EX-10.1



 





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”).



 









 





     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



11









 






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.




12









 







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



13









 







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,



14









 







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



15









 







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




16









 







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.



17









 





     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




18









 







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:



19









 





          (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.



20









 





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




21









 







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.



22









 





     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.



23









 





     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



24









 







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]




25









 





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 ]




 









 






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]





 









 






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]




 









 





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