Exhibit 10.1
OPERATIONS TRANSFER AGREEMENT
     This OPERATIONS TRANSFER AGREEMENT (“Agreement”), is entered into effective
as of July 20, 2007, by and among DIVERSICARE TREEMONT, LLC, a Delaware limited
liability company (“Diversicare Treemont”), DIVERSICARE DOCTORS, LLC, a Delaware
limited liability company (“Diversicare Doctors”), DIVERSICARE ESTATES, LLC, a
Delaware limited liability company (“Diversicare Estates”), DIVERSICARE KATY,
LLC, a Delaware limited liability company (“Diversicare Katy”), DIVERSICARE
HUMBLE, LLC, a Delaware limited liability company (“Diversicare Humble”),
DIVERSICARE NORMANDY TERRACE, LLC, a Delaware limited liability company
(“Diversicare Normandy”), and DIVERSICARE BALLINGER, LLC, a Delaware limited
liability company (“Diversicare Ballinger”) (each of the forgoing are
individually a “New Operator” and collectively the “New Operators”), DIVERSICARE
TEXAS I, LLC, a Delaware limited liability company (“Diversicare Texas”)
(Diversicare Texas and the New Operators are collectively the “Diversicare
Parties”), and SENIOR MANAGEMENT SERVICES OF AMERICA NORTH TEXAS, INC., a Texas
corporation (“SMS North Texas”), SENIOR MANAGEMENT SERVICES OF ESTATES AT FORT
WORTH, INC., a Texas corporation (“SMS Estates”), SENIOR MANAGEMENT SERVICES OF
DOCTORS AT DALLAS, INC., a Texas corporation (“SMS Doctors”), SENIOR MANAGEMENT
SERVICES OF HUMBLE, INC., a Texas corporation (“SMS Humble”), SENIOR MANAGEMENT
SERVICES OF KATY, INC., a Texas corporation (“SMS Katy”), SENIOR MANAGEMENT
SERVICES OF TREEMONT, INC., a Texas corporation (“SMS Treemont”), SENIOR
MANAGEMENT SERVICES OF HERITAGE OAKS AT BALLINGER, INC., a Texas corporation
(“SMS Heritage Oaks”), and SENIOR MANAGEMENT SERVICES OF NORMANDY AT SAN
ANTONIO, INC., a Texas corporation (“SMS Normandy”) (SMS Estates, SMS Doctors,
SMS Humble, SMS Katy, SMS Treemont, SMS Heritage Oaks and SMS Normandy are each
individually a “Transferor” and collectively the “Transferors”) (SMS North Texas
and the Transferors are collectively the “SMS Parties”). This Agreement shall be
deemed a separate and distinct agreement by and between each SMS Party and its
corresponding Diversicare Party.
RECITALS
     A. Transferors currently operate seven (7) skilled nursing facilities as
follows: SMS Treemont operates Treemont Nursing and Rehabilitation Center, 5550
Harvest Hill Road, Suite 500, Dallas, Texas (the “Treemont Facility”); SMS
Doctors operates Doctors Healthcare Center, 9009 White Rock Trail, Dallas, Texas
(the “Doctors Facility”); SMS Estates operates Estates Healthcare Center, 201
Sycamore School Road, Fort Worth, Texas (the “Estates Facility”); SMS Katy
operates Oakmont Nursing and Rehabilitation Center of Katy, 1525 Tull Drive,
Katy, Texas (the “Katy Facility”); SMS Humble operates Oakmont Nursing and
Rehabilitation Center of Humble, 8450 Will Clayton Parkway, Humble, Texas (the
“Humble Facility”); SMS Normandy operates Normandy Terrace Nursing and
Rehabilitation Center, 841 Rice Road, San Antonio, Texas (the “Normandy Terrace
Facility”); and SMS Heritage Oaks operates Heritage Oaks Nursing and
Rehabilitation Center, 2001 6th Street, Ballinger, Texas (the “Heritage Oaks
Facility”) (each of the foregoing is individually a “Facility” and collectively
the “Facilities”).

 

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     B. Each respective Transferor is also the employer of each Facility’s
employees (the “Employees”).
     C. SMS North Texas leases all of the Facilities from OHI Asset (TX), LLC
(“Omega”) pursuant to a Consolidated Master Lease dated as of June 1, 2005 (the
“Omega Lease”).
     D. Each Transferor subleases its respective Facility from SMS North Texas
pursuant to a Sublease dated April 30, 2004 (each herein a “Sublease” and
collectively the “Subleases”).
     E. On January 17, 2007, the SMS Parties filed a voluntary petition for
relief under chapter 11 of title 11 of the United States Bankruptcy Code (the
“Bankruptcy Code”) in the United States Bankruptcy Court for the Northern
District of Texas (the “Bankruptcy Court”).
     F. Pursuant to that certain First Amended Chapter 11 Plan Proposed by the
Debtors, dated May 17, 2007 (the “Plan”), SMS North Texas and the Transferors
propose to transfer operations of the Facilities and sell or assign certain
assets associated therewith to Diversicare Texas and the New Operators.
Capitalized terms used but not defined herein have the meanings assigned to them
in the Plan or Appendix 1 to the First Amended Disclosure Statement in Support
of Chapter 11 Plan Proposed by the Debtors, dated June 17, 2007 (as amended,
modified or restated, the “Disclosure Statement”).
     G. The transfer of (i) the Omega Lease to Diversicare Texas and (ii) the
operations of the Facilities from the Transferors to the New Operators shall be
effective as of 12:01 a.m. local time on the day immediately following the date
of the Closing (as defined in Section 4.1) (the “Transfer Date”).
     H. Diversicare Texas, SMS North Texas, Transferors and New Operators desire
to enter into this Agreement in order to assign the Omega Lease from SMS North
Texas to Diversicare Texas and facilitate, effective as of the Transfer Date,
the orderly transition of each Facility’s operations, and the sale of certain
assets, from Transferors to New Operators.
AGREEMENT
     NOW, THEREFORE, in consideration of the mutual promises contained herein,
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties hereto agree that:
SECTION 1
PURCHASE AND SALE OF BUSINESS OPERATION
     1.1 Purchase Price. On the terms and subject to the conditions set forth in
this Agreement, in consideration for (i) the assignment to Diversicare Texas of
the Omega Lease and Subleases and (ii) the transfer to each New Operator of the
Acquired Assets (as defined below) and any and all business activities of each
Transferor associated with such Transferor’s operation of its respective
Facility (individually a “Business” and collectively the “Businesses”), the
Diversicare Parties will pay to the SMS Parties the following:

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          (a) Base Purchase Price. At Closing, the Diversicare Parties will pay
the following amounts to the SMS Parties (collectively, the “Base Purchase
Price”):
               (i) $8,500,00.00; and
               (ii) plus $70,000.00 as the parties’ agreed-upon value of the
usable inventory (at cost) located in the Facilities on the Closing Date (as
defined below).
          (b) Additional Purchase Price. In addition to the Base Purchase Price,
at Closing the Diversicare Parties will assume and agree to pay to the
applicable third party or otherwise perform the following obligations of the SMS
Parties as additional consideration for the Acquired Assets (herein, the
“Additional Purchase Price”):
               (i) the obligation of SMS North Texas to provide a Security
Deposit in the amount of $826,875 pursuant to Section 38.1 of the Omega Lease;
               (ii) the sum of up to $108,837.32 to pay the unpaid balances
owing on the vehicles listed on Schedule 1.3(b), but excluding any vehicles not
used at the Facilities;
               (iii) the 2007 real and personal property taxes related to the
Facilities;
               (iv) an amount sufficient to assume the paid time off liabilities
for the Retained Employees (as defined in Section 3.4 below) identified on
Schedule 1.1(b)(iv) to be attached hereto by the parties at Closing; and
               (v) the cure amounts for the Assumed Contracts listed on
Schedule 1.1(b)(v); provided, however, that except as provided in
Section 1.1(b)(i) above, all cure amounts required to assume and assign the
Omega Lease shall be paid at Closing by the SMS Parties.
     The Base Purchase Price and the Additional Purchase Price are collectively,
the “Purchase Price”. The Base Purchase Price shall be payable at Closing in
immediately available funds by wire transfer to the account designated in
writing by the SMS Parties. The parties agree to reasonably allocate the
Purchase Price among the various components of the Acquired Assets.
     1.2 Deposit. Simultaneously with the execution and delivery of this
Agreement to the SMS Parties (but in any event no later than July 20, 2007), the
Diversicare Parties shall submit a cashier’s check in the amount of $250,000.00
(the “Deposit”) payable to Senior Management Services of Treemont, Inc. The
Deposit shall be held by the SMS Parties until Closing or until such amount is
returned in accordance with the provisions of this Agreement or the Bid
Procedures set forth in the Disclosure Statement. If the Diversicare Parties are
the Purchaser, the Deposit shall be applied against, and the Base Purchase Price
reduced by, such amount.
     1.3 Acquired Assets. On the Transfer Date (as defined in Section 4.2 below)
and subject to the terms and conditions of this Agreement, (i) Diversicare Texas
will purchase and acquire from SMS North Texas, and SMS North Texas shall
transfer, assign and convey to Diversicare Texas, all of SMS North Texas’s
right, title and interest as tenant under the Omega Lease and as sublessor under
the Sublease, and (ii) each New Operator will purchase and acquire from
Transferor, and Transferor will sell, assign, transfer and deliver, or cause to
be sold,

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assigned, transferred and delivered, to New Operator, free and clear of all
liens, claims, encumbrances and interests, all right, title and interest in, to
and under all of the assets, property, rights, licenses and business, wherever
located, real, personal or mixed, tangible or intangible, owned, held or used in
the conduct of the Business by each Transferor as the same will exist on the
Closing Date (collectively, the “Acquired Assets”), including, all right, title
and interest of each Transferor in, to, and under the following assets:
          (a) Equipment. All the furnishings, furniture, supplies, tools,
equipment, and other tangible personal property of every kind and description
owned or used by any Transferor in operating its Facility, including that
equipment listed on Schedule 1.3(a), (collectively, the “Equipment”). The SMS
Parties represent and warrant that, to the SMS Parties’ knowledge, all of the
Equipment is owned by the respective Transferors and none is subject to any
equipment lease except as expressly noted on Schedule 1.3(a).
          (b) Vehicles. All vehicles listed on Schedule 1.3(b), all of which
shall be owned (and not leased) by a Transferor or an affiliate thereof
immediately prior to Closing. To the extent vehicles listed on Schedule 1.3(b)
are owned by Serenity Management Services, Inc., such vehicles shall be deemed
to be acquired by the New Operators of the Facilities where such vehicles are
located.
          (c) Inventory. All inventory and supplies, including perishables and
expendables owned or used by any Transferor in the operation of its Facility,
whether or not carried on the Books and Records (the “Inventory”).
          (d) Intellectual Property. All (i) trademarks, service marks,
copyrights, and all applications and registrations therefore, and any trade,
registered, or assumed names, including the names “Treemont Nursing and
Rehabilitation Center”, “Doctors Healthcare Center”, “Estates Healthcare
Center”, “Oakmont Nursing and Rehabilitation Center of Katy”, “Oakmont Nursing
and Rehabilitation Center of Humble”, “Normandy Terrace Nursing and
Rehabilitation Center”, and “Heritage Oaks Nursing and Rehabilitation Center”,
any and all derivatives thereof, (ii) any Internet website domain names;
(iii) trade secrets, know how, methods and other intellectual property rights
and intangible property; (iv) software and computer programs; and (v) any other
confidential or proprietary information relating to the Business (collectively,
the “Intellectual Property”).
          (e) Omega Lease. All rights under the Omega Lease and all subleases
executed in connection therewith and such other rights and obligations as set
forth in greater detail in the Assumption and Assignment of Leasehold Interests,
to be executed and delivered at Closing (the “Lease Assignment”).
          (f) Contract Rights. All rights under the executory contracts and
unexpired leases (collectively, the “Assumed Contracts”) listed on
Schedule 1.3(f). No obligation under any contract or lease is expressly or
impliedly assumed except to the extent it is specifically listed on Schedule
1.3(f). The Diversicare Parties may amend Schedule 1.3(f) to remove contracts or
leases at any time before Closing by written notice to the SMS Parties.

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          (g) Permits, Etc. Each Transferor’s transferable federal, state and
local permits, authorizations, franchises, licenses, registrations,
qualifications, consents, approvals, waivers and all agency listings owned or
used by Transferor in the operation of its Facility (collectively, the
“Permits”), but expressly excluding any Permits designated as excluded from the
Acquired Assets.
          (h) Books, Records and Information. All confidential information,
files, manuals, information, records (including financial, personnel, payroll
and patient records), billing records, data, databases, plans, books, ledgers,
business plans, projections, documents, lists, and any other recorded knowledge
(whether in hard or electronic copy) pertaining to the Acquired Assets and/or to
the Business, including without limitation all employment files, medical records
with respect to Residents of its Facility, cost reports, surveys with plans of
correction, copies of historical financial records, electronic files, and any
other operational data solely related to the operation of and located at such
Facility as authorized, and to the extent permissible, by applicable law
(collectively, “Books and Records”), other than the SMS Parties’ tax filings and
related records and any books and records which Transferor is required by law to
retain.
          (i) Unlisted Assets. All other assets and Facilities not specifically
identified in this Section 1.3 that are used in conducting the Business or owned
by any SMS Party and not specifically excluded under the terms of this
Agreement.
     1.4 Excluded Assets. Notwithstanding Section 1.3 above, the assets of the
SMS Parties identified in this Section 1.4 (the “Excluded Assets”) are not
included in the Acquired Assets and will not be sold or transferred to the
Diversicare Parties hereunder.
          (a) Receivables. All notes receivable, accounts receivable, cost
report settlements receivable and other receivables or amounts of any kind that
are payable or due any SMS Party and any and all rights of any SMS Party which
secure or guarantee payment of same, subject to the transfer and settlement
process set forth in Section 3.5 below.
          (b) Cash and Security; Deposits. All of SMS Parties’ cash and cash
equivalents, petty cash, security and utility deposits and prepaid expenses,
wherever located, including, without limitation, any amounts currently held by
Omega as a Security Deposit pursuant to Section 38.1 of the Omega Lease.
          (c) Contracts. Any executory contracts and unexpired leases not
included in the Assumed Contracts (herein the “Excluded Contracts”).
          (d) Organizational Records. Each SMS Party’s tax returns and other
records having to do with the organization of such SMS Party.
          (e) Excluded Permits. The Transferor’s Medicaid provider numbers and
related provider agreements.
          (f) Claims, Etc. To the extent such rights existed prior to the
Transfer Date, all of SMS Parties’ setoff and recoupment rights against third
parties that assert claims against the SMS Parties’ estates, to the extent the
SMS Parties elect to assert such rights.

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          (g) Rights under this Agreement. The rights which accrue or will
accrue to the SMS Parties under this Agreement.
          (h) Causes of Action. Causes of action that arise in favor of the SMS
Parties on and prior to the Transfer Date, including those causes of action
arising under §§ 544, 547, 548, 549, 550 and 553 of the Bankruptcy Code.
     1.5 Excluded Liabilities. Except as expressly provided in this Agreement,
the Diversicare Parties shall not assume any claims, lawsuits, liabilities,
obligations, or debts of the SMS Parties or any other person (“Excluded
Liabilities”), including without limitation: (a) malpractice or other tort
claims to the extent based on acts or omissions of any SMS Party occurring on or
before the Transfer Date, or claims for breach of contract to the extent based
on acts or omissions of any SMS Party occurring on or before the Transfer Date;
(b) any accounts payable, taxes, or other obligation or liability of any SMS
Party to pay money incurred by SMS Party on or prior to the Transfer Date,
including without limitation all Medicaid, Medicare, Veterans Administration and
other overpayments, if any, relating to periods prior to the Transfer Date;
(c) any claims, lawsuits, liabilities or obligations regarding the Resident
funds (as set forth in Section 3.2) occurring or related to occurrences prior to
the Transfer Date; (d) all costs or obligations required to cure any defaults
under the Omega Lease other than the security deposit obligation expressly
assumed under Section 1.1(b)(i) above; and (e) any other obligations or
liabilities incurred by any SMS Party prior to the Transfer Date, subject to the
obligations of the New Operators under any Assumed Contracts.
SECTION 2
DELIVERIES UPON CLOSING DATE
     2.1 SMS Parties’ Deliveries Upon Closing Date. The SMS Parties shall
deliver the following to the applicable Diversicare Party on the Closing Date
(as defined in Section 4.1 below):
          (a) The accounting of Resident funds required by Section 3.2 hereof.
          (b) The Confirmation Order (as defined in Section 9.4(a) below), the
Cure Amount Order and evidence of compliance with Section 2.4(d) below.
          (c) Duly executed Bills of Sale with respect to the Acquired Assets,
Assignment and Assumption Agreements with respect to the Assumed Contracts, the
Lease Assignment, and Certificates of Title covering the vehicles identified on
Schedule 1.3(b), each sufficient to convey title to the Acquired Assets, free
and clear of all liens, in form and substance acceptable to the New Operators.
          (d) A closing statement (the “Closing Statement”) setting forth the
calculation of the Base Purchase Price, the then known prorations set forth in
Sections 2.3 and 3.6, the Resident fund accounting set forth in Section 3.2 and
any Base Purchase Price adjustments pursuant to Section 3.4(b), subject to
adjustment pursuant to Section 3.8.
          (e) The Collection Services Agreement in mutually acceptable form
setting forth the parties agreements with respect to billing and collection
services to be provided by

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Diversicare Management Services Co., an affiliate of the Diversicare Parties,
after the Transfer Date.
          (f) All documents required to evidence the Post Confirmation Credit
Facility to be provided by Diversicare Leasing Corp. to the Liquidating Trust in
the original principal amount of up to $2,200,000.00.
          (g) Possession of the Acquired Assets.
     2.2 Diversicare Parties’ Deliveries Upon Closing. The Diversicare Parties
shall deliver to the SMS Parties at the Closing:
          (a) The payment in immediately available funds of the Base Purchase
Price subject to any adjustment set forth on the Closing Statement. The
Diversicare Parties and the SMS Parties agree that the Deposit will be applied
to the payment of the Base Purchase Price and so reflected on the closing
statement.
          (b) The Collection Services Agreement in mutually acceptable form
setting forth the parties agreements with respect to billing and collection
services to be provided by Diversicare Management Services Co., an affiliate of
the Diversicare Parties, after the Transfer Date.
          (c) All documents required to evidence the Post Confirmation Credit
Facility to be provided by Diversicare Leasing Corp. to the Liquidating Trust in
the original principal amount of up to $2,200,000.00.
          (d) All other documents and agreements necessary to consummate the
transactions described herein.
     2.3 Prorations. Utilities that are the responsibility of the SMS Parties
shall be metered as of the date of Closing, with the SMS Parties responsible for
accrued utility expenses so determined and the Diversicare Parties responsible
for utility expenses accruing from and after the date of Closing as well as the
transfer of service to the Diversicare Parties’ account as of the date of the
Closing. If any statement or invoice necessary to make the foregoing
determination has not yet been received and the amount due thereunder is not
otherwise ascertainable, then proration and payment therefor will be deferred
and addressed pursuant to Section 3.8 of this Agreement.
     2.4 Conditions to the Diversicare Parties’ Obligation to Close. The
obligations of the Diversicare Parties under this Agreement are subject to the
satisfaction, on or prior to the Closing Date, of all the following conditions,
compliance with which, or the occurrence of which, may be waived in writing, in
whole or in part, by the Diversicare Parties:
          (a) Representations, Warranties and Covenants.
               (i) Continued Accuracy of Representations and Warranties. All
representations and warranties of the SMS Parties contained in this Agreement
will be true and

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correct in all material respects as of the Closing Date with the same force and
effect as if made on and as of the Closing Date.
               (ii) Performance of Agreements. The SMS Parties will have
performed and satisfied all covenants and conditions in all material respects
required by this Agreement to be performed or satisfied by it on or prior to the
Closing Date.
          (b) Confirmation Order. The Bankruptcy Court will have entered either
(i) the Confirmation Order (as defined in Section 9.4(a)), which will not have
been stayed, modified, reversed or amended in any manner adverse to the
Diversicare Parties, and all other orders, approvals and consents from the
Bankruptcy Court required to transfer the Facilities or (ii) an order in form
substantially similar to the Confirmation Order approving the transactions
described herein, which order will not have been stayed, modified, reversed or
amended in any manner adverse to the Diversicare Parties, and all other orders,
approvals and consents from the Bankruptcy Court required to consummate the
transactions described herein.
          (c) Deleted.
          (d) Cure Amount Order. The Bankruptcy Court shall have entered a final
order setting forth the cure amounts for each Assumed Contract (the “Cure Amount
Order”).
          (e) Other Documents. The SMS Parties will have executed and delivered
to the Diversicare Parties such other documents, bills of sale, assignments and
other instruments of transfer or conveyance as may be necessary to evidence and
effect the sale, assignment, transfer, conveyance and delivery of the Acquired
Assets to the Diversicare Parties or as reasonably requested by the Diversicare
Parties.
          (f) Change of Ownership Approval. The appropriate state agency or
agencies will have accepted for interim approval the New Operators’ change of
ownership application for the operation of the Facilities as skilled nursing
facilities.
          (g) Material Adverse Change. No material adverse change shall have
occurred with respect to the Facilities, taken as a whole, their financial
condition or the Acquired Assets, between the date of this Agreement and the
Closing Date.
     2.5 Conditions to the SMS Parties’ Obligations to Close. The obligations of
the SMS Parties hereunder are subject to the satisfaction, on or prior to the
Closing Date, of all of the following conditions, compliance with which, or the
occurrence of which, may be waived, in writing, in whole or in part by the SMS
Parties.
          (a) Representations, Warranties and Covenants.
               (i) Continued Accuracy of Representations and Warranties. All
representations and warranties of the Diversicare Parties contained in this
Agreement will be true in all respects as of the Closing Date with the same
force and effect as if made on and as of the Closing Date.

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               (ii) Performance of Agreements. The Diversicare Parties will have
performed and satisfied all covenants and conditions required by this Agreement
to be performed or satisfied by it on or prior to the Closing Date, including
payment of the Purchase Price.
          (b) Confirmation Order. The Bankruptcy Court will have entered (i) the
Confirmation Order, which will not have been stayed, modified, reversed or
amended in any manner adverse to the Diversicare Parties, and all other orders,
approvals and consents from the Bankruptcy Court required to transfer the
Acquired Assets or (ii) an order in form substantially similar to the
Confirmation Order reasonably satisfactory to the Diversicare Parties approving
the transactions described herein, which order will not have been stayed,
modified, reversed or amended in any manner adverse to the Diversicare Parties,
and all other orders, approvals and consents from the Bankruptcy Court required
to consummate the transactions described herein.
          (c) Post Confirmation Credit Facility. The parties will have executed
and delivered all documents necessary to consummate the Post Confirmation Credit
Facility.
SECTION 3
TRANSFER OF OPERATIONS
     3.1 Effectiveness of Transfer; Cooperation.
          (a) The transfer of (i) operations of each Facility from the
applicable Transferor to the applicable New Operator, (ii) the assignment of the
Omega Lease from SMS North Texas to Diversicare Texas and (iii) the assignment
of the Subleases from each Transferor to the corresponding New Operator shall
become effective as 12:01 a.m. local time on the Transfer Date.
          (b) The parties hereto agree to cooperate with each other to effect an
orderly transfer of the operations of each Facility. Following the execution
hereof, each Transferor shall, at the applicable New Operator’s sole expense,
use commercially reasonable efforts to cooperate with such New Operator to
furnish all requested documentation and to execute all documents and consents
reasonably necessary for such New Operator to obtain any required licenses,
agreements, certificates and consents, necessary to operate the Facility not
already in possession of such New Operator, from third parties and government
program agencies. Each New Operator shall promptly apply for issuance of all
such required licenses and shall complete all change of ownership applications
for its Transferor’s existing Medicare provider numbers and agreements and apply
for the New Operator’s own Medicaid provider numbers and agreements.
     3.2 Resident Funds; Advance Payments.
          (a) Prior to Closing, and subject to adjustment by Transferors and New
Operators within thirty (30) days following the Transfer Date, each Transferor
will provide its New Operator with an accounting of all funds belonging to
Residents (defined below) at its Facility that are held by such Transferor in a
custodial capacity and an accounting of all advance payments received by each of
them pertaining to Residents at such Facility. Such accounting will set forth
the names of the Residents for whom such funds are held and the amounts held on
behalf of each Resident, and shall be true, correct and complete as of the
Transfer Date. In this Agreement, “Residents” shall mean all residents of any
Facility pursuant to agreements and

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arrangements with the applicable Transferor entered into in the ordinary course
of such Transferor’s business.
          (b) On the Closing Date, each Transferor shall transfer such funds to
a bank account designated by its New Operator, and such New Operator shall
promptly acknowledge the receipt thereof and upon such transfer shall assume all
of Transferor’s financial and custodial obligations with respect to such amounts
deposited. As of the date of receipt of such funds, each Transferor is relieved
of all fiduciary and custodial obligations with respect to such funds actually
transferred to its New Operator and such New Operator shall assume all such
obligations and be directly accountable to the Residents with respect to all
transferred funds.
          (c) With respect to such trust accounts for Residents, upon its
receipt thereof, each New Operator shall assume custody of such accounts and
agrees to treat such accounts in the fiduciary capacity required by law. Each
New Operator agrees to indemnify and hold its Transferor harmless from all
liabilities, claims, and demands that may be asserted against such Transferor in
connection with all amounts received by such New Operator pursuant to this
Section 3.2 and New Operator’s treatment of such amounts following the Closing
Date (collectively, the “Assumed Obligations”).
          (d) Notwithstanding the above, the New Operators will not assume
liability for amounts due to Residents of any Facility on or before the Transfer
Date who are listed (whether by individual Resident name or in another manner)
as creditors in the Transferor’s bankruptcy case, to the extent a Resident’s
claim is listed as a liability of the Transferor’s bankruptcy case. At the
Closing, Transferor shall provide New Operator with a list of all such Residents
and amounts as of the Transfer Date.
     3.3 Final Cost Reports. Each Transferor shall prepare and file with the
appropriate governmental authorities a final cost reports for its Facility (and
any other cost reports for periods ending on or before the Transfer Date that
are not yet filed) within the time frame required by law. Each such cost report
shall be prepared in accordance with all applicable laws and regulations. Each
New Operator shall cooperate with the appropriate Transferor, the Plan Agent and
their respective agents, representatives and advisors, in filing such final cost
reports and any appeals related thereto and shall make any information related
to such matters in its possession available to such Transferor or the Plan
Agent.
     3.4 Employees.
          (a) Each Transferor shall terminate the employment of all of its
Employees effective as of the Transfer Date and, except as set forth in
Section 3.4(b) below, shall pay all wages and benefits due as of the Transfer
Date to all of the Employees in accordance with Transferor’s standard policies
and applicable laws to the extent permitted by the Bankruptcy Court. Following
the Transfer Date, Transferors shall have no liability or obligation to continue
any benefits provided to Employees prior to the date thereof under any employee
benefit program offered by any SMS Party, except to the extent required by
applicable law and ordered by the Bankruptcy Court.

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          (b) Each Transferor will provide its New Operator with a list of
Facility Employees at least five (5) business days prior to the Closing Date
(“Transferor’s Employees”). The New Operator shall rehire, or cause to be
rehired, at least the minimum number of such Transferor’s Employees necessary to
avoid creating any obligation under the WARN Act (defined in Section 3.4(c)
below) on the part of the Transferor; provided, that the SMS Parties shall
provide to the Diversicare Parties a complete list of all Employees terminated
in the ninety (90) day period ending on the Closing Date. The New Operators
shall provide the Transferors at least two (2) business days prior to the
Closing Date with a list of Employees to whom they do not intend to offer
employment. Those Employees employed by a New Operator or its designee shall be
referred to as the “Retained Employees.” Nothing herein is otherwise intended to
limit or restrict changes in services or positions of any Retained Employees
after the Transfer Date so long as such changes are made in compliance with the
WARN Act. As to the Retained Employees only, New Operators or their designees
shall assume, and be obligated to pay when due, any and all earned or accrued
paid time off earned prior to the Transfer Date as provided in
Section 1.1(b)(iv). To the extent any Transferor’s Employee is not a Retained
Employee as of the Transfer Date, the Transferors shall retain any liability
for, and be obligated to pay any and all earned or accrued vacation and other
paid time off to such Transferor’s Employee, subject to applicable limits under
the Bankruptcy Code.
          (c) New Operator and Transferor acknowledge and agree that the
provisions of Section 3.4(b) are designed, in part, to ensure that Transferor is
not required to give notice to Employees of the Facility of the “closure”
thereof under the Worker Adjustment and Retraining Notification Act (the “WARN
Act”) or any other comparable state law. Nothing in this Section 3.4(c) shall,
however, create any rights in favor of any person not a party hereto, including
but not limited to the Transferor’s Employees of the Facility, or constitute an
employment agreement or condition of employment for any of Transferor’s
Employees, regardless of that person’s status upon or after the Transfer Date.
     3.5 Accounts Receivable. At Closing, each Transferor shall give the
appropriate New Operator control over its depository accounts where payments are
received with respect to its accounts receivable for the purpose of
administering the terms of this Section 3.5. Each New Operator is hereby
authorized to receive and has the right to collect all receivables arising from
services rendered at its Facility on and after the Transfer Date. In connection
with such collections, each New Operator shall endorse and deposit the same into
New Operator bank account for the Facility under the name and control of New
Operator (a “New Operator Account”). As soon as practicable after the Transfer
Date, each New Operator shall (to the extent permitted by law) instruct account
debtors of its Facility to make payment directly into the New Operator Account
for that Facility. Any payments received by any Transferor or New Operator after
the Transfer Date with respect to a Facility from third party payors, such as
the Medicare program, the Medicaid program, the Veteran’s Administration, or
managed care companies or health maintenance organizations or from or on behalf
of private pay patients, shall be handled as follows:
          (a) if such payments either specifically indicate on the accompanying
remittance advice, or if the parties reasonably agree, that they relate to the
period prior to the Transfer Date, then (A) in the event that such payments are
received by a New Operator, the New Operator shall promptly deposit such
payments for the benefit of the appropriate Transferor

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by wiring said amounts in accordance with the wire transfer instructions
provided by Transferor (“Transferor Account”) (but in any event, not later than
ten (10) business days following the receipt of such payment, and until so
deposited, shall be held in trust for the benefit of Transferor) and (B) in the
event that such payments are received by a Transferor, such Transferor shall
retain the payments;
          (b) if such payments specifically indicate on the accompanying
remittance advice, or if the parties reasonably agree that they relate to the
period after the Transfer Date, then (A) in the event that such payments are
received by a New Operator, such New Operator shall deposit the payments in its
New Operator Account and (B) in the event that such payments are received by a
Transferor, such Transferor shall promptly forward such payments to the New
Operator Account (but in any event, not later than ten (10) business days
following the receipt of such payment, and until so forwarded, shall be held in
trust for the benefit of New Operator);
          (c) if such payments indicate on the accompanying remittance advice,
or if the parties reasonably agree, that they relate to periods both prior to
and after the Transfer Date, the New Operator shall retain the portion thereof
which relates to the period on and after the Transfer Date and the balance shall
be promptly deposited into Transferor Account (within ten (10) business days
following the receipt of such payment) and such Transferor shall promptly
following receipt by the Transferor of any payments related to periods both
prior to and after the Transfer Date (within ten (10) business days following
the receipt of such funds) forward to the appropriate New Operator Account the
amount of such payment relating to the period on and after the Transfer Date;
and
          (d) for private pay patients, if the accompanying remittance advice
does not indicate the period to which payment relates or if there is no
accompanying remittance advice and if the parties do not agree as to how to
apply such payment, then 100% of such amounts collected shall be applied to
current services provided at the Facility. For all other payment sources, if the
accompanying remittance advice does not indicate the period to which a payment
relates or if there is no accompanying remittance advice and if the parties do
not otherwise agree as to how to apply such payment, then 100% of such amount
collected within the first 30 days after the Transfer Date from an account that
is not identifiable, using best efforts, shall be deemed to have been collected
in respect of an account receivable that was due to a Transferor in respect of
services provided prior to the Transfer Date (and such Transferor shall be
permitted to retain such proceeds, without limitation). If any amount shall be
collected after the 30th day after the Transfer Date from an account that is not
identifiable, using best efforts, as being in payment of a post-Transfer Date
receivable, then 100% of such amount shall be deemed to have been collected as a
New Operator’s accounts receivable (and such New Operator shall be permitted to
retain such proceeds, without limitation).
To the extent either party receives any proceeds from the accounts receivable of
the other party, the parties acknowledge that the party receiving the payment
belonging to the other party shall hold the payment in trust. Except as
specifically provided in this Agreement, neither party shall have any right to
offset or recoupment with respect to such accounts receivable, and any party
erroneously receiving a payment belonging to the other party shall have no
right, title or interest whatsoever in the payment and shall remit the same to
the other as provided herein.

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Notwithstanding any provision of this Agreement to the contrary, so long as any
amounts remain outstanding under the Post Confirmation Credit Facility, then any
amounts determined to relate to the period prior to the Transfer Date shall be
applied to repayment of the Post Confirmation Credit Facility, in accordance
with the terms thereof.
     3.6 Payment of Operating Costs, Prorations and Deposits. Each New Operator
shall be responsible for, and shall pay on a timely basis, any claims or charges
which are due to third parties arising from the use, operation or control of its
Facility from and after the Transfer Date. Revenues and expenses for the billing
period in which this Agreement is executed, including rent prepaid under Omega
Lease, shall be prorated between the applicable SMS Parties and Diversicare
Parties as of the Transfer Date. All such prorations shall be made on the basis
of actual days elapsed in the relevant accounting or revenue period and shall be
based on the most recent information available to the SMS Parties and
Diversicare Parties. Utility charges that are not metered and read on the
Transfer Date shall be estimated based on prior charges, and shall be
re-prorated upon receipt of statements therefor. In general, such prorations
shall be made so as to reimburse the SMS Parties for actual prepaid expense
items, and to charge the SMS Parties for prepaid revenue items, to the extent
that the same are attributable to periods after the Transfer Date.
     3.7 Treatment of Prorations. The accounts of all SMS Parties and
Diversicare Parties created pursuant to the prorations provided for in the
preceding Section 3.6 shall be netted against each other. Any net positive
balance remaining for utility charges and prepaid expenses shall be transmitted
by the Diversicare Parties to the SMS Parties, as appropriate, in immediately
available funds and any negative balance shall be transmitted by the SMS Parties
to the Diversicare Parties, as appropriate, in immediately available funds.
     3.8 Future Settlement. All amounts owing from a Diversicare Party to an SMS
Party, excluding amounts in respect of Section 3.5 hereof, that require
adjustment after the date of the Closing Statement, including without
limitation, re-prorations according to Section 3.6 hereof, shall be settled
three (3) months after the Transfer Date. Any adjustments owed by any SMS Party
to any Diversicare Party, may be offset against any sums owed to that SMS Party
or any other SMS Party by any Diversicare Party under Section 3.5. Any
adjustment owed by any Diversicare Party to any SMS party may be offset against
any sums owed to that Diversicare Party or any other Diversicare Party by any
SMS Party under Section 3.5. In case of any such offset, the offsetting party
shall provide promptly to the other party reasonable information and
documentation to support the offset. If, thereafter, an SMS Party determines
that any further adjustment is to be made, the SMS Party shall submit a
statement to the Diversicare Party setting forth any and all such items and the
calculation of the amounts due hereunder. Such statement shall be submitted with
appropriate backup materials. For such amounts owed by a Diversicare Party to an
SMS Party, a Diversicare Party shall have thirty (30) days from the date of
receipt of such statement to tender payment to the SMS Party or to question or
dispute in writing any item thereon. Any disputes regarding future settlement
that cannot be resolved between the SMS Parties and the Diversicare Parties
shall be resolved by the Bankruptcy Court.
     3.9 Medicare; Medicaid; Veterans Administration. Each Transferor and New
Operator understand that reimbursements from Medicare, Medicaid, and other third
party payors for items/services provided/rendered after the Transfer Date may
continue to be issued to

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Transferors for a period of time. The amounts included in any such Medicare,
Medicaid, or Veterans Administration checks received by a New Operator or
Transferor shall be treated as accounts receivable in accordance with
Section 3.5 of this Agreement. Pursuant to Section 3.5 above, the new Operators
shall have control over the Transferors’ depository accounts in order to
administer the terms of Section 3.5 with respect to such collections. In the
event that a new Operator collects any such reimbursement, the New Operator
shall immediately notify Transferor, in the manner set out in the “Notices”
portion of this Agreement, of the receipt of any reimbursements owed to
Transferor, and of the receipt of any correspondence or other notice from the
Texas Department of Aging and Disability Services, from the Texas Health and
Human Services Commission, from the Centers for Medicare & Medicaid Services,
including but not limited to any intermediary thereof (“CMS”), from Medicaid,
Medicare, the Veterans Administration, or any other third party payor, of any
dispute regarding, intent to recoup, or intent to pay additional amounts for
services provided by Transferor prior to the Transfer Date, and shall fully
cooperate with Transferor to defend against any action that attempts to recoup
payments or require payments from the Transferor.
     3.10 Transfer of Records; Access To Policy and Procedures Manuals. Each SMS
Party shall transfer to its corresponding Diversicare Party, in the same
condition as currently maintained, the Books and Records; provided, however,
that (a) each SMS Party shall be entitled to keep such copies of all the
foregoing as it deems necessary; (b) the Diversicare Parties shall have no claim
or right of indemnity against the SMS Parties arising from the condition or
quality of the records so transferred, including claims based on their
completeness or accuracy; and (c) the SMS Parties shall be under no duty to
update or service the hardware, software or data base contained in computers, if
any, remaining on the premises.
     3.11 Deposits. All deposits, if any, held by a utility or other party to an
executory contract shall remain the property of the applicable SMS Party, and
the applicable Diversicare Party shall be required to post its own replacement
deposits on the Transfer Date or promptly thereafter, as required by the
corresponding utilities or contract counterparties.
     3.12 Compliance with Laws. The parties shall comply in all material
respects with all applicable laws, and with all applicable rules and regulations
of all governmental authorities, in conjunction with the execution, delivery and
performance of this Agreement and the transactions contemplated hereby.
     3.13 Residents; Resident Records. On and after the Transfer Date, each New
Operator shall be solely responsible for caring for the Residents of its
Facility. Each New Operator shall preserve the existence and maintain the
confidentiality of the Resident records transferred to each New Operator
pursuant to this Agreement in accordance with federal and state law.
     3.14 Accounts Payable. Each New Operator shall establish its own accounts
and agrees to pay for supplies and other goods or equipment ordered and received
at its Facility on and subsequent to the Transfer Date in order to maintain
services to its Residents.
     3.15 Access to Resident Records. Subsequent to the Transfer Date, upon
reasonable advance notice and during normal business hours, the Diversicare
Parties shall allow the SMS Parties and their respective agents and
representatives, at the SMS Parties’ sole cost and expense,

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to have reasonable access to (upon reasonable prior written notice and in
compliance with applicable law), and to make copies of, the Books and Records,
to the extent reasonably necessary to enable the SMS Parties to investigate and
defend malpractice, employee or other claims, to file or defend cost reports and
tax returns, to verify accounts receivable collections due to any SMS Party, or
for such other reasonable and lawful purposes as identified by an SMS Party or
the Plan Agent. Each Diversicare Party will maintain the Books and Records to
the extent required by law, but in no event less than seven (7) years with
respect to Resident records and no less than six (6) years with respect to other
records.
     3.16 Regulatory Inspections; Surveys; Licensure Costs. Each New Operator
shall be solely responsible for and shall bear all costs and expenses incurred
in connection with any requirements of regulatory inspections or surveys
conducted after the Transfer Date and implementing any plans of correction
relating to matters first identified on such post-Transfer Date surveys or
inspections. In addition, New Operator shall be responsible for all costs and
expenses incurred in connection with its acquisition of the Licenses. These
include, but are not limited to, changes, if any, required to bring any Facility
into compliance with any Life Safety Code applicable to such Facility.
Transferors represent and warrant that, to the best of their knowledge, all
current outstanding survey deficiencies, including any Life Safety Code
deficiencies are set forth on the Facilities’ most recent Medicare/Medicaid
surveys, true and correct copies of which have been provided to the DMS Parties.
     3.17 Remittances, Mail and Other Communications. All remittances, mail and
other communications relating to the Excluded Assets or Liabilities received by
a Diversicare Party at any time after the Transfer Date shall be promptly turned
over to the applicable SMS Party. All remittances, mail and other communications
relating to the operations of any Facility following the Transfer Date received
by an SMS Party or its affiliates at any time after the Transfer Date shall be
promptly turned over to the applicable Diversicare Party.
     3.18 Admission Agreements. Each Transferor hereby assigns to New Operator,
and New Operator hereby accepts assignment of all Admission Agreements
pertaining to Residents (the “Admission Agreements”), provided that each
Transferor shall retain such rights in the Admission Agreements as are necessary
for such Transferor to collect and enforce each Transferor’s Accounts
Receivable.
     3.19 Confidentiality and HIPAA Compliance. The parties to this Agreement
acknowledge and agree that the definition of “health care operations” set forth
in Section 164.501 of the Health Insurance Portability and Accountability Act of
1996 (“HIPAA”) permits the parties to use and disclose individually identifiable
Resident and Employee health information in order to assure a smooth transition
of Facility operations. The parties agree to comply with, and to cause their
respective employees, subcontractors and agents to comply with, applicable state
and federal laws and regulations relating to the security, protection and
privacy of individually identifiable health care information, including, without
limitation, the regulations promulgated pursuant to HIPAA, and any amendments to
those regulations that may occur from time to time. Each New Operator agrees
that its employees, subcontractors, and agents shall maintain the
confidentiality of Resident and Employee records and medical information, in
accordance with applicable state and federal laws, rules and regulations. Each
New Operator and its employees, subcontractors, or agents agree not to disclose
protected health information to any

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third party except where permitted or required by law or where the Resident or
Employee expressly approves such disclosure in writing.
SECTION 4
CLOSING AND TRANSFER DATES
     4.1 Closing Date. The “Closing Date” shall be the date on which
transactions contemplated in this Agreement shall be consummated (the
“Closing”), and all documents necessary in connection therewith shall be
executed and delivered.
     4.2 Transfer Date. The transfer of the operations of the Facility from each
Transferor to New Operator shall be effective as of 12:01 a.m. local time on the
day immediately following the Closing Date (the “Transfer Date”).
     4.3 Time and Place of Closing. The Closing Date shall occur simultaneously
with the Effective Date of the Plan, but in no event later than Friday,
August 10, 2007. The Closing shall take place at the offices of Gardere Wynne
Sewell LLP, 1601 Elm Street, Suite 3000, Dallas, Texas 75201 or at such other
time and place as designated by the parties.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF THE DIVERSICARE PARTIES
     The Diversicare Parties hereby make the representations and warranties
indicated below to the SMS Parties:
     5.1 Authority, Validity and Binding Effect. Each Diversicare Party will
have as of the execution of this Agreement all necessary corporate or limited
liability company power and authority to operate its Facility and to carry on
its business as it is now being conducted. Each Diversicare Party has all
necessary corporate or limited liability company power and authority, as the
case may be, to enter into this Agreement and to execute all documents and
instruments referred to herein or contemplated hereby and all necessary action
has been taken to authorize the individuals executing this Agreement on each of
their behalf to do so. This Agreement has been duly and validly executed and
delivered by each Diversicare Party and is enforceable against it in accordance
with its terms.
     5.2 No Defaults. The execution and delivery of this Agreement and any
documents contemplated hereby by each Diversicare Party, and the performance of
its obligations hereunder and thereunder, does not and will not:
          (a) conflict with or result in any material breach of the provisions
of, or constitute a default under any Diversicare Party’s governing documents;
          (b) violate any material restriction to which a Diversicare Party is
subject or, without the giving of notice, passage of time, or both, violate (or
give rise to any right of termination, cancellation or acceleration under) any
material license, authorization or permit or other material agreement or
instrument to which a Diversicare Party is a party which will not be satisfied
or terminated prior to the date hereof as a result of the transactions
contemplated by this Agreement, or result in the termination of any such
instrument or termination of any provisions

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in such instruments that will result in the impairment of any Diversicare
Party’s rights under such instruments (it is understood and agreed that in
connection with this representation and warranty that New Operator will schedule
any item covered by this representation and warranty if such item contains a
restriction on transfer of the Facility); and
          (c) constitute a violation of any applicable material resolution,
rule, regulation, law, statute or ordinance of any administrative agency or
governmental authority, or of any judgment, decree, writ, injunction or order of
any court to which any Diversicare Party is subject or by which its assets are
bound, or any credit agreement or other financing arrangement to which any
Diversicare Party, or any of their respective affiliates are a party.
     5.3 No Litigation. There are no actions, suits, claims, governmental
investigations or other legal or administrative proceedings, or any orders,
decrees or judgments in progress, pending or in effect, or to the knowledge of
any Diversicare Party, threatened against, any Diversicare Party relating to the
transactions contemplated by this Agreement.
     5.4 Financial Capacity. Subject to Section 2.4(h), each Diversicare Party
shall, at Closing, have the financial capacity to consummate the transactions
contemplated herein on the Closing Date.
     5.5 Accuracy of Representations and Warranties. Each representation and
warranty of the Diversicare Parties hereunder is true, complete and correct in
all respects as of the date hereof.
SECTION 6
REPRESENTATIONS AND WARRANTIES OF THE SMS PARTIES
     Except as expressly provided herein, the Diversicare Parties hereby
acknowledge and agree that the Diversicare Parties have conducted their own due
diligence investigation of the Business and the Acquired Assets and that they
will acquire the Acquired Assets “AS IS, WHERE IS”, except for representations
and warranties contained herein. The Diversicare Parties will not have any
recourse to any of the officers, managers, attorneys, or advisors of Transferors
in the event any of the representations or warranties made herein, or deemed
made herein, are inaccurate in any respect as at any time of expression thereof,
except in the event such inaccuracy is the result of fraud or the intentional
misrepresentation or omission of fact. The Diversicare Parties specifically
acknowledge and agree that if any information provided in the Plan or Disclosure
Statement is applicable to any Section hereof, then such information shall be
deemed to have been provided to the Diversicare Parties with respect to all such
Sections hereof. Subject to the foregoing, the SMS Parties hereby represent and
warrant as follows to the Diversicare Parties:
     6.1 Authority, Validity and Binding Effect. Upon receipt of approval of the
Bankruptcy Court, the SMS Parties have all necessary power and authority to
enter into this Agreement and to execute all documents and instruments referred
to herein or contemplated hereby and all necessary action has been taken to
authorize the individuals executing this Agreement to do so. This Agreement has
been duly and validly executed and delivered by the SMS Parties and is
enforceable against the SMS Parties in accordance with its terms.

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     6.2 Accuracy of Representations and Warranties. Each representation and
warranty of the SMS Parties hereunder is true to the knowledge of the SMS
Parties, as of the date hereof.
     6.3 Contract Rights. To the knowledge of the SMS Parties, as of the date
hereof, all executory contracts and unexpired leases of the SMS Parties with
respect to the Business, Equipment, Inventory or any other aspect of the
operations of the Facilities are listed on Exhibit A to the Cure Amounts Motion
(as amended) or have been otherwise identified by the SMS Parties to the
Diversicare Parties
     6.4 Survey Deficiencies. To the knowledge of the SMS Parties, as of the
date hereof, the Diversicare Parties have been notified or otherwise provided
information concerning all current, uncorrected survey deficiencies at the
Facilities.
     6.5 As Is—Where Is. Except as set forth in this Section 6, the SMS Parties
make no representation or warranty whatsoever, express or implied, including any
implied warranty or representation as to condition, merchantability or
suitability of any Acquired Asset, which survives Closing.
SECTION 7
TERMINATION
     7.1 Grounds for Termination. Notwithstanding any contrary provision
contained herein, this Agreement may be terminated and the transactions
contemplated hereby may be abandoned by:
          (a) written agreement of the parties at any time before the Closing;
          (b) either the SMS Parties or the Diversicare Parties (a) if a bid
other than the Diversicare Parties’ bid is approved by the Bankruptcy Court and
subsequently consummated, (b) if any Facility is damaged or destroyed by reason
of fire, casualty or any other cause whatsoever prior to the Closing and cannot
be repaired or restored to its pre-casualty condition by the SMS Parties prior
to the Closing for a cost not in excess of $100,000; or (c) a material portion
of any Facility necessary for the operation of the corresponding Transferor’s
Business becomes subject to a taking by virtue of eminent domain (or any action
to so take is commenced);
          (c) either the SMS Parties or the Diversicare Parties, (a) at any time
after August 9, 2007, if the Confirmation Order has not been entered by such
date provided the SMS Parties will not have the right to terminate to the extent
the SMS Parties have failed to diligently pursue the entry of the Confirmation
Order), (b) immediately upon notice to the other party, if any law or regulation
makes the consummation of the transactions contemplated hereby illegal or
otherwise prohibited or consummating the transactions contemplated hereby would
violate any non-appealable final order, decree or judgment of any court or
governmental authority having competent jurisdiction, or (c) at any time prior
to the conclusion of the Auction, if the Diversicare Parties have not removed
the condition set forth in Section 2.4(h);
          (d) the Diversicare Parties (a) at any time before the Closing, if any
condition listed in Section 2.4 has become incapable of fulfillment or cure and
has not been waived by the

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Diversicare Parties, provided that the Diversicare Parties are not then in
breach of this Agreement; (b) at any time after August 15, 2007, if the Closing
fails to occur by such date, unless (i) the failure is due to the action or
inaction of, or breach of this Agreement by, the Diversicare Parties or (ii)
Omega consents to an extension of time pursuant to 11 U.S.C. § 365(d)(4)(B)(ii);
provided such extension expires on or before September 15, 2007; or (c) if the
Closing has not occurred as the result of the SMS Parties’ failure to consummate
the transactions contemplated hereunder within five (5) days after the
satisfaction of the conditions listed in Section 2.4, provided that the
Diversicare Parties are not in breach hereunder and are ready to close; and
          (e) the SMS Parties (a) at any time before the Closing, if any
condition listed in Section 2.5 have become incapable of fulfillment or cure and
have not been waived by the SMS Parties, provided that the SMS Parties are not
then in breach of this Agreement; (b) at any time after August 15, 2007, if the
Closing fails to occur by such date, unless (i) the failure is due to the action
or inaction of, or breach of this Agreement by, the SMS Parties or (ii) Omega
consents to an extension of time pursuant to 11 U.S.C. § 365(d)(4)(B)(ii);
provided such extension expires on or before September 15, 2007; or (c) if the
Closing has not occurred as the result of the failure of the Diversicare Parties
to consummate the transactions contemplated hereunder within five (5) days after
the satisfaction of the conditions set forth in Section 2.5, so long as the SMS
Parties are not in breach hereunder and are ready to close.
     7.2 Effect of Termination. If this Agreement is terminated under
Section 7.1, the party terminating will promptly provide written notice thereof
to the other party and this Agreement will thereafter become void and have no
further force and effect and, except for those provisions that expressly survive
the termination of this Agreement, all further obligations of the parties to
each other under this Agreement will terminate without further obligation or
liability, except as provided in this Section 7.2. The Deposit shall be treated
as follows:
          (a) If this Agreement is terminated under Section 7.1(a), the Deposit
shall be disbursed as provided in the written agreement pursuant to which such
termination is effected.
          (b) If this Agreement is terminated under Section 7.1(b), (c) or (d),
the Deposit shall be disbursed to the Diversicare Parties.
          (c) If this Agreement is terminated under Section 7.1(e), the Deposit
shall be disbursed to the SMS Parties.
          (d) Survival. Section 7.2 will survive termination of this Agreement.
     7.3 Effect of Casualty/Condemnation. If, at any time after the date of this
Agreement and prior to Closing, (a) any Facility is destroyed or suffers any
damage, whether by reason of fire, casualty or any other cause whatsoever, or
(b) a material portion of any Facility necessary for the operation becomes
subject to a taking by virtue of eminent domain (or any action to so take is
commenced), and (c) this Agreement is not terminated by the Diversicare Parties
or the SMS Parties pursuant to Section 7.1(b), then the Closing shall
nevertheless occur on the scheduled date for Closing without adjustment to
Purchase Price, except that:

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          (a) In the event of an occurrence described in clause (a) above of
Section 7.3 of less than $100,000, the SMS Parties shall, at their option and in
their sole discretion, either (a) at the SMS Parties’ expense, repair or restore
the Facilities to at least its condition as existed immediately prior to such
occurrence or (b) afford the Diversicare Parties a credit against the Purchase
Price in the amount equal to the amount determined as of the Closing Date
reasonably necessary to effect such repair and restoration (provided that the
SMS Parties shall in either event retain all rights to any insurance proceeds
payable thereon). If the damage is greater than $100,000, then the Diversicare
Parties, at their option shall cause the SMS Parties to either (x) at the SMS
Parties’ expense, repair or restore any Facility to at least its condition as
existed immediately prior to such occurrence or (y) afford the Diversicare
Parties a credit against the Purchase Price in the amount equal to the amount
determined as of the Closing Date reasonably necessary to effect such repair and
restoration, to the extent the Diversicare Parties do not terminate the
Agreement (provided that the SMS Parties shall in either event retain all rights
to any insurance proceeds payable thereon); provided, that if the SMS Parties
determine that they are unable to comply with such request because (a) they are
not able to make arrangements with Omega acceptable to all parties allowing
insurance proceeds to be used for such repair or restoration, and/or (b) the
required Purchase Price reduction would not be permitted by the Plan or
otherwise invalidate any approvals necessary for the consummation of the
transactions contemplated by this Agreement, then either party may terminate
this Agreement by written notice to the other.
          (b) In the event of an occurrence described in clause (b) of
Section 7.3 and the parties do not elect to terminate, then, at Closing, the SMS
Parties shall assign to the Diversicare Parties all of the SMS Parties’ right,
title and interest in and to the condemnation award payable to the SMS Parties
as a result of such taking, or, if such award is paid to the SMS Parties prior
to Closing, the SMS Parties shall afford the Diversicare Parties a credit
against the Purchase Price in the amount of such award so paid to the SMS
Parties.
     7.4 Default. In the event the SMS Parties or the Diversicare Parties
default in their respective obligations under this Agreement, the other parties
will have remedies available at law or in equity.
SECTION 8
EXPIRATION OF REPRESENTATIONS AND WARRANTIES
     8.1 Expiration of Representations, Warranties and Covenants. The
representations, warranties and (except as set forth in the following sentence)
covenants set forth in this Agreement shall terminate and expire, and shall
cease to be of any force or effect, on the Closing Date; all liability of the
parties hereto with respect to such representations, warranties and covenants
shall thereupon be extinguished. Those covenants that contemplate actions to be
taken or obligations in effect after the Closing or termination of this
Agreement, as the case may be, shall survive in accordance with their terms and
to the extent so contemplated. THE NEW OPERATORS ACKNOWLEDGE THAT THEY HAVE HAD
SUFFICIENT OPPORTUNITY TO MAKE WHATEVER INVESTIGATION MAY BE NECESSARY AND
ADVISABLE FOR PURPOSES OF DETERMINING WHETHER OR NOT TO ENTER INTO THIS
AGREEMENT.

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SECTION 9
COVENANTS
     9.1 Access. Prior to the Closing, the SMS Parties will allow the
Diversicare Parties and its agents to (A) have access to the Facilities and
(B) conduct physical inspections, environmental and other assessments and deemed
necessary by the Diversicare Parties or their lender. The SMS Parties will
deliver such additional information relating to the Facilities that is in the
possession of the SMS Parties as reasonably requested by the Diversicare Parties
representatives. Prior to Closing, and for a reasonable period thereafter, the
SMS Parties shall provide the Diversicare Parties with access to the SMS
Parties’ electronic records and software for purposes of allowing the
Diversicare Parties to transfer applicable information to its payroll software
and American Health Tech system.
     9.2 Operation Prior to Closing. Subject to its obligations under the
Bankruptcy Code, the SMS Parties agree, from the date hereof until the Closing,
to maintain the Facilities in good repair consistent with their condition on the
date of this Agreement (ordinary wear and tear and damage by casualty excepted)
and operate them in the ordinary course. Between the date hereof and the Closing
Date, the SMS Parties shall diligently pursue correction of all outstanding
survey deficiencies pertaining to the operation of the Facilities.
     9.3 Notice of Breaches. Promptly after gaining knowledge thereof, the SMS
Parties will notify the Diversicare Parties of any material breaches or
violations by the SMS Parties, whether intentional or unintentional, of the
representations, warranties, covenants or other terms, conditions or
restrictions of this Agreement applicable to the SMS Parties.
     9.4 Bankruptcy Court Approvals.
          (a) Bankruptcy Court Confirmation Order. The SMS Parties and the
Diversicare Parties shall have obtained final approval in the Bankruptcy Cases
of the transactions contemplated by this Agreement. Without limiting the
foregoing, the Bankruptcy Court shall have entered a final order or orders (the
“Confirmation Order”) (i) approving the transactions described herein and
authorizing the SMS Parties to sell the Acquired Assets (which comprise
substantially all of the SMS Parties’ remaining assets) to the Diversicare
Parties pursuant to this Agreement free and clear of any and all liens, claims,
charges, encumbrances, mortgages, pledges, security interests and other
interests (including any and all “claims and interests” in the Company Assets
within the meaning of Section 363(f) of the Bankruptcy Code), other than those
expressly assumed by the Diversicare Parties in this Agreement, and otherwise
free and clear of claims and liabilities; (ii) expressly providing that at
Closing all of the SMS Parties’ right, title and interest in the Acquired Assets
shall vest in the Diversicare Parties in accordance with this Agreement;
(iii) expressly providing that all liens, claims, charges, encumbrances,
mortgages, pledges, security interests and other interests (including any and
all “claims and interests” in the Company Assets within the meaning of Section
363(f) of the Bankruptcy Code) existing as of the Closing shall be released from
the Acquired Assets and attach to the proceeds of this transaction without
recourse to the Diversicare Parties; (iv) authorizing SMS North Texas to assume
and assign pursuant to Section 365 of the Bankruptcy Code, the Omega Lease and
authorizing the SMS Parties to assume and assign the Assumed Contracts to the
Diversicare Parties pursuant to this Agreement; (v) making a determination that
the Diversicare Parties are

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good faith purchasers and sound business reasons exist for the transaction; (vi)
expressly providing that, pursuant to Bankruptcy Rule of Procedure 3020(e),
Section 363(m) of the Bankruptcy Code and other applicable authority, the
Confirmation Order approving the consummation of this Agreement is not stayed
for any period and that the reversal or modification on appeal of the
Confirmation Order shall not affect the validity of the sale of the Acquired
Assets or assignment of assumed leases to the Diversicare Parties pursuant to
this Agreement, whether or not the Diversicare Parties knew of the pendency of
the appeal, unless such authorization and sale are stayed pending appeal;
(vii) finding that adequate and proper notice was given to all parties entitled
to receive notice in connection with the transactions contemplated by this
Agreement, including without limitation appropriate notice to all parties to
executory contracts to be assumed and assigned to the Diversicare Parties
pursuant to this Agreement; (viii) finding that the Diversicare Parties is not a
successor in interest to any of the SMS Parties and shall not be liable for any
liabilities, torts, of debts of the SMS Parties, other than the Assumed
Liabilities under this Agreement; (ix) pursuant to 11 U.S.C. § 1146, the
transaction shall be free and clear of any sales, use, value added, documentary,
stamp, registration, transfer, conveyance, excise, recording, license and other
similar taxes and fees (including without limitation any goods and services tax)
and (x) containing such other provisions as are reasonably requested by the
Diversicare Parties.
          (b) Best Efforts. The SMS Parties shall have used their reasonable
best efforts to obtain the Confirmation Order. The SMS Parties shall also have
complied in all material respects with all requirements of the Bankruptcy Code,
including without limitation appropriate notice to all parties entitled thereto,
relating to obtaining the Confirmation Order and approval of the transactions
contemplated by this Agreement.
     9.5 Expenses. Except as otherwise provided in this Agreement, each party
will bear all of its own expenses incurred by it in connection with this
Agreement and the transactions contemplated thereby, including legal,
accounting, and investment advisor fees and travel expenses.
SECTION 10
MISCELLANEOUS
     10.1 Regulatory Filings. Simultaneously with the execution and delivery of
this Agreement (but in no event later than July 20, 2007), New Operators shall
deliver to Transferors any necessary filings or notices to be provided to the
appropriate governmental entities in connection with the transactions
contemplated herein, including any required notice associated with a proposed
change of ownership (“CHOW Application”) of the Transferors. Upon the entry of
the Confirmation Order approving New Operators as the “Purchaser,” such filings
or notices, including all CHOW Applications, shall be delivered by Transferors
to the appropriate governmental agency or agencies.
     10.2 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, contemplated
hereby or reasonably requested by the other party to perfect or evidence their
rights hereunder.

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     10.3 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be personally
delivered, or sent by overnight commercial delivery service (provided a receipt
is available with respect to such delivery), or mailed by first-class registered
or certified mail, return receipt requested, postage prepaid (and shall be
effective when received, if sent by personal delivery or by facsimile
transmission or by overnight delivery service, or on the third (3rd) day after
mailing, if mailed):
If to the SMS Parties, to:
Senior Management Services of North Texas, Inc.
c/o Gardere Wynne Sewell LLP
1601 Elm Street, Suite 3000
Dallas, Texas 75201
Attn: Deirdre B. Ruckman/Notice Enclosed
Telephone No.: (214) 999-4250
Facsimile No.: (214) 999-3250
If to the Diversicare Parties:
c/o Advocat Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027-2926
Attn: William R. Council, President
Telephone No.: (615) 771-7575
Facsimile No.: (615) 771-7409
with a copy to:
Harwell Howard Hyne Gabbert & Manner, P.C.
315 Deaderick Street, Suite 1800
Nashville, Tennessee 37238
Attn: Glenn B. Rose
or to such other person or address as any party hereto shall furnish to the
other parties hereto in writing pursuant to this Section 10.4.
     10.4 Entire Agreement; Amendment; Waiver. This Agreement, together with the
other agreements referred to herein, constitutes the entire understanding
between the parties with respect to the subject matter hereof, superseding all
negotiations, prior discussions and preliminary agreements. This Agreement may
not be modified or amended except in writing signed by the SMS Parties and the
Diversicare Parties. 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 or as
a waiver of any other term, provision or condition of this Agreement. No failure
to act shall be construed as a waiver of any term, provision, condition or
rights granted hereunder.

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     10.5 Assignment. Neither this Agreement nor the rights, duties or
obligations arising hereunder shall be assignable or delegable by either party
hereto without the express prior written consent of the other party hereto;
provided, however, that if any Diversicare Party seeks to assign any or all of
its rights and delegate any or all of its duties under this Agreement to any
affiliate, such consent from the SMS Parties shall not be unreasonably withheld.
In no event shall any such assignment relieve any Diversicare Party of its
obligations under this Agreement. Subject to the foregoing, this Agreement and
the rights and obligations set forth herein shall inure to the benefit of, and
be binding upon, the parties hereto and each of their respective successors and
permitted assigns.
     10.6 Joint Venture; Third Party Beneficiaries. Nothing contained herein
shall be construed as forming a joint venture or partnership between the parties
hereto with respect to the subject matter hereof. The parties hereto do not
intend that any third party shall have any rights under this Agreement.
     10.7 Broker’s Fees. The SMS Parties have not engaged any agent, broker or
similar entity to act on their behalf in connection with the transactions
contemplated herein, and no SMS Party shall pay any fee to any agent, broker or
similar entity in connection herewith.
     10.8 Representation By Counsel. The parties hereto acknowledge that they
have been represented by independent legal counsel of their choosing throughout
all of the negotiations which preceded the execution of this Agreement, and that
each party has executed this Agreement with the consent and on the advice of
such independent legal counsel. This Agreement is a negotiated document. As a
result, any rule of construction providing for any ambiguity in the terms of
this Agreement to be construed against the draftsperson of this Agreement shall
be inapplicable to the interpretation of this Agreement.
     10.9 Captions. The section headings contained herein are for convenience
only and shall not be considered or referred to in resolving questions of
interpretation.
     10.10 Counterparts. This Agreement may be executed and delivered (including
by facsimile transmittal, which for purposes of this Agreement shall be deemed
to be an original signature) in one or more counterparts and all such
counterparts taken together shall constitute a single original Agreement.
     10.11 Governing Law. This Agreement shall be governed by the laws of the
State of Texas as to, including, but not limited to, matters of validity,
construction, effect and performance but exclusive of its conflicts of laws
provisions.
     10.12 Enforceability. Subject to approval by the Bankruptcy Court, this
Agreement constitutes the valid and legally binding obligation of the
Diversicare Parties and the SMS Parties, enforceable in accordance with its
terms, except as such enforceability may be limited by equitable principals and
by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or
similar laws relating to or affecting the rights of creditors generally.
     10.13 Jurisdiction. Each party hereto acknowledges the jurisdiction of the
Bankruptcy Court, and consents to the jurisdiction of the courts of the State of
Texas or, as applicable, if it can acquire jurisdiction, the United States
District Court for the Northern District of Texas as to

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claims arising under or brought in connection with this Agreement and the
transactions contemplated herein.
     10.14 Waiver of Jury Trial. EACH OF THE PARTIES HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION BROUGHT ON OR WITH RESPECT TO
THIS AGREEMENT, INCLUDING TO ENFORCE OR DEFEND ANY RIGHTS HEREUNDER, AND AGREES
THAT ANY SUCH ACTION SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
[Signature Pages Follow]

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Exhibit 10.1
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on July
___, 2007 but to be effective as of the day and year first above written.
SMS PARTIES:

                                  SENIOR MANAGEMENT SERVICES OF AMERICA II, INC.
 
                   
 
          By:
Name:   /s/ Louis E. Robichaux, IV
 
Louis E. Robichaux, IV    
 
          Title:   Chief Restructuring Officer    
 
                    SENIOR MANAGEMENT SERVICES OR AMERICA NORTH TEXAS, INC.  
SENIOR MANAGEMENT SERVICES OF HERITAGE OAKS AT BALLINGER, INC.
 
                   
By:
Name:
  /s/ Louis E. Robichaux, IV
 
Louis E. Robichaux, IV       By:
Name:   /s/ Louis E. Robichaux, IV
 
Louis E. Robichaux, IV    
Title:
  Chief Restructuring Officer       Title:   Chief Restructuring Officer    
 
                    SENIOR MANAGEMENT SERVICES OF ESTATES AT FORT WORTH, INC.  
SENIOR MANAGEMENT SERVICES OF KATY, INC.
 
                   
By:
  /s/ Louis E. Robichaux, IV       By:   /s/ Louis E. Robichaux, IV    
 
                   
Name:
  Louis E. Robichaux, IV       Name:   Louis E. Robichaux, IV    
Title:
  Chief Restructuring Officer       Title:   Chief Restructuring Officer    
 
                    SENIOR MANAGEMENT SERVICES OF HUMBLE, INC.   SENIOR
MANAGEMENT SERVICES OF TREEMONT, INC.
 
                   
By:
  /s/ Louis E. Robichaux, IV       By:   /s/ Louis E. Robichaux, IV    
 
                   
Name:
  Louis E. Robichaux, IV       Name:   Louis E. Robichaux, IV    
Title:
  Chief Restructuring Officer       Title:   Chief Restructuring Officer    
 
                    SENIOR MANAGEMENT SERVICES OF DOCTORS AT DALLAS, INC.  
SENIOR MANAGEMENT SERVICES OF NORMANDY AT SAN ANTONIO, INC.
 
                   
By:
  /s/ Louis E. Robichaux, IV       By:   /s/ Louis E. Robichaux, IV    
 
                   
Name:
  Louis E. Robichaux, IV       Name:   Louis E. Robichaux, IV    
Title:
  Chief Restructuring Officer       Title:   Chief Restructuring Officer    

[ Signature Page to Operations Transfer Agreement ]

 

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Exhibit 10.1
DIVERSICARE PARTIES:

                  DIVERSICARE TEXAS I, LLC
 
                By:   /s/ William R. Council, III               Title:  
President
 
                DIVERSICARE BALLINGER, LLC
DIVERSICARE DOCTORS, LLC
DIVERSICARE ESTATES, LLC
DIVERSICARE HUMBLE, LLC
DIVERSICARE KATY, LLC
DIVERSICARE NORMANDY TERRACE, LLC
DIVERSICARE TREEMONT, LLC
 
                BY:   DIVERSICARE TEXAS I, LLC
the sole member
 
           
 
      By:   /s/ William R. Council, III
 
           
 
      Title:   President

[Signature Page to Operations Transfer Agreement]

 

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Exhibit 10.1
     The undersigned joins in the execution of this Agreement for the purpose of
agreeing to transfer to the Diversicare Parties any interest it may have in the
vehicles listed in Schedule 1.3(b).

             
 
  SERENITY MANAGEMENT SERVICES, INC.    
 
           
 
  By:
Name:   /s/ Louis E. Robichaux, IV
 
Louis E. Robichaux, IV    
 
  Title:   Chief Restructuring Officer    

[Signature Page to Operations Transfer Agreement]

 

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Exhibit 10.1
LIST OF SCHEDULES

     
Schedule 1.1(b)(iv)
  PTO for Retained Employees
Schedule 1.1(b)(v)
  Cure Amounts
Schedule 1.3(a)
  Equipment
Schedule 1.3(b)
  Vehicles and Pay-off Amounts
Schedule 1.3(f)
  Assumed Contracts and Cure Costs