Gardullo Title: Vice President Title: Vice President BORROWER: ATTEST: BALANCED CARE CORPORATION a Delaware corporation By:/s/ Robin L. Barber By:/s/ Robert J. Sutton[SEAL] Name: Robin L. Barber Name: Robert J. Sutton Title: Vice President - Title: Vice President - Legal Affairs, Corporate Services and Assistant Secretary Secretary ATTEST: BCC AT HERMITAGE PARK CARE CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary 70 ATTEST: BCC AT LEBANON CARE CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT LEBANON PARK MANOR, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT MT. VERNON PARK CARE CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT MT. VERNON PARK CARE CENTER WEST, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary 71 ATTEST: BCC AT NEVADA PARK CARE CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT NIXA PARK CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT REPUBLIC PARK CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT SPRINGFIELD CARE CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary 72 ATTEST: DIXON MANAGEMENT, INC. a Missouri corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT DARLINGTON, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BALANCED CARE AT EYERS GROVE, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BALANCED CARE AT BUTLER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary 73 ATTEST: BALANCED CARE AT SARVER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BALANCED CARE AT NORTH RIDGE, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary 74 EXHIBIT F LIST OF ACCOUNTS RECEIVABLE FACILITIES and ACCOUNTS RECEIVABLE BORROWERS 1. The "Accounts Receivable Facilities" and the "Accounts Receivable Borrowers" are as follows: BCC AT HERMITAGE PARK CARE CENTER, INC., doing business as Balanced Care, Hermitage Highway 54 and 1st Street Hermitage, MO 65668 BCC AT LEBANON CARE CENTER, INC., doing business as Balanced Care, Lebanon North 596 Morton Road Lebanon, MO 65536 BCC AT LEBANON PARK MANOR, INC., doing business as Balanced Care, Lebanon South 514 W. Fremont Road Lebanon, MO 65536 BCC AT MT. VERNON PARK CARE CENTER, INC., doing business as Balanced Care, Springfield West II 3403 West Mt. Vernon Springfield, MO 65802 BCC AT MT. VERNON PARK CARE CENTER WEST, INC., doing business as Balanced Care, Springfield West I 3403 West Mt. Vernon Springfield, MO 65802 BCC AT NEVADA PARK CARE CENTER, INC., doing business as Balanced Care, Nevada 700 East Highland Nevada, MO 64772 BCC AT NIXA PARK CENTER, INC., doing business as Balanced Care, Nixa 1104 North Main Nixa, MO 65714 75 BCC AT REPUBLIC PARK CENTER, INC., doing business as Balanced Care, Republic 901 East Highway 174 Republic, MO 65738 BCC AT SPRINGFIELD CARE CENTER, INC., doing business as Balanced Care, Springfield East 3535 East Cherokee Springfield MO 65809 DIXON MANAGEMENT INC., doing business as Balanced Care, Dixon 301 East 10th Street Dixon, MO 65459 EX-10.2 3 REVOLVING CREDIT NOTE FROM BALANCED CARE CORP. 1 Exhibit 10.2 REVOLVING CREDIT NOTE $15,000,000.00 April 22, 1999 FOR VALUE RECEIVED, the undersigned, by and among BALANCED CARE CORPORATION, a Delaware corporation, BALANCED CARE CORPORATION, a Delaware corporation, BCC AT HERMITAGE PARK CARE CENTER, INC., a Delaware corporation, BCC AT LEBANON CARE CENTER, INC., a Delaware corporation, BCC AT LEBANON PARK MANOR, INC., a Delaware corporation, BCC AT MT. VERNON PARK CARE CENTER, INC., a Delaware corporation, BCC AT MT. VERNON PARK CARE CENTER WEST, INC., a Delaware corporation, BCC AT NEVADA PARK CARE CENTER, INC., a Delaware corporation, BCC AT NIXA PARK CENTER, INC., a Delaware corporation, BCC AT REPUBLIC PARK CENTER, INC., a Delaware corporation, BCC AT SPRINGFIELD CARE CENTER, INC., a Delaware corporation, DIXON MANAGEMENT INC., a Missouri corporation, BCC AT DARLINGTON, INC., a Delaware corporation, BALANCED CARE AT EYERS GROVE, INC., a Delaware corporation, BALANCED CARE AT BUTLER, INC., a Delaware corporation, BALANCED CARE AT SARVER, INC., a Delaware corporation, BALANCED CARE AT NORTH RIDGE, INC., a Delaware corporation (collectively and individually, the "Borrower") jointly and severally, promise to pay, in lawful money of the United States, to the order of HCFP FUNDING, INC., a Delaware corporation ("Lender"), the principal sum of Fifteen Million and No/100 Dollars ($15,000,000.00), or so much thereof as shall be advanced or readvanced and shall remain unpaid under the Loan established pursuant to that certain Loan and Security Agreement by and among the undersigned and Lender (as amended from time to time, the "Loan Agreement"), plus interest on the unpaid balance thereof, computed on a 360-day basis, at the rate per annum that is set forth in the Loan Agreement. All capitalized terms used, and not otherwise specifically defined, in this Revolving Credit Note ("Note") shall have the meanings ascribed to them in the Loan Agreement. This Note shall evidence the undersigned's obligation to repay all sums advanced by Lender from time to time under and as part of the Loan. The actual amount due and owing from time to time under this Note shall be evidenced by Lender's records of receipts and disbursements with respect to the Loan, which shall, subject to the provisions of Section 2.2(e) of the Loan Agreement be conclusive evidence of that amount, absent manifest error. 2 Interest hereon shall be payable monthly, in arrears, on the first Business Day of each month hereafter (for the previous month). For purposes of this Note, a "Business Day" shall mean any day on which banks are open for business in Maryland, excluding Saturdays and Sundays. This Note shall become due and payable upon the earlier to occur of (i) the expiration of the Term, or (ii) any Event of Default under the Loan Agreement. At such time, the entire principal balance of this Note and all other fees, costs and expenses, if any, shall be due and payable in full. Lender shall then have the option at any time and from time to time to exercise all of the rights and remedies set forth in this Note and in the other Loan Documents, as well as all rights and remedies otherwise available to Lender at law or in equity, to collect the unpaid indebtedness under this Note and the other Loan Documents. This Note is secured by the Collateral, as defined in and described in the Loan Agreement. This Note is secured by the Mortgage (as defined in the Loan Agreement.) Whenever any principal and/or interest and/or fee under this Note shall not be paid when due, whether at the stated maturity or by acceleration, interest on such unpaid amounts shall thereafter be payable at a rate per annum equal to five percentage points above the stated rate of interest on this Note until such amounts shall be paid. The undersigned and Lender intend to conform strictly to the applicable usury laws in effect from time to time during the term of the Loan. Accordingly, if any transaction contemplated hereby would be usurious under such laws, then notwithstanding any other provision hereof: (a) the aggregate of all interest that is contracted for, charged, or received under this Note or under any other Loan Document shall not exceed the maximum amount of interest allowed by applicable law, and any excess shall be promptly credited to the undersigned by Lender (or, to the extent that such consideration shall have been paid, such excess shall be promptly refunded to the undersigned by Lender); (b) neither the undersigned nor any other Person (as defined in the Loan Agreement) now or hereafter liable hereunder shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum interest permitted by applicable law; and (c) the effective rate of interest shall be reduced to the Highest Lawful Rate (as defined in the Loan Agreement). All sums paid, or agreed to be paid, to Lender for the use, forbearance, and detention of the debt of Borrower to Lender shall, to the extent permitted by applicable law, be allocated 2 3 throughout the full term of this Note until payment is made in full so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term thereof. If at any time the rate of interest under the Note exceeds the Highest Lawful Rate, the rate of interest to accrue pursuant to this Note shall be limited, notwithstanding anything to the contrary herein, to the Highest Lawful Rate, but any subsequent reductions in the Base Rate shall not reduce the interest to accrue pursuant to this Note below the Highest Lawful Rate until the total amount of interest accrued equals the amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had at all times been in effect. If the total amount of interest paid or accrued pursuant to this Note under the foregoing provisions is less than the total amount of interest that would have accrued if a varying rate per annum equal to the interest rate under this Note had been in effect, then the undersigned agrees to pay to Lender an amount equal to the difference between (a) the lesser of (i) the amount of interest that would have accrued if the Highest Lawful Rate had at all times been in effect, or (ii) the amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had at all times been in effect, and (b) the amount of interest accrued in accordance with the other provisions of this Note and the Loan Agreement. This Note is the "Note" referred to in the Loan Agreement and the Mortgage, and is issued pursuant to the Loan Agreement. Reference is made to the Loan Agreement for a statement of the additional rights and obligations of the undersigned and Lender. In the event of any conflict between the terms hereof and the terms of the Loan Agreement, the terms of the Loan Agreement shall prevail. All of the terms, covenants, provisions, conditions, stipulations, promises and agreements contained in the Loan Documents to be kept, observed and/or performed by the undersigned are made a part of this Note and are incorporated herein by this reference to the same extent and with the same force and effect as if they were fully set forth herein, and the undersigned promises and agrees to keep, observe and perform them or cause them to be kept, observed and performed, strictly in accordance with the terms and provisions thereof. Each party liable hereon in any capacity, whether as maker, endorser, surety, guarantor or otherwise, (i) waives presentment for payment, demand, protest and notice of presentment, notice of protest, notice of non-payment and notice of dishonor of this debt and each and every other notice of any kind respecting this 3 4 Note and all lack of diligence or delays in collection or enforcement hereof, except such notices as are contemplated in the Loan Agreement, (ii) agrees that Lender and any subsequent holder of this Note, at any time or times, without notice to the undersigned or its consent, may grant extensions of time, without limit as to the number of the aggregate period of such extensions, for the payment of any principal, interest or other sums due hereunder, (iii) to the extent permitted by law, waives all exemptions under the laws of the State of Maryland and/or any state or territory of the United States, (iv) to the extent permitted by law, waives the benefit of any law or rule of law intended for its advantage or protection as an obligor hereunder or providing for its release or discharge from liability hereon, in whole or in part, on account of any facts or circumstances other than full and complete payment of all amounts due hereunder, and (v) agrees to pay, in addition to all other sums of money due, all costs of collection and reasonable attorney's fees, whether suit be brought or not, if this Note is not paid in full when due, whether at the stated maturity or by acceleration. No waiver by Lender or any subsequent holder of this Note of any one or more defaults by the undersigned in the performance of any of its obligations hereunder shall operate or be construed as a waiver of any future default or defaults, whether of a like or different nature. No failure or delay on the part of Lender in exercising any right, power or remedy under this Note (including, without limitation, the right to declare this Note due and payable) shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. If any term, covenant or condition of this Note, or the application of such term, covenant or condition to any party or circumstance shall be found by a court of competent jurisdiction to be, to any extent, invalid or unenforceable, the remainder of this Note and the application of such term, covenant, or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition shall be valid and enforced to the fullest extent permitted by law. Upon determination that any such term is invalid, illegal or unenforceable, the undersigned shall cooperate with Lender to amend this Note so as to effect the original intent of the parties as closely as possible in an acceptable manner. No amendment, supplement or modification of this Note nor any waiver of any provision hereof shall be made except in 4 5 writing executed by the party against whom enforcement is sought. This Note shall be binding upon the undersigned and its successors and assigns. Notwithstanding the foregoing, the undersigned may not assign any of its rights or delegate any of its obligations hereunder without the prior written consent of Lender, which may be withheld in its sole discretion. THIS NOTE IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND WITHOUT RESPECT TO ANY OTHERWISE APPLICABLE CONFLICTS-OF-LAWS PRINCIPLES, BOTH AS TO INTERPRETATION AND PERFORMANCE, AND THE PARTIES EXPRESSLY CONSENT AND AGREE TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF MARYLAND AND THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND, WAIVING ALL CLAIMS OR DEFENSES BASED ON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE, INCONVENIENT FORUM OR THE LIKE. BORROWER HEREBY CONSENTS TO SERVICE OF PROCESS BY MAILING A COPY OF THE SUMMONS TO BORROWER, BY CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER'S ADDRESS SET FORTH IN SECTION 9.4 OF THE LOAN AGREEMENT. BORROWER FURTHER WAIVES ANY CLAIM FOR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY LENDER IN GOOD FAITH. THE UNDERSIGNED HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY THE UNDERSIGNED, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS NOTE TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF THE UNDERSIGNED'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, THE UNDERSIGNED HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING LENDER'S COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO ANY BORROWER THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. 5 6 IN WITNESS WHEREOF, the undersigned have executed this Note as of the date first above written. BORROWER: ATTEST: BALANCED CARE CORPORATION a Delaware corporation By:/s/ Robin L. Barber By:/s/ Robert J. Sutton[SEAL] Name: Robin L. Barber Name: Robert J. Sutton Title: Vice President - Title: Vice President - Legal Affairs, Corporate Services and Assistant Secretary Secretary ATTEST: BCC AT HERMITAGE PARK CARE CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT LEBANON CARE CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT LEBANON PARK MANOR, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary 6 7 ATTEST: BCC AT MT. VERNON PARK CARE CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT MT. VERNON PARK CARE CENTER WEST, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT NEVADA PARK CARE CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT NIXA PARK CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary 7 8 ATTEST: BCC AT REPUBLIC PARK CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT SPRINGFIELD CARE CENTER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: DIXON MANAGEMENT, INC. a Missouri corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BCC AT DARLINGTON, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary 8 9 ATTEST: BALANCED CARE AT EYERS GROVE, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BALANCED CARE AT BUTLER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BALANCED CARE AT SARVER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BALANCED CARE AT NORTH RIDGE, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary 9 EX-10.3 4 ENVIRONMENTAL INDEMNITY AGREEMENT BY BALANCED CARE 1 Exhibit 10.3 ENVIRONMENTAL INDEMNITY AGREEMENT THIS ENVIRONMENTAL INDEMNITY AGREEMENT (the "Agreement") is made this 22nd day of April, 1999 by and among BALANCED CARE CORPORATION, a Delaware corporation, BCC AT DARLINGTON, INC., a Delaware corporation, BALANCED CARE AT BUTLER, INC., a Delaware corporation, BALANCED CARE AT SARVER, INC., a Delaware corporation, BALANCED CARE AT NORTH RIDGE, INC., a Delaware corporation, BALANCED CARE AT EYERS GROVE, INC., a Delaware corporation (collectively and individually, the "Borrower"), in favor of HCFP FUNDING, INC., a Delaware corporation, having its principal office at Two Wisconsin Circle, Fourth Floor, Chevy Chase, Maryland 20815 ("Lender"). RECITALS A. Borrower is the owner of certain real and personal property known, as more particularly described in Exhibit A attached hereto and made a part hereof by this reference (collectively, the "Property"). B. Borrower has asked the Lender to make a revolving credit loan available to the Borrower in the principal amount of $15,000,000 (the "Loan"), and the Lender has agreed to make the Loan, provided (among other things) (i) the Borrower agrees to execute and deliver those security instruments listed and described in Exhibit B attached hereto and made a part hereof by this reference (as amended, modified, supplemented and restated from time to time, collectively, the "Mortgage"), covering the Property (as defined in the Mortgage) and securing the Borrower's obligations to the Lender in connection with the Loan (the "Obligations"), and (ii) the Borrower executes and delivers this Agreement in favor of Lender. AGREEMENT NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Borrower hereby agrees as follows: 1. Unless otherwise defined herein, all capitalized terms used herein shall have the meanings assigned to such terms in that certain Loan and Security Agreement of even date herewith 2 made by and between Lender and Borrower and pursuant to which Lender has agreed to make the Loan (as amended, modified and restated from time to time, the "Loan Agreement") In addition, for the purposes of this Agreement, the following terms shall have the meanings set forth below: "Environmental Laws" shall mean all provisions of laws, statutes, ordinances, rules, regulations, permits, licenses, judgments, writs, injunctions, decrees, orders, awards and standards promulgated by any Governmental Authority concerning the protection of, or regulation of the discharge of substances into, the environment or concerning the health or safety of persons with respect to environmental hazards, and includes, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. Section 9601 et seq., the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Solid and Hazardous Waste Amendments of 1984, 42 U.S.C. Section 6901 et seq., the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S. C. Section 1251 et seq., the Clean Air Act of 1966, as amended, 42 U.S.C. Section 7401 et seq., the Toxic Substances Control Act of 1976, 15 U.S.C. Section 2601 et seq., the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. Section 651 et seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Section 11001 et seq., the National Environmental Policy of 1975, 42 U.S.C. Section 4321 et seq., the Safe Drinking Water Act of 1974, as amended, 42 U.S.C. Section 300 (f) et seq., and any similar or implementing law of the State of North Carolina and the Commonwealth of Pennsylvania, and all amendments, rules, and regulations promulgated thereunder. "Hazardous Constituent" shall have the meaning assigned to that term under 40 C.F.R. Section 260.10. "Hazardous Substances" shall mean at any time any substance, waste, pollutant, contaminant or material, in solid, liquid or gaseous form, which: (i) is a substance regulated or defined or designated as hazardous, extremely or imminently hazardous, dangerous, or toxic pursuant to any law, by any local, state, territorial or federal governmental authority; (ii) is a substance with respect to which such a governmental authority 2 3 otherwise requires environmental investigation, monitoring, reporting, or remediation; including but not limited to, (A) all substances, wasters, pollutants, contaminants and materials regulated, or defined or designated as hazardous, extremely or imminently hazardous, dangerous or toxic, under the following federal statutes and their state counterparts, as well as these statutes' implementing regulations: the Hazardous Materials Transportation Act, 42 U.S.C. Section 1801 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act, 2 U.S.C. Section 9601 et seq. ("CERCLA"), the Clean Water Act, 33 U.S.C. Section 1251 et seq., the Safe Drinking Water Act Section 2011 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Section 7401 et seq., and the Emergency Planning and Community Right to Know, 42 U.S.C. Section 11011 et seq.; (B) petroleum and petroleum products including crude oil and any fractions thereof; (C) natural gas, synthetic gas, and any mixtures thereof; (D) radon; (E) radioactive substances; (F) asbestos; (G) urea formaldehyde; and (H) polychlorinated biphenyls. "Solid Wastes" shall have the meaning assigned thereto in C.F.R. Section 261.2. "Storage Containers" shall mean existing and future containers for Toxic Substances and above ground and underground storage tank systems (including underground piping, conduits or sumps). "Toxic Substances" shall mean, collectively, Hazardous Substances, Hazardous Constituent, Solid Wastes, petroleum products and used oil. 2. Borrower covenants and agrees, as its sole cost and expense, to indemnify, protect and save Lender harmless against and from any and all damages, losses, liabilities, obligations, penalties, claims, litigation, demands, defenses, judgments, suits, proceedings, costs, disbursements or expenses of any kind or of any nature whatsoever (including, without limitation, reasonable attorneys' fees and reasonable experts' fees and disbursements) that may at any time be imposed upon, incurred by 3 4 or asserted or awarded against Lender (unless resulting from any act or omission by Lender constituting gross negligence or willful misconduct) and arising from or out of: (a) any Toxic Substances or Storage Containers on, in, under or affecting all or any portion of the Property or any surrounding areas, including, without limitation, (i) the costs of "removal," as defined in 42 U.S.C.Section 9601, as amended from time to time, of any and all Toxic Substances and Storage Containers from all or any portion of the Property or any surrounding areas, (ii) additional costs required to take necessary precautions to protect against the "release," as defined in 42 U.S.C.Section 9601, as amended from time to time, of Toxic Substances on, in, under or affecting the Property into the air, any body of water, any other public domain or any surrounding areas, and (iii) costs incurred to comply, in connection with all or any portion of the Property or any surrounding areas, with all applicable laws, orders, judgments or regulations with respect to Toxic Substances and Storage Containers, or (b) the enforcement of this Agreement, whether any of such matters arise before or after foreclosure of the mortgage or other taking of title to all or any portion of any Property by Lender. Lender's rights under this Agreement shall be in addition to all rights of Lender under the Mortgage, the Note and any guaranty or guaranties (whether of payment and/or performance) given to Lender in connection with the Loan and under any other documents or instruments evidencing or securing the Loan (the Mortgage, the Note, any such guaranty or guaranties and such other documents or instruments, as the same may be amended, restated or modified from time to time, are collectively referred to as the "Loan Documents"), and payments by Borrower under this Agreement shall not reduce Borrower's obligations and liabilities under any of the Loan Documents. 3. The liability of Borrower under this Agreement shall in no way be limited by (i) any extensions of time for performance required by any of the Loan Documents, (ii) any sale, assignment or foreclosure of the Note or the Mortgage or any sale or transfer of all or part of the Property, (iii) any exculpatory provision in any of the Loan Documents limiting Lender's recourse to property encumbered by any mortgage or to any other security, or limiting the Lender's rights to a deficiency judgment against 4 5 Borrower, (iv) the accuracy or inaccuracy of the representations and warranties made by Borrower under any of the Loan Documents, (v) the release of Borrower or any other person from performance or observance of any of the agreements, covenants, terms or conditions contained in any of the Loan Documents by operation of law, the Lender's voluntary act, or otherwise, (vi) the release or substitution in whole or in part of any collateral or security for the Note, or (vii) Lender's failure to record any Mortgage or file any UCC financing statements (or Lender's improper recording or filing of any such financing statement) or to otherwise perfect, protect, secure or insure any security interest or lien given as security for the Note. 4. Borrower hereby waives any right or claim of right to cause a marshaling of Borrower's assets or to cause or the Lender to proceed against any of the security for the Loan before proceeding under this Agreement against Borrower. Moreover, Borrower agrees that any payments required to be made under this Agreement shall become due on demand. In addition, with respect to this Agreement, Borrower expressly waives and relinquishes all rights and remedies (including any rights of subrogation) accorded by applicable law to indemnitors or guarantors. 5. No failure or delay on Lender's part to exercise any right, power or privilege under any of the Loan Documents shall operate as a waiver of any such right, power or privilege. 6. Any one or more of Borrower or any other party liable upon or in respect of this Agreement or the Loan may be released without affecting the liability of any party not so released. 7. No provision of this Agreement may be changed, waived, discharged or terminated orally, by telephone or by any other means except by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 8. Except as provided in this Agreement, this Agreement shall be binding upon Borrower, and its successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. Notwithstanding the foregoing, Borrower may not, without the prior written consent of Lender in each instance, 5 6 assign, transfer or set over to another, in whole or in part, all or any part of Borrower's benefits, rights, duties and obligations under this Agreement, including, but not limited to, performance of and compliance with the conditions of this Agreement. However, this shall not limit the right of Borrower to contract with others for any appropriate or necessary remediation. 9. This Agreement and the rights and obligations of the parties hereunder shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State of Maryland. 10. The provisions of this Agreement shall be in addition to any and all other obligations and liabilities Borrower may have to Lender under the Note, the Mortgage, the other Loan Documents, and under common law, and shall survive (i) the repayment of all sums due pursuant to the Note, (ii) the satisfaction of all of the other obligations of Borrower under any Loan Documents, (iii) the discharge of any Mortgage held by Lender, and (iv) the foreclosure of any Mortgage held by Lender or acceptance of a deed in lieu of foreclosure of any property encumbered by a Mortgage. 11. No Action Prior to Default. Lender agrees that, prior to the occurrence of an Event of Default under the Note or the other Loan Documents, Lender shall not voluntarily incur any costs or expenses or commission any test to determine is any Hazardous Substances, Hazardous Constituents, Solid Wastes, Storage Containers or Toxic Substances exist on the Property. 12. Waiver of Trial by Jury. EACH OF BORROWER AND LENDER HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUES TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY EACH OF BORROWER AND LENDER, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. EACH PARTY IS HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES TO THIS NOTE, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF THE FOREGOING 6 7 WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, EACH OF BORROWER AND LENDER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. 7 8 IN WITNESS WHEREOF, Borrower has executed this Agreement as of the day and year first above written. BORROWER: ATTEST: BALANCED CARE CORPORATION a Delaware corporation By:/s/ Robin L. Barber By:/s/ Robert J. Sutton Name: Robin L. Barber Name: Robert J. Sutton Title: Vice President - Title: Vice President - Legal Affairs, Corporate Services and Assistant Secretary Secretary ATTEST: BCC AT DARLINGTON, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BALANCED CARE AT BUTLER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BALANCED CARE AT SARVER, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary 8 9 ATTEST: BALANCED CARE AT NORTH RIDGE, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary ATTEST: BALANCED CARE AT EYERS GROVE, INC. a Delaware corporation By:/s/ Robert J. Sutton By:/s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President - Title: Vice President and Corporate Services Secretary and Secretary LENDER: (As to Sections 11 and 12 only) ATTEST: HCFP FUNDING, INC. a Delaware corporation By:/s/ Debra M. Van Alstyne By: /s/ Jeffrey P. Hoffman Name: Debra M. Van Alstyne Name: Jeffrey P. Hoffman Title: Vice President Title: Vice President 9 EX-10.4 5 DEED OF TRUST, ASSIGNMENT OF RENTS AND LEASES 1 Exhibit 10.4 DEED OF TRUST, ASSIGNMENT OF RENTS AND LEASES AND SECURITY AGREEMENT (THIS INSTRUMENT SECURES FUTURE ADVANCES) THIS DEED OF TRUST, ASSIGNMENT OF RENTS AND LEASES AND SECURITY AGREEMENT (this "Deed of Trust" or "Mortgage") is made as of this 22nd day of April, 1999 by and between BALANCED CARE OF NORTH RIDGE, INC., a Delaware corporation doing business as OUTLOOK POINTE AT NORTHRIDGE with a mailing address of 600 Newton Road, Raleigh, North Carolina 27609 (the "Grantor"), BLANCO TACKABERY COMBS & METAMOROS, P.A., with a mailing address of 110 South Stratford Road, Suite 500, Winston-Salem, North Carolina 27104-4214, as Trustee ("Trustee"), in favor of HCFP FUNDING, INC., a Delaware corporation with its principal mailing address at c/o HealthCare Financial Partners, Inc. 2 Wisconsin Circle, Fourth Floor, Chevy Chase, Maryland 20815 (the "Beneficiary" or the "Lender"). WITNESSETH: WHEREAS, the Beneficiary has agreed to make available to the Grantor and certain of its affiliates (collectively, the "Borrower") pursuant to that certain Loan and Security Agreement of even date herewith, as amended, modified or restated from time to time (collectively, the "Loan Agreement") a revolving credit facility in the principal amount of up to $15,000,000 (the "Loan"); WHEREAS, the Borrower's obligations to the Grantor in connection with the Loan are evidenced by that certain Revolving Credit Note of even date herewith in the principal amount of the Loan, made by the Grantor payable to the Beneficiary (as amended, modified, supplemented and replaced from time to time, the "Note"); WHEREAS, as a condition precedent to making the Loan, the Beneficiary has required that the Grantor execute and deliver this instrument in order to secure the obligations of Grantor and the other parties constituting Borrower to the Beneficiary under the Note, the Loan Agreement and all other Loan Documents, as defined in the Loan Agreement (all of such obligations being hereinafter collectively called the "Obligations"); 2 WHEREAS, unless otherwise defined herein, all capitalized terms used herein shall have the respective meanings given to them in the Loan Agreement; and WHEREAS, the maximum aggregate principal amount of Obligations intended to be secured by this Mortgage shall equal Fifteen Million Dollars ($15,000,000). NOW THEREFORE, in consideration of the sum of Ten and 00/100 Dollars ($10.00) paid by the Trustee to the Grantor, receipt of which is hereby acknowledged, and as security for the payment thereof, together with all existing and future liabilities of Grantor and Borrower to Beneficiary under the Note, the Loan Agreement and all other Loan Documents, and as security for the due and timely performance by Grantor of all of the other provisions of the Loan Documents, and intending to be legally bound hereby, Borrower and Grantor hereby GRANTS, BARGAINS, SELLS, CONVEYS, ASSIGNS, TRANSFERS, RELEASES, PLEDGES and MORTGAGES to Trustee all of Grantor's interest in certain real property located at 600 Newton Road, Raleigh, North Carolina in Wake County, North Carolina and more particularly described on Exhibit A attached hereto and made a part hereof (the "Property"); TOGETHER WITH all of Grantor's right, title and interest in and to the following property rights and interests which Grantor hereby assigns to Beneficiary until the Obligations are paid in full (the Property, together with the following property, being hereinafter collectively called the "Mortgaged Property"): (1) 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, air conditioning equipment, carpeting and other floor coverings, water heaters, awnings and storm sashes, cleaning apparatus, signs, landscaping, and parking areas, which are or shall be attached or affixed to the Property or such buildings, structures or improvements (the "Improvements"); (2) all streets, lanes, alleys, passageways, water courses, easements, rights, liberties, privileges, air rights, development rights, oil and gas rights, water rights, water stock, tenements, hereditaments and appurtenances whatsoever thereunto 2 3 belonging to or in any way made appurtenant hereafter, and the reversions and remainder, with respect thereto (the "Appurtenances"); (3) all fixtures and equipment now or hereafter located on, attached to or used or useful in connection with the Property and/or the Improvements, including, but not limited to, beds, linen, televisions, carpeting, telephones, cash registers, computers, lamps, glassware, rehabilitation equipment, restaurant and kitchen equipment, tools, tooling furniture, additions, parts, fittings, accessories, special tools, attachments; provided, however, that with respect to any items which are leased and not owned, the Equipment shall include the leasehold interest only together with any options to purchase any of such items and any additional or greater rights with respect to such items hereafter acquired (the "Equipment"); (4) all general intangibles and other intangible personal property arising out of or connected with the Property, the Improvements or any other portion of the Mortgaged Property, including, without limitation, things in action, contract rights and other rights to payment of money, proceeds from insurance policies after payment of prior interest, patents, unpatented inventions, trade secrets, copyrights, contract rights, goodwill, literary rights, rights to performance, rights under licenses, choses in action claims, information contained in computer media (such as data bases, source and object codes, and information therein), things in action, trademarks and trademarks applied for (together with the goodwill associated therewith) and derivatives thereof, trade names, including the right to make, use, and vend goods utilizing any of the foregoing, and permits, licenses, certifications, authorizations and approvals, and the rights of Grantor thereunder, issued by any governmental, regulatory, or private authority, agency, or entity whether now owned or hereafter acquired (the "General Intangibles") ; (5) all instruments, chattel paper, documents or other writings obtained from or in connection with the operation of the Property or the Improvements (including, without limitation, all ledger sheets, computer records and printouts, data bases, programs, books of account and files relating thereto) (the "Instruments"); 3 4 (6) all licenses, permits, certificates, approvals, authorizations and registrations obtained from any governmental or quasi-governmental authority and required, used or useful in connection with the ownership, operation, use or occupancy of the Property or the Improvements, including, without limitation, environmental permits, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need, regulatory approvals and all such other permits, licenses, rights and approvals (the "Permits"); (7) all leases, agreements of sale and other agreements affecting the use or occupancy of any portion or all of the Property or Improvements whether heretofore or hereafter executed and all rights of Grantor to payment under any such lease or agreement (the "Leases"); (8) all rent and other payments of whatever nature from time to time payable pursuant to any Lease, including (without limitation) leases of individual apartments or units to residents and leases of retail space for businesses such as pharmacies, stores, beauty shops, barber shops, newsstands, physicians' offices, and specialty shops (the "Rents"); (9) any securities or guaranties held by Grantor with respect to any of the General Intangibles, Proceeds (hereinafter defined), Leases or Accounts Receivable, and any notes, drafts, acceptances, chattel paper, documents or other instruments evidencing the same ("Securities"); (10) all proceeds (whether cash or non-cash, moveable or immoveable, tangible or intangible), including proceeds of insurance and condemnation, from the sale, exchange, transfer, collection, loss, damage, disposition, substitution or replacement of any of the Mortgaged Property (the "Proceeds"); and (11) the right, in the name and on behalf of itself or Grantor, to appear in or defend any action or proceeding brought with respect to the Mortgaged Property (including without limitation, any condemnation or arbitration proceedings) and to commence any action or proceedings to protect the interest of Beneficiary in the Mortgaged Property. 4 5 TO HAVE AND TO HOLD the Mortgaged Property unto Trustee, its successors and assigns forever, together with all privileges, easements, hereditaments and appurtenances thereto belonging unto the Trustee, its successors and assigns in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to the Mortgaged Property hereafter acquired by, or released to, Grantor or constructed, assembled or placed by Grantor on the Property, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such case, without any further mortgage, pledge, conveyance, assignment or other act by Grantor, shall become subject to the lien of this Deed of Trust and security agreement as fully and completely, and with the same effect, as though now owned by Grantor and specifically described herein. Notwithstanding the foregoing, Grantor shall, at its own cost, make, execute, acknowledge, deliver and record any and all such further acts, deeds, conveyances, mortgages, notices of assignment, transfers, assurances and other documents as Beneficiary shall from time to time reasonably require for better assuring conveying, assigning, transferring and confirming unto Trustee of the Mortgaged Property and the other rights hereby conveyed or assigned or intended now or hereafter so to be, or which Grantor may be or may hereafter become bound to convey or assign for carrying out the intention of facilitating the performance of the terms of this Deed of Trust. In addition, Grantor hereby agrees that this Deed of Trust is a security agreement under the North Carolina Uniform Commercial Code and creates in Beneficiary a security interest thereunder in, among other things, all Equipment, General Intangibles, Proceeds, Leases, Rents, Permits, Instruments and Securities. Grantor shall, at its own cost and expense, execute, deliver and file any financing statements, continuation certificates and other documents Beneficiary may reasonably require from time to time to perfect and maintain in favor of the Beneficiary a security interest under the Uniform Commercial Code in such Equipment, General Intangibles, Proceeds, Leases, Rents, Permits, Instruments and Securities. Without limiting the generality of any of the foregoing, Grantor hereby irrevocably appoints Beneficiary attorney-in-fact for Grantor to execute, deliver and file any of the documents referred to hereinabove for and on behalf of Grantor. 5 6 AND Grantor, for itself, its successors and assigns, covenants with Trustee, its heirs, successors and assigns, that Grantor is seized of and has the right to convey the Mortgaged Property in fee simple; that such Mortgaged Property is free and clear of all liens and encumbrances, except the Permitted Liens (as defined in the Loan Agreement) and that Grantor will warrant and defend the title to the Mortgaged Property against the lawful claims of all persons whomsoever. THIS Deed of Trust secures, inter alia, the advance of Loan proceeds as well as any future advances made by Beneficiary to protect is liens and security interests and otherwise pursuant to this instrument and the Loan Documents. The priority of all such future advances shall relate back to the date of this Deed of Trust. This Deed of Trust also secures advances made by Beneficiary with respect to the Mortgaged Property for the payment of taxes, assessments, maintenance charges, and insurance premiums, costs incurred by Beneficiary for the protection of the Mortgaged Property or the lien of this Deed of Trust, and expenses incurred by Beneficiary by reason of the occurrence of an Event of Default hereunder and the priority of such advances, costs and expenses shall also relate back to the date of this Deed of Trust. 6 7 THIS CONVEYANCE IS MADE UPON THIS SPECIAL TRUST that if Grantor shall pay the Note secured by this Deed of Trust in accordance with its terms, together with all interest due on the Note, and all renewals and extensions of the Note, and all other Obligations, and shall faithfully comply with all of the covenants, stipulations and conditions of this Deed of Trust and any other Loan Documents, this Deed of Trust shall become null and void and may be canceled of record at the request and at the cost of Grantor. However, if Grantor defaults in the prompt payment of any installment of principal, interest and/or any fees or other amounts due under the Note when the same shall become due and payable or if Grantor defaults in, or there occurs an Event of Default under, any of the terms and conditions of the Note or in the payment, when due and demandable, of any of the obligations or if Grantor defaults in any of the covenants, conditions and stipulations contained in this Deed of Trust or any other document evidencing or securing the Note, or if a petition in bankruptcy, either voluntary or involuntary, is filed on behalf of Grantor, if Grantor becomes insolvent, executes an assignment for the benefit of its creditors or if a receiver is appointed for Grantor, then and in any of such events, the entire principal sum secured by this Deed of Trust, together with all interest and charges thereon, shall, at the option of Beneficiary, become immediately due and payable; and upon application of Beneficiary, it shall be the duty of Trustee or its Successor or Substitute Trustee to sell the Mortgaged Property, or any part thereof, at public auction to the highest bidder for cash either on the Mortgaged Property or at the courthouse in the county in which the Mortgaged Property is located, after first giving notice of sale to Grantor and to the then record owner of the Mortgaged Property and to any other Persons entitled by law to such notice, and after all hearings required by law are held and after first posting a notice of sale and publishing notice of sale containing the information required at the time of such sale as is required by the laws then in effect in North Carolina relating to foreclosure by power of sale of real property. Upon any such sale, Trustee shall execute and deliver to the purchaser a deed to the Mortgaged Property, or such part thereof as is sold; and after deducting five percent (5%) of the proceeds of such sale as compensation to Trustee, but not less than $2,500.00, and after paying all expenses incurred by it, including reasonable attorneys' fees for legal services actually performed, Trustee shall apply the remaining proceeds of the sale first to the payment of all indebtedness secured by this Deed of Trust, and the balance, if 7 8 any, shall be paid to Grantor or to such other persons as may be lawfully entitled thereto. Grantor agrees that Beneficiary shall have the right to bid at any sale conducted by Trustee under this Deed of Trust and shall have the right to purchase the Mortgaged Property, or such part thereof as is sold, at such sale. GRANTOR WARRANTS TO AND COVENANTS WITH Beneficiary as follows: 2. Title. As of the date hereof (a) Grantor has good and marketable title to an indefeasible fee simple estate in the Mortgaged Property, subject to no lien, charge or encumbrance except the Permitted Liens; (b) this Deed of Trust is and shall remain a valid and enforceable first lien on the Mortgaged Property subject only to the Permitted Liens; (c) Grantor shall preserve such title, and all of its rights in and to the Mortgaged Property, and shall forever warrant and defend the validity and priority of the lien hereof against the claims of all persons and entities whomsoever, subject only to the Permitted Liens; and (d) Grantor has full power and lawful authority to mortgage the Mortgaged Property and grant a security interest therein in the manner and term herein done or intended hereafter to be done. 3. Payment and Performance. Grantor shall punctually pay or cause to be paid the Obligations, in the amounts and at the times and places that the same may be due, and perform and comply with all of the terms, covenants, conditions and obligations contained in the Loan Documents. 4. Present and Future Advances. Advances made pursuant to the Note secured hereby are to be disbursed in accordance with the Loan Agreement. This Deed of Trust is given wholly or in part to secure present obligations and future advances which may, from time to time, be incurred hereunder. The amount of present obligations secured hereby in which Borrower is indebted to Lender is the principal sum of Fifteen Million and No/100 Dollars ($15,000,000.00). The maximum principal amount, including present and future obligations, which may be secured by this Deed of Trust at any one time is Fifteen Million and No/100 Dollars ($15,000,000.00). The period within which future advances and future obligations secured by this Deed of Trust may be incurred shall be the period commencing on the date of this Deed of Trust 8 9 and ending three (3) years from the date hereof unless extended pursuant to the provisions of the Loan Agreement. Lender may, at its option, determine and declare any or all present and future obligations secured by this Deed of Trust to be in default and immediately due and payable upon the default in payment of one or more of the obligations secured hereby, or the default of any other term or condition of this Deed of Trust. The total indebtedness secured by this Deed of Trust may be evidenced by various notes or other written instruments and evidences of indebtedness; and one or more of all such notes or the written instruments and evidences of indebtedness may, from time to time, be combined and merged into a single note or evidence of indebtedness. Such combination or merger shall not constitute nor be construed as a payment, satisfaction or discharge of any prior advance made or prior obligation incurred. All future advances made pursuant to this Deed of Trust and the Note and the Loan Agreement shall be considered to be made pursuant to the requirements of N.C.G.S. Section 45-67, et. seq., or any amendments thereto. 5. Taxes and Other Charges. Grantor shall pay all taxes of every kind and nature (including real and personal property, income, gross receipts, franchise, profits, sales and withholding taxes), all general and special assessments, water and sewer rents and charges, and all levies, permits, inspection and license fees and other public charges now or hereafter levied or assessed against the Mortgaged Property as liens or assessments (hereinafter individually called a "Tax" and collectively the "Taxes") as the same shall become due and payable from time to time and before interest or penalties accrue thereon; provided, however, that Grantor shall not be required to pay any Tax to the extent that nonpayment thereof is permitted while the validity thereof is being contested, so long as (a) Grantor notifies Beneficiary in writing of its intention to contest the validity thereof, (b) the validity thereof is being contested in good faith by Grantor and (c) Grantor deposits with Beneficiary if Beneficiary so requests an amount deemed sufficient to make such payment if the contest is unsuccessful. Notwithstanding the foregoing, Grantor shall under no circumstances permit the Mortgaged Property to be sold or advertised for sale for nonpayment of any Tax. Grantor shall not apply for or claim any deduction from the taxable value of the Mortgaged Property because of the existence of this Deed of Trust, 9 10 subject to Grantor's right to contest any Tax as hereinabove provided. Grantor shall deliver to Beneficiary receipts evidencing the payment of such Tax on or before the last day on which any Tax may be paid without interest or penalties or as soon thereafter as such receipts are available. 6. Insurance. Grantor shall maintain insurance covering the Mortgaged Property required under the terms of the Note and otherwise comply with the provisions of the Loan Agreement with respect to such insurance. 7. Tax and Insurance Escrow. After the occurrence of an Event of Default, Grantor shall pay to Beneficiary on the first day of each month a sum equal to one-twelfth (1/12) of the amount of (a) all real estate taxes, all water and sewer charges and assessments, if any, as estimated from time to time by Beneficiary, becoming due with respect to the Mortgaged Property on the next succeeding date upon which the same shall be due and payable and (b) all premiums, computed on an annual basis, for the insurance required to be carried pursuant to paragraph 4 hereof. All such amounts (hereinafter, the "Escrows") shall be held by Beneficiary in such manner as it sees fit without any obligation to invest the same or (if invested) to account for any income or loss resulting therefrom; provided however, that if and to the extent that Beneficiary is required under applicable law to invest the Escrows for the benefit of Grantor, Beneficiary shall also have the right to charge a reasonable service fee in connection therewith unless prohibited under such law. The Escrows shall be applied to the payment of the respective items in respect of which the Escrows were deposited, or at Beneficiary's option, to the payment of any such items in such order of priority as Beneficiary shall determine, as the same become due and payable. If, prior to the date upon which any of the aforesaid items shall be due and payable, the amount of Escrows then on deposit therefor shall be insufficient to pay such item, Grantor within five (5) days after demand is made therefor shall deposit the amount of such deficiency with Beneficiary. Beneficiary may at its option apply the Escrows or any part thereof in payment of any unpaid portion of the Obligations. If, when making any assignment of this Deed of Trust, the then Beneficiary shall pay over to its assignee the then balance of the Escrows and such assigning Beneficiary shall have no further obligation to Grantor with respect to such deposits. 10 11 8. Casualty Loss. Grantor shall notify Beneficiary in writing immediately upon the occurrence of any loss affecting the Mortgaged Property. Grantor hereby directs any insurer to pay directly to Beneficiary any moneys payable under any insurance policy covering the Mortgaged Property or any portion thereof, and Grantor hereby appoints Beneficiary as attorney-in-fact to endorse any draft therefor. Subject to Section 6.7 of the Loan Agreement sums paid to Beneficiary by any insurer may be retained and applied by Beneficiary toward payment of the Obligations (whether or not any portion thereof may then be due and payable) in such priority and proportions as Beneficiary in its discretion shall deem proper, and any sums not so applied, at the discretion of Beneficiary, may be paid, either in whole or in part, to Grantor for such purposes and upon such conditions as Beneficiary shall designate. 9. Condemnation. In the event that the whole or any part of the Mortgaged Property secured by this Deed of Trust is condemned or taken for any period of time, or there is any other injury to or decrease in value of the Mortgaged Property as a result of any public or quasi-public authority or corporation exercising the power of eminent domain or otherwise, all sums awarded as damages for such condemnation or taking to which Grantor is entitled shall be paid over immediately to Beneficiary. Upon the receipt thereof, Beneficiary may deduct and withhold from the amount actually received any costs, charges or fees incurred by Beneficiary in connection with the recovery of such award (hereinafter, "Beneficiary's Costs"), and thereafter Beneficiary may apply all or any portion of the balance to the discharge of the Obligations and, at the option of Beneficiary, may pay over any sums not so applied to Grantor for the purpose of restoring or repairing the Mortgaged Property or for any purpose or object satisfactory to Beneficiary in which event the Obligations shall not be reduced by that amount. Grantor hereby irrevocably appoints Beneficiary as attorney-in-fact for Grantor for the purpose of collection of any or all proceeds available in connection with the condemnation of the Mortgaged Property. If the Mortgaged Property is transferred, through foreclosure or otherwise, prior to the receipt by Beneficiary of such award of payment, Beneficiary shall have the right, whether or not a deficiency judgment with respect to the Obligations shall have been sought, recovered or denied, to receive such award or payment, or a portion thereof sufficient to pay the Obligations, whichever is less. 11 12 10. Preservation of Lien; No Conveyance of Title. (1) Grantor shall pay, from time to time as and when the same shall become due, all claims and demands of any persons or entities which, if unpaid, might result in or permit the creation of a lien on the Mortgaged Property or any part thereof, and in general shall do or cause to be done everything necessary so that the lien hereof shall be fully preserved and so that there shall not be created, permitted or suffered to exist any lien, encumbrance or charge affecting the Mortgaged Property other than those matters referred to in paragraph 1(a) hereof which have been approved in writing by Beneficiary, or as permitted under the terms of the Loan Agreement, all at the sole cost of Grantor. At Beneficiary's election, and without notice to Grantor, Beneficiary may make but is not obligated to make, any payments which Grantor has failed to make under any prior lien, but such payment by Beneficiary shall not release Grantor from Grantor's obligations or constitute a waiver of Grantor's default hereunder. Any sum so expended by Beneficiary shall be secured by this Mortgage, together with interest thereon at the Default Rate (as defined in the Loan Agreement), from the date such payment is made by Beneficiary until the date of repayment by Grantor. Notwithstanding the foregoing, Grantor shall have the right, at its sole cost and expense, to contest in good faith by any lawful means any such claims and demands, provided that it notifies Beneficiary in writing of its intention to do so and deposits with Beneficiary, if Beneficiary so requests, an amount deemed sufficient by Beneficiary to satisfy such claims and demands if it is ultimately determined that Grantor is responsible therefor. (2) Grantor shall not convey or attempt to convey or permit or suffer a conveyance or transfer of legal or equitable title to the Property or any part thereof and whether such conveyance or transfer is voluntary, involuntary, by operation of law or otherwise, so long as any part of the Obligations remains unpaid without the prior written consent or Beneficiary. 11. Maintenance and Repair; Compliance with Laws and Regulations. Grantor shall cause the Mortgaged Property to be maintained in good condition and repair, reasonable wear and tear excepted. None of the Improvements or Equipment shall be removed, demolished, materially altered or sold (except for normal replacement of the Equipment), without the prior written consent of 12 13 Beneficiary. Grantor shall promptly repair, replace or rebuild any part of the Mortgaged Property which may be damaged or destroyed by any casualty or which may be affected by any condemnation or eminent domain proceeding. Grantor shall promptly comply with all laws, orders, ordinances, regulations, restrictions and requirements of governmental authorities, of courts and of insurance companies applicable to Grantor or affecting the Mortgaged Property, or the use thereof. Grantor also shall promptly comply with the provisions of any recorded covenants, conditions or restrictions to which the Mortgaged Property or any part thereof may at any time be subject. Grantor shall not cause or allow the construction or erection of any public, municipal or utility improvements upon the Mortgaged Property other than those required by public authorities, without the prior written consent of Beneficiary. Grantor shall not drill or extract or enter into any lease for the drilling for or extraction of oil, gas or other hydrocarbon substances or any mineral of any kind or character on or from the Mortgaged Property or any part thereof without the prior written consent of Beneficiary. Grantor shall not seek, make or consent to any change in zoning or conditions of use of the Mortgaged Property. 12. Assignment of Leases and Rents. For valuable consideration, the receipt and sufficiency of which Borrower acknowledges, Borrower hereby grants, bargains, assigns, transfers, sets over, sells and conveys, the Leases and the Rents unto Lender; TO HAVE AND TO HOLD the Leases and the Rents unto Lender, forever, and Borrower does hereby bind itself and its heirs, executors, administrators, personal representatives, successors, and assigns to warrant and forever defend the title to the Leases and the Rents unto Lender against every person whomsoever lawfully claiming or to claim the same or any part thereof. Borrower and Lender intend this assignment of the Leases and the Rents to be absolute, unconditional and presently effective, and not an assignment for additional security only. (a) Lender hereby grants to Borrower a limited license (the "License") to exercise and enjoy all the rights and benefits of the landlord or lessor of the Leases and the Rents, including without limitation, the right to collect, demand, sue for, attach, levy, recover, and receive the Rents, as and when, but not before, they become due and payable, and to give proper receipts, releases and acquittances therefor. Grantor hereby agrees to receive all Rents 13 14 and hold the same as a trust then due and payable, next to the payment of the taxes and assessments on the Property and the insurance premiums required by the terms of the Loan Documents, and then to the costs of Documents and the Leases. Thereafter, Grantor may use the balance of the Rents collected in any manner not inconsistent with the Loan Documents. (b) Upon the occurrence of an Event of Default, Lender shall have the complete right, power and authority hereunder, then or thereafter, to terminate the License and then and thereafter, without taking possession of the Property, in Grantor's name, to collect, demand, sue for, attach, levy, recover, and receive the Rents and to give proper receipts, releases and acquittances therefor, and after deducting all reasonably incurred costs and expenses of operation and collection, including reasonable attorney's fees, to apply the net proceeds thereof in reduction or repayment of the Indebtedness in such order of priority as Lender may determine, in its sole discretion. Upon Lender's termination of the License, and without regard to the adequacy of the security, with or without any action or proceeding through any person or by any agent, Lender may and shall have the complete right, power and authority hereunder, then or thereafter, to answer upon, take possession of, manage and operate the Property, or any part thereof; to make, modify, enforce, cancel or accept surrender of any Lease; to remove and evict any tenant or lessees under any of the Leases; to increase or decrease the Rents; and to decorate, clean and repair, and otherwise do any act or incur any cost or expense which Lender may deem reasonably necessary to protect the status and value of the Property. (c) Upon the occurrence of an Event of Default and in addition to any other remedies set forth in this Instrument, and without the necessity of Lender's entering upon and taking and maintaining full control of the Property in person, by agent or by a court-appointed receiver, Lender shall immediately be entitled to possession of all Rents as the same become due and payable, including without limitation Rents then due and unpaid, and all such Rents shall immediately upon delivery of such notice be held by Grantor as trustee for the benefit of Lender only; provided however, that the written notice by Lender to Grantor of the breach by Grantor shall contain a statement that Lender exercises its rights to such Rents. Grantor agrees that commencing upon delivery of such written notice of an Event of Default by Lender to Grantor, 14 15 each tenant of the Property shall make such Rents payable to and pay such Rents to Lender or Lender's agents on Lender's written demand to each tenant therefor, delivered to each tenant personally, by mail or by delivering such demand to each rental unit, without any liability on the part of any tenant to inquire further as to the existence of an Event of Default. 13. Leases. Grantor shall not enter into any lease or similar agreement for space in or on the Mortgaged Property without in each case obtaining Beneficiary's prior written approval of all the terms and conditions thereof and, once approved, Grantor shall not amend, modify or cancel any such lease or similar agreement or assign any amounts due thereunder without obtaining Beneficiary's prior written approval. Beneficiary's approval pursuant to this paragraph 11 shall in no instance be unreasonably withheld or delayed. 14. Required Notice. Grantor shall give Beneficiary prompt written notice of any action or proceeding purporting to affect the Mortgaged Property of which it has actual knowledge including, without limitation, the following: (a) a fire or other casualty causing damage to the Mortgaged Property; (b) receipt of notice of condemnation of the Mortgaged Property or any part thereof; (c) receipt of notice from any governmental authority adversely affecting the structure, use or occupancy of the Mortgaged Property; (d) receipt of any notice from the holder of any lien or security interest in the Mortgaged Property; or (e) commencement of any litigation affecting the Mortgaged Property. After the occurrence of an Event of Default, Beneficiary shall have the right to appear in or defend any such action or proceeding to the same extent as Grantor. Furthermore, Beneficiary shall have the right to bring any action or proceeding, in the name and on behalf of itself or Grantor, which Beneficiary, in its discretion, feels should be brought to protect its interest in the Mortgaged Property or any part thereof after the occurrence of an Event of Default. 15. Beneficiary's Right to Cure. Beneficiary shall have the right, but not the obligation, at Beneficiary's election and without notice to Grantor, to cure any default by Grantor under this Mortgage or any of the other Loan Documents or under any mortgage or with respect to any security interest, lien or encumbrance which is senior in lien and position to this Deed of Trust. Any payments made or expenses incurred by Beneficiary in 15 16 the exercise of such right shall not release Grantor from Grantor's obligation or constitute a waiver of Grantor's default hereunder. Any such payments made or expenses incurred by Beneficiary shall be repayable on demand by Beneficiary, together with interest thereon at the Default Rate from the date such payment was made or such expense was incurred, and the aggregate amount thereof, including such interest, shall become part of the Obligations and shall be secured by the lien of this Deed of Trust. 16. Estoppel Certificate. Within five (5) days after being requested to do so by Beneficiary, Grantor shall furnish to Beneficiary or any proposed assignee of this Deed of Trust and a statement, duly executed, acknowledged and certified by Grantor, setting forth the remaining unpaid amount of the Obligations and whether there exist any uncured defaults, offsets or defenses thereto. 17. Right to Inspect. Grantor shall permit Beneficiary and its agents to enter and inspect the Mortgaged Property or any part thereof at all reasonable times. 18. Revenue, Tax or Other Stamps. Grantor shall pay the cost of any revenue, tax or other stamps now or hereafter required by the laws of the State of North Carolina or the United States or local governmental or quasi-governmental agency to be affixed to this Deed of Trust and if any taxes are imposed under the laws or the Commonwealth of Pennsylvania or the United States with respect to debts secured by a mortgage, or with respect to evidences of indebtedness so secured, Grantor shall pay or reimburse Beneficiary upon demand the amount of such taxes without credit against any of the Obligations. If Grantor does not or may not do so, Beneficiary may at its option accelerate the Obligations evidenced by the Loan Documents to maturity as in the case of default by Grantor. 19. Possession. Until an Event of Default, Grantor shall be permitted to retain actual possession of the Mortgaged Property, to manage, operate, use and enjoy the same and all rights appertaining thereto, and to collect, receive, take, use and enjoy the Rents. The right of Grantor to collect the Income and Rents may be revoked by Beneficiary at any time and from time to time after an Event of Default has occurred under this Deed of Trust, by giving notice or such revocation to Grantor. Following the giving of such notice, Beneficiary may retain and apply the Rents toward payment 16 17 of the Obligations in such priority and proportions as Beneficiary, in its discretion, shall determine. 20. Events of Default. The occurrence of any one or more of the following events shall, at Beneficiary's option, constitute a default hereunder (each an "Event of Default"): (1) an Event of Default shall occur under the Loan Agreement, the Note or any other Loan Document; (2) Except as otherwise specifically provided for in this Deed of Trust, Grantor shall fail to observe or perform any of the covenants or agreements on its part to be observed or performed under this Deed of Trust within twenty (20) days after written notice from Beneficiary of such noncompliance; (3) Any representation or warranty of Grantor under this Deed of Trust shall be untrue in any material respect; or (4) Except as permitted herein, Grantor shall have conveyed or attempted to convey or permitted or suffered a conveyance or transfer of legal or equitable title to the Mortgaged Property or any part thereof, or permit a lien, charge or encumbrance on the Mortgaged Property other than the Permitted Liens, irrespective of whether such conveyance, transfer, lien, charge or encumbrance was voluntary, involuntary, incurred by operation of law or otherwise, without the prior written consent of Beneficiary. 21. Remedies. Upon the occurrence of any Event of Default: (1) The Obligations shall, at the option of Beneficiary, become due and payable immediately without presentment, demand, notice of nonpayment, protest, notice of protest or other notice of dishonor, all of which are hereby expressly waived by Grantor. (2) Beneficiary may institute appropriate proceedings at law or equity to collect the amount of the Obligations then due (by acceleration or otherwise), or for specific performance of any of the covenants of Grantor under any of the Loan Documents (and Grantor acknowledges that all such covenants may be specifically enforced by Beneficiary by injunction or other appropriate equitable remedy), or to recover damages for any breach thereof, or 17 18 to direct Trustee to institute an action of foreclosure against the Mortgaged Property, or take such other action at law or in equity for the enforcement of this Deed of Trust and realization on the Deed of Trust security or any other security herein or elsewhere provided for, and proceed therein to final judgment and execution for the Obligations, with interest as specified in paragraph 21 below, together with costs and expenses as specified in paragraph 22 below. (3) With or without demand upon Grantor for the surrender of possession, Beneficiary may enter upon and take possession of the Mortgaged Property, breaking locks if necessary and without liability for trespass, damages or otherwise and, upon so doing, Beneficiary may, in its discretion and in addition to any of its other rights, as Beneficiary in possession, alter, improve, complete or repair the Mortgaged Property (and in so doing Beneficiary shall have the right to use the Mortgaged Property and to expend such amount for that purpose as Deed of Trust shall deem best, all of which, with interest thereon at the Default Rate from date of payment, shall be repayable by Grantor on demand and shall be secured hereby), and operate, rent, sell or lease the same in the name of Grantor or Beneficiary upon such terms and conditions as Beneficiary shall deem appropriate, and Grantor hereby irrevocably appoints Beneficiary attorney-in-fact for Grantor for all such purposes. (4) Beneficiary may further, by summary proceedings, initiate an action for possession or otherwise, dispossess any tenants, users or occupiers of the Mortgaged Property then or thereafter in default in the payment of any rent or other charge for the use thereof, and any tenants or other users or occupiers whose leasehold estates or rights to use the Mortgaged Property are subordinate to the lien of this Deed of Trust, whether or not any such tenant, user or occupier is so in default; and Grantor hereby irrevocably appoints Beneficiary attorney-in-fact of Grantor for all such purposes. If Grantor remains in possession after demand by Beneficiary for surrender of possession of the Mortgaged Property, such continued possession by Grantor shall be as tenant of Beneficiary, and Grantor agrees to pay monthly in advance to Beneficiary such rent for the Mortgaged Property so occupied as Beneficiary may demand, and in default of so doing, Grantor may also be dispossessed by summary proceedings or otherwise. In case of the appointment of a receiver of the rents, the foregoing 18 19 agreement of Grantor to pay rent shall inure to the benefit of such receiver. (5) With or without taking possession of the Mortgaged Property, Beneficiary may collect and receive all the Income and Rents and, after deducting the cost of all alterations, improvements, repairs, completion, partial completion, operation, sale, rental, leasing commissions and charges, including, but not limited to, counsel fees, incurred by Beneficiary, apply the net income to the sums secured hereby in such manner as Beneficiary in its discretion shall determine. Beneficiary shall be liable to account only for the Income and Rents actually received. (6) If Beneficiary shall so elect, Grantor shall not resist or contest, but shall join in any petition to any court by Beneficiary for the appointment of a receiver or receivers of the Mortgaged Property or any part thereof, and of all the Income and Rents therefrom, with such powers as the court making such appointment shall confer, and Grantor hereby appoints Beneficiary attorney-in-fact of Grantor for all such purposes. (7) All deposits held in connection with the rental, lease, license or use of space or other facilities on the Mortgaged Property at the time of the occurrence of such event of default, all interest of Grantor in all premiums for, or dividends upon, any insurance for the Mortgaged Property, and all refunds or rebates of taxes and assessments upon the Mortgaged Property, are hereby assigned to Beneficiary as further security for the payment of the Obligations during the continuance of any such event of default. (8) To the extent now or hereafter permitted by law and subject to such grace periods and notice requirements thereby imposed, Beneficiary may cause a judicial sale of the Mortgaged Property in accordance with this subparagraph (h). Such sale may be made without demand on Grantor at the time and place fixed in the notice of such sale, and such sale may be of the Mortgaged Property as a whole or in separate lots, and in such order of Beneficiary may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Such sale of the Mortgaged Property may be postponed by public announcement at the time and place of sale, and may be further postponed from time to time thereafter by public announcement at the time fixed by the preceding postponement. Any 19 20 person or entity, including Beneficiary, may purchase at such sale. After deducting all costs, fees, and expenses of Beneficiary, including cost of evidence of title in connection with such sale, the proceeds of sale shall be applied to payment of the Obligations. The Mortgaged Property may be sold as aforesaid either before, after, or during the pendency of any proceedings for the enforcement of the provisions of this Deed of Trust, and such power and right of sale shall not be affected by any entry hereunder, or by the exercise of any other right, remedy or power with respect to the enforcement of the provisions of any of the Loan Documents or the collection of the amount of the Obligations. The provisions of this subparagraph (h) are not intended to and shall not adversely affect Beneficiary's right, in its discretion, to conduct a nonjudicial sale of such portions of the Mortgaged Property as constitute personal property, and with respect to such property, Beneficiary shall have all rights of a "secured party" under the Uniform Commercial Code of the State of North Carolina. 1. Remedies Cumulative, etc. (9) No right or remedy conferred upon or reserved to Beneficiary under any of the Loan Documents or with respect to any of the Mortgaged Property or the Collateral (as defined in the Note), or now or hereafter existing at law or in equity or by statute or other legislative enactment, is intended to be exclusive of any other such right or remedy and each and every such right or remedy shall be cumulative and concurrent, and shall be pursued separately, concurrently, successively or otherwise, at the sole discretion of Beneficiary, and shall not be exhausted by any one exercise thereof but may be exercised as often as occasion therefor shall occur. No act of Beneficiary shall be deemed or construed as an election to proceed under any one such right or remedy to the exclusion of any other such right or remedy; furthermore, each such right or remedy of Beneficiary shall be separate, distinct and cumulative and none shall be given effect to the exclusion of any other. The failure to exercise or delay in exercising any such right or remedy, or the failure to insist upon strict performance of any term of any of the Loan Documents, shall not be construed as a waiver or release of the same, or of any event of default thereunder, or of any obligation or liability of Grantor thereunder. 20 21 (10) The recovery of any judgment by Beneficiary or the levy of execution under any judgment upon the Mortgaged Property shall not affect in any manner, or to any extent, the lien of this Deed of Trust upon the Mortgaged Property, or any security interest in any other Mortgaged Property, or any rights, remedies or powers of Beneficiary under any of the Loan Documents or with respect to any of the Mortgaged Property, but such lien and such security interest and such rights, remedies and powers of Beneficiary shall continue unimpaired as before. Further, the entry of any judgment by Beneficiary shall not affect in any way the interest payable hereunder or under any of the other Loan Documents on any amounts due to Beneficiary, but interest shall continue to accrue on such amounts at the Default Rate (as hereinafter defined) after the entry of any judgment and continuing until distribution of the proceeds of any Sheriff's sale. (11) Grantor hereby waives presentment, demand, notice of nonpayment, protest, notice of protest or other notice of dishonor, and any and all other notices in connection with any default in the payment of, or any enforcement of the payment of, the Obligations, except such notices as contemplated herein or in the Note. To the extent permitted by law, Grantor waives the right to any stay of execution and the benefit of all exemption laws now or hereinafter in effect. (12) Grantor agrees that Beneficiary may release, compromise, forbear with respect to, waive, suspend, extend or renew any of the terms of the Loan Documents (and Grantor hereby waives any notice of any of the foregoing), and that the Loan Documents may be amended, supplemented or modified by Beneficiary and the other signatory parties and that Beneficiary may resort to any of the Mortgaged Property (or any other collateral securing the Obligations) in such order and manner as it may think fit, or accept the assignment, substitution, exchange, pledge, or release of all or any portion of any of the Mortgaged Property, for such consideration, or none, as it may require, without in any way affecting the validity of any liens over or other security interest in the remainder of any such Mortgaged Property (or the priority thereof or the portion of any subordinate holder of any lien or other security interest with respect thereto); and any action taken by Beneficiary pursuant to the foregoing shall in no way be construed as a waiver or release of any right or remedy of 21 22 Beneficiary, or of any event of default, or of any liability or obligation of Grantor, under any of the Loan Documents. (13) To the extent permitted by law, Grantor shall not at any time insist upon, or plead, or in any manner whatever claim or take any benefit or advantage of any stay or extension or moratorium law, or any exemption from execution or sale of the Mortgaged Property, wherever enacted, now or at any time hereafter in force, which may affect the covenants and terms of performance of this Deed of Trust, nor claim, take, or insist upon any benefit or advantage of any law now or hereafter in effect by providing for the valuation or appraisal of the Mortgaged Property, prior to any sale of any of Grantor's interest therein; nor, after any such sale or sales, claim or exercise any right under any statute heretofore or hereafter enacted to redeem the Mortgaged Property so sold or any part thereof, and Grantor hereby expressly waives all benefit or advantage of any such law or laws, and covenants not to hinder, delay, or impede the execution of any power herein granted to Beneficiary but to suffer and permit the execution of every power as though no such law or laws had been made or enacted. Grantor further waives and releases all procedural errors, defects and imperfections in any proceeding instituted by Beneficiary under any of the Loan Documents. (14) Grantor, for itself and for all persons hereafter claiming through or under it or who may at any time hereinafter become holders of liens junior to the lien of this Mortgage hereby expressly waives and releases all rights to direct the order in which any of the Mortgaged Property shall be sold in the event of any sale or sales pursuant hereto and to have any of the Mortgaged Property and/or any other property now or hereafter constituting security for the Obligations marshalled upon any foreclosure of this Deed of Trust or of any other security for any of the Obligations. (15) Grantor agrees that any action or proceeding against it to enforce the Deed of Trust may be commenced in state or federal court in North Carolina, and Grantor waives personal service of process and agrees that a summons and complaint commencing an action or proceeding in any such court shall be properly served if served by registered or certified mail in accordance with the notice provisions set forth herein and Grantor 22 23 expressly waives any and all defenses to an exercise of personal jurisdiction by any such court. 22. Default Rate. Following the occurrence of any Event of Default and continuing until all Obligations are paid in full, the outstanding Obligations shall bear interest at the Default Rate, and shall be secured by this Deed of Trust. 23. Costs and Expenses. Following the occurrence of any Event of Default, Grantor shall pay upon demand all reasonable costs and expenses (including all amounts paid to attorneys, accountants, real estate brokers and other advisors employed by Beneficiary and to any contractors for labor and materials), incurred by Beneficiary in the exercise of any of its rights, remedies or powers under any of the Loan Documents, or as a secured or unsecured creditor, as the case may be, of Grantor in any federal or state bankruptcy proceedings, or with respect to any of the Mortgaged Property with respect to such event of default, and any amount thereof not paid promptly following demand therefor, together with interest thereon at the Default Rate from the date of such demand, shall become part of the Obligations and shall be secured by the lien or this Deed of Trust. In connection with and as part of the foregoing, in the event that any of the Loan Documents is placed in the hands of any attorney for the collection of any sum payable thereunder, Grantor agrees to pay reasonable attorneys' fees for the collection of the amount being claimed under such Loan Documents, as well as all costs, disbursements, and allowances provided by law, and the payment of such fees and costs, disbursements and allowances shall also be secured by the lien of this Deed of Trust. Nothing in this paragraph shall limit the obligation of Grantor to pay costs and expenses of Beneficiary for which Grantor is otherwise liable under the Loan Documents. 24. Indemnity. Grantor agrees to reimburse Beneficiary and/or Trustee, on demand, for any attorneys' fees or other costs and expenses reasonably incurred by Beneficiary or by Trustee in connection with any litigation or threatened litigation arising out of or in any way related to the validity of the lien of this Deed of Trust or the right of Beneficiary to enforce the terms and conditions of this Deed of Trust including, but not limited to, the right of Beneficiary to enforce the terms and conditions of this Deed of Trust in any bankruptcy, insolvency or receivership proceedings. 23 24 25. Substitution of Trustee. Beneficiary shall have the continuing, irrevocable right and power, from time to time, without notice to Grantor and without specifying any reason therefor, to remove the Trustee named herein and any successor Trustee and to appoint a Substitute Trustee by filing for record in the office of the Register of Deeds in the county in which the Real Property is located an instrument duly acknowledged appointing such Substitute Trustee, and the Substitute Trustee shall thereupon become the successor to the title to the Real Property and the same shall be vested in him in trust for the objects and purposes set forth in this Deed of Trust as if such Substitute Trustee had originally been named Trustee herein with all the powers, duties and obligations conferred upon Trustee in this Deed of Trust. Beneficiary may name or substitute more than one person or entity as Trustee hereunder, and in such event, each Trustee named or substituted is hereby vested with full power and authority to fully exercise in his own name alone, and without joinder of any other Trustee, all or any of the powers, authorities and duties hereby and by law vested in and imposed upon the Trustee or Trustees; and the acts and deeds of any Trustee hereunder acting alone shall be as fully binding and effective as if all said Trustees had joined therein; provided however, that no Trustee shall be liable for any of the acts or omissions of any other Trustee. 26. Renewals and Extensions. This Deed of Trust shall secure any and all renewals, or extensions of the whole or any part of the Obligations hereby secured however evidenced, with interest at such lawful rate as may be agreed upon and any such renewals or extensions or any change in the terms or rate of interest shall not impair in any manner the validity of or priority of this Deed of Trust, nor release Grantor from personal liability for the indebtedness hereby secured. 27. Severability. In the event that for any reason one or more of the provisions of this Deed of Trust or their application to any person or circumstance shall be held to be invalid, illegal, or unenforceable in any respect or to any extent, such provisions shall nevertheless remain valid, legal and enforceable in all such other respects and to such extent as may be permissible. In addition, any such invalidity, illegality, or unenforceability 24 25 shall not affect any other provision of this Deed of Trust, but this Deed of Trust shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 28. Successors and Assigns. This Deed of Trust inures to the benefit of Beneficiary and Trustee and binds Grantor, and their respective successors and assigns, and the words "Beneficiary", "Trustee" and "Grantor" whenever occurring herein shall be deemed to include such respective successors and assigns. Beneficiary may assign or otherwise transfer this Deed of Trust and any or all of the Loan Documents to any other person or entity, and such other person or entity shall thereupon become vested with all of the benefits in respect thereof granted to Beneficiary herein or otherwise. 29. All Advances Notwithstanding Revolving Nature. It is acknowledged and understood that by reason of Grantee's right under the Loan Agreement to make Revolving Credit Loans (as defined in the Loan Agreement) on a revolving basis, the outstanding Obligations may fluctuate from time to time. It is intended that this Deed of Trust shall secure, inter alia, all sums advanced by Beneficiary pursuant to the terms of the Agreement. 30. Notices. All notices required to be given to any of the parties hereunder shall be in writing and shall be deemed to have been sufficiently given for all purposes when presented personally to such party or sent by certified or registered mail, return receipt requested, to such party at its address set forth below: Grantor: Balanced Care at North Ridge, Inc. 600 Newton Road Raleigh, North Carolina 227609 Attention: Clint Fegan, CFO With a Copy to: Wolf, Block, Schorr and Solis-Cohen, LLP 111 S. 15th Street, 12th Floor Packard Building Philadelphia, Pennsylvania 1912-2678 Attention: John M. Coogan, Jr., Esquire Beneficiary: HCFP Funding II, Inc. c/o HealthCare Financial Partners Inc. 2 Wisconsin Circle, Fourth Floor Chevy Chase, Maryland 20815 25 26 Attention: Mr. Ethan Leder, President Such notice shall be deemed to be given when received if delivered personally or two (2) days after the date mailed if sent by certified or registered mail, return receipt requested. Any notice of any change in such address shall also be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived in writing by the party entitled to receive such notice. 31. Definitions; Number and Gender. In the event Grantor consists of more than one person or entity, the obligations and liabilities hereunder of each of such persons and entities shall be joint and several and the word "Grantor" shall mean all or some or any of them. For purposes of this Deed of Trust, the singular shall be deemed to include the plural and the neuter shall be deemed to include the masculine and feminine, as the context may require. The words "Loan Document" or "Loan Documents," shall include any supplements to or any amendments of or restatements or any of the Loan Documents. The words "Property," "Mortgaged Property," "Improvements," "Appurtenances," "Equipment," "Permits," "General Intangibles," "Instruments," "Awards," "Leases," "Rents," "Securities" and "Proceeds" shall include any portion of and additions to such property. 32. Incorporation by Reference. All of the terms and provisions of the Loan Agreement are hereby incorporated herein by reference. 33. Captions. The captions or headings of the paragraphs of this Deed of Trust are for convenience only and shall not control or affect the meaning or construction of any of the terms or provisions of this Deed of Trust. 34. Governing Law. This Deed of Trust shall be governed by and construed in accordance with the laws of the State of North Carolina. 35. Security Agreement. It is the intent of the parties that this Deed of Trust shall also constitute a security agreement within the meaning of the Uniform Commercial Code as adopted in Chapter 25 of the North Carolina General Statutes ("Uniform 26 27 Commercial Code") with respect to the Personal Property; and to that end, Grantor hereby grants a security interest in the Equipment, General Intangibles, Instruments, Permits, Leases, Rents, Securities and Proceeds (collectively, the "Personal Property") for the benefit of Beneficiary to secure the indebtedness evidenced by the Note and secured by this Deed of Trust and all other sums and charges which may become due under or in connection with the Note or any extensions, renewals, replacements, modifications and amendments thereof, whether now existing or hereafter arising, or under this Deed of Trust. The security interest granted in this Deed of Trust shall be evidenced by financing statements and such continuations thereof as may, from time to time, be required by Beneficiary. For purposes of this paragraph, Grantor shall be considered a "debtor" and Beneficiary shall be considered a "secured party" within the meaning of the Uniform Commercial Code, shall have the option of proceeding as to both real and personal property in accordance with the rights and remedies of Beneficiary in respect to the Mortgaged Property or Beneficiary may proceed to exercise its rights and remedies as to the Personal Property under the provisions of the Uniform Commercial Code in which event Beneficiary shall be entitled to all of the remedies provided either herein or as provided for a secured party in the Uniform Commercial Code. The name of the debtor and the secured party, the mailing address of the secured party from which information concerning the security interest may be obtained and the mailing address of the debtor are set forth in the preamble, and a description of the Personal Property is also set forth herein, all in compliance with the requirements of Article 9, Section 402, of the Uniform Commercial Code. All replacements, renewals and additions to the Personal Property shall become and be immediately subject to the security interest granted in this Deed of Trust and be covered by the terms of this Deed of Trust. Upon request by Beneficiary, Grantor shall deliver to Beneficiary an inventory of the Personal Property in reasonable detail. [SEPARATE SIGNATURE PAGE FOLLOWS] 27 28 IN WITNESS WHEREOF, Grantor has executed this Deed of Trust the day and year first above written. ATTEST: BALANCED CARE AT NORTH RIDGE, INC. By: /s/ Robert J. Sutton By: /s/ Robin L. Barber Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Secretary Assistant Secretary [CORPORATE SEAL] STATE OF PENNSYLVANIA ) ) COUNTY OF CUMBERLAND ) I, Wendy L. Clark a Notary Public of the County and State aforesaid, certify that Robin L. Barber personally appeared before me this day and acknowledged that (s)he is the Vice President and Secretary of Balanced Care Corporation, a Delaware corporation, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed by Robin L. Barber as its Vice President, sealed with its corporate seal, and attested by Robert J. Sutton as its Vice President and Assistant Secretary. WITNESS my hand and notarial seal or stamp, this the 22nd day of April, 1999. /s/ Wendy L. Clark Notary Public My Commission Expires: [Notarial Seal/Stamp] EX-10.5 6 FORM OF OPEN-END MORTGAGE, ASSIGNMENT OF RENTS, 1 Exhibit 10.5 FORM OF OPEN-END MORTGAGE, ASSIGNMENT OF RENTS, LEASES AND SECURITY AGREEMENT(Secures Future Advances) (Pennsylvania Form) THIS OPEN-END MORTGAGE, ASSIGNMENT OF RENTS, LEASES AND SECURITY AGREEMENT (this "Mortgage") is made as of this 22nd day of April, 1999 by [ ], a Delaware corporation, with a mailing address of [ ] (the "Mortgagor") in favor of HCFP FUNDING INC., a Delaware corporation with its principal mailing address at c/o HealthCare Financial Partners, Inc., 2 Wisconsin Circle, Fourth Floor, Chevy Chase, Maryland 20815 (the "Mortgagee" or the "Lender"). WITNESSETH: WHEREAS, Mortgagee has agreed to make available to the Mortgagor and certain of its affiliates (collectively, the "Borrower") pursuant to that certain Loan and Security Agreement, of even date herewith, as amended, modified or restated from time to time (collectively, the "Loan Agreement") a revolving loan facility up to the maximum principal amount of $15,000,000.00 (the "Loan"); WHEREAS, the Borrower's obligations to the Mortgagee in connection with the Loan are evidenced by that certain Revolving Credit Note of even date herewith in the maximum principal amount of the Loan, issued by the Borrower and made payable to the Mortgagee (as amended, modified, supplemented and replaced from time to time, the "Note"); WHEREAS, as a condition precedent to making the Loan, Mortgagee requires Mortgagor to execute and deliver this Mortgage in order to secure the obligations of Mortgagor and the other parties constituting the Borrower to the Mortgagee under the Note, the Loan Agreement and all other Loan Documents, as defined in the Loan Agreement (all of such obligations being hereinafter collectively called the "Obligations"); 2 WHEREAS, unless otherwise defined herein, all capitalized terms used herein shall have the respective meanings given to them in the Loan Agreement; and WHEREAS, the maximum aggregate amount principal amount of Obligations intended to be secured by this Mortgage shall equal Fifteen Million Dollars ($15,000,000). NOW THEREFORE, in consideration of the aforesaid Obligations and as security for the payment thereof, together with all existing and future liabilities of Mortgagor to Mortgagee under the Note, the Loan Agreement and all other Loan Documents, and as security for the due and timely performance by Mortgagor of all of the other provisions of the Loan Documents, and intending to be legally bound hereby, Mortgagor hereby GRANTS, BARGAINS, SELLS, CONVEYS, ASSIGNS, TRANSFERS, RELEASES, PLEDGES and MORTGAGES to Mortgagee all of Mortgagor's interest in certain real property located at[ ] and more particularly described on Exhibit A attached hereto and made a part hereof (the "Property"); TOGETHER WITH all of Mortgagor's right, title and interest in and to the following property rights and interests which Mortgagor hereby assigns to Mortgagee until the Obligations are paid in full (the Property, together with the following property, being hereinafter collectively called the "Mortgaged Property"): (a) 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, air conditioning equipment, carpeting and other floor coverings, water heaters, awnings and storm sashes, cleaning apparatus, signs, landscaping, and parking areas, which are or shall be attached or affixed to the Property or such buildings, structures or improvements (the "Improvements"); (b) all streets, lanes, alleys, passageways, water courses, easements, rights, liberties, privileges, air rights, development rights, oil and gas rights, water rights, water stock, tenements, hereditaments and appurtenances whatsoever thereunto belonging to 3 or in any way made appurtenant hereafter, and the reversions and remainder, with respect thereto (the "Appurtenances"); (c) all fixtures and equipment now or hereafter located on, attached to or used or useful in connection with the Property and/or the Improvements, including, but not limited to, beds, linen, televisions, carpeting, telephones, cash registers, computers, lamps, glassware, rehabilitation equipment, restaurant and kitchen equipment, tools, tooling furniture, additions, parts, fittings, accessories, special tools, attachments; provided, however, that with respect to any items which are leased and not owned, the Equipment shall include the leasehold interest only together with any options to purchase any of such items and any additional or greater rights with respect to such items hereafter acquired (the "Equipment"); (d) all general intangibles and other intangible personal property arising out of or connected with the Property, the Improvements or any other portion of the Mortgaged Property, including, without limitation, things in action, contract rights and other rights to payment of money, proceeds from insurance policies after payment of prior interest, patents, unpatented inventions, trade secrets, copyrights, contract rights, goodwill, literary rights, rights to performance, rights under licenses, choses in action claims, information contained in computer media (such as data bases, source and object codes, and information therein), things in action, trademarks and trademarks applied for (together with the goodwill associated therewith) and derivatives thereof, trade names, including the right to make, use, and vend goods utilizing any of the foregoing, and permits, licenses, certifications, authorizations and approvals, and the rights of Mortgagor thereunder, issued by any governmental, regulatory, or private authority, agency, or entity whether now owned or hereafter acquired (the "General Intangibles") ; (e) all instruments, chattel paper, documents or other writings obtained from or in connection with the operation of the Property or the Improvements (including, without limitation, all ledger sheets, computer records and printouts, data bases, programs, books of account and files relating thereto) (the "Instruments"); 3 4 (f) all licenses, permits, certificates, approvals, authorizations and registrations obtained from any governmental or quasi-governmental authority and required, used or useful in connection with the ownership, operation, use or occupancy of the Property or the Improvements, including, without limitation, environmental permits, business licenses, state health department licenses, food service licenses, licenses to conduct business, certificates of need, regulatory approvals and all such other permits, licenses, rights and approvals (the "Permits"); (g) all leases, agreements of sale and other agreements affecting the use or occupancy of any portion or all of the Property or Improvements whether heretofore or hereafter executed and all rights of Mortgagor to payment under any such lease or agreement (the "Leases"); (h) all rent and other payments of whatever nature from time to time payable pursuant to any Lease, including (without limitation) leases of individual apartments or units to residents and leases of retail space for businesses such as pharmacies, stores, beauty shops, barber shops, newsstands, physicians' offices, and specialty shops (the "Rents"); (i) any securities or guaranties held by Mortgagor with respect to any of the General Intangibles, Proceeds (hereinafter defined), Leases or Accounts Receivable, and any notes, drafts, acceptances, chattel paper, documents or other instruments evidencing the same ("Securities"); (j) all proceeds (whether cash or non-cash, moveable or immoveable, tangible or intangible), including proceeds of insurance and condemnation, from the sale, exchange, transfer, collection, loss, damage, disposition, substitution or replacement of any of the Mortgaged Property (the "Proceeds"); and (k) the right, in the name and on behalf of itself or Mortgagor, to appear in or defend any action or proceeding brought with respect to the Mortgaged Property (including without limitation, any condemnation or arbitration proceedings) and to commence any action or proceedings to protect the interest of Mortgagee in the Mortgaged Property. 4 5 TO HAVE AND TO HOLD the Mortgaged Property unto Mortgagee, its successors and assigns forever, together with all right, title and interest of Mortgagor in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to the Mortgaged Property hereafter acquired by, or released to, Mortgagor or constructed, assembled or placed by Mortgagor on the Real Property, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such case, without any further mortgage, pledge, conveyance, assignment or other act by Mortgagor, shall become subject to the lien of this Mortgage and security agreement as fully and completely, and with the same effect, as though now owned by Mortgagor and specifically described herein. Notwithstanding the foregoing, Mortgagor shall, at its own cost, make, execute, acknowledge, deliver and record any and all such further acts, deeds, conveyances, mortgages, notices of assignment, transfers, assurances and other documents as Mortgagee shall from time to time reasonably require for better assuring conveying, assigning, transferring and confirming unto Mortgagee of the Mortgaged Property and the other rights hereby conveyed or assigned or intended now or hereafter so to be, or which Mortgagor may be or may hereafter become bound to convey or assign for carrying out the intention of facilitating the performance of the terms of this Mortgage. In addition, Mortgagor hereby agrees that this Mortgage is a security agreement under the Pennsylvania Uniform Commercial Code and creates in Mortgagee a security interest thereunder in, among other things, all Equipment, General Intangibles, Proceeds, Leases, Rents, Permits, Instruments and Securities. Mortgagor shall, at its own cost and expense, execute, deliver and file any financing statements, continuation certificates and other documents Mortgagee may reasonably require from time to time to perfect and maintain in favor of the Mortgagee a security interest under the Uniform Commercial Code in such Equipment, General Intangibles, Proceeds, Leases, Rents, Permits, Instruments and Securities. Without limiting the generality of any of the foregoing, Mortgagor hereby irrevocably appoints Mortgagee attorney-in-fact for Mortgagor to execute, deliver and file any of the documents referred to hereinabove for and on behalf of Mortgagor. 5 6 PROVIDED ALWAYS, and these presents are upon this express condition, that if Mortgagor or its successors or assigns shall well and truly pay or cause to be paid unto Mortgagee, its successors or assigns, the Obligations secured by this Mortgage, and otherwise perform Mortgagor's obligations under the Loan Documents, then this Mortgage, and the estate hereby granted, shall cease, terminate and be void, and Mortgagee shall furnish to Mortgagor a satisfaction of this Mortgage in proper form for recording, but Mortgagee shall not be required to bear any expense or cost in connection with such satisfaction or the recording thereof. THIS IS AN OPEN-END MORTGAGE and secures, inter alia, present and future advances made by Mortgagee pursuant to the Loan Documents, including, without limitation, advances made by Mortgagee after the initial advance of Loan proceeds on the date hereof pursuant to the Loan Agreement, and regardless of the revolving nature of the Loan. The priority of all such future advances shall relate back to the date of this Mortgage. This Mortgage also secures advances made by Mortgagee with respect to the Mortgaged Property for the payment of taxes, assessments, maintenance charges, and insurance premiums, costs incurred by Mortgagee for the protection of the Mortgaged Property or the lien of this Mortgage, and expenses incurred by Mortgagee by reason of the occurrence of an event of default hereunder and the priority of such advances, costs and expenses shall also relate back to the date of this Mortgage. MORTGAGOR WARRANTS TO AND COVENANTS WITH Mortgagee as follows: 1. Title. As of the date hereof (a) Mortgagor has good and marketable title to an indefeasible fee simple estate in the Mortgaged Property, subject to no lien, charge or encumbrance except the Permitted Liens (as defined in the Loan Agreement); (b) this Mortgage is and shall remain a valid and enforceable first lien on the Mortgaged Property subject only to the matters referred to in subparagraph (a) hereof; (c) Mortgagor shall preserve such title, and all of its rights in and to the Mortgaged Property, and shall forever warrant and defend the validity and priority of the lien hereof against the claims of all persons and entities whomsoever, subject only to the matters referred to in subparagraph (a) hereof; and (d) Mortgagor has full power and lawful authority to mortgage the Mortgaged 6 7 Property and grant a security interest therein in the manner and term herein done or intended hereafter to be done. 2. Payment and Performance. Mortgagor shall punctually pay or cause to be paid the Obligations, in the amounts and at the times and places that the same may be due, and perform and comply with all of the terms, covenants, conditions and obligations contained in the Loan Documents. 3. Taxes and Other Charges. Mortgagor shall pay all taxes of every kind and nature (including real and personal property, income, gross receipts, franchise, profits, sales and withholding taxes), all general and special assessments, water and sewer rents and charges, and all levies, permits, inspection and license fees and other public charges now or hereafter levied or assessed against the Mortgaged Property as liens or assessments (hereinafter individually called a "Tax" and collectively the "Taxes") as the same shall become due and payable from time to time and before interest or penalties accrue thereon; provided, however, that Mortgagor shall not be required to pay any Tax to the extent that nonpayment thereof is permitted while the validity thereof is being contested, so long as (a) Mortgagor notifies Mortgagee in writing of its intention to contest the validity thereof, (b) the validity thereof is being contested in good faith by Mortgagor and (c) Mortgagor deposits with Mortgagee if Mortgagee so requests an amount deemed sufficient to make such payment if the contest is unsuccessful. Notwithstanding the foregoing, Mortgagor shall under no circumstances permit the Mortgaged Property to be sold or advertised for sale for nonpayment of any Tax. Mortgagor shall not apply for or claim any deduction from the taxable value of the Mortgaged Property because of the existence of this Mortgage, subject to Mortgagor's right to contest any Tax as hereinabove provided. Mortgagor shall deliver to Mortgagee receipts evidencing the payment of such Tax on or before the last day on which any Tax may be paid without interest or penalties or as soon thereafter as such receipts are available. 4. Insurance. Mortgagor shall maintain insurance covering the Mortgaged Property required under the terms of the Loan Agreement and otherwise comply with the provisions of the Loan Agreement with respect to such insurance. 7 8 5. Tax and Insurance Escrow. After the occurrence of an Event of Default, Mortgagor shall pay to Mortgagee on the first day of each month a sum equal to one-twelfth (1/12) of the amount of (a) all real estate taxes, all water and sewer charges and assessments, if any, as estimated from time to time by Mortgagee, becoming due with respect to the Mortgaged Property on the next succeeding date upon which the same shall be due and payable and (b) all premiums, computed on an annual basis, for the insurance required to be carried pursuant to paragraph 4 hereof. All such amounts (hereinafter, the "Escrows") shall be held by Mortgagee in such manner as it sees fit without any obligation to invest the same or (if invested) to account for any income or loss resulting therefrom; provided however, that if and to the extent that Mortgagee is required under applicable law to invest the Escrows for the benefit of Mortgagor, Mortgagee shall also have the right to charge a reasonable service fee in connection therewith unless prohibited under such law. The Escrows shall be applied to the payment of the respective items in respect of which the Escrows were deposited, or at Mortgagee's option, to the payment of any such items in such order of priority as Mortgagee shall determine, as the same become due and payable. If, prior to the date upon which any of the aforesaid items shall be due and payable, the amount of Escrows then on deposit therefor shall be insufficient to pay such item, Mortgagor within five (5) days after demand is made therefor shall deposit the amount of such deficiency with Mortgagee. Mortgagee may at its option apply the Escrows or any part thereof in payment of any unpaid portion of the Obligations. If, when making any assignment of this Mortgage, the then Mortgagee shall pay over to its assignee the then balance of the Escrows and such assigning Mortgagee shall have no further obligation to Mortgagor with respect to such deposits. 6. Casualty Loss. Mortgagor shall notify Mortgagee in writing immediately upon the occurrence of any loss affecting the Mortgaged Property. Mortgagor hereby directs any insurer to pay directly to Mortgagee any moneys payable under any insurance policy covering the Mortgaged Property or any portion thereof, and Mortgagor hereby appoints Mortgagee as attorney-in-fact to endorse any draft therefor. Subject to Section 6.7 of the Loan Agreement sums paid to Mortgagee by any insurer may be retained and applied by Mortgagee toward payment of the Obligations (whether or not any portion thereof may then be due and payable) 8 9 in such priority and proportions as Mortgagee in its discretion shall deem proper, and any sums not so applied, at the discretion of Mortgagee, may be paid, either in whole or in part, to Mortgagor for such purposes and upon such conditions as Mortgagee shall designate. 7. Condemnation. In the event that the whole or any part of the Mortgaged Property secured by this Mortgage is condemned or taken for any period of time, or there is any other injury to or decrease in value of the Mortgaged Property as a result of any public or quasi-public authority or corporation exercising the power of eminent domain or otherwise, all sums awarded as damages for such condemnation or taking to which Mortgagor is entitled shall be paid over immediately to Mortgagee. Upon the receipt thereof, Mortgagee may deduct and withhold from the amount actually received any costs, charges or fees incurred by Mortgagee in connection with the recovery of such award (hereinafter, "Mortgagee's Costs"), and thereafter Mortgagee may apply all or any portion of the balance to the discharge of the Obligations and, at the option of Mortgagee, may pay over any sums not so applied to Mortgagor for the purpose of restoring or repairing the Mortgaged Property or for any purpose or object satisfactory to Mortgagee in which event the Obligations shall not be reduced by that amount. Mortgagor hereby irrevocably appoints Mortgagee as attorney-in-fact for Mortgagor for the purpose of collection of any or all proceeds available in connection with the condemnation of the Mortgaged Property. If the Mortgaged Property is transferred, through foreclosure or otherwise, prior to the receipt by Mortgagee of such award of payment, Mortgagee shall have the right, whether or not a deficiency judgment with respect to the Obligations shall have been sought, recovered or denied, to receive such award or payment, or a portion thereof sufficient to pay the Obligations, whichever is less. 8. Preservation of Lien; No Conveyance of Title. (a) Mortgagor shall pay, from time to time as and when the same shall become due, all claims and demands of any persons or entities which, if unpaid, might result in or permit the creation of a lien on the Mortgaged Property or any part thereof, and in general shall do or cause to be done everything necessary so that the lien hereof shall be fully preserved and so that 9 10 there shall not be created, permitted or suffered to exist any lien, encumbrance or charge affecting the Mortgaged Property other than those matters referred to in paragraph 1(a) hereof which have been approved in writing by Mortgagee, or as permitted under the terms of Loan Agreement, all at the sole cost of Mortgagor. At Mortgagee's election, and without notice to Mortgagor, Mortgagee may make but is not obligated to make, any payments which Mortgagor has failed to make under any prior lien, but such payment by Mortgagee shall not release Mortgagor from Mortgagor's obligations or constitute a waiver of Mortgagor's default hereunder. Any sum so expended by Mortgagee shall be secured by this Mortgage, together with interest thereon at the Default Rate (as defined in the Loan Agreement), from the date such payment is made by Mortgagee until the date of repayment by Mortgagor. Notwithstanding the foregoing, Mortgagor shall have the right, at its sole cost and expense, to contest in good faith by any lawful means any such claims and demands, provided that it notifies Mortgagee in writing of its intention to do so and deposits with Mortgagee, if Mortgagee so requests, an amount deemed sufficient by Mortgagee to satisfy such claims and demands if it is ultimately determined that Mortgagor is responsible therefor. (b) Mortgagor shall not convey or attempt to convey or permit or suffer a conveyance or transfer of legal or equitable title to the Property or any part thereof and whether such conveyance or transfer is voluntary, involuntary, by operation of law or otherwise, so long as any part of the Obligations remains unpaid without the prior written consent or Mortgagee. 9. Maintenance and Repair; Compliance with Laws and Regulations. Mortgagor shall cause the Mortgaged Property to be maintained in good condition and repair, reasonable wear and tear excepted. None of the Improvements or Equipment shall be removed, demolished, materially altered or sold (except for normal replacement of the Equipment), without the prior written consent of Mortgagee. Mortgagor shall promptly repair, replace or rebuild any part of the Mortgaged Property which may be damaged or destroyed by any casualty or which may be affected by any condemnation or eminent domain proceeding. Mortgagor shall promptly comply with all laws, orders, ordinances, regulations, restrictions and requirements of governmental authorities, of courts and of insurance companies applicable to Mortgagor or 10 11 affecting the Mortgaged Property, or the use thereof. Mortgagor also shall promptly comply with the provisions of any recorded covenants, conditions or restrictions to which the Mortgaged Property or any part thereof may at any time be subject. Mortgagor shall not cause or allow the construction or erection of any public, municipal or utility improvements upon the Mortgaged Property other than those required by public authorities, without the prior written consent of Mortgagee. Mortgagor shall not drill or extract or enter into any lease for the drilling for or extraction of oil, gas or other hydrocarbon substances or any mineral of any kind or character on or from the Mortgaged Property or any part thereof without the prior written consent of Mortgagee. Mortgagor shall not seek, make or consent to any change in zoning or conditions of use of the Mortgaged Property. 10. Absolute Assignment of Rents. For valuable consideration, the receipt and sufficiency of which Mortgagor acknowledges, Mortgagor hereby grants, bargains, assigns, transfers, sets over, sells and conveys, the Leases and the Rents unto Mortgagee; TO HAVE AND TO HOLD the Leases and the Rents unto Mortgagee, forever, and Mortgagor does hereby bind itself and its heirs, executors, administrators, personal representatives, successors, and assigns to warrant and forever defend the title to the Leases and the Rents unto Mortgagee against every person whomsoever lawfully claiming or to claim the same or any part thereof. Mortgagor and Mortgagee intend this assignment of the Leases and the Rents to be absolute, unconditional and presently effective, and not an assignment for additional security only. (a) Mortgagee hereby grants to Mortgagor a limited license (the "License") to exercise and enjoy all the rights and benefits of the landlord or lessor of the Leases and the Rents, including without limitation, the right to collect, demand, sue for, attach, levy, recover, and receive the Rents, as and when, but not before, they become due and payable, and to give proper receipts, releases and acquittances therefor. Mortgagor hereby agrees to receive all Rents and hold the same as a trust then due and payable, next to the payment of the taxes and assessments on the Property and the insurance premiums required by the terms of the Loan Documents, and then to the costs of Documents and the Leases. Thereafter, Mortgagor may use the balance of the Rents collected in any manner not inconsistent with the Loan Documents. 11 12 (b) Upon the occurrence of an Event of Default, Mortgagee shall have the complete right, power and authority hereunder, then or thereafter, to terminate the License and then and thereafter, without taking possession of the Property, in Mortgagor's name, to collect, demand, sue for, attach, levy, recover, and receive the Rents and to give proper receipts, releases and acquittances therefor, and after deducting all reasonably incurred costs and expenses of operation and collection, including reasonable attorney's fees, to apply the net proceeds thereof in reduction or repayment of the Indebtedness in such order of priority as Mortgagee may determine, in its sole discretion. Upon Mortgagee's termination of the License, and without regard to the adequacy of the security, with or without any action or proceeding through any person or by any agent, Mortgagee may and shall have the complete right, power and authority hereunder, then or thereafter, to answer upon, take possession of, manage and operate the Property, or any part thereof; to make, modify, enforce, cancel or accept surrender of any Lease; to remove and evict any tenant or lessees under any of the Leases; to increase or decrease the Rents; and to decorate, clean and repair, and otherwise do any act or incur any cost or expense which Mortgagee may deem reasonably necessary to protect the status and value of the Property. (c) Upon the occurrence of an Event of Default and in addition to any other remedies set forth in this Instrument, and without the necessity of Mortgagee's entering upon and taking and maintaining full control of the Property in person, by agent or by a court-appointed receiver, Mortgagee shall immediately be entitled to possession of all Rents as the same become due and payable, including without limitation Rents then due and unpaid, and all such Rents shall immediately upon delivery of such notice be held by Mortgagor as trustee for the benefit of Mortgagee only; provided however, that the written notice by Mortgagee to Mortgagor of the breach by Mortgagor shall contain a statement that Mortgagee exercises its rights to such Rents. Mortgagor agrees that commencing upon delivery of such written notice of an Event of Default by Mortgagee to Mortgagor, each tenant of the Property shall make such Rents payable to and pay such Rents to Mortgagee or Mortgagee's agents on Mortgagee's written demand to each tenant therefor, delivered to each tenant personally, by mail or by delivering such demand to each rental unit, without 12 13 any liability on the part of any tenant to inquire further as to the existence of an Event of Default. 11. Leases. Mortgagor shall not enter into any lease or similar agreement for space in or on the Mortgaged Property without in each case obtaining Mortgagee's prior written approval of all the terms and conditions thereof and, once approved, Mortgagor shall not amend, modify or cancel any such lease or similar agreement or assign any amounts due thereunder without obtaining Mortgagee's prior written approval. Mortgagee's approval pursuant to this paragraph 11 shall in no instance be unreasonably withheld or delayed. 12. Required Notice. Mortgagor shall give Mortgagee prompt written notice of any action or proceeding purporting to affect the Mortgaged Property of which it has actual knowledge including, without limitation, the following: (a) a fire or other casualty causing damage to the Mortgaged Property (b) receipt of notice of condemnation of the Mortgaged Property or any part thereof; (c) receipt of notice from any governmental authority adversely affecting the structure, use or occupancy of the Mortgaged Property; (d) receipt of any notice from the holder of any lien or security interest in the Mortgaged Property; or (e) commencement of any litigation affecting the Mortgaged Property. After the occurrence of an Event of Default, Mortgagee shall have the right to appear in or defend any such action or proceeding to the same extent as Mortgagor. Furthermore, Mortgagee shall have the right to bring any action or proceeding, in the name and on behalf of itself or Mortgagor, which Mortgagee, in its discretion, feels should be brought to protect its interest in the Mortgaged Property or any part thereof after the occurrence of an Event of Default. 13. Mortgagee's Right to Cure. Mortgagee shall have the right, but not the obligation, at Mortgagee's election and without notice to Mortgagor, to cure any default by Mortgagor under this Mortgage or any of the other Loan Documents or under any mortgage or with respect to any security interest, lien or encumbrance which is senior in lien and position to this Mortgage. Any payments made or expenses incurred by Mortgagee in the exercise of such right shall not release Mortgagor from Mortgagor's obligation or constitute a waiver of Mortgagor's default hereunder. Any such payments made or expenses incurred 13 14 by Mortgagee shall be repayable on demand by Mortgagee, together with interest thereon at the Default Rate from the date such payment was made or such expense was incurred, and the aggregate amount thereof, including such interest, shall become part of the Obligations and shall be secured by the lien of this Mortgage. 14. Estoppel Certificate. Within five (5) days after being requested to do so by Mortgagee, Mortgagor shall furnish to Mortgagee or any proposed assignee of this Mortgage a statement, duly executed, acknowledged and certified by Mortgagor, setting forth the remaining unpaid amount of the Obligations and whether there exists any uncured defaults, offsets or defenses thereto. 15. Right to Inspect. Mortgagor shall permit Mortgagee and its agents to enter and inspect the Mortgaged Property or any part thereof at all reasonable times. 16. Revenue, Tax or Other Stamps. Mortgagor shall pay the cost of any revenue, tax or other stamps now or hereafter required by the laws of the Commonwealth of Pennsylvania or the United States to be affixed to this Mortgage and if any taxes are imposed under the laws of the Commonwealth of Pennsylvania, the United States or local governmental or quasi governmental agency with respect to debts secured by a mortgage, or with respect to evidences of indebtedness so secured, Mortgagor shall pay or reimburse Mortgagee upon demand the amount of such taxes without credit against any of the Obligations. If Mortgagor does not or may not do so, Mortgagee may at its option accelerate the Obligations evidenced by the Loan Documents to maturity as in the case of default by Mortgagor or Borrower. 17. Possession. Until an Event of Default, Mortgagor shall be permitted to retain actual possession of the Mortgaged Property, to manage, operate, use and enjoy the same and all rights appertaining thereto, and to collect, receive, take, use and enjoy the Rents. The right of Mortgagor to collect the Income and Rents may be revoked by Mortgagee at any time and from time to time after an Event of Default has occurred under this Mortgage, by giving notice or such revocation to Mortgagor. Following the giving of such notice, Mortgagee may retain and apply the Rents toward payment of the Obligations in such priority and proportions as Mortgagee, in its discretion, shall determine. 14 15 18. Events of Default. The occurrence of any one or more of the following events shall, at Mortgagee's option, constitute a default hereunder (each an "Event of Default"): (a) an Event of Default shall occur under the Loan Agreement, the Note or any other Loan Document; (b) Except as otherwise specifically provided for in this Mortgage, Mortgagor shall fail to observe or perform any of the covenants or agreements on its part to be observed or performed under this Mortgage within twenty (20) days after written notice from Mortgagee of such noncompliance; (c) Any representation or warranty of Mortgagor under this Mortgage shall be untrue in any material respect; or (d) Except as permitted herein, Mortgagor shall have conveyed or attempted to convey or permitted or suffered a conveyance or transfer of legal or equitable title to the Property or any part thereof, or permit a lien, charge or encumbrance on the Property other than the Permitted Liens, irrespective of whether such conveyance, transfer, lien, charge or encumbrance was voluntary, involuntary, incurred by operation of law or otherwise, without the prior written consent of Mortgagee. 19. Remedies. Upon the occurrence of any Event of Default: (a) The Obligations shall, at the option of Mortgagee, become due and payable immediately without presentment, demand, notice of nonpayment, protest, notice of protest or other notice of dishonor, all of which are hereby expressly waived by Mortgagor. (b) Mortgagee may institute appropriate proceedings at law or equity to collect the amount of the Obligations then due (by acceleration or otherwise), or for specific performance of any of the covenants of Mortgagor under any of the Loan Documents (and Mortgagor acknowledges that all such covenants may be specifically enforced by Mortgagee by injunction or other appropriate equitable remedy), or to recover damages for any 15 16 breach thereof, or to institute an action of mortgage foreclosure against the Mortgaged Property, or take such other action at law or in equity for the enforcement of this Mortgage and realization on the Mortgage security or any other security herein or elsewhere provided for, and proceed therein to final judgment and execution for the Obligations, with interest as specified in paragraph 21 below, together with costs and expenses as specified in paragraph 22 below. (c) With or without demand upon Mortgagor for the surrender of possession, Mortgagee may enter upon and take possession of the Mortgaged Property, breaking locks if necessary and without liability for trespass, damages or otherwise and, upon so doing, Mortgagee may, in its discretion and in addition to any of its other rights, as Mortgagee in possession, alter, improve, complete or repair the Mortgaged Property (and in so doing Mortgagee shall have the right to use the Mortgaged Property and to expend such amount for that purpose as Mortgagee shall deem best, all of which, with interest thereon at the Default Rate from date of payment, shall be repayable by Mortgagor on demand and shall be secured hereby), and operate, rent, sell or lease the same in the name of Mortgagor or Mortgagee upon such terms and conditions as Mortgagee shall deem appropriate, and Mortgagor hereby irrevocably appoints Mortgagee attorney-in-fact for Mortgagor for all such purposes. (d) Mortgagee may further, by summary proceedings, initiate an action for possession or otherwise, dispossess any tenants, users or occupiers of the Mortgaged Property then or thereafter in default in the payment of any rent or other charge for the use thereof, and any tenants or other users or occupiers whose leasehold estates or rights to use the Mortgaged Property are subordinate to the lien of this Mortgage, whether or not any such tenant, user or occupier is so in default; and Mortgagor hereby irrevocably appoints Mortgagee attorney-in-fact of Mortgagor for all such purposes. If Mortgagor remains in possession after demand by Mortgagee for surrender of possession of the Mortgaged Property, such continued possession by Mortgagor shall be as tenant of Mortgagee, and Mortgagor agrees to pay monthly in advance to Mortgagee such rent for the Mortgaged Property so occupied as Mortgagee may demand, and in default of so doing, Mortgagor may also be dispossessed by summary proceedings or otherwise. In case of the appointment of a 16 17 receiver of the rents, the foregoing agreement of Mortgagor to pay rent shall inure to the benefit of such receiver. (e) With or without taking possession of the Mortgaged Property, Mortgagee may collect and receive all the Income and Rents and, after deducting the cost of all alterations, improvements, repairs, completion, partial completion, operation, sale, rental, leasing commissions and charges, including, but not limited to, counsel fees, incurred by Mortgagee, apply the net income to the sums secured hereby in such manner as Mortgagee in its discretion shall determine. Mortgagee shall be liable to account only for the Income and Rents actually received. (f) If Mortgagee shall so elect, Mortgagor shall not resist or contest, but shall join in any petition to any court by Mortgagee for the appointment of a receiver or receivers of the Mortgaged Property or any part thereof, and of all the Income and Rents therefrom, with such powers as the court making such appointment shall confer, and Mortgagor hereby appoints Mortgagee attorney-in-fact of Mortgagor for all such purposes. (g) All deposits held in connection with the rental, lease, license or use of space or other facilities on the Mortgaged Property at the time of the occurrence of such event of default, all interest of Mortgagor in all premiums for, or dividends upon, any insurance for the Mortgaged Property, and all refunds or rebates of taxes and assessments upon the Mortgaged Property, are hereby assigned to Mortgagee as further security for the payment of the Obligations during the continuance of any such event of default. (h) To the extent now or hereafter permitted by law and subject to such grace periods and notice requirements thereby imposed, Mortgagee may cause a judicial sale of the Mortgaged Property in accordance with this subparagraph (h). Such sale may be made without demand on Mortgagor at the time and place fixed in the notice of such sale, and such sale may be of the Mortgaged Property as a whole or in separate lots, and in such order of Mortgagee may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Such sale of the Mortgaged Property may be postponed by public announcement at the time and place of sale, and may be further postponed from time to time thereafter by public 17 18 announcement at the time fixed by the preceding postponement. Any person or entity, including Mortgagee , may purchase at such sale. After deducting all costs, fees, and expenses of Mortgagee, including cost of evidence of title in connection with such sale, the proceeds of sale shall be applied to payment of the Obligations. The Mortgaged Property may be sold as aforesaid either before, after, or during the pendency of any proceedings for the enforcement of the provisions of this Mortgage, and such power and right of sale shall not be affected by any entry hereunder, or by the exercise of any other right, remedy or power with respect to the enforcement of the provisions of any of the Loan Documents or the collection of the amount of the Obligations. The provisions of this subparagraph (h) are not intended to and shall not adversely affect Mortgagee's rights to conduct a nonjudicial sale of such portions of the Mortgaged Property as constitute personal property. 20. Remedies Cumulative, etc. (a) No right or remedy conferred upon or reserved to Mortgagee under any of the Loan Documents or with respect to any of the Mortgaged Property, or now or hereafter existing at law or in equity or by statute or other legislative enactment, is intended to be exclusive of any other such right or remedy and each and every such right or remedy shall be cumulative and concurrent, and shall be pursued separately, concurrently, successively or otherwise, at the sole discretion of Mortgagee, and shall not be exhausted by any one exercise thereof but may be exercised as often as occasion therefor shall occur. No act of Mortgagee shall be deemed or construed as an election to proceed under any one such right or remedy to the exclusion of any other such right or remedy; furthermore, each such right or remedy of Mortgagee shall be separate, distinct and cumulative and none shall be given effect to the exclusion of any other. The failure to exercise or delay in exercising any such right or remedy, or the failure to insist upon strict performance of any term of any of the Loan Documents, shall not be construed as a waiver or release of the same, or of any event of default thereunder, or of any obligation or liability of Mortgagor thereunder. (b) The recovery of any judgment by Mortgagee or the levy of execution under any judgment upon the Mortgaged Property shall not affect in any manner, or to any extent, the lien of 18 19 this Mortgage upon the Mortgaged Property, or any security interest in any other Mortgaged Property, or any rights, remedies or powers of Mortgagee under any of the Loan Documents or with respect to any of the Mortgaged Property, but such lien and such security interest and such rights, remedies and powers of Mortgagee shall continue unimpaired as before. Further, the entry of any judgment by Mortgagee shall not affect in any way the interest payable hereunder or under any of the other Loan Documents on any amounts due to Mortgagee, but interest shall continue to accrue on such amounts at the Default Rate (as hereinafter defined) after the entry of any judgment and continuing until distribution of the proceeds of any Sheriff's sale. (c) Mortgagor hereby waives presentment, demand, notice of nonpayment, protest, notice of protest or other notice of dishonor, and any and all other notices in connection with any default in the payment of, or any enforcement of the payment of, the Obligations, except such notices as contemplated hereon or in the Loan Agreement. To the extent permitted by law, Mortgagor waives the right to any stay of execution and the benefit of all exemption laws now or hereinafter in effect. (d) Mortgagor agrees that Mortgagee may release, compromise, forbear with respect to, waive, suspend, extend or renew any of the terms of the Loan Documents (and Mortgagor hereby waives any notice of any of the foregoing), and that the Loan Documents may be amended, supplemented or modified by Mortgagee and the other signatory parties and that Mortgagee may resort to any of the Mortgaged Property (or any other collateral securing the Obligations) in such order and manner as it may think fit, or accept the assignment, substitution, exchange, pledge, or release of all or any portion of any of the Mortgaged Property, for such consideration, or none, as it may require, without in any way affecting the validity of any liens over or other security interest in the remainder of any such Mortgaged Property (or the priority thereof or the portion of any subordinate holder of any lien or other security interest with respect thereto); and any action taken by Mortgagee pursuant to the foregoing shall in no way be construed as a waiver or release of any right or remedy of Mortgagee, or of any event of default, or of any liability or obligation of Mortgagor, under any of the Loan Documents. 19 20 (e) To the extent permitted by law, Mortgagor shall not at any time insist upon, or plead, or in any manner whatever claim or take any benefit or advantage of any stay or extension or moratorium law, or any exemption from execution or sale of the Mortgaged Property, wherever enacted, now or at any time hereafter in force, which may affect the covenants and terms of performance of this Mortgage, nor claim, take, or insist upon any benefit or advantage of any law now or hereafter by providing for the valuation or appraisal of the Mortgaged Property, prior to any sale of any of Mortgagor's interest therein; nor, after any such sale or sales, claim or exercise any right under any statute heretofore or hereafter enacted to redeem the Mortgaged Property so sold or any part thereof, and Mortgagor hereby expressly waives all benefit or advantage of any such law or laws, and covenants not to hinder, delay, or impede the execution of any power herein granted to Mortgagee but to suffer and permit the execution of every power as though no such law or laws had been made or enacted. Mortgagor further waives and releases all procedural errors, defects and imperfections in any proceeding instituted by Mortgagee under any of the Loan Documents. (f) Mortgagor, for itself and for all persons hereafter claiming through or under it or who may at any time hereinafter become holders of liens junior to the lien of this Mortgage hereby expressly waives and releases all rights to direct the order in which any of the Mortgaged Property shall be sold in the event of any sale or sales pursuant hereto and to have any of the Mortgaged Property and/or any other property now or hereafter constituting security for the Obligations marshaled upon any foreclosure of this Mortgage or of any other security for any of the Obligations. (g) Mortgagor agrees that any action or proceeding against it to enforce the Mortgage may be commenced in state or federal court in Pennsylvania, and Mortgagor waives personal service of process and agrees that a summons and complaint commencing an action or proceeding in any such court shall be properly served if served by registered or certified mail in accordance with the notice provisions set forth herein and Mortgagor expressly waives any and all defenses to an exercise of personal jurisdiction by any such court. 20 21 21. Default Rate. Following the occurrence of any Event of Default and continuing until all Obligations are paid in full, the outstanding Obligations shall bear interest at the Default Rate, and shall be secured by this Mortgage. 22. Costs and Expenses. Following the occurrence of any Event of Default, Mortgagor shall pay upon demand all costs and expenses (including all amounts paid to attorneys, accountants, real estate brokers and other advisors employed by Mortgagee and to any contractors for labor and materials), incurred by Mortgagee in the exercise of any of its rights, remedies or powers under any of the Loan Documents, or as a secured or unsecured creditor, as the case may be, of Mortgagor in any federal or state bankruptcy proceedings, or with respect to any of the Mortgaged Property with respect to such event of default, and any amount thereof not paid promptly following demand therefor, together with interest thereon at the Default Rate from the date of such demand, shall become part of the Obligations and shall be secured by the lien or this Mortgage. In connection with and as part of the foregoing, in the event that any of the Loan Documents is placed in the hands of any attorney for the collection of any sum payable thereunder, Mortgagor agrees to pay reasonable attorneys' fees for the collection of the amount being claimed under such Loan Documents, as well as all costs, disbursements, and allowances provided by law, and the payment of such fees and costs, disbursements and allowances shall also be secured by the lien of this Mortgage. Nothing in this paragraph shall limit the obligation of Mortgagor to pay costs and expenses of Mortgagee for which Mortgagor is otherwise liable under the Loan Documents. 23. Renewals and Extensions. This Mortgage shall secure any and all renewals, or extensions of the whole or any part of the Obligations hereby secured however evidenced, with interest at such lawful rate as may be agreed upon and any such renewals or extensions or any change in the terms or rate of interest shall not impair in any manner the validity of or priority of this Mortgage, nor release Mortgagor from personal liability for the indebtedness hereby secured. 24. Severability. In the event that for any reason one or more of the provisions of this Mortgage or their application to any person or circumstance shall be held to be invalid, illegal, or unenforceable in any respect or to any extent, such 21 22 provisions shall nevertheless remain valid, legal and enforceable in all such other respects and to such extent as may be permissible. In addition, any such invalidity, illegality, or unenforceability shall not affect any other provision of this Mortgage, but this Mortgage shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 25. Successors and Assigns. This Mortgage inures to the benefit of Mortgagee and binds Mortgagor, and their respective successors and assigns, and the words "Mortgagee" and "Mortgagor" whenever occurring herein shall be deemed to include such respective successors and assigns. Mortgagee may assign or otherwise transfer this Mortgage and any or all of the Loan Documents to any other person, and such other person shall thereupon become vested with all of the benefits in respect thereof granted to Mortgagee herein or otherwise. 26. Notices. All notices required to be given to any of the parties hereunder shall be in writing and shall be deemed to have been sufficiently given for all purposes when presented personally to such party or sent by certified or registered mail, return receipt requested, to such party at its address set forth below: Mortgagor: c/o Balanced Care Corporation 5021 Louise Drive, Suite 200 Mechanicsburg, Pennsylvania 17055 Attention: Clint Fegan, Chief Financial Officer Telephone: (717) 796-6187 Telecopier: (717) 796-6150 with a copy to: Wolf, Block, Schorr and Solis-Cohen, LLP 111 S. 15th Street 12th Floor Packard Building Philadelphia, Pennsylvania 19102-2678 Attention: John M.. Coogan, Jr. Mortgagee: HCFP Funding, Inc. c/o HealthCare Financial Partners Inc. 22 23 2 Wisconsin Circle, Fourth Floor Chevy Chase, Maryland 20815 Attention: Mr. Ethan Leder, President Such notice shall be deemed to be given when received if delivered personally or two (2) days after the date mailed if sent by certified or registered mail, return receipt requested. Any notice of any change in such address shall also be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived in writing by the party entitled to receive such notice. 27. Indebtedness. It is the intent of Mortgagor and Mortgagee that this Mortgage secure any and all indebtedness of Mortgagor to Mortgagee under or in connection with the Note and the Loan Agreement or any extensions, renewals, replacements, modifications and amendments thereof, whether now existing or hereafter rising, due or to become due, absolute or contingent, liquidated or unliquidated, direct or indirect, and this Mortgage is intended and does secure, not only the indebtedness hereinabove specifically referred to, but also any and all other debts, obligations and liabilities of Mortgagor to Mortgagee, whether now existing or hereafter arising, including without limitation any future or additional advances made by Mortgagee to Mortgagor for any purpose, and any and all extensions or renewals of same, or any part thereof, at any time before actual satisfaction and cancellation of this Mortgage in the public records where it is recorded, and whether the same be evidenced by promissory note, open account, endorsement, guaranty agreement, pledge agreement, or otherwise; and it is expressly agreed that any indebtedness at any time secured hereby may be extended, rearranged or renewed, and that any part of the security herein described may be waived or released without in any way altering, varying or diminishing the force, effect or lien of this Mortgage; and the lien priority of this Mortgage and Security Agreement shall continue on all of the real estate and other property and rights covered hereby and not expressly released until all sums with interest and charges hereby secured are fully paid; and no other security now existing or hereafter taken to secure the payment of said indebtedness or any part thereof shall in any manner be impaired or affected by the execution of this Mortgage ; and no security subsequently taken by Mortgagee or other holder or holders of said indebtedness 23 24 shall in any manner impair or affect the security given by this Mortgage; and all security for the payment of said indebtedness or any part thereof shall be taken, considered and held as cumulative. 28. Adequacy of Consideration on Sheriff Sale. Mortgagor, as an inducement to Mortgagee to make the Loan, agrees that, after an event of default and subsequent sale, on execution process of the Mortgaged Property, the bid accepted by the Sheriff, although not exceeding costs and unpaid taxes, shall be deemed adequate consideration for the Mortgaged Property and any right to challenge or question any such Sheriff's sale, on the ground of inadequacy of consideration and/or petition the court to set aside any such sale, is hereby expressly waived, provided however, that such Sheriff's sale is conducted in accordance with all applicable laws. 29. SECTION INTENTIONALLY DELETED. 30. Open End Mortgage. This Mortgage is an Open-End Mortgage securing future advances pursuant to 42 Pa. C.S.A. Section8143. WITHOUT LIMITING ANY OTHER PROVISION OF THIS MORTGAGE, THIS MORTGAGE SECURES UNPAID BALANCES OF ADVANCES MADE, WITH RESPECT TO THE MORTGAGED PROPERTY, FOR THE PAYMENT OF TAXES, ASSESSMENTS, MAINTENANCE CHARGES, INSURANCE PREMIUMS OR COSTS INCURRED FOR THE PROTECTION OF THE MORTGAGED PROPERTY OR THE LIEN OF THE MORTGAGE, OR EXPENSES INCURRED BY THE MORTGAGEE BY REASON OF DEFAULT BY THE MORTGAGOR UNDER THE MORTGAGE, AND TO ENABLE COMPLETION OF THE IMPROVEMENTS FOR WHICH THE LOAN WAS ORIGINALLY MADE. SUCH ADVANCES INCLUDE, WITHOUT LIMITATION, ALL ADVANCES MADE AS PROVIDED IN THE LOAN DOCUMENTS. The receipt by Mortgagee of written notice either from Mortgagor or another party, purportedly sent to terminate, limit, or restrict future advances whether or not such notice is sent pursuant to the provisions of 42 Pa. C.S.A. Section8143(b) or 8143(c) shall be an event of default hereunder without the benefit of notice or a cure period for Mortgagor. The obligations of Mortgagor hereunder and the other parties constituting the Borrower have expressly granted mortgages and other liens on the Mortgaged Property and other real and personal property located in Pennsylvania, North Carolina and elsewhere. Each such mortgage, security interest or other lien granted in 24 25 favor of Lender, by the Borrower is cross collateralized to secure all the Obligations. Resort to any remedy or item of collateral by Lender shall not discharge Mortgagor or any other Borrower of its liability for the Obligations until all of the same are indefeasibly paid in full. Lender may allocate the proceeds from the sale, transfer, foreclosure or otherwise of the Mortgaged Property as it determines. 31. Definitions; Number and Gender. In the event Mortgagor consists of more than one person or entity, the obligations and liabilities hereunder of each of such persons and entities shall be joint and several and the word "Mortgagor" shall mean all or some or any of them. For purposes of this Mortgage, the singular shall be deemed to include the plural and the neuter shall be deemed to include the masculine and feminine, as the context may require. The words "Loan Document" or "Loan Documents," shall include any supplements to or any amendments of or restatements or any of the Loan Documents. The words "Property," "Mortgaged Property," "Improvements," "Appurtenances," "Equipment," "Permits", "General Intangibles," "Instruments", "Awards," "Leases", "Rents," "Securities" and "Proceeds" shall include any portion of and additions to such property. 32. Incorporation by Reference. All of the terms and provisions of the Loan Agreement are hereby incorporated herein by reference. 33. Captions. The captions or headings of the paragraphs of this Mortgage are for convenience only and shall not control or affect the meaning or construction of any of the terms or provisions of this Mortgage. 34. Governing Law. This Mortgage shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 25 26 IN WITNESS WHEREOF, Mortgagor has executed this Mortgage the day and year first above written. ATTEST: By: /s/ Robert J. Sutton By:/s/ Robin L. Barber Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary [CORPORATE SEAL] The address of the within named mortgagee is: Two Wisconsin Circle, 4th Floor, Chevy Chase, Maryland 20815 On behalf of Mortgagee COMMONWEALTH OF PENNSYLVANIA : : ss. COUNTY OF CUMBERLAND : On this 22nd, the day of April, 1999, before me, a Notary Public in and for the Commonwealth of Pennsylvania, personally appeared who acknowledged himself to be the Vice President and Secretary of Mortgagor, and that he as such officer, executed the foregoing instrument on behalf of such corporation for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Wendy L. Clark Notary Public My Commission Expires: 26 EX-10.6 7 SCHEDULE TO FORM OF OPEN-END MORTGAGE 1 Exhibit 10.6 SCHEDULE TO FORM OF OPEN-END MORTGAGE, ASSIGNMENT OF RENTS, LEASES AND SECURITY
Mortgager Mortgager's Real Property Mailing Address Location Balanced Care at 164 Schiebel Road 164 Schiebel Road Butler, Inc. d/b/a Clearfield Township Butler, PA 16001 Outlook Pointe Butler, PA 16001 Clearfield Township Keepsakes at Butler Butler County BCC at Darlington, 498 Lisbon Road 498 Lisbon Road Inc. d/b/a Outlook Darlington, PA 16115 Darlington, PA 16115 Pointe Commons at Beaver County South Beaver Balanced Care at 120 Elliot Road 120 Elliot Road Sarver, Inc. d/b/a Sarver, PA 16055 Sarver, PA 16055 Outlook Pointe Butler County Commons at Sarver Balanced Care at Box 340, Route 1 Box 340, Route 1 Eyers Grove, Inc. Millville, PA 17846 Eyersgrove Millville, PA 17846 Butler County
EX-10.7 8 ACCOUNTS RECEIVABLE INTERCREDITOR AGREEMENT 1 Exhibit 10.7 ACCOUNTS RECEIVABLE INTERCREDITOR AGREEMENT THIS ACCOUNTS RECEIVABLE INTERCREDITOR AGREEMENT is made as of this 22nd day of April, 1999, by and between HCFP FUNDING, INC., a Delaware corporation, having an office at 2 Wisconsin Circle, 4th Floor, Chevy Chase, Maryland 20815 (the "Credit Lender"); and MEDITRUST MORTGAGE INVESTMENTS, INC., a Delaware corporation, having an office at 197 First Avenue, Needham Heights, Massachusetts 02494 ("MMI"). WHEREAS, Balanced Care Corporation ("Parent"), the following subsidiaries of the Parent: BCC at Hermitage Park Care Center, Inc., BCC at Lebanon Care Center, Inc., BCC at Lebanon Park Manor, Inc., BCC at Mt. Vernon Park Care Center, Inc., BCC at Mount Vernon Park Care Center West, Inc., BCC at Nevada Park Care Center, Inc., BCC at Nixa Park Center, Inc., BCC at Republic Park Center, Inc., BCC at Springfield Care Center, Inc., all of which are Delaware corporations, and Dixon Management, Inc., a Missouri corporation (collectively, the "A/R Subs"); and certain other affiliated entities of the Parent (all of the foregoing are referred to herein, collectively, as the "Borrower") are parties to a loan and security agreement with the Credit Lender dated as of April 22nd, 1999 (together with any and all other documents securing, evidencing or otherwise given in connection with the loan and security agreement or the loans thereunder are hereinafter collectively referred to as, the "Credit Agreement"); and WHEREAS, MMI acknowledges having been informed by the Credit Lender that as collateral for the loans made pursuant to the Credit Agreement, the Credit Lender has been granted, inter alia, a security interest in certain assets of the A/R Subs as described on Exhibit A attached hereto (the "Credit Lender Collateral"); and WHEREAS, certain of the entities constituting the Borrower have entered into a $3,115,000 mortgage loan transaction with MMI (the "BCC Loan") and certain other entities constituting the Borrower are lessees under certain leases in connection with a $41,385,000 loan from MMI to Hawthorne Health Properties, Inc. (the "Hawthorne Loan") (together the BCC Loan and Hawthorne Loan shall be hereinafter referred to as the "Loan"), which Loan is secured, in part, by mortgage and security agreements and/or 2 assignments of leases and rents affecting the skilled nursing facilities more particularly described in Exhibit B attached hereto (collectively the "Facility") and by a security interest covering the Credit Lender Collateral. All documents evidencing, securing or otherwise given in connection with the Loan are hereinafter collectively referred to as the "MMI Loan Documents" and all collateral thereunder shall be collectively referred to as the "MMI Collateral" (which includes, without limitation, the Credit Lender Collateral). NOW, THEREFORE, for consideration paid, receipt of which is hereby acknowledged, the parties hereto hereby act and agree as follows: 1. Consent. Notwithstanding anything to the contrary set forth in the MMI Loan Documents, MMI hereby consents to the execution and delivery by Borrower of the Credit Agreement and the granting by the A/R Subs to the Credit Lender of security interests in the Credit Lender Collateral. 2. Notices. The Credit Lender agrees to give MMI a copy of any notice of default and/or any other notice pertaining to any exercise of any right and/or remedy under the Credit Agreement that the Credit Lender gives to the Borrower pursuant to the Credit Agreement, simultaneously with the giving of such notice to the Borrower. MMI agrees to give the Credit Lender a copy of any notice of default and/or any other notice pertaining to any exercise of any right and/or remedy under the MMI Loan Documents that MMI gives to the Borrower pursuant to the Borrower/MMI Documents, simultaneously with the giving of such notice to the Borrower. 3. Priorities with Respect to the Collateral. a) Notwithstanding anything to the contrary that may be set forth in any of the MMI Loan Documents, MMI acknowledges and agrees that, as between MMI and the Credit Lender, except as provided in paragraph 3(d) below, the Credit Lender's security interest in that portion of the Credit Lender Collateral that constitutes Accounts (as hereinafter defined) shall be treated as prior to MMI's security interest in such Accounts. b) The Credit Lender acknowledges having been informed by MMI that, as additional security for the obligations of the Borrower under the MMI 2 3 Loan Documents, as part of the MMI Collateral, (i) the A/R Subs have each granted MMI a collateral assignment of, and perfected security interest in, all licenses, approvals, qualifications, variances, permissive uses, certificates of need, franchises, accreditation's, certificates, certifications, consents, permits and other authorizations (collectively, the "Permits") and agreements and patient admission agreements, contracts, contract rights, warranties and representations and franchises (collectively, the "Contracts") benefiting, relating to or affecting the Facility and the ownership, construction, development, maintenance, management, repair, use, occupancy, possession or operation thereof or the operation of any programs or services in conjunction with the Facility and all renewals and replacements and substitutions therefor, now or hereafter issued by or entered into with any governmental authority or maintained or used by the A/R Subs or entered into by the A/R Subs with any third party, including, without limitation, patient contracts and governmental reimbursement contracts associated with the Facility which generates Accounts and (ii) each of the A/R Subs has granted MMI a perfected security interest in all books, records, ledgers, print-outs, papers, data, file materials and information relating to the Facility, any account debtors in respect thereof and/or to the operation of each of the A/R Subs' businesses, and all rights of access to such books, records, ledgers, print-outs, papers, file materials and information, and all property in which such books, records, ledgers, print-outs, data, file materials and information are stored, recorded, and maintained (collectively, the "Books and Records"). Notwithstanding anything to the contrary set forth in the Credit Agreement, the Credit Lender further acknowledges and agrees that, as between the Credit Lender and MMI, MMI's said security interest in the Permits, the Contracts and the Books and Records, as well as MMI's security interest in all other items of the Credit Lender Collateral (other than, as provided in paragraphs 3(a) and 3(d), in Accounts accruing prior to the "Trigger Event", as 3 4 hereinafter defined) shall be treated as prior to the Credit Lender's security interest in the Permits, the Contracts, the Books and Records and the other items of the Credit Lender Collateral (other than Accounts accruing prior to the Trigger Event). As used herein, the term Accounts shall mean (i) accounts (as defined in the Uniform Commercial Code as adopted in Massachusetts) of each of the A/R Subs and (ii) rights to payment for goods sold or leased or services rendered by any of the A/R Subs or any other party, whether or not yet earned by performance, including, without limitation, obligations evidenced by an account, note, contract, security agreement, chattel paper, or other evidence of indebtedness (collectively, the "Receivables"); together with (1) all security pledged, assigned, hypothecated or granted to or held by any of the A/R Subs to secure the foregoing, (2) any property received in payment, settlement or compromise of any account or Receivable, (3) all guarantees, endorsements and indemnifications on, or of, any of the foregoing, (4) all rights, remedies and privileges pertaining to any of the foregoing, (5) all powers of attorney for the execution of any evidence of indebtedness or security or other writing in connection therewith, and (6) all evidences of the filing of financing statements and other statements and the registration of other instruments in connection therewith and amendments thereto; all whether now existing or hereafter acquired or arising and including all proceeds and products thereof, c) Without representing or implying that the license hereafter referred to is necessary, MMI hereby grants to the Credit Lender a license in the Permits, the Contracts and the Books and Records (the "License Rights"), but only to the extent that (i) MMI is able to do so consistent with applicable law and MMI's contractual obligations (now existing or hereafter entered into) and (ii) the License Rights are necessary for the Credit Lender to sue for and collect all Accounts that accrue prior to the Trigger Event; provided, 4 5 however, that the foregoing grant is made without any representation or implication on behalf of MMI that it has the ability to make any such grant in accordance with the terms hereof and without any other representation of any kind or nature whatsoever. In addition, MMI agrees that it will not intentionally use whatever rights it may have in the Permits, the Contracts and the Books and Records for the purpose of hindering the Credit Lender from collecting Accounts that accrued prior to the Trigger Event. d) Notwithstanding any priority that would otherwise apply as a matter of law, after the occurrence of a default or breach of condition continuing beyond all applicable notice and/or grace periods, if any, under any of the MMI Loan Documents (i) three (3) Business Days after written notice (the "Trigger Notice") from MMI to the Credit Lender of the commencement by MMI of any action to exercise any of its rights and/or remedies under any of the MMI Loan Documents including, without limitation, the taking of any steps to accelerate or to demand full payment under the MMI Loan Documents or to realize on its collateral thereunder (the "Trigger Event"), all Accounts arising and/or accruing from operations at the Facility on or after the Trigger Event (and the proceeds thereof), and the rights to collect and retain the same shall be, as between the Credit Lender and MMI, MMI's as first priority collateral for the obligations of Borrower to MMI and (ii) MMI agrees with the Credit Lender that all uncollected Accounts that accrued prior to the Trigger Event are part of the Accounts in which the Credit Lender has a security interest prior to MMI's and as to which the rights to collect and retain the same shall, as between the Credit Lender and MMI, be the Credit Lender's as collateral for the obligations owed to the Credit Lender under the Credit Agreement. e) MMI hereby grants to the Credit Lender access to the Facility and the Books and Records thereof at reasonable times and after reasonable notice to MMI to the extent such access is necessary for 5 6 the Credit Lender to pursue its rights in such Accounts accruing prior to the Trigger Event. Such right of access shall be effective from and after the time MMI takes possession of the Facility and the Books and Records thereof. f) It is recognized that individual patients may have unpaid Accounts that accrued both before and after the Trigger Event. MMI and the Credit Lender agree that payments received in these circumstances shall be applied against the oldest Accounts first. g) In the event that the Credit Lender collects any Accounts that accrued on or after the Trigger Event, the Credit Lender shall forward such Accounts to MMI. In the event that MMI collects any Accounts that accrued prior to the Trigger Event, MMI shall forward such Accounts to the Credit Lender. 4. The Credit Lender's Exercise of Remedies. Notwithstanding anything to the contrary set forth in the Credit Agreement, the Credit Lender agrees that, without the prior written consent of MMI, which consent may be withheld in MMI's sole and absolute discretion, (a) the Credit Lender shall not exercise any of its rights and remedies under the Credit Agreement with respect to the Borrower or the Credit Lender Collateral, other than such rights and remedies as may be necessary to collect the Accounts that accrue prior to the Trigger Event and (b) without limiting the foregoing, the Credit Lender shall not file, cause to be filed or join in the filing of, any petition under the United States Bankruptcy Code, as the same may hereafter be amended and including any successor provision thereto, or any similar petition or pleading under any state law, against the Borrower or seek any relief with respect to the Borrower (including, without limitation, the appointment of a receiver, trustee or other similar official for the Borrower or any of its businesses or assets) under any such law. The Credit Lender will not demand or accept as security for the indebtedness evidenced by the Credit Agreement any collateral owned, wholly or in part, by any of the A/R Subs, other than such collateral as is already included within the definition of the Credit Lender Collateral, without the prior written consent of MMI, in each instance, which consent may be withheld in MMI's sole and absolute discretion. 6 7 5. Bind and Inure; Construction. This Agreement shall be binding upon and inure only to the benefit of MMI, the Credit Lender and their respective successors and assigns (including, without limitation, any future holder of the lender's interest under the Loan); provided, however, that this Agreement shall be null and void and of no further force or effect upon the payment in full of all obligations under either the Credit Agreement or the MMI Loan Documents. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. 6. Notices. All notices and other communications hereunder shall be in writing and mailed (by registered or certified mail, return receipt requested and post prepaid), delivered by a reputable commercial overnight delivery service with provision for a receipt, with delivery charges prepaid, or transmitted by facsimile on a regular business day between the hours of 9:00 a.m. and 5:00 p.m., and shall be effective upon such receipt, or upon attempted delivery if delivery is refused by the addressee, addressed to the respective parties, as follows: (a) if to the Credit Lender: HCFP Funding, Inc. 2 Wisconsin Circle Fourth Floor Chevy Chase, Maryland 20815 Attention: Ethan D. Leder, President Telephone: (301) 961-1640 Fax: (301) 664-9860 (b) if to MMI: Meditrust Mortgage Investments, Inc. 197 First Avenue Needham Heights, MA 02494 Attention: David Benson, President Telephone: (781) 433-6000 Fax: (781) 433-1290 (c) with a copy to: Meditrust Mortgage Instruments, Inc. 197 First Avenue Needham Heights, MA 02494 Attn: Michael S. Benjamin, General Counsel 7 8 Telephone: (781) 433-6000 Fax: (781) 433-1224 or to such other address or facsimile telephone number as either party may hereafter designate by written notice given to the other. When any notice is to be given under this Agreement simultaneously with notice to another party or simultaneously with the happening of an event, such notice shall be given as simultaneously as is reasonable in the circumstances. 7. No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and nothing contained herein shall confer upon anyone other than the parties hereto and their permitted successors and assigns, any right to insist upon or to enforce the performance or observance of any of the obligations contained herein; provided, however, that notwithstanding the foregoing, it is acknowledged and agreed that the Borrower may rely on the waiver set forth in Paragraph 1. 8. Entire Agreement; Amendments. This Agreement sets forth the entire agreement of the parties with respect to the Credit Lender Collateral and the MMI Collateral and can be amended, modified, supplemented, extended, terminated, discharged or changed only by an agreement in writing which makes specific reference to this Agreement and which is signed by all parties hereto. The Credit Lender shall provide MMI with copies of all amendments to the Credit Agreement and MMI shall provide the Credit Lender with copies of all amendments to any of the MMI Loan Documents. 9. No Waiver. No waiver of any term, provision or condition of this Agreement in any one or more instances, shall be deemed to be or be construed as a further or continuing waiver of any such term, provision or condition of this Agreement. No failure to act shall be construed as a waiver of any term, provision, condition or right granted hereunder. Excluding any breach of any covenant set for the herein, no action or inaction with respect to the MMI Collateral; nor any amendment to any of the MMI Loan Documents; nor any exercise or nonexercise of any right, power or remedy under the MMI Loan Documents; nor any waiver, consent, release indulgence, 8 9 extension, renewal, modification, delay or other action, inaction or omission in respect of the obligations evidenced by the MMI Loan Documents will in any event give rise to any claim by the Credit Lender against MMI. Excluding any breach of any covenant set forth herein, no action or inaction with respect to the Credit Lender Collateral; nor any amendment to the Credit Agreement; nor any exercise or nonexercise of any right, power or remedy under the Credit Agreement; nor any waiver, consent, release, indulgence, extension, renewal, modification, delay or other action, inaction or omission in respect of the obligations evidenced by the Credit Agreement will in any event give rise to any claim by MMI against the Credit Lender. The Credit Lender irrevocably waives any right to require marshalling of the assets of the Borrower and agrees that MMI shall have no obligation to seek satisfaction of the Borrower's obligations under the MMI Documents through recourse to collateral, if any, other than the Facility prior to the exercise of MMI's rights with respect to the Facility. MMI irrevocably waives any right to require marshalling of the assets of the Borrowers and agrees that the Credit Lender shall have no obligation to seek satisfaction of the indebtedness evidenced by the Credit Agreement through recourse to collateral, if any, other than the Accounts that accrued prior to the Trigger Event prior to the exercise of the Credit Lender's rights with respect to such Accounts. 10. No Joint Venture. Nothing contained herein shall be construed as forming a joint venture or partnership between the parties hereto with respect to the subject matter hereof. 11. Further Assurances. Each of the parties hereto agrees to execute and deliver any and all further agreements, documents or instruments necessary to effectuate this Agreement and the transactions referred to herein or contemplated hereby or reasonably requested by the other party to perfect or evidence its rights hereunder. 12. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than the number of counterparts containing the respective signatures of, or on behalf of, all of the parties hereto. 9 10 13. Captions and Headings. The captions and headings set forth in this Agreement are included for convenience and reference only and the words contained therein shall in no way be held or deemed to define, limit, describe, explain, modify, amplify or add to the interpretation, construction or meaning of, or the scope or intent of, this Agreement or any part hereof. 14. Limitation of Liability. All parties dealing with MMI, in any way, shall look only to the assets of MMI for the payment of any sum or the performance of any obligation. Furthermore, in no event shall MMI ever be liable to the Credit Lender or any other party for any indirect or consequential damages incurred by the Credit Lender or such other party, resulting from any cause whatsoever. Notwithstanding the foregoing, the Credit Lender hereby acknowledges and agrees that the Borrower and the Credit Lender shall look only to the assets of MMI for the payment of any sum or performance of any obligation due by or from MMI pursuant to the terms and provisions hereof. 15. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. To the maximum extent permitted by applicable law, the Credit Lender hereby submits to the jurisdiction of the courts of the Commonwealth of Massachusetts and the United States District Court for the District of Massachusetts, as well as to the jurisdiction of all courts from which an appeal may be taken from the aforesaid courts, for the purpose of any suit, action or other proceeding arising out of, or with respect to this Agreement and expressly waive any and all objections they may have as to venue in any of such courts. 16. Time of the Essence. Time is of the essence of this Agreement. 10 11 WITNESS the execution hereof under seal as of the day and year first written above. WITNESS HCFP FUNDING, INC. /s/ Vicki Canales By: /s/ Howard Widra Name: Vicki Canales Name: Howard Widra Title: Senior Vice President WITNESS MEDITRUST MORTGAGE INVESTMENTS, INC. /s/ Annemarie Wasniewski By: /s/ Michael F. Bushee Name: Annemarie Wasniewski Name: Michael F. Bushee Title: Chief Operating Officer 11 12 The undersigned parties hereby join in the execution of this Accounts Receivable Intercreditor Agreement for the purpose of consenting to and acknowledging the terms and conditions thereof. WITNESS: BALANCED CARE CORPORATION /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Senior Counsel and Vice President of Legal Affairs, Assistant Secretary WITNESS: BCC AT HERMITAGE PARK CARE CENTER, INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: BCC AT LEBANON CARE CENTER INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: BCC AT LEBANON PARK MANOR, INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary 12 13 WITNESS: BCC AT MT. VERNON PARK CARE CENTER, INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: BCC AT MT. VERNON PARK CARE CENTER WEST, INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: BCC AT NEVADA PARK CARE CENTER, CENTER, INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: BCC AT NIXA PARK CENTER INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary 13 14 WITNESS: BCC AT REPUBLIC PARK CENTER INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: BCC AT SPRINGFIELD CARE CENTER INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: DIXON MANAGEMENT INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: BCC AT DARLINGTON, INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary 14 15 WITNESS: BALANCED CARE AT EYERS GROVE INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: BALANCED CARE AT BUTLER INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: BALANCED CARE AT SARVER, INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary WITNESS: BALANCED CARE AT NORTH RIDGE, INC. /s/ Deborah Myers Welsh By: /s/ Robin L. Barber Name: Robin L. Barber Title: Vice President and Secretary 15 16 EXHIBIT A CREDIT LENDER COLLATERAL Subject in all respects to this Accounts Receivable Intercreditor Agreement between Lender and MMI, the following constitutes the Credit Lender Collateral: (i). All of each of the A/R Subs' now-owned and hereafter acquired or arising accounts, as such term is defined in the UCC, based on or arising in connection with any obligations for the payment of money arising out of the A/R Subs' sale of goods or rendition of services ("Accounts"), and all of such A/R Subs' rights, remedies, security and liens, in, to and in respect of the Accounts, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, guaranties or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligation of any Account Debtor (hereinafter defined), and credit and other insurance. As used herein, "Account Debtor" means any person obligated on any Account or any A/R Subs, including without limitation, any Insurer and any Medicaid/Medicare payor. (ii). With respect to Accounts only, all moneys, securities and other property and the proceeds thereof, now or hereafter held or received by, in transit to, in possession of, or under the control of Credit Lender or a bailee or Affiliate (hereinafter defined) of Credit Lender, from or for such A/R Subs, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of such A/R Subs deposits (general or special), balances, sums and credits with Lender at any time existing. As used herein, "Affiliate" means with respect to a specified person, any person directly or indirectly controlling, controlled by, or under common control with the specified person, including without limitation its stockholders and any affiliates. A person shall be deemed to control a corporation if the person possesses, directly or indirectly, the power to direct or cause the direction of the management and business of the corporation whether through the ownership of voting securities, by contract, or otherwise. (iii). All of such A/R Subs' now or hereafter acquired deposit accounts into which Accounts are deposited. 16 17 (iv). All of such A/R Subs' now owned and hereafter acquired or arising general intangibles with respect to, evidencing or relating to its Accounts, including, but not limited to, all existing and future, choses in action, claims, books, records, ledger cards, contracts, licenses, formulae, tax and other types of refunds, returned and unearned insurance premiums, rights and claims under insurance policies, and computer programs, information, software, records, and data, as the same relates to the Accounts. (v). The proceeds (including, with out limitation, insurance proceeds) sale of the foregoing. 17 18 EXHIBIT B LIST OF FACILITIES BCC AT HERMITAGE PARK CARE CENTER, INC., Balance Care, Hermitage Highway 54 and 1st Street Hermitage, MO 65668 BCC AT LEBANON CARE CENTER, INC., Balance Care Lebanon North 596 Morton Road Lebanon, MO 65536 BCC AT LEBANON PARK MANOR, INC., Balanced Care, Lebanon South 514 W. Fremont Road Lebanon, MO 65536 BCC AT MT. VERNON PARK CARE CENTER, INC., Balanced Care, Springfield West II 3403 West Mt. Vernon Springfield, MO 65802 BCC AT MT. VERNON PARK CARE CENTER WEST, INC., Balanced Care, Springfield West I 3403 West Mt. Vernon Springfield, MO 65802 BCC AT NEVADA PARK CARE CENTER, INC., Balanced Care, Nevada 700 East Highland Nevada, MO 64772 BCC AT NIXA PARK CENTER, INC., Balanced Care, Nixa 1104 North Main Nixa, MO 65714 18 19 BCC AT REPUBLIC PARK CENTER INC., Balanced Care, Republic 901 East Highway 174 Republic, MO 65738 BCC AT SPRINGFIELD CARE CENTER, INC., Balanced Care, Springfield East 3535 East Cherokee Springfield, MO 65459 DIXON MANAGEMENT, INC., Balanced Care, Dixon 301 East 10th Street Dixon, MO 65459 19 EX-10.8 9 AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT 1 Exhibit 10.8 AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT originally dated as of April 22, 1999 by and among BALANCED CARE CORPORATION, BCC AT HERMITAGE PARK CARE CENTER, INC., BCC AT LEBANON CARE CENTER, INC., BCC AT LEBANON PARK MANOR, INC., BCC AT MT. VERNON PARK CARE CENTER, INC., BCC AT MT. VERNON PARK CARE CENTER WEST, INC., BCC AT NEVADA PARK CARE CENTER, INC., BCC AT NIXA PARK CENTER, INC., BCC AT REPUBLIC PARK CENTER, INC., BCC AT SPRINGFIELD CARE CENTER, INC., DIXON MANAGEMENT INC., BCC AT DARLINGTON, INC., BALANCED CARE AT EYERS GROVE, INC., BALANCED CARE AT BUTLER, INC., BALANCED CARE AT SARVER, INC., BALANCED CARE AT NORTH RIDGE, INC. and HCFP FUNDING, INC. Amended as of July 1, 1999 2 AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT (this "Amendment") is made as of this 1st day of July, 1999, by and among BALANCED CARE CORPORATION, a Delaware corporation, BCC AT HERMITAGE PARK CARE CENTER, INC., a Delaware corporation, BCC AT LEBANON CARE CENTER, INC., a Delaware corporation, BCC AT LEBANON PARK MANOR, INC., a Delaware corporation, BCC AT MT. VERNON PARK CARE CENTER, INC., a Delaware corporation, BCC AT MT. VERNON PARK CARE CENTER WEST, INC., a Delaware corporation, BCC AT NEVADA PARK CARE CENTER, INC., a Delaware corporation, BCC AT NIXA PARK CENTER, INC., a Delaware corporation, BCC AT REPUBLIC PARK CENTER, INC., a Delaware corporation, BCC AT SPRINGFIELD CARE CENTER, INC., a Delaware corporation, DIXON MANAGEMENT INC., a Missouri corporation, BCC AT DARLINGTON, INC., a Delaware corporation, BALANCED CARE AT EYERS GROVE, INC., a Delaware corporation, BALANCED CARE AT BUTLER, INC., a Delaware corporation, BALANCED CARE AT SARVER, INC., a Delaware corporation, BALANCED CARE AT NORTH RIDGE, INC., a Delaware corporation (collectively and individually, the "Borrower"), and HCFP FUNDING, INC., a Delaware corporation (the "Lender"). RECITALS A. Pursuant to that certain Loan and Security Agreement dated April 22, 1999 by and among Borrower and Lender (as amended hereby and as further amended, modified and restated from time to time, collectively, the "Loan Agreement"), the Lender agreed to make available to the Borrower a revolving credit facility (the "Loan"). B. Borrower has requested that Lender agree to make certain changes to the terms of the Loan Agreement, and Lender has agreed to do so provided (among other things) that Borrower executes and delivers this Amendment and otherwise complies with the agreements set forth herein. NOW, THEREFORE, in consideration of the foregoing, the terms and conditions set forth in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower hereby agree as follows: Section 1. Definitions. Unless otherwise defined herein, all capitalized terms herein shall have the meanings assigned to such terms in the Loan Agreement. 3 Section 2. Amendments to the Loan Agreement. Borrower and Lender hereby agree to amend and modify the provisions of the Loan Agreement as follows: 2.1. The definition of "EBITDA" set forth in Section 1.1 is hereby deleted in its entirety and the following new section is inserted in lieu thereof (with the revised portions thereof being underlined below): "EBITDA. "EBITDA" means, the sum of the following, calculated individually with respect to each Real Estate Borrower, and then added together for all Real Estate Borrowers, as determined in accordance with GAAP and reflected in Borrower's most current consolidated financial statements: (a) net income (after rental expense with respect to each Leasehold Facility), plus (b) interest expense, plus (c) depreciation and amortization, plus (d) income tax expense, plus (e) fifty percent (50%) of the management fee expense, for either (i) the twelve (12) most recently completed calendar months, or (ii) the six (6) most recently completed calendar months on an annualized basis, provided that if Borrower elects the option described in subparagraph (ii), such option shall apply throughout the Loan Term and Borrower may not elect the option described in subparagraph (i) at any time thereafter. If any Property has a negative EBITDA for any period, then for purposes of this definition, EBITDA for that period for such Property shall equal zero. For purposes of this definition, management fee expense shall be limited as described in Section 7.6 hereof." 2.2. Section 2.1(d) is hereby deleted in its entirety and the following new section is inserted in lieu thereof (with the revised portions thereof being underlined below): "(d) The maximum aggregate principal balance of all Revolving Credit Loans outstanding at any time hereunder shall not exceed the 2 4 Borrowing Base. The Borrowing Base shall equal the sum of the following: (i) with respect to each Property covered by a first priority fee simple Mortgage in favor of Lender other than the Property owned by Balanced Care at North Ridge, Inc. d/b/a Outlook Pointe at Northridge (hereinafter "Northridge"), an amount not to exceed eighty five percent (85%) of the product of 8.0 times EBITDA, plus (ii) with respect to Northridge only, an amount not to exceed eighty five percent (85%) of the product of 8.5 times EBITDA, plus (iii) with respect to each Leasehold Facility, an amount not to exceed the lesser of eighty five percent (85%) of the product of 5.0 times EBITDA, or eighty five percent (85%) of the product of the number of years remaining under the applicable lease times EBITDA (such formulas described in subparagraphs (i), (ii) and (iii) above being referred to herein as the "Real Estate Borrowing Base"); plus (ii) eighty five percent (85%) of the Qualified Accounts due and owing from any Medicaid/Medicare Insurer or other Account Debtor (such formula being referred to herein as the "Accounts Receivable Borrowing Base"). Notwithstanding the foregoing, that portion of the Real Estate Borrowing Base attributable to the Leasehold Borrowers shall not exceed fifteen percent (15%) of the Real Estate Borrowing Base, and any advances made against any of the Leasehold Facilities shall be conditioned upon Lender obtaining a written agreement from the applicable fee owner, which agreement shall provide appropriate consents and lease protection deemed appropriate by Lender in its sole credit judgment. Calculation of the Borrowing Base shall be subject to Lender's reasonable review." 2.3. Section 2.4(b) is hereby deleted in its entirety and the following new section is inserted in lieu thereof (with the revised portion thereof being underlined below): 3 5 "(b) For so long as the Loan is available to Borrower, Borrower unconditionally shall pay Lender a monthly usage fee (the "Usage Fee") equal to .021% of the average amount by which the Maximum Loan Amount exceeds the average amount of the outstanding principal balance of the Revolving Credit Loans during the preceding month. The Usage Fee shall be payable monthly in arrears on the first Business Day of each successive calendar month." 2.4. Section 2.8(c) is hereby deleted in its entirety and the following new section is inserted in lieu thereof: "(c) Upon at least thirty (30) days prior written notice to Lender (the "Termination Notice Period"), Borrower may terminate this Agreement before the third annual anniversary of the Closing Date, provided that, at the effective date of such termination, Borrower shall pay to Lender (in addition to the then outstanding principal, accrued interest and other Obligations owing under the terms of this Agreement and any other Loan Documents) as liquidated damages for the loss of bargain and not as a penalty, an amount equal to (i) three percent (3%) of the Maximum Loan Amount if the effective date of such termination by Borrower is on or before the first anniversary of the Closing Date, (ii) two percent (2%) of the Maximum Loan Amount if the effective date of such termination by Borrower is after the first anniversary of the Closing Date and before the second anniversary of the Closing Date, and (iii) one percent (1%) of the Maximum Loan Amount if the effective date of such termination by Borrower is after the second anniversary of the Closing Date and before the third anniversary of the Closing Date." 2.5. A new Section 6.27 is hereby added as follows: 4 6 Section 6.27 Debt Service Coverage Ratio. At the end of each calendar month throughout the Loan Term, Borrower (as defined below for purposes of this Section 6.27 only, taken as a whole) shall have maintained a Debt Service Coverage Ratio (hereinafter defined) of at least 1.1:1.0. As used herein, "Debt Service Coverage Ratio" means the ratio of (a) EBITDA to (ii) Debt Service (hereinafter defined). The Debt Service Coverage Ratio shall be measured on a monthly basis beginning with the month ending June, 1999 and continuing until the Obligations are repaid in full and the Loan Agreement is terminated. As used herein, "Debt Service" means, for any given period, all regularly scheduled principal and interest payments due under all loans to Borrower from Lender, plus all payments on operating and capital leases, and any other debt permitted pursuant to the terms of the Loan Documents or otherwise permitted in writing by Lender. For purposes of this Section 6.27, Borrower means, BCC at Darlington, Inc., Balanced Care at Eyers Grove, Inc., Balanced Care at Butler, Inc., Balanced Care at Sarver, Inc. and Balanced Care at Northridge, Inc. Section 3. Representations and Warranties; No Event of Default. Each Borrower hereby confirms that all of the representations and warranties set forth in the Loan Agreement are true and correct, except as previously disclosed to Lender in writing. To the Borrower's best knowledge, no Event of Default has occurred. Section 4. Fees. In consideration of Lender's agreement to enter into this Amendment, Borrower hereby agrees to pay to Lender a document preparation, due diligence and legal fee equal to $3,000.00 (the "Fee"), which Fee shall be (a) due and payable by Borrower on the date of its execution and delivery of this Amendment, and (b) constitute a portion of the Obligations evidenced by the Note and secured by the Loan Agreement and other Loan Documents. Borrower hereby authorizes Lender to deduct the Fee from the proceeds of the Loan. 5 7 Section 5. Enforceability. This Amendment constitutes the legal, valid and binding obligation of each Borrower, and is enforceable against each Borrower in accordance with its terms. Section 6. Effective Date. This Amendment shall be effective upon (a) execution and delivery to Lender of this Amendment by each Borrower and Lender, and (b) payment by Borrower of the Fee. Section 7. Reference to the Effect on the Loan Agreement. (a) Upon the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of similar import shall mean and be a reference to the Loan Agreement as amended by this Amendment. (b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided in this Amendment, operate as a waiver of any right, power or remedy of Lender, nor constitute a waiver of any provision of the Loan Agreement, or any other documents, instruments and agreements executed or delivered in connection with the Loan Agreement. Section 8. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland. Section 9. Headings. Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. Section 10. Counterparts. This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as of the date first written above. 6 8 LENDER: ATTEST: HCFP FUNDING, INC. a Delaware corporation By: /s/ Diana Pennington By: /s/ Jeffrey P. Hoffman Name: Diana Pennington Name: Jeffrey P. Hoffman Title: Associate General Title: Vice President Counsel BORROWER: ATTEST: BALANCED CARE CORPORATION a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Brad E. Hollinger [SEAL] Name: Robert J. Sutton Name: Brad E. Hollinger Title: Secretary Title: Chairman of the Board, President and Chief Executive Officer ATTEST: BCC AT HERMITAGE PARK CARE CENTER, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: BCC AT LEBANON CARE CENTER, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary 7 9 ATTEST: BCC AT LEBANON PARK MANOR, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: BCC AT MT. VERNON PARK CARE CENTER, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: BCC AT MT. VERNON PARK CARE CENTER WEST, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: BCC AT NEVADA PARK CARE CENTER, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary 8 10 ATTEST: BCC AT NIXA PARK CENTER, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: BCC AT REPUBLIC PARK CENTER, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: BCC AT SPRINGFIELD CARE CENTER, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: DIXON MANAGEMENT, INC. a Missouri corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: BCC AT DARLINGTON, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary 9 11 ATTEST: BALANCED CARE AT EYERS GROVE, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: BALANCED CARE AT BUTLER, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: BALANCED CARE AT SARVER, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary ATTEST: BALANCED CARE AT NORTH RIDGE, INC. a Delaware corporation By: /s/ Robert J. Sutton By: /s/ Robin L. Barber [SEAL] Name: Robert J. Sutton Name: Robin L. Barber Title: Vice President and Title: Vice President and Assistant Secretary Secretary 10 EX-10.9 10 AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT 1 Exhibit 10.9 AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT originally dated as of April 22, 1999 by and among BALANCED CARE CORPORATION, BCC AT HERMITAGE PARK CARE CENTER, INC., BCC AT LEBANON CARE CENTER, INC., BCC AT LEBANON PARK MANOR, INC., BCC AT MT. VERNON PARK CARE CENTER, INC., BCC AT MT. VERNON PARK CARE CENTER WEST, INC., BCC AT NEVADA PARK CARE CENTER, INC., BCC AT NIXA PARK CENTER, INC., BCC AT REPUBLIC PARK CENTER, INC., BCC AT SPRINGFIELD CARE CENTER, INC., DIXON MANAGEMENT INC., BCC AT DARLINGTON, INC., BALANCED CARE AT EYERS GROVE, INC., BALANCED CARE AT BUTLER, INC., BALANCED CARE AT SARVER, INC., BALANCED CARE AT NORTH RIDGE, INC. and HCFP FUNDING, INC. Amended as of July 29, 1999 2 AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT (this "Amendment") is made as of this 29th day of July, 1999, by and among BALANCED CARE CORPORATION, a Delaware corporation, BCC AT HERMITAGE PARK CARE CENTER, INC., a Delaware corporation, BCC AT LEBANON CARE CENTER, INC., a Delaware corporation, BCC AT LEBANON PARK MANOR, INC., a Delaware corporation, BCC AT MT. VERNON PARK CARE CENTER, INC., a Delaware corporation, BCC AT MT. VERNON PARK CARE CENTER WEST, INC., a Delaware corporation, BCC AT NEVADA PARK CARE CENTER, INC., a Delaware corporation, BCC AT NIXA PARK CENTER, INC., a Delaware corporation, BCC AT REPUBLIC PARK CENTER, INC., a Delaware corporation, BCC AT SPRINGFIELD CARE CENTER, INC., a Delaware corporation, DIXON MANAGEMENT INC., a Missouri corporation, BCC AT DARLINGTON, INC., a Delaware corporation, BALANCED CARE AT EYERS GROVE, INC., a Delaware corporation, BALANCED CARE AT BUTLER, INC., a Delaware corporation, BALANCED CARE AT SARVER, INC., a Delaware corporation, BALANCED CARE AT NORTH RIDGE, INC., a Delaware corporation (collectively and individually, the "Borrower"), and HCFP FUNDING, INC., a Delaware corporation (the "Lender"). RECITALS A. Pursuant to that certain Loan and Security Agreement dated April 22, 1999 by and among Borrower and Lender (as previously amended pursuant to that certain Amendment No. 1 dated July 1, 1999 made by and between Lender and Borrower, as amended by this Amendment, and as further amended, modified and restated from time to time, collectively, the "Loan Agreement"), the Lender agreed to make available to the Borrower a revolving credit facility (the "Loan"). B. Borrower has requested that Lender agree to increase the principal amount available to be advanced under the Loan and to make certain other changes to the terms of the Loan Agreement, and Lender has agreed to do so provided (among other things) that Borrower executes and delivers this Amendment and otherwise complies with the agreements set forth herein. NOW, THEREFORE, in consideration of the foregoing, the terms and conditions set forth in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower hereby agree as follows: 3 Section 1. Definitions. Unless otherwise defined herein, all capitalized terms herein shall have the meanings assigned to such terms in the Loan Agreement. Section 2. Amendments to the Loan Agreement. Borrower and Lender hereby agree to amend and modify the provisions of the Loan Agreement as follows: 2.1 Definitions of Mortgage. The definition of Mortgage is hereby deleted in its entirety and the following new definition is inserted in its place (with the amended portion thereof being underlined in bold below): "Mortgage. "Mortgage" means, individually, each of the mortgages, deeds of trust, amendments to mortgages and amendments to deeds of trust listed and described in Exhibit G attached hereto and made a part hereof by this reference (as such exhibit may be amended from time to time), and all of such mortgages collectively, as the same may be amended, modified, supplemented, restated and replaced from time to time, together with any and all other mortgages, deeds of trust and leasehold mortgages and deeds of trust which may hereafter be executed and delivered by any Borrower (whether now existing as a Borrower hereunder or hereafter added as a Borrower hereunder pursuant to an amendment hereto) in favor of Lender to secure the Obligations. "Mortgage" includes the Leasehold Mortgage and each Mortgage covering a Skilled Nursing Property. 2.2 Definitions of Note. The definition of Note is hereby deleted in its entirety and the following new definition is inserted in its place (with the amended portion thereof being underlined in bold below): "Note. "Note" means that certain Amended and Restated Revolving Credit Note dated July 29, 1999 in the principal amount of $20,000,000.00 made by the Borrower payable to the Lender, as the same may be amended, modified and restated from time to time." 2 4 2.3 Additional Definitions. The following definitions are hereby added to Section 1.1 in the locations required to maintain alphabetical order: Nevada Park. "Nevada Park" means BCC at Nevada Park Care Center, Inc., a Delaware corporation, and its permitted successors and assigns. North Ridge. "North Ridge" means Balanced Care at North Ridge, Inc., a Delaware corporation doing business as Outlook Pointe at Northridge, together with its permitted successors and assigns. Republic Park. "Republic Park" means BCC at Republic Park Care Center, Inc., a Delaware corporation, and its permitted successors and assigns. Skilled Nursing Advance. "Skilled Nursing Advance" means an advance made under this Agreement to a Skilled Nursing Facility Borrower based on the Borrowing Base applicable to each Skilled Nursing Property, as described in Section 2.1(d) (iv) hereof. Except as otherwise described herein, each Skilled Nursing Advance shall constitute a Real Estate Advance hereunder. Skilled Nursing Facility Borrower. "Skilled Nursing Facility Borrower" means, individually, each of Republic Park and Nevada Park, and collectively, both Republic Park and Nevada Park, together with their respective permitted successors and assigns. Except as otherwise set forth herein, each Skilled Nursing Facility Borrower shall constitute a Real Estate Borrower and all provisions of this Agreement applicable to Real Estate Borrowers shall apply equally to each Skilled Nursing Facility Borrower. Skilled Nursing Property. "Skilled Nursing Property" means the Property owned by Republic Park and Nevada Park. Except as otherwise set forth herein, all provisions of this Agreement applicable 3 5 to a Property shall apply equally to each Skilled Nursing Property. 2.4. EBITDA Definition. The definition of "EBITDA" set forth in Section 1.1 is hereby deleted in its entirety and the following new section is inserted in its place (with the revised portions thereof being underlined in bold below): "EBITDA. "EBITDA" means, the sum of the following, calculated individually with respect to each Real Estate Borrower, and then added together for all Real Estate Borrowers, as determined in accordance with GAAP and reflected in Borrower's most current consolidated financial statements: (a) for each Real Estate Borrower other than the Skilled Nursing Facility Borrowers, (i) net income (after rental expense with respect to each Leasehold Facility), plus (ii) interest expense, plus (iii) depreciation and amortization, plus (iv) income tax expense, plus (v) the total management fee expense minus (vi) 3% of gross revenues of each Real Estate Borrower for either (A) the twelve (12) most recently completed calendar months, or (B) the six (6) most recently completed calendar months on an annualized basis, provided that if Borrower elects the option described in subparagraph (B) above, such option shall apply throughout the Loan Term and Borrower may not elect the option described in subparagraph (A) above at any time thereafter; and (b) for each Skilled Nursing Facility Borrower, (i) net income, plus (ii) interest expense, plus (iii) depreciation and amortization, plus (iv) income tax expense, plus (v) the total management fee expense for the twelve (12) most recently completed calendar months, minus (vi) 4.5% of gross revenues of each Skilled Nursing Facility Borrower for the twelve (12) most recently completed calendar months. If any Property has a negative EBITDA for any period, then for purposes of this definition, EBITDA for that period for such Property shall equal zero. For purposes of subparagraph (a)(v) of this definition, management fee expense shall be limited as described in Section 7.6 hereof." 4 6 2.5 Increase in Maximum Loan Amount. Section 2.1(a) is hereby deleted in its entirety and the following new Section 2.1(a) is inserted in its place (with the amended and renumbered portions thereof being underlined in bold below): "(a) Subject to the availability under the Borrowing Base, the maximum aggregate principal amount of the Loan which may be extended by Lender to Borrower under this Agreement and remain outstanding at any time is Twenty Million and No/100 Dollars ($20,000,000.00) (the "Maximum Loan Amount"). Upon the release of both Skilled Nursing Facility Borrowers and both Skilled Nursing Properties and the reduction of the outstanding principal balance hereunder to $15,000,000, as contemplated and described in Section 2.10(f) hereof, the Maximum Loan Amount shall be immediately and automatically reduced to Fifteen Million and No/100 Dollars ($15,000,000) for all purposes, including the calculation of the Termination Fee and the Usage Fee. Notwithstanding the foregoing, provided no Event of Default has occurred, the Borrower shall be permitted to reduce the Maximum Loan Amount subject to the following conditions: (i) At any time during the period commencing October 1 and ending on October 31 of each year during the Term of the Loan, but no more than once during such period, the Borrower may deliver to Lender a written request to reduce the Maximum Loan Amount (such request being hereinafter referred to as a "Reduction Notice"). (ii) Following Lender's receipt of a Reduction Notice, the Maximum Loan Amount shall be reduced as of November 1 of the year in which the Reduction Notice is delivered. (iii) The Maximum Loan Amount may be reduced by no more than $5,000,000.00 per year. (iv) Once the Maximum Loan Amount is reduced, it may not be increased. 5 7 (v) Except as described above with respect to releases of the Skilled Nursing Borrowers, any reduction of the Maximum Loan Amount pursuant to this Section (i) shall not effect the calculation of the Termination Fee described in Section 2.8(c) hereof (i.e., any Termination Fee shall be calculated based on the original Maximum Loan Amount equal to $15,000,000); and (ii) shall effect the calculation of the Usage Fee (i.e., the Usage Fee shall be calculated on the Maximum Loan Amount in effect from time to time)." 2.6 Borrowing Base. Section 2.1(d) is hereby deleted in its entirety and the following new section is inserted in lieu thereof (with the revised portions being underlined and printed in bold below): "(d) The maximum aggregate principal balance of all Revolving Credit Loans outstanding at any time hereunder shall not exceed the Borrowing Base. The Borrowing Base shall equal the sum of the following: (i) with respect to each Property covered by a first priority fee simple Mortgage in favor of Lender, other than the Property owned by North Ridge and the Property owned by each Skilled Nursing Facility Borrower, an amount not to exceed eighty five percent (85%) of the product of 8.0 times EBITDA, plus (ii) with respect to the Property owned by Northridge only, an amount not to exceed eighty five percent (85%) of the product of 8.5 times EBITDA, plus (iii) with respect to each Leasehold Facility, an amount not to exceed the lesser of eighty five percent (85%) of the product of 5.0 times EBITDA, or eighty five percent (85%) of the product of the number of years remaining under the applicable lease times EBITDA, plus (iv) with respect to each Skilled Nursing Property, an amount not to exceed eighty five percent (85%) of the product of 6.0 times EBITDA (such formulas described in subparagraphs (i), (ii), (iii) and (iv) above being referred to herein as the 6 8 "Real Estate Borrowing Base"); plus (v) eighty five percent (85%) of the Qualified Accounts due and owing from any Medicaid/Medicare Insurer or other Account Debtor (such formula being referred to herein as the "Accounts Receivable Borrowing Base"). Notwithstanding the foregoing, that portion of the Real Estate Borrowing Base attributable to the Leasehold Borrowers shall not exceed fifteen percent (15%) of the Real Estate Borrowing Base, and any advances made against any of the Leasehold Facilities shall be conditioned upon Lender obtaining a written agreement from the applicable fee owner, which agreement shall provide appropriate consents and lease protection deemed appropriate by Lender in its sole credit judgment. Calculation of the Borrowing Base shall be subject to Lender's reasonable review." 2.7 Release of Skilled Nursing Borrowers. Section 2.10 is amended by adding the following new subparagraph (f): (f) Notwithstanding the foregoing subparagraphs (a) through (e), the Lender agrees to release the Mortgage or Mortgages covering the Skilled Nursing Properties or either of them as applicable, as well as the Skilled Nursing Facility Borrower or Borrowers, upon satisfaction of the following conditions: (i) No Event of Default shall have occurred and be continuing; (ii) Upon such release, Borrower shall be in compliance with the Borrowing Base; (iii) Contemporaneously with such release, Borrower shall pay to Lender all outstanding Obligations advanced under the Borrowing Base against the applicable Skilled Nursing Property to be released and all accrued and unpaid interest and fees with respect thereto (such amounts being hereinafter referred to as the "Skilled Nursing Obligations"); and 7 9 (iv) Contemporaneously with such release, Borrower shall pay to Lender a release fee equal to 1.4% of that portion of the Skilled Nursing Advances that shall be repaid. 2.8. Debt Service Coverage Ratio. Section 6.27 is hereby deleted in its entirety and the following new section is hereby inserted in its place (with the revised portion thereof being underlined in bold below): Section 6.27 Debt Service Coverage Ratio. At the end of each calendar month throughout the Loan Term, Borrower (as defined below for purposes of this Section 6.27 only, taken as a whole) shall have maintained a Debt Service Coverage Ratio (hereinafter defined) of at least 1.1:1.0. As used herein, "Debt Service Coverage Ratio" means the ratio of (a) EBITDA to (ii) Debt Service (hereinafter defined). The Debt Service Coverage Ratio shall be measured on a monthly basis beginning with the month ending June, 1999 and continuing until the Obligations are repaid in full and the Loan Agreement is terminated. As used herein, "Debt Service" means, for any given period, all regularly scheduled principal and interest payments due under all loans to Borrower from Lender, plus all payments on operating and capital leases, and any other debt permitted pursuant to the terms of the Loan Documents or otherwise permitted in writing by Lender. For purposes of this Section 6.27, "Borrower" means, BCC at Darlington, Inc., Balanced Care at Eyers Grove, Inc., Balanced Care at Butler, Inc., Balanced Care at Sarver, Inc. and Balanced Care at Northridge, Inc., Republic Park and Nevada Park. 2.9. Skilled Nursing Borrower's Pledge. As security for the payment of all liabilities of Borrower to Lender under the Note, this Agreement and all other Loan Documents, including but not limited to any extensions, modifications, substitutions, increases and renewals thereof, (a) the payment of all amounts advanced by Lender to preserve, protect, defend, and enforce its rights hereunder and in the Skilled Nursing Facility Borrower 8 10 Collateral (as hereinafter defined) in accordance with the terms of this Agreement and all other Loan Documents, including (without limitation) the Mortgage covering each Skilled Nursing Property, and (b) the payment of all reasonable expenses incurred by Lender in connection therewith, each of Republic Park and Nevada Park hereby assigns and grants to Lender a continuing first priority lien on and security interest in, upon, and to each and every portion of the following property, which property shall constitute a portion of the Pledgor Collateral under Section 3.1A of the Loan Agreement: (i) All of the Skilled Nursing Facility Borrower's now-owned and hereafter acquired or arising Accounts, accounts receivable and rights to payment of every kind and description, and all of Skilled Nursing Borrower's contract rights, chattel paper, documents and instruments with respect thereto, and all of the Skilled Nursing Facility Borrower's rights, remedies, security and liens, in, to and in respect of the Accounts, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, guaranties or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligation of any Account Debtor, and credit and other insurance; (ii) All moneys, securities and other property and the proceeds thereof, now or hereafter held or received by, in transit to, in possession of, or under the control of Lender or a bailee or Affiliate of Lender, from or for the Skilled Nursing Facility Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of the Skilled Nursing Facility Borrower's deposits (general or special), balances, sums and credits with Lender at any time existing; (iii) All of the Skilled Nursing Facility Borrower's right, title and interest in, to and in respect of all goods relating to, or which by sale have resulted in, Accounts, including, without limitation, all goods described in invoices or other documents or instruments with respect to, or otherwise representing or evidencing, any Account, and all returned, reclaimed or repossessed goods; (iv) All of the Skilled Nursing Facility Borrower's now or hereafter acquired deposit accounts into which Accounts are deposited; 9 11 (v) All of the Skilled Nursing Facility Borrower's now owned and hereafter acquired or arising general intangibles and other property of every kind and description with respect to, evidencing or relating to its Accounts, accounts receivable and other rights to payment, including, but not limited to, all existing and future customer lists, choses in action, claims, books, records, ledger cards, contracts, licenses, formulae, tax and other types of refunds, returned and unearned insurance premiums, rights and claims under insurance policies, and computer programs, information, software, records, and data, as the same relates to the Accounts; and (vi) The proceeds (including, without limitation, insurance proceeds) of all of the foregoing. 2.10. Notices. Section 9.4 is hereby amended by changing the Borrower's address to the following address: c/o Balanced Care Corporation 1215 Manor Drive Mechanicsburg, PA 17055 Attention : Chief Financial Officer Telephone: (717) 796-6187 Telecopier: (717) 796-6150 2.11. Exhibit G. Exhibit G is hereby amended by adding the following: "7. Deed of Trust and Security Agreement dated July 29, 1999 executed and delivered by Republic Park for the benefit of Lender covering the property known as 901 East Highway 174, Republic, Missouri. 8. Deed of Trust and Security Agreement dated July 29, 1999 executed and delivered by Nevada Park for the benefit of Lender covering the property known as 700 East Highland Avenue, Nevada, Missouri." 2.12 Exhibit I. Exhibit I is hereby amended by adding the following to Section A entitled "Real Estate Borrowers (granting first priority fee simple Mortgages)": 10 12 BCC at Republic Park Center, Inc., d/b/a Balanced Care Republic and/or Republic Park Care Center 901 East Highway 174 Republic, Missouri 65738 BCC at Nevada Park Care Center, Inc. d/b/a Balanced Care Nevada and/or Nevada Park Care Center 700 Est Highland Avenue Nevada, Missouri 64772 2.13 Management Fees. The last sentence of Section 7.6 is hereby deleted in its entirety. Section 3. Conditions to Closing; Commitment Fee. In order for this Agreement to be effective, the Borrower shall: (a) Comply with the Conditions to Real Estate Advances with respect to each Skilled Nursing Facility. (b) Comply with the Conditions to Closing and Conditions to Advances to the extent such Conditions have not been previously satisfied. (c) Execute and deliver to Lender the Loan Documents listed and described on the Closing Checklist attached hereto as Exhibit A and made a part hereof. (d) Cause to be delivered to Lender all other items listed and described on the Closing Checklist. (e) Pay to the Lender an additional Commitment Fee equal to $50,000.00. (f) Deliver to Lender updated Schedules and Exhibits to the Loan Agreement (g) Cause to be delivered to the Lender an (i) Amendment to the Intercreditor Agreement pursuant to which Meditrust agrees (among other things) that each of Republic Park and Nevada are no longer subject to the Intercreditor Agreement and Meditrust's liens on each Skilled Nursing Facility Borrower's Collateral and each Skilled Nursing Property are released, and (ii) all appropriate termination statements and releases 11 13 required to release and terminate such liens and security interests. (h) Pay to the Lender its due diligence and legal fees (excluding title premiums, recordation and transfer taxes, documentary stamp taxes, search fees, recordation fees and expenses, survey expenses, environmental audit expenses, and all other amounts required to be paid to third parties (ie., parties other than Lender and Lender's Affiliates) by the Borrower in order to effectuate the transactions contemplated by this Agreement), and excluding the additional Commitment Fee, described in Section 3(e) hereof, equal to $36,307.00 (collectively, the "Legal Fees"). Section 4. Payment of Commitment Fee and Legal Fees. The Borrower hereby authorizes and instructs the Lender to deduct the Commitment Fee and the Legal Fees from the proceeds of the Loan, and Borrower agrees that such amounts constitute a portion of the Obligations evidenced and secured by the Loan Documents. Section 5. Updated Schedules. The updated Schedules delivered by Borrower in connection with this Agreement are hereby incorporated into the Loan Agreement. Section 6. Representations and Warranties; No Event of Default. Each Borrower hereby confirms that all of the representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct, except as previously disclosed to Lender in writing. To the Borrower's best knowledge, no Event of Default has occurred. Borrower and Lender acknowledge that (a) Borrower has delivered copies of certain correspondence regarding the electric utility transformer located on the Republic Park Property pursuant to which Borrower has disclosed to Lender that such transformer is leaking and will be repaired on July 29 or July 30, 1999, and (b) Borrower shall not be in violation or breach of any representations, warranties or covenants under the Loan Documents as a result of such transformer leak and/or such correspondence. Section 7. Renewal; Lien Continuation; No Novation. The Borrower hereby renews the Obligations and promises to pay and perform all Obligations as modified by this Agreement. The liens and security interests granted under the Loan Documents 12 14 are hereby ratified and confirmed as valid, subsisting and continuing to secure the Obligations, as modified hereby. Nothing herein shall in any manner diminish, impair, waive or extinguish the Note, the Obligations or such liens and security interests. The execution and delivery of this Agreement shall not constitute a novation of the debt evidenced and secured by the Loan Documents. Section 8. Enforceability. This Amendment constitutes the legal, valid and binding obligation of each Borrower, and is enforceable against each Borrower in accordance with its terms. Section 9. Reference to the Effect on the Loan Agreement. (a) Upon the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of similar import shall mean and be a reference to the Loan Agreement as amended by this Amendment. (b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided in this Amendment, operate as a waiver of any right, power or remedy of Lender, nor constitute a waiver of any provision of the Loan Agreement, or any other documents, instruments and agreements executed or delivered in connection with the Loan Agreement. Section 10. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland. Section 11. Headings. Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. Section 12. Counterparts. This Amendment may be executed in counterpart originals, and both counterparts taken together shall be deemed to constitute one and the same instrument. 13 15 IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as of the date first written above. LENDER: ATTEST: HCFP FUNDING, INC. a Delaware corporation, By: /s/Debra Van Alstyne By:/s/Michael G. Gardullo Name:Debra Van Alstyne Name:Michael G. Gardullo Title:Vice President Title:Vice President BORROWER: ATTEST: BALANCED CARE CORPORATION a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President- Title:Senior Vice President Corporate Services and Legal Counsel and and Secretary Assistant Secretary ATTEST: BCC AT HERMITAGE PARK CARE CENTER, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary ATTEST: BCC AT LEBANON CARE CENTER, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary 14 16 ATTEST: BCC AT LEBANON PARK MANOR, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary ATTEST: BCC AT MT. VERNON PARK CARE CENTER, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary ATTEST: BCC AT MT. VERNON PARK CARE CENTER WEST, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Senior Vice President Assistant Secretary and Legal Counsel and Assistant Secretary ATTEST: BCC AT NEVADA PARK CARE CENTER, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Senior Vice President Assistant Secretary and Legal Counsel and Assistant Secretary 15 17 ATTEST: BCC AT NIXA PARK CENTER, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Senior Vice President Assistant Secretary and Legal Counsel and Assistant Secretary ATTEST: BCC AT REPUBLIC PARK CENTER, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Senior Vice President Assistant Secretary and Legal Counsel and Assistant Secretary ATTEST: BCC AT SPRINGFIELD CARE CENTER, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary ATTEST: DIXON MANAGEMENT, INC. a Missouri corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary ATTEST: BCC AT DARLINGTON, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary 16 18 ATTEST: BALANCED CARE AT EYERS GROVE, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary ATTEST: BALANCED CARE AT BUTLER, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary ATTEST: BALANCED CARE AT SARVER, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary ATTEST: BALANCED CARE AT NORTH RIDGE, INC. a Delaware corporation By:/s/Robert J. Sutton By:/s/Robin L. Barber [SEAL] Name:Robert J. Sutton Name:Robin L. Barber Title:Vice President and Title:Vice President and Assistant Secretary Secretary 17 EX-10.13 11 SEPARATION AGREEMENT DATED AS OF AUGUST 23, 1999 1 Exhibit 10.13 August 23, 1999 Brian L. Barth 201 Fleetwood Drive Red Lion, PA 17356 Re: Separation Letter Agreement Dear Brian: This letter sets forth our agreement regarding your separation from Balanced Care Corporation (hereinafter "the Company") effective August 15, 1999 (the "Effective Date"). 1. Commencing on the Effective Date and continuing up through and including August 14, 2000, you will receive severance pay at your final base salary rate (minus deductions and withholdings required by law), paid semi-monthly in accordance with the Company's normal payroll practices. Additionally, within thirty (30) calendar days from the date on which you execute and deliver this Agreement, the Company will pay you a lump sum payment in the amount of $75,000 (less applicable deductions and withholdings required by law), plus a lump sum payment equal to the dollar value of your accumulated but unused vacation days as of the Effective Date. You agree and acknowledge that you will only be paid such severance (as well as the consideration outlined in paragraphs 2 and 3 of this Agreement) if you execute, deliver, and do not breach this Agreement, which contains various terms and conditions including, but not limited to, a general release, a non-competition and non-solicitation provision, and a confidentiality provision. 2. During your employment with the Company, you were awarded the following stock options: - ------------------------------------------------------------------------------- Stock Option Grant Number Stock Option Date Number of Shares - ------------------------------------------------------------------------------- 21 08/01/96 11,250 - ------------------------------------------------------------------------------- 82 06/25/97 15,000 - ------------------------------------------------------------------------------- 194 11/06/97 15,000 - ------------------------------------------------------------------------------- 257 08/18/98 30,000 - ------------------------------------------------------------------------------- 658 05/05/99 28,865 - ------------------------------------------------------------------------------- 659 05/05/99 1,135 - ------------------------------------------------------------------------------- 2 (a) Your stock option grants numbered 21, 82, 194 and 257 representing an aggregate of 71,250 shares will continue to vest in accordance with their scheduled terms and be exercisable until August 15, 2000 in accordance with the Company's 1996 Stock Incentive Plan, as amended and restated (the "1996 Stock Incentive Plan"). (b) Your stock option grants numbered 658 and 659 representing an aggregate of 30,000 shares will immediately vest and become exercisable in accordance with the 1996 Stock Incentive Plan. 3. The Note dated April 1, 1996 made by you in favor of the Company in the original principal amount of $20,000 and having an outstanding principal balance of $7,000 shall be marked satisfied and paid in full on the books and records of the Company as of the Effective Date upon your execution and delivery of this Agreement. 4. You acknowledge and agree you elected not to have health care coverage through the Company during your employment with the Company and thus are not eligible for COBRA participation. 5. You and the Company hereby acknowledge and agree that termination of your employment with the Company shall be reflected as a separation by mutual agreement. 6. You agree to fully cooperate with the Company, or any subsidiary, affiliate, division or business unit of the Company or any related entity of the Company (hereinafter "Affiliates") and their counsel in connection with any litigation in which knowledge from you of matters in which you were involved while employed is required, and make yourself reasonably available to the Company to do so at times and locations as to not interfere with your duties and responsibilities to any future employer. The Company will reimburse you for any reasonable out of pocket expenses incurred by you at the Company's request in connection with such litigation (such expenses not to include any compensation for your time). You will not be entitled to reimbursement for any expenses in which your involvement in litigation is required by a party other than the Company or its Affiliates. 2 3 7. You agree that you will not issue any press release or make any public statement concerning your employment with, or departure from, the Company without the prior written consent of the Company. You agree that you will not disclose the terms of this Agreement to anyone except your spouse, your tax advisor, your attorney and taxing authorities. You further agree that you will not disparage the Company, Affiliates or their directors, officers, employees, products or services in any statements which you make to any third party, nor will you voluntarily cooperate in any proceedings or investigations against the Company or Affiliates, litigation or regulatory or administrative proceedings or investigations against the Company or Affiliates, nor will you act in any manner disparaging to the Company or contrary to its interests provided that this restriction will not prevent you from testifying truthfully under subpoena in any legal proceeding. The Company agrees that it will not disparage you in any statement made by an authorized representative of the Company to third parties outside of the Company, provided that this restriction will not prevent the Company or any employee or representative of the Company from testifying truthfully in any legal, regulatory or administrative proceeding or in providing truthful information to regulatory or governmental bodies, rating agencies, analysts, credit providers, investors or shareholders. 8. In consideration of the Company's promises and obligations set forth herein which you acknowledge provide you with valuable post-termination compensation, you hereby agree to: (a) Release the Company and Affiliates and their past, present and future officers, directors, attorneys, employees, shareholders and agents and their respective successors and assigns of and from any and all actions, charges, causes of action or claims of any kind, known or unknown, which you ever had, now have or hereafter may have arising out of any matter, occurrence or event existing or occurring prior to execution and delivery hereof, including without limitation: any claims relating to or arising out of your employment with and/or separation of employment with the Company; except as specifically described in this Agreement, any claims for unpaid or withheld wages, severance, benefits, stock, restricted stock, or stock options, bonuses and/or compensation of any kind; any claims arising under or relating to your Employment Agreement dated September 20, 1995, as amended by that certain Amendment to Employment Agreement dated July 1, 3 4 1998 (together being your "Employment Agreement"); any claims for attorneys' fees, costs or expenses; any claims of discrimination or harassment based on age, sex, race, religion, color, creed, disability, handicap, citizenship, national origin, sexual orientation or any other factor prohibited by federal, state or local law and/or claims of retaliation thereunder (including, but not limited to, claims for violation of Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act and the Pennsylvania Human Relations Act); any claims arising under the Employee Retirement Income Security Act; and/or other statutory or common law claims now existing or hereinafter recognized, including but not limited to, breach of contract, libel, slander, fraud, whistleblower, wrongful discharge, promissory estoppel, equitable estoppel and misrepresentation; provided, that the Company shall not be released from its indemnification obligations, if any, owed to you pursuant to the Company's indemnification policies covering executive officers for actions that have occurred during the term of your employment. (b) Not use for your personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company any confidential information and/or proprietary information relating to the Business Activities (as defined in Section 8(c) below), the Company and its Affiliates, which you acquired in the course of your employment with the Company and which is not otherwise lawfully known by and readily available to the general public. For purposes of this Agreement, confidential information includes, but is not limited to: any information regarding the Company or its Affiliates' information and computer systems; security; business methods; decision-making processes; policies, procedures or techniques; inventions, including discoveries, improvements or ideas, whether potential or not; research or development projects or results; marketing strategies, reports or analyses; financial controls; methods of development; bids, estimates, direct and indirect costs; trade secrets or other knowledge or processes of or developed by the Company or its Affiliates; any names and addresses of directors, employees, suppliers, customers or clients of the Company or its Affiliates; any data on or relating to past, present or prospective business partners, officers, directors, employees, 4 5 customers or clients; information relating to the Company or its Affiliates' relationships with past, present or prospective business partners, customers, attorneys, accountants, auditors, investment bankers, lenders, brokers, analysts, rating agencies, credit providers and government agencies; any information considered for press release but ultimately not made public; and any other confidential information relating to or dealing with the business operations or activities of the Company or its Affiliates learned by you during your employment with the Company. (c) Subject to Section 8(e) below, not do any of the following during the period commencing on the Effective Date and ending on August 15, 2000: directly or indirectly own an interest in, manage, or control a business engaged in any of the Business Activities; otherwise engage in any of the Business Activities in a fashion that competes with the Company or its Affiliates; or provide to a competitor of the Company or its Affiliates consulting service or services as an employee, partner or owner, which services relate to any of the Business Activities. As used herein, the term "Business Activities" shall mean managing, leasing, or owning long-term care facilities or assisted living centers, or managing, leasing, or owning sub-acute operations or facilities or nursing homes within a thirty (30) mile radius of any Company or Affiliate facility existing on the Effective Date or of any proposed Company or Affiliate facility listed on Exhibit A attached hereto and incorporated herein by reference. (d) Subject to Section 8(e) below, not do any of the following during the period commencing on the Effective Date and ending on August 15, 2000: directly or indirectly solicit or encourage Company Customers to deal with you or any other person or entity other than the Company in connection with the Company Customers' requirements for the Business Activities, or assist or aid any others to do so; directly or indirectly solicit or encourage other personnel subject to the provisions of this Section 8 to engage in any of the activities restricted in this Agreement; or directly or indirectly solicit for your benefit or the benefit of others the employment services of any then present employee of the Company. As used herein, the term "Company Customers" shall mean (i) those persons or 5 6 entities you or other Company personnel sold, solicited or serviced within the six (6) months prior to the Effective Date or (ii) those persons or entities about which you had access to proprietary information within the six (6) months prior to the Effective Date. (e) If the Company fails to make any of the severance payments required under Section 1 of this Agreement, and such failure continues and remains uncured for twenty (20) consecutive calendar days after the applicable due date, the provisions of Section 8(c) regarding non-competition and Section 8(d) regarding non-solicitation shall terminate upon the expiration of said twenty (20) day period; provided, however, if the Company's failure to make any severance payment is a result of (i) any actual breach by you of the terms of this Agreement, the provisions of Sections 8(c) and 8(d) shall remain in full force and effect in accordance with their terms or (ii) any alleged breach by you of the terms of this Agreement, the provisions of Sections 8(c) and 8(d) shall remain in full force and effect in accordance with their terms until such time as the alleged breach and the applicability of Sections 8(c) and 8(d) are resolved pursuant to (y) the mutual agreement of you and the Company evidenced in writing or (z) a final judgment or order issued by a court of competent jurisdiction. 9. The Company and its Affiliates release you and your heirs, representatives, administrators, trustees, executors, and assigns of and from any and all claims based on any actions taken by you during your employment within the scope and in the ordinary course of the performance of your duties, with the exception of any claim involving criminal or fraudulent conduct on your part. 10. In addition to your obligations with respect to confidentiality described above, you will continue to comply at all times after the termination of your employment with your common law obligation not to disclose to third parties or use for your own benefit any trade secret or confidential proprietary information belonging to the Company. You agree and represent that you have returned or will return to the Company all tangible and intangible property in your possession which is the property of the Company or which contains confidential or proprietary information of the Company. You further agree that, 6 7 should you fail to pay, within thirty (30) days after receipt of bills for same, any charges incurred by you on any credit, charge or calling card issued to you as a Company employee, the Company may deduct any and all amounts which are not reimbursable under the terms of the Company's expense reimbursement policies and practices from the severance to be paid to you pursuant to paragraph 1 of this Agreement, and you hereby authorize the Company to take such deductions. 11. You agree and acknowledge that: (i) you have been advised to consult with an attorney prior to executing this Agreement and have been represented by your own attorney, Steven Santoro, Esquire in connection with the negotiation of this Agreement; (ii) no promise or inducement not expressed hereby has been made to you; (iii) you understand the meaning and effect of this Agreement and have voluntarily consented to its terms; and (iv) you have been given twenty-one (21) days to decide whether to sign this Agreement. 12. If any term or provision of this agreement is determined by any Court of competent jurisdiction to be unenforceable, illegal or invalid, the other terms and provisions shall remain in full force and effect. 13. This Agreement constitutes the entire agreement between you and the Company relating to your separation from employment and supersedes all prior agreements between you and the Company, oral or written, express or implied, including, without limitation your Employment Agreement. Any modifications of this Agreement must be in writing and signed by you and the President of the Company. This Agreement shall be construed in accordance with the laws of the Commonwealth of Pennsylvania, and our signatures below establish our mutual intent to be legally bound by this Agreement. This Agreement will be binding on our respective heirs, representatives, administrators, trustees, executors, successors and assigns, and your death or disability after this Agreement becomes effective shall have no effect of any sort upon this Agreement or the terms and obligations created hereunder. This Agreement may be executed in counterparts with the same effect as if all signatures were upon the same instrument. 7 8 BALANCED CARE CORPORATION /s/ Brad E. Hollinger By: Brad E. Hollinger, President and CEO Date: August 23, 1999 /s/ Brian L. Barth 8/26/99 Brian L. Barth Date /s/ Lori A. Barth 8/26/99 Witness Date 8 EX-10.35 12 SEPARATION AGREEMENT, DATED AS OF JULY 13, 1999 1 Exhibit 10.35 July 13, 1999 Paul Kruis 3045 Schoolhouse Road Middletown, PA 17057 Re: Separation Letter Agreement Dear Paul: This Separation Letter Agreement ("Agreement") sets forth our agreement regarding your separation from Balanced Care Corporation (hereinafter "the Company") effective February 12, 1999 (the "Effective Date" of this Agreement). 1. Effective February 12, 1999 through and including May 11, 2000, you will receive severance pay at your final base salary rate (minus deductions and withholdings required by law), paid bi-weekly in accordance with the Company's normal payroll practices, subject to paragraph 14 below. You agree and acknowledge that you will only be paid such severance (as well as the consideration outlined in paragraphs 2 and 3 of this letter agreement) if you execute, do not revoke, and do not breach this Agreement which contains various terms and conditions including but not limited to, a General Release and confidentiality provision. 2. Your group health insurance coverage will continue through February 11, 2000. The Company will make the same contribution toward the premium as it does for its employees. After February 11, 2000, you will have the right to continue the coverage pursuant to COBRA. The Company will cover the cost of your COBRA coverage for the first twelve months of the COBRA period. You will be responsible for the COBRA premium for the remainder of the COBRA period, should you elect to continue the coverage. 3. All of your granted options (180,000) in the stock of the Company will immediately vest and become exercisable. You will have until 5:00 p.m. on July 15, 2000 to exercise any or all of your options. 2 4. The Company's records will reflect the termination of your employment as a separation by mutual agreement. 5. You agree to fully cooperate with the Company, or any subsidiary, affiliate, division or business unit of the Company or any related entity of the Company (hereinafter "Affiliates") and their counsel in connection with any litigation in which knowledge from you of matters in which you were involved while employed is required, and make yourself reasonably available to the Company to do so at times and locations as to not interfere with your duties and responsibilities to any future employer. The Company will reimburse you for any reasonable out of pocket expenses incurred by you at the Company's request in connection with such litigation such expenses will not include any compensation for your time, unless the number of hours expended by you exceeds 50 hours, in which event you will be compensated by the Company at the rate of $150.00 per hour for all hours in excess of 50 hours. You will not be entitled to reimbursement for either time or expenses in which your involvement in litigation is required by a party other than the Company. 6. Neither you nor the Company will issue any press release or make any public statement concerning your employment with, or departure from, the Company without the prior written consent of the other party. You agree that you will not disclose the terms of this letter agreement to anyone except your spouse, your tax advisor, your attorney and taxing authorities. You further agree that you will not disparage the Company, Affiliates or their directors, officers, employees, products or services in any statements which you make to any third party, nor will you voluntarily cooperate in any proceedings or investigations against the Company or Affiliates, litigation or regulatory or administrative proceeding or investigations against the Company or affiliates, nor will you act in any manner disloyal to the Company or contrary to its interests provided that this restriction will not prevent you from testifying truthfully under subpoena in any legal proceeding. The Company agrees that it will not disparage you in any statement made by an authorized representative of the Company to third parties outside of the Company, provided that this restriction will not prevent the Company or any employee or representative of the Company from testifying truthfully in any legal, regulatory or administrative proceeding or in providing truthful information to regulatory or governmental bodies, rating agencies, analysts, credit providers, investors or shareholders. The Company will respond to any 3 requests for references concerning you from prospective employers by confirming your dates of employment and positions held, and informing the prospective employer that it is Company policy not to provide additional information. All requests for references should be directed by you to Peggy Wilson, Vice President of Human Resources. 7. In consideration of the Company's promises and obligations set forth herein, which you acknowledge provide you with valuable post-termination compensation, you hereby agree to: (a) Release the Company and Affiliates and their past, present and future officers, directors, attorneys, employees, shareholders and agents and their respective successors and assigns of and from any and all actions, charges, causes of action or claims of any kind, known or unknown, which you ever had, now have or hereafter may have arising out of any matter, occurrence or event existing or occurring prior to execution hereof, including without limitation: any claims relating to or arising out of your employment with and/or separation of employment with the Company; except as specifically described in this letter agreement, any claims for unpaid or withheld wages, severance, benefits, stock, restricted stock, or stock options, bonuses and/or compensation of any kind; any claims arising under or relating to your offer letter dated October 3, 1997 and Change in Control Agreement dated November 5, 1998; any claims for attorney's fees, costs or expenses; any claims of discrimination or harassment based on age, sex, race, religion, color, creed, disability, handicap, citizenship, national origin, sexual orientation or any other factor prohibited by federal, state or local law and/or claims of retaliation thereunder (including, but not limited to, claims for violation of the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act and the Pennsylvania Human Relations Act); any claims arising under the Employee Retirement Income Security Act; and/or other statutory or common law claims now existing or hereinafter recognized, including but not limited to, breach of contract, libel, slander, fraud, whistleblower, wrongful discharge, promissory estoppel, equitable estoppel and misrepresentation. 4 (b) Not to use for your personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company any confidential information and/or proprietary information relating to the Company and its Affiliates, which you acquired in the course of your employment with the Company and which is not otherwise lawfully known by and readily available to the general public. For purposes of this Agreement, confidential information includes, but is not limited to: any information regarding the Company or its Affiliates' computer systems; security; business methods; inventions, including discoveries, improvements or ideas, whether potential or not; research or development projects or results; marketing strategies, reports or analysis; financial controls; methods of development; bids, estimates, direct and indirect costs; trade secrets of or developed by the Company or its Affiliates; any names and addresses of employees, suppliers, customers or clients of the Company or its Affiliates; any data on or relating to past, present or prospective business partners, officers, directors, employees, customers or clients; information relating to the Company or its Affiliates' relationships with past, present or prospective business partners, customers, brokers, analysts, rating agencies, credit providers and government agencies; any information considered for press release but ultimately not made public; and any other confidential information relating to or dealing with the business operations or activities of the Company or its Affiliates learned by you during your employment with the Company. 8. The Company and its Affiliates and their past, present and future officers, employees, agents, directors, attorneys and shareholders release you, your heirs, successors and assigns of and from any and all claims based on any actions taken by you during your employment with the Company, with the exception of any claim involving criminal or fraudulent conduct on your part. (Unless such actions were reasonably known to the President of the Company). 9. In addition to your obligations with respect to confidentiality described above, you will continue to comply at all times after the termination of your employment with your common law obligation not to disclose to third parties or use for your own benefit any trade secret or confidential proprietary information belonging to the Company. You agree and represent 5 that you have returned or will return to the Company all tangible and intangible property in your possession which is the property of the Company or which contains confidential or proprietary information of the Company. 10. You agree and acknowledge that: (a) you have been advised to consult with an attorney prior to executing this Agreement and have been represented by your own attorney, Stephen L. Grose, Esquire, in connection with the negotiation of this Agreement; (b) no promise or inducement not expressed hereby has been made to you; (c) you understand the meaning and effect of this Agreement and have voluntarily consented to its terms; and (d) you have had twenty-one (21) days to decide whether to sign this Agreement. 11. If any term or provision of this Agreement is determined by any Court of competent jurisdiction to be unenforceable, illegal or invalid, the other terms and provisions shall remain in full force and effect. 12. You agree and acknowledge that you shall have seven (7) days following the date upon which you sign this Agreement within which to revoke it. This Agreement shall not be effective or enforceable until the seven (7) day revocation period has expired. Any revocation must be in writing signed by you and faxed or hand-delivered to the offices of Deborah Myers Welsh, Esquire, before the revocation period has expired. 13. This Agreement constitutes the entire agreement between you and the Company relating to your separation from employment and supersedes all prior agreements between you and the Company, oral or written, express or implied. Any modifications of this Agreement must be in writing and signed by you and the President of the Company. This Agreement shall be construed in accordance with the laws of the Commonwealth of Pennsylvania, and our signatures below establish our mutual intent to be legally bound by this Agreement. Brad Hollinger certifies that he has authority to enter into this Agreement and is aware of no limitations that would affect his authority to do so. This Agreement will be binding on our respective heirs, successors and assigns, and your death or disability after this Agreement becomes effective shall have no effect of any sort upon this Agreement or the terms and obligations created hereunder. This Agreement may be executed in counterparts with the same effect as if all signatures were upon the same instrument. 6 14. No later than three (3) business days after this Agreement becomes enforceable as provided in paragraph 12, the Company will reimburse you for all payments then due to you under paragraph 1 of this Agreement retroactive to the Effective Date in a lump sum (less applicable deductions and withholdings required by law). BALANCED CARE CORPORATION /s/ Brad E. Hollinger By: Brad E. Hollinger, President and CEO Date: July 21, 1999 /s/ Paul Kruis 7/19/99 Paul Kruis Date /s/ Stephen L. Grose 7/19/99 Witness Date EX-10.36 13 CHANGE IN CONTROL AGREEMENT 1 Exhibit 10.36 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, made as of the 29th day of July, 1999, by and between Balanced Care Corporation, a Delaware corporation with a principal office at 1215 Manor Drive, Mechanicsburg, PA, 17055 (the "Company") and Gary W. Anderson, an individual health care executive (the "Executive"). WITNESSETH: WHEREAS, the Company presently employs the Executive, on an employee at will basis, as Executive Vice President of Operations; WHEREAS, the Company and the Executive mutually desire to provide certain severance payment rights to the Executive under specified circumstances; WHEREAS, in consideration of providing such severance payment rights to the Executive, the Company desires that the Executive agree to certain non-compete and non-solicitation restrictions; and WHEREAS, the Executive is willing to be employed by the Company in the foregoing capacity and to be subject to the non-compete and non-solicitation restrictions upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and intending to be legally bound, the parties hereto agree as follows: 1. Employment. The Company employs the Executive as an employee at will and the Executive's employment by the Company is subject to all of the terms and conditions set forth herein. 2. Termination Following a Change in Control. The Executive shall be entitled to receive a Severance Payment if, within one (1) year following a Change in Control, there occurs any of the following events (A) any termination of the Executive except for Cause; (B) any material reduction in the Executive's responsibilities (including reporting responsibilities) or authority, including as such responsibilities or authority may be increased from time to time; 2 (C) the assignment to the Executive of duties inconsistent with the Executive's office on the date of a Change in Control or as the same may be increased from time to time after a Change in Control; (D) any material reduction (including, after a Change in Control, proportional reductions affecting all employees or executive employees) in the Executive's annual base salary in effect on the date of a Change in Control or as the same may be increased from time to time after a Change in Control; (E) any failure (including, after a Change in Control, proportional failures affecting all executive employees) to continue the Executive's participation on substantially similar terms in the Plan or any bonus plan in which the Executive participated at the time of the Change in Control or any change or amendment to any substantive provisions of any such plan which would materially decrease the potential benefits to the Executive under any of such plans; (F) any failure (including, after a Change in Control, a proportional failure affecting all executive employees) to provide the Executive with benefits at least as favorable as those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident or other employee plans in which the Executive participated at the time of the Change in Control, unless such reduction relates to a reduction in benefits applicable to all employees generally; (G) the reassignment of the Executive to a location greater than sixty (60) miles from the principal executive offices of the Company before the Change in Control; and (H) in the event of any of the events described in (B) through (G) above, the Executive voluntarily terminates his employment under this Agreement as a result of such event(s). 3. Definitions: As used in this Agreement, the following terms shall have the meanings set forth below: (A) "Cause" shall mean willful misconduct, intentional and material failure to perform duties under this Agreement by the Executive or the Executive's conviction of a felony. No 2 3 termination for cause shall be effective unless and until the Executive is given written notice that the act or omission constitutes "Cause" under this Agreement and the Executive is given an opportunity to correct or cure the particular act or omission within thirty (30) days after receipt by the Executive of such written notice from the Company. (B) A "Change in Control" shall be deemed to have taken place if: (i) any person, including a group but not excluding the Company or any current stockholder of the Company who beneficially owns five percent (5%) or more of the Company's outstanding shares, becomes the beneficial owner of shares of the Company having fifty-one percent (51%) or more of the total number of votes that may be cast for the election of directors or (ii) there occurs any cash tender or exchange offer for shares of the Company, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, and as a result of or in connection with any such event persons who were directors of the Company before the event shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company. As used herein, the terms "person" and "beneficial owner" have the same meaning as under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. (C) A "Severance Payment" shall include the following: (i) all outstanding stock options granted to the Executive, if any, under the Company's 1996 Stock Incentive Plan, as such plan may be amended from time to time (the "Plan"), shall immediately become vested and shall be exerciseable in accordance with the provisions of the Plan and (ii) a lump sum cash payment, shall be payable within 30 days of termination of employment, equal to the amount determined by multiplying by two (2) the Executive's annual base salary then in effect on the date of termination. 4. Notice of Termination. Any notice of termination of employment of the Executive shall be given by the Company in writing and delivered by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, at such address as the Executive shall have furnished to the Company in writing. 3 4 5. Non-Competition and Non-Solicitation. As further consideration for the Company's execution and delivery of this Agreement to the Executive, the Executive agrees as follows: (A) Restrictions on Competition. While employed by the Company and for a period of one (1) year following termination of the Executive's employment, the Executive agrees that he will not directly or indirectly own an interest in, manage or control, or provide consulting services or services as an employee or partner, to a business engaged in managing, leasing, owning or operating assisted living facilities, nursing homes or sub-acute operations (the "Business Activities") within a sixty (60) mile radius of any Company facility existing or under active development at the time of such termination. (B) Restriction on Solicitation. While employed by the Company and for a period of one (1) year following termination of the Executive's employment, the Executive agrees that he will not directly or indirectly: (i) solicit or encourage any of the Company's customers to deal with the Executive or any other third party other than the Company or (ii) solicit for the Executive's benefit or for the benefit of any third party the employment or services of any then current employee of the Company. (C) Listed Stock Ownership Exception. Nothing in this Section 5 shall prohibit the Executive from owning stock in a publicly traded company as a passive investor provided that the Executive shall not own more than 5% of the equity of a publicly traded competing enterprise of the Company's. 6. Successors. (A) This Agreement is personal to the Executive and shall not be assignable by the Executive otherwise than by his will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal heirs and representatives. (B) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (C) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this 4 5 Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, the Company shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 7. Entire Agreement. This writing represents the entire agreement and understanding between the parties with respect to the subject matter contained herein and may not be altered or amended except in a writing signed by both parties. 8. Unenforceability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. 9. Waiver. The failure of the parties to insist upon strict compliance with any provisionhereof or the failure to assert any right the parties may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right thereof by the parties. 10. Counterparts. This Agreement may be executed by the parties in two or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument. 11. Headings. The headings of the sections and subsections of this Agreement are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any of the provisions of this Agreement. 12. Governing Law. This Agreement has been negotiated and executed within the Commonwealth of Pennsylvania and shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 5 6 IN WITNESS WHEREOF, intending to be legally bound hereby, the parties have executed this Agreement as of the date first above written. ATTEST: BALANCED CARE CORPORATION /s/ Robin L. Barber By: /s/ Brad E. Hollinger Asst. Secretary Brad E. Hollinger President and CEO WITNESS: EXECUTIVE /s/ Robin L. Barber /s/ Gary W. Anderson Gary W. Anderson 6 EX-10.37 14 FIRST AMENDMENT AND RESTATED CHANGE IN CONTROL 1 Exhibit 10.37 FIRST AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT THIS FIRST AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT, made as of the 26th day of May, 1999, by and between Balanced Care Corporation, a Delaware corporation with a principal office at 5021 Louise Drive, Suite 200, Mechanicsburg, PA, 17055 (the "Company") and Mark S. Moore, an individual health care executive (the "Executive"). Reference is made to that certain Change in Control Agreement dated September 23, 1998, by and between the Company and the Executive (the "Existing Agreement"). WITNESSETH: WHEREAS, the Company and the Executive desire to amend and restate the terms and conditions of the Existing Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Company and the Executive agree to amend and restate the Existing Agreement in its entirety and to that end agree that this First Amended and Restate Change in Control Agreement shall be deemed effective on and as of the date hereof, shall supersede the Existing Agreement in its entirety and shall be referred to herein as the "Agreement". The Company and the Executive covenant and agree as follows: 1. Employment. The Company employs the Executive as an employee at will and the Executive's employment by the Company is subject to all of the terms and conditions set forth herein. 2. Termination Following a Change in Control. The Executive shall be entitled to receive a Severance Payment if, within three (3) years following a Change in Control, there occurs any of the following events (A) any termination of the Executive except for Cause; 2 (B) any material reduction in the Executive's responsibilities (including reporting responsibilities) or authority, including as such responsibilities or authority may be increased from time to time; (C) the assignment to the Executive of duties inconsistent with the Executive's office on the date of a Change in Control or as the same may be increased from time to time after a Change in Control; (D) any material reduction (including, after a Change in Control, proportional reductions affecting all employees or executive employees) in the Executive's annual base salary in effect on the date of a Change in Control or as the same may be increased from time to time after a Change in Control; (E) any failure (including, after a Change in Control, proportional failures affecting all executive employees) to continue the Executive's participation on substantially similar terms in the Plan or any bonus plan in which the Executive participated at the time of the Change in Control or any change or amendment to any substantive provisions of any such plan which would materially decrease the potential benefits to the Executive under any of such plans; (F) any failure (including, after a Change in Control, a proportional failure affecting all executive employees) to provide the Executive with benefits at least as favorable as those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident or other employee plans in which the Executive participated at the time of the Change in Control, unless such reduction relates to a reduction in benefits applicable to all employees generally; (G) the reassignment of the Executive to a location greater than sixty (60) miles from the principal executive offices of the Company before the Change in Control; and (H) in the event of any of the events described in (B) through (G) above, the Executive voluntarily terminates 2 3 his employment under this Agreement as a result of such event(s). 3. Definitions: As used in this Agreement, the following terms shall have the meanings set forth below: (A) "Cause" shall mean willful misconduct, intentional and material failure to perform duties under this Agreement by the Executive or the Executive's conviction of a felony. No termination for cause shall be effective unless and until the Executive is given written notice that the act or omission constitutes "Cause" under this Agreement and the Executive is given an opportunity to correct or cure the particular act or omission within thirty (30) days after receipt by the Executive of such written notice from the Company. (B) A "Change in Control" shall be deemed to have taken place if: (i) any person, including a group but not excluding the Company or any current stockholder of the Company who beneficially owns five percent (5%) or more of the Company's outstanding shares, becomes the beneficial owner of shares of the Company having twenty percent (20%) or more of the total number of votes that may be cast for the election of directors or (ii) there occurs any cash tender or exchange offer for shares of the Company, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, and as a result of or in connection with any such event persons who were directors of the Company before the event shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company. As used herein, the terms "person" and "beneficial owner" have the same meaning as under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. (C) A "Severance Payment" shall include the following: (i) all outstanding stock options granted to the Executive, if any, under the Company's 1996 Stock Incentive Plan, as such plan may be amended from time to time (the "Plan"), shall immediately become vested and shall be exerciseable in accordance with the provisions of the Plan and (ii) a lump sum cash payment, shall be payable 3 4 within 30 days of termination of employment, equal to the sum of (a) the amount determined by multiplying by three (3) the Executive's annual base salary then in effect on the date of termination and (b) the maximum amount of the Executive's potential annual bonus percentage payable for the year in which the termination took place. 4. Notice of Termination. Any notice of termination of employment of the Executive shall be given by the Company in writing and delivered by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, at such address as the Executive shall have furnished to the Company in writing. 5. Non-Competition and Non-Solicitation. As further consideration for the Company's execution and delivery of this Agreement to the Executive, the Executive agrees as follows: (A) Restrictions on Competition. While employed by the Company and for a period of one (1) year following termination of the Executive's employment, the Executive agrees that he will not directly or indirectly own an interest in, manage or control, or provide consulting services or services as an employee or partner, to a business engaged in managing, leasing, owning or operating assisted living facilities (the "Business Activities") within a sixty (60) mile radius of any Company facility existing or under active development at the time of such termination. (B) Restriction on Solicitation. While employed by the Company and for a period of one (1) year following termination of the Executive's employment, the Executive agrees that he will not directly or indirectly: (i) solicit or encourage any of the Company's customers to deal with the Executive or any other third party other than the Company or (ii) solicit for the Executive's benefit or for the benefit of any third party the employment or services of any then current employee of the Company. (C) Listed Stock Ownership Exception. Nothing in this Section 5 shall prohibit the Executive from owning 4 5 stock in a publicly traded company as a passive investor provided that the Executive shall not own more than 5% of the equity of a publicly traded competing enterprise of the Company's. Notwithstanding the foregoing, the restrictions contained in this Section 5(C) shall not apply to publicly traded nursing home and sub-acute care companies and shall only apply to publicly traded assisted living companies while the Executive is employed by the Company and for a one (1) year period following termination of the Executive's employment. 6. Successors. (A) This Agreement is personal to the Executive and shall not be assignable by the Executive otherwise than by his will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal heirs and representatives. (B) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (C) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, the Company shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 7. Entire Agreement. This writing represents the entire agreement and understanding between the parties with respect to the subject matter contained herein and may not be altered or amended except in a writing signed by both parties. 5 6 8. Unenforceability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. 9. Waiver. The failure of the parties to insist upon strict compliance with any provision hereof or the failure to assert any right the parties may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right thereof by the parties. 10. Counterparts. This Agreement may be executed by the parties in two or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument. 11. Headings. The headings of the sections and subsections of this Agreement are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any of the provisions of this Agreement. 12. Governing Law. This Agreement has been negotiated and executed within the Commonwealth of Pennsylvania and shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, intending to be legally bound hereby, the parties have executed this Agreement as of the date first above written. ATTEST: BALANCED CARE CORPORATION By: /s/ Brad E. Hollinger Asst. Secretary Name: Brad E. Hollinger Title: Chief Executive Officer WITNESS: EXECUTIVE: /s/ Mark S. Moore Mark S. Moore 6 EX-21.1 15 SCHEDULE OF SUBSIDIARIES 1 Exhibit 21.1 Significant Subsidiaries of Balanced Care Corporation BCC Development and Management Co. BCC Investment Corporation BCC at Hermitage Park Care Center, Inc. BCC at Lebanon Care Center, Inc. BCC at Lebanon Park Manor, Inc. BCC at Nevada Park Care Center, Inc. BCC at Nevada Park Terrace Apartments, Inc. BCC at Nixa Park Center, Inc. BCC at Republic Park Center, Inc. BCC at Springfield Care Center, Inc. BCC at Kingston II, Inc. BCC at Kingston, Inc. BCC at Blakely, Inc. BCC at Bloomsburg, Inc. Balanced Care at Butler, Inc. BCC at Mid-Valley, Inc. BCC at State College, Inc. BCC at Mt. Vernon Park Care Center, Inc. BCC at Mt. Vernon Park Care Center West, Inc. Dixon Management, Inc. BCC at Mt. Royal Pines, Inc. Balanced Care at North Ridge, Inc. BCC at Darlington, Inc. Balanced Care at Eyers Grove, Inc. Balanced Care at Saxonburg, Inc. Balanced Care at Stafford, Inc. Balanced Care at Bloomsburg II, Inc. EX-27.1 16 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 8,160 0 11,912 2,352 0 23,604 24,075 2,778 71,055 16,162 0 0 0 17 38,341 71,055 78,446 78,446 0 102,469 0 0 647 (24,192) (555) (23,637) 0 0 0 (23,637) (1.41) (1.41)
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