Document:

<PAGE>
                                                                    Exhibit 10.1

                                                                  EXECUTION COPY

                                CREDIT AGREEMENT

                           DATED AS OF OCTOBER 6, 2004

                                      AMONG

                          BEVERLY FUNDING CORPORATION,

                             MERRILL LYNCH CAPITAL,
          A DIVISION OF MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.,
                            AS AGENT AND AS A LENDER

                                       AND

                             THE ADDITIONAL LENDERS
                         FROM TIME TO TIME PARTY HERETO

                              (MERRILL LYNCH LOGO)
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                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                                <C>
ARTICLE I DEFINITIONS................................................................................1
Section 1.1         Certain Defined Terms............................................................1
Section 1.2         Accounting Terms and Determinations.............................................13
Section 1.3         Other Definitional Provisions...................................................13
ARTICLE II LOANS AND LETTERS OF CREDIT..............................................................14
Section 2.1         Letters of Credit and Letter of Credit Fees.....................................14
Section 2.2         Loans and Borrowings............................................................16
Section 2.3         Interest, Interest Calculations and Certain Fees................................19
Section 2.4         Notes...........................................................................20
Section 2.5         General Provisions Regarding Payment; Loan Account..............................20
Section 2.6         Maximum Interest................................................................21
Section 2.7         Taxes...........................................................................21
Section 2.8         Credit Rating Downgrades........................................................22
ARTICLE III REPRESENTATION AND WARRANTIES...........................................................23
Section 3.1         Existence and Power.............................................................23
Section 3.2         Organization and Governmental Authorization; No Contravention...................23
Section 3.3         Binding Effect..................................................................23
Section 3.4         Capitalization..................................................................24
Section 3.5         Financial Information...........................................................24
Section 3.6         Litigation......................................................................24
Section 3.7         Ownership of Property...........................................................24
Section 3.8         No Default......................................................................25
Section 3.9         Reserved........................................................................25
Section 3.10        Regulated Entities..............................................................25
Section 3.11        Margin Regulations..............................................................25
Section 3.12        Compliance With Laws............................................................25
Section 3.13        Taxes...........................................................................25
Section 3.14        Reserved........................................................................26
Section 3.15        Related Transactions............................................................26
Section 3.16        Employment, Equityholders and Subscription Agreements...........................26
Section 3.17        Real Property Interests.........................................................26
Section 3.18        Solvency........................................................................26
Section 3.19        Full Disclosure.................................................................26
Section 3.20        Eligible Accounts...............................................................27
Section 3.21        Representations and Warranties Incorporated from Other Operative Documents......28
ARTICLE IV AFFIRMATIVE COVENANTS....................................................................28
Section 4.1         Financial Statements and Other Reports..........................................28
Section 4.2         Payment and Performance of Obligations..........................................30
Section 4.3         Conduct of Business and Maintenance of Existence................................30
Section 4.4         Compliance with Laws............................................................30
Section 4.5         Inspection of Property, Books and Records.......................................30
Section 4.6         Use of Proceeds.................................................................30
Section 4.7         Further Assurances..............................................................30
Section 4.8         Notices to Lender...............................................................30
ARTICLE V NEGATIVE COVENANTS........................................................................32
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<TABLE>
<S>                                                                                                 <C>
Section 5.1         Debt............................................................................32
Section 5.2         Liens...........................................................................32
Section 5.3         Contingent Obligations..........................................................33
Section 5.4         Restricted Distributions........................................................33
Section 5.5         Restrictive Agreements..........................................................33
Section 5.6         Consolidations, Mergers and Sales of Assets.....................................33
Section 5.7         Purchase of Assets, Subsidiaries................................................33
Section 5.8         Transactions with Affiliates....................................................33
Section 5.9         Modification of Other Documents.................................................33
Section 5.10        Fiscal Year.....................................................................33
Section 5.11        Conduct of Business.............................................................33
Section 5.12        Fees............................................................................34
Section 5.13        Lease...........................................................................34
Section 5.14        Bank Accounts...................................................................34
ARTICLE VI FINANCIAL COVENANTS......................................................................34
Section 6.1         Minimum Borrowing Base..........................................................34
ARTICLE VII CONDITIONS..............................................................................34
Section 7.1         Conditions to Closing...........................................................34
Section 7.2         Conditions to Each Loan and Support Agreement...................................35
ARTICLE VIII EVENTS OF DEFAULT......................................................................35
Section 8.1         Events of Default...............................................................35
Section 8.2         Acceleration and Suspension or Termination of Commitment........................37
Section 8.3         Cash Collateral.................................................................37
Section 8.4         Setoff Rights...................................................................37
Section 8.5         Application of Proceeds.........................................................38
ARTICLE IX EXPENSES, INDEMNITY, TAXES AND RIGHT TO PERFORM..........................................38
Section 9.1         Expenses........................................................................38
Section 9.2         Indemnity.......................................................................39
Section 9.3         Taxes...........................................................................39
Section 9.4         Right to Perform................................................................39
ARTICLE X AGENT.....................................................................................39
Section 10.1        Appointment and Authorization...................................................39
Section 10.2        Agent and Affiliates............................................................40
Section 10.3        Action by Agent.................................................................40
Section 10.4        Consultation with Experts.......................................................40
Section 10.5        Liability of Agent..............................................................40
Section 10.6        Indemnification.................................................................41
Section 10.7        Right to Request and Act on Instructions........................................41
Section 10.8        Credit Decision.................................................................41
Section 10.9        Collateral Matters..............................................................41
Section 10.10       Agency for Perfection...........................................................42
Section 10.11       Notice of Default...............................................................42
Section 10.12       Successor Agent.................................................................42
Section 10.13       Disbursements of Loans; Payment.................................................43
ARTICLE XI MISCELLANEOUS............................................................................45
Section 11.1        Survival........................................................................45
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<S>                                                                                                              <C>
Section 11.2        No Waivers...................................................................................45
Section 11.3        Notices......................................................................................45
Section 11.4        Severability.................................................................................45
Section 11.5        Amendments and Waivers.......................................................................45
Section 11.6        Assignments; Participations..................................................................46
Section 11.7        Headings.....................................................................................47
Section 11.8        Confidentiality..............................................................................47
Section 11.9        GOVERNING LAW; SUBMISSION TO JURISDICTION....................................................48
Section 11.10       WAIVER OF JURY TRIAL.........................................................................48
Section 11.11       Publication; Advertisement...................................................................48
Section 11.12       Counterparts; Integration....................................................................49
</TABLE>

                                      iii
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                         ANNEXES, EXHIBITS AND SCHEDULES

ANNEXES

Annex A         Commitment Annex
Annex B         Closing Checklist

EXHIBITS

Exhibit A       Assignment Agreement
Exhibit B       Compliance Certificate
Exhibit C       Borrowing Base Certificate
Exhibit D       Letter of Credit Request

SCHEDULES

Schedule 1.1    Specified Selling Subsidiaries
Schedule 3.1    Organizational Information
Schedule 3.2    Government Actions and Filings
Schedule 3.4    Capitalization
Schedule 3.16   Employment, Equityholders and Subscription Agreements
Schedule 5.8    Affiliate Transactions

                                       iv
<PAGE>
                                CREDIT AGREEMENT

      CREDIT AGREEMENT dated as of October 6, 2004 among BEVERLY FUNDING
CORPORATION, a Delaware corporation, as Borrower, the financial institutions
from time to time parties hereto, each as a Lender, and MERRILL LYNCH CAPITAL, A
DIVISION OF MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., individually as a
Lender and as Agent.

                                    RECITALS:

      WHEREAS, Borrower desires that Lenders extend certain letter of credit
facilities to Borrower in order to issue letters of credit on behalf of Borrower
or one or more of Borrower's Affiliates; and

      WHEREAS, Borrower desires to secure all of its Obligations under the
Financing Documents by granting to Agent, for the benefit of Agent and Lenders,
a security interest in and lien upon certain of its personal and real property.

      NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, Borrower, Lenders and Agent agree as
follows:

                                   ARTICLE I
                                   DEFINITIONS

      SECTION 1.1 CERTAIN DEFINED TERMS. The following terms have the following
meanings:

      "ACCOUNT" means, collectively and without duplication: (I) any "account"
(as that term is defined in the UCC), any accounts receivable (whether in the
form of payments for services rendered or otherwise), any "health-care-insurance
receivables" (as that term is defined in the UCC), any "payment intangibles" (as
that term is defined in the UCC) and all other rights to payment and/or
reimbursement of every kind and description, whether or not earned by
performance, (II) all Supporting Obligations in respect of the foregoing, and
(III) all proceeds of any of the foregoing.

      "ACCOUNT DEBTOR" means "account debtor" (as that term is defined in the
UCC) and any other Person obligated on any Account of any Selling Subsidiary,
including, but not limited to, any Governmental Account Debtor.

      "ACCOUNT SALE DOCUMENTS" means that certain Receivables Purchase and Sale
Agreement, dated as of the Closing Date by and among each of the Selling
Subsidiaries, the Borrower and Beverly, as supplemented from time to time in
accordance with the terms of Section 5.9, together with all other documents,
instruments and agreements contemplated thereby or otherwise executed or
delivered in connection therewith.

      "AFFILIATE" means with respect to any Person: (I) any Person that directly
or indirectly controls such Person, (II) any Person which is controlled by or is
under common control with
<PAGE>
such controlling Person, and (III) in the case of an individual, the parents,
descendants, siblings and spouse of such individual. As used in this definition,
the term "CONTROL" of a Person means the possession, directly or indirectly, of
the power to vote ten percent (10%) or more of any class of voting securities of
such Person or to direct or cause the direction of the management or policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.

      "AGENT" means Merrill Lynch in its capacity as agent for the Lenders
hereunder, as such capacity is established and subject to the provisions of
Article X, and the successors of Merrill Lynch in such capacity.

      "AGREEMENT" means this Credit Agreement, as the same may be amended,
supplemented, restated or otherwise modified from time to time.

      "APPROVED GOODS OR SERVICES" means goods sold or services rendered by any
Selling Subsidiary in the ordinary course of business, in compliance in all
material respects with all applicable Laws.

      "ASSIGNEE" has the meaning set forth in subsection 11.6(a).

      "ASSIGNMENT AGREEMENT" means an agreement substantially in the form of
Exhibit A hereto.

      "AVAILABLE CASH" means unrestricted cash on hand of Borrower as of the
date of determination held in the Collection Account or any other Deposit
Account in which Agent has been granted for the benefit of Agent and Lenders, a
perfected first priority security interest pursuant to a Deposit Account Control
Agreement.

      "BEVERLY" means Beverly Enterprises, Inc., a Delaware corporation.

      "BEVERLY GROUP" means, collectively, Beverly, the Borrower and, as of any
date, any Subsidiary of Beverly, the accounts of which would be consolidated
with those of Beverly in Beverly's consolidated financial statements if such
statements were prepared as of such date.

      "BORROWER" means Beverly Funding Corporation, a Delaware corporation.

      "BORROWING" means the issuance of a Letter of Credit in accordance with
Section 2.1 or the borrowing of a Loan in accordance with Section 2.2.

      "BORROWING BASE" means the following, subject to the adjustments described
in Section 2.8:

      (I) the product of: (X) seventy five percent (75%) and (Y) the aggregate
      Outstanding Balance at such time of the Eligible Accounts; plus

      (II) the product of: (X) ninety five percent (95%) and (Y) the amount of
      Available Cash;

                                       2
<PAGE>
provided, however, the aggregate amount of Eligible Accounts that were generated
by any Selling Subsidiary that is no longer owned, either directly or
indirectly, by Beverly, shall not exceed five percent (5%) of the total
Borrowing Base. The Borrowing Base shall be determined by Agent based on the
most recent Borrowing Base Certificate delivered to Agent in accordance with
this Agreement and such other information as may be available to Agent.

      "BORROWING BASE CERTIFICATE" means a certificate, duly executed by a
Responsible Officer, appropriately completed and substantially in the form of
Exhibit C hereto.

      "BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which either the New York Stock Exchange is closed, or on which commercial banks
in Chicago are authorized by law to close, and a day on which dealings are
carried on in the London interbank eurodollar market.

      "CAPITAL LEASE" of any Person means any lease of any property by such
Person as lessee which would, in accordance with GAAP, be required to be
accounted for as a capital lease on the balance sheet of such Person.

      "CLOSING CHECKLIST" means Annex B to this Agreement.

      "CLOSING DATE" means the date on which each of the conditions precedent
specified in Section 7.1 of this Agreement have been satisfied.

      "CODE" means the Internal Revenue Code of 1986.

      "COLLATERAL" means all property, now existing or hereafter acquired,
mortgaged or pledged to, or purported to be subjected to a Lien in favor of,
Agent, for the benefit of Agent and Lenders, pursuant to the Security Documents.

      "COLLECTION ACCOUNT" has the meaning set forth in subsection 2.2(c).

      "COLLECTION BANK" has the meaning set forth in subsection 2.2(c).

      "COMMITMENT" means the sum of each Lender's Commitment Amount. As of the
Closing Date, the amount of the Commitment is $40,000,000.

      "COMMITMENT AMOUNT" means, as to any Lender, the dollar amount set forth
opposite such Lender's name on the Commitment Annex under the column "Commitment
Amount" or, if different, in the most recent Assignment Agreement to which such
Lender is a party.

      "COMMITMENT ANNEX" means Annex A to this Agreement.

      "COMMITMENT EXPIRY DATE" means October 6, 2008.

      "COMPLIANCE CERTIFICATE" means a certificate, duly executed by a
Responsible Officer, appropriately completed and substantially in the form of
Exhibit B hereto.

                                       3
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      "CREDIT EXPOSURE" means any period of time during which the Commitment is
outstanding or any Loan, Reimbursement Obligation or other Obligation remains
unpaid or any Letter of Credit or Support Agreement remains outstanding;
provided, however, no Credit Exposure shall be deemed to exist solely due to the
existence of contingent indemnification liability, absent the assertion of a
claim with respect thereto.

      "DEBT" of a Person means at any date, without duplication: (I) all
obligations of such Person for borrowed money, (II) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (III)
all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising and paid in the ordinary course
of business, (IV) all Capital Leases of such Person, if any, (V) all
non-contingent obligations of such Person to reimburse any bank or other Person
in respect of amounts paid under a letter of credit or similar instrument, (VI)
all equity securities of such Person subject to repurchase or redemption
otherwise than at the sole option of such Person, (VII) all obligations secured
by a Lien on any asset of such Person, whether or not such obligation is
otherwise an obligation of such Person, and (VIII) all Debt of others Guaranteed
by such Person.

      "DEFAULT" means any condition or event which with the giving of notice or
lapse of time or both would, unless cured or waived, become an Event of Default.

      "DEFAULTED LENDER" means, so long as such failure shall remain in
existence and uncured, any Lender which shall have failed to make any Loan or
other credit accommodation, disbursement or reimbursement required pursuant to
the terms of any Financing Documents.

      "DEPOSIT ACCOUNT" means a "deposit account" (as defined in Article 9 of
the UCC).

      "DEPOSIT ACCOUNT CONTROL AGREEMENT" means an agreement which: (I) is in
form and substance satisfactory to Agent, by and among Agent, Borrower and the
Collection Bank, and provides that: (X) such bank shall comply with instructions
originated by Agent directing disposition of the funds in the Collection Account
without further consent by Borrower, and (Y) such bank shall agree that it shall
have no Lien on, or right of setoff or recoupment against, the Collection
Account or the contents thereof, other than in respect of commercially
reasonable fees and other items expressly consented to by Agent, and containing
such other terms and conditions as Agent may require; or (II) is otherwise in
form and substance satisfactory to Agent.

      "DEPOSIT ACCOUNT RESTRICTION AGREEMENT" means an agreement which: (I) is
in form and substance satisfactory to Lender, among Lender, each Selling
Subsidiary and Lockbox Bank regarding each Lockbox Account into which proceeds
of Accounts from Governmental Account Debtors are paid directly by the
Governmental Account Debtor, and which agreement provides that: (X) the Lockbox
Bank shall not enter into any agreement with respect to such Lockbox Account
pursuant to which the Lockbox Bank agrees to comply with instructions originated
by any Person, other than the Selling Subsidiary that owns the Lockbox Account,
directing disposition of the funds in such Lockbox Account, and (Y) the Lockbox
Bank shall agree that it shall have no Lien on, or right of setoff or recoupment
against, such Lockbox Account or the contents thereof, other than in respect of
commercially reasonable fees and other items expressly consented to by Agent,
and containing such other terms and conditions as Agent may require, including
as to any such agreement pertaining to any Lockbox Account, providing that the

                                       4
<PAGE>
Lockbox Bank shall wire, or otherwise transfer, in immediately available funds,
on a daily basis to the Collection Account all funds received or deposited into
such Lockbox Account, unless the applicable Selling Subsidiary shall revoke such
standing transfer instructions upon at least ten (10) days prior written notice
to the Lockbox Bank and Agent or otherwise instruct the Lockbox Bank in writing,
subject to the limitations set forth in the Deposit Account Restriction
Agreement and the other Financing Documents; or (II) is otherwise in form and
substance satisfactory to Agent.

      "DISTRIBUTIONS" means any management fees, salaries or other fees or
compensation, lease or rental payments, repayments of or debt service on loans
or other indebtedness, dividends or other distributions with respect to any of
its stock, partnership or membership interests (as the case may be) now or
hereafter outstanding, the purchase, redemption or other acquisition for value
of any of its stock, partnership or membership interests (as the case may be)
now or hereafter outstanding, or the return of any capital of its stockholders,
partners or members. Purchases of Receivables by Borrower from the Selling
Subsidiaries pursuant to the terms of the Account Sale Documents shall not
constitute "DISTRIBUTIONS."

      "ELIGIBLE ACCOUNT" means an Account sold to Borrower which constitutes a
Medicaid Receivable or VA Receivable (each as defined below) and was: (I)
originated or generated by a Selling Subsidiary in the ordinary course of
business from the rendition of Approved Goods or Services, (II) generated
originally in the name of such Selling Subsidiary, and not acquired by such
Selling Subsidiary via assignment or otherwise, and (III) validly transferred
and sold to Borrower pursuant to the Account Sale Documents. Without limiting
the generality of the foregoing, no Account shall be an Eligible Account if:

      (A) the Account remains unpaid more than one hundred twenty (120) days
past the claim or invoice date (but in no event more than one hundred fifty five
(155) days after the applicable Approved Goods or Services have been rendered or
delivered);

      (B) the Account is not genuine, is evidenced by a judgment or is subject
to any defense, set-off, recoupment, counterclaim, deduction, discount, credit
chargeback or adjustment of any kind or the applicable Subsidiary is not able to
bring suit or otherwise enforce its remedies against the Account Debtor through
judicial process, provided, however, that this subclause (b) shall not apply to
any set-off or deduction unless and until such set-off or deduction shall have
been applied by the applicable Account Debtor against such Account;

      (C) if the Account arises from the performance of services, the services
have not actually been performed or the services were undertaken in material
violation of any law, or the Account represents a progress billing for which
services have not been fully and completely rendered;

      (D) the Account is subject to a Lien other than Permitted Liens;

      (E) the Account is evidenced by chattel paper or an instrument of any
kind, or has been reduced to judgment, unless such chattel paper or instrument
has been delivered to Agent;

      (F) the Account Debtor is an Affiliate or Subsidiary of Borrower, Beverly
or any Subsidiary;

                                       5
<PAGE>
      (G) any covenant, representation or warranty contained in the Financing
Documents with respect to such Account has been breached in any material respect

      (H) the Account has not been invoiced to the applicable Account Debtor
within sixty (60) days following the date the applicable Approved Goods or
Services were rendered or delivered, in accordance with such Subsidiary's credit
and collection procedures (other than for residents/patients whose entitlement
to Medicaid or VA reimbursement is pending);

      (I) the Account Debtor has its principal place of business or executive
office outside the United States or the Account is payable in a currency other
than United States dollars;

      (J) the Account does not arise from the sale or rendering of Approved
Goods or Services;

      (K) the Account arises out of a cost report settlement account;

      (L) the Account was generated by a Selling Subsidiary from a Facility with
respect to which any applicable Governmental Authority: (I) has revoked or
suspended the applicable Medicaid or Medicare qualification pertaining to the
Facility, or (II) has revoked or suspended any material healthcare permit
pertaining to the Facility, and, in any case, such Account arose or was sold to
the Borrower after the date of such Governmental Authority action and such
Governmental Authority action has not been reversed or rescinded;

      (M) the Account was sold to Borrower from a Subsidiary that is subject to
any voluntary or involuntary proceedings under the U.S. Bankruptcy Code;

      (N) any of the representations or warranties made by Borrower in Section
3.20 with respect to such Account or Account Debtor are otherwise untrue with
respect thereto; or

      (O) (I) any of the representations or warranties made by any of the
Subsidiaries with respect to such Account or Account Debtor in the relevant
Account Sale Documents are otherwise untrue with respect thereto, or (II) the
Selling Subsidiaries shall not have complied with any of the covenants or other
agreements made by them with respect to such Account or Account Debtor in the
relevant Account Sale Documents.

      "EVENT OF DEFAULT" has the meaning set forth in Section 8.1.

      "FACILITY" or "FACILITIES" mean one (1) or more of the nursing homes,
elder care centers and other buildings and facilities owned or operated by any
of the Selling Subsidiaries.

      "FINANCING DOCUMENTS" means this Agreement, any Notes, the Security
Documents, the Information Certificate, any fee letter between Merrill Lynch and
Borrower relating to the transactions contemplated hereby and all other
documents, instruments and agreements contemplated herein or thereby and
heretofore executed, executed concurrently herewith or executed at any time and
from time to time hereafter, as any or all of the same may be amended,
supplemented, restated or otherwise modified from time to time.

                                       6
<PAGE>
      "FISCAL YEAR" means a fiscal year of Borrower, ending on December 31 of
each calendar year.

      "FITCH" means Fitch Ratings, Ltd.

      "GAAP" means generally accepted accounting principles set forth from time
to time in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the U.S. accounting
profession), which are applicable to the circumstances as of the date of
determination.

      "GOVERNMENTAL ACCOUNT DEBTOR" means any Account Debtor that is Medicaid or
VA.

      "GOVERNMENTAL AUTHORITY" means any nation or government, any state or
other political subdivision thereof, and any agency, department or Person
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government and any corporation or other Person
owned or controlled (through stock or capital ownership or otherwise) by any of
the foregoing, whether domestic or foreign.

      "GUARANTEE" by any Person means any obligation, contingent or otherwise,
of such Person directly or indirectly guaranteeing any Debt or other obligation
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person: (I) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt or other obligation (whether arising by virtue of partnership arrangements,
by agreement to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise), or
(II) entered into for the purpose of assuring in any other manner the obligee of
such Debt or other obligation of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part), provided that the term
Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business. The term "GUARANTEE" used as a verb has a
corresponding meaning.

      "HEALTHCARE LAWS" means, collectively, all applicable Laws relating to
operation of nursing homes, skilled nursing facilities, intermediate care
facilities, adult care facilities, patient healthcare, patient healthcare
information, patient abuse, the quality and adequacy of medical care,
distribution of pharmaceuticals, rate setting, equipment, personnel, operating
policies, fee splitting, including without limitation, HIPAA, Section 1128B(b)
of the Social Security Act, as amended, 42 U.S.C. Section 1320a-7(b) (Criminal
Penalties Involving Medicare or State Health Care Programs), commonly referred
to as the "Federal Anti-Kickback Statute," and the Social Security Act, as
amended, Section 1877, 42 U.S.C. Section 1395nn (Prohibition Against Certain
Referrals), commonly referred to as "Stark Statute," and all rules and
regulations promulgated thereunder.

      "HIPAA" means the Health Insurance Portability and Accountability Act of
1996, as the same may be amended, modified or supplemented from time to time,
and any successor statute thereto, and any and all rules or regulations
promulgated from time to time thereunder.

                                       7
<PAGE>
      "INDEMNITEES" has the meaning set forth in Section 9.2.

      "INFORMATION CERTIFICATE" means that certain Information Certificate of
even date herewith executed by Borrower and delivered to Agent.

      "LAWS" means, collectively, all federal, state and local laws, statutes,
codes, ordinances, orders, rules and regulations, including judicial opinions or
presidential authority in the applicable jurisdiction, now or hereafter in
effect, and in each case as amended or supplemented from time to time.

      "LC ISSUER" means a bank or trust company acceptable to Merrill Lynch and
Borrower, as issuer of one or more Letters of Credit outstanding at any time.

      "LEHMAN AGENT" means the administrative agent under the Lehman Credit
Agreement.

      "LEHMAN CREDIT AGREEMENT" means that certain Credit Agreement, dated as of
October 22, 2003, among Beverly, as borrower, the several banks and other
financial institutions or entities from time to time parties thereto as lenders,
Lehman Brothers Inc., as advisor, sole lead arranger and sole bookrunner and
Lehman Commercial Paper Inc., as administrative agent, as the same has been
amended by that certain First Amendment to Credit Agreement dated May 13, 2004,
and by that certain Second Amendment to Credit Agreement and First Amendment to
Guarantee and Collateral Agreement dated June 17, 2004, and as the same may be
further amended or restated, refinanced, supplemented or otherwise modified from
time to time.

      "LENDER" means each of: (I) Merrill Lynch, (II) each other financial
institution party hereto, (III) each other Person that becomes a holder of an
Obligation pursuant to Section 11.6, (IV) Agent, to the extent of any other
Loans made by Agent which have not been settled among the Lenders pursuant to
Section 10.13, and (V) the respective successors of all of the foregoing, and
Lenders means all of the foregoing.

      "LETTER OF CREDIT" means a standby or "direct pay" letter of credit issued
for the account of Borrower for the benefit of one (1) or more of Borrower's
Affiliates by an LC Issuer which expires by its terms within one (1) year after
the date of issuance. Notwithstanding the foregoing, a Letter of Credit may
provide for automatic extensions of its expiry date for one (1) or more
successive one (1) year periods, provided that the LC Issuer that issued such
Letter of Credit has the right to terminate such Letter of Credit on each such
annual expiration date but only upon at least 30 days prior written notice to
Borrower and Agent and provided further, no Letter of Credit may have a term
that ends later than on the Commitment Expiry Date, and no renewal term may
extend the term of the Letter of Credit to a date that is later than the
Commitment Expiry Date unless, in either case, Borrower complies with the
applicable terms and provisions of subsection 2.1(a)(iii) and subsection 2.1(e)
with respect to such Letter of Credit.

      "LETTER OF CREDIT LIABILITIES" means, at any time of calculation, the sum
of (I) the amount then available for drawing under all outstanding Letters of
Credit (without regard to whether any conditions to drawing thereunder can then
be met), to the extent subject to a Support Agreement plus (II) the aggregate
unpaid amount of all Reimbursement Obligations in respect of

                                       8
<PAGE>
previous drawings made under such Letters of Credit, to the extent subject to a
Support Agreement.

      "LETTER OF CREDIT REQUEST" means a written notice of a Responsible
Officer, appropriately completed and substantially in the form of Exhibit D
hereto and, in any event and to the extent applicable, specifying: (I) the
anticipated date of issuance or increase of a Letter of Credit; (II) the expiry
date of such Letter of Credit; (III) the proposed terms of such Letter of
Credit, including the face amount; and (IV) the transactions or additional
transaction or transactions that are to be supported or financed with such
Letter of Credit or increase thereof.

      "LIBOR" means a rate per annum (rounded upwards, if necessary, to the
nearest 1/16 of 1%) equal to (a) the rate of interest which is identified and
normally published by Bloomberg Professional Service Page BBAM 1 as the offered
rate, for the first day of each calendar month, for loans in U.S. dollars for
the period of one (1) month under the caption British Bankers Association LIBOR
Rates as of 11:00 a.m. (London time); divided by (b) the sum of one minus the
daily average during the preceding month of the aggregate maximum reserve
requirement (expressed as a decimal) then imposed under Regulation D of the
Board of Governors of the Federal Reserve System (or any successor thereto) for
"Eurocurrency Liabilities" (as defined therein). If Bloomberg Professional
Service no longer reports the LIBOR or Lender determines in good faith that the
rate so reported no longer accurately reflects the rate available to Lender in
the London Interbank Market or if such index no longer exists or if Page BBAM 1
no longer exists or accurately reflects the rate available to Lender in the
London Interbank Market, Lender may select a replacement index or replacement
page, as the case may be.

      "LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement and the
other Financing Documents, Borrower shall be deemed to own subject to a Lien any
asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, Capital Lease or other title
retention agreement relating to such asset.

      "LOAN ACCOUNT" has the meaning set forth in subsection 2.5(b).

      "LOAN LIMIT" means, at any time, the lesser of: (I) the Borrowing Base and
(II) the Commitment.

      "LOCKBOX ACCOUNT" has the meaning set forth in subsection 2.2(c).

      "LOCKBOX BANK" has the meaning set forth in subsection 2.2(c).

      "LOANS" has the meaning set forth in subsection 2.2(a).

      "MARGIN STOCK" has the meaning assigned thereto in Regulation U of the
Federal Reserve Board.

      "MATERIAL ADVERSE EFFECT" means, with respect to any event, act, condition
or occurrence of whatever nature (including any adverse determination in any
litigation, arbitration,

                                       9
<PAGE>
or governmental investigation or proceeding), whether singly or in conjunction
with any other event or events, act or acts, condition or conditions, occurrence
or occurrences, whether or not related, a material adverse change in, or a
material adverse effect upon, any of: (I) the financial condition, operations,
business or properties of the Beverly Group, taken as a whole, (II) the rights
and remedies of Agent or Lenders under any Financing Document, or the ability of
Beverly or Borrower to perform any of its obligations under any Financing
Document to which it is a party, (III) the legality, validity or enforceability
of any Financing Document, or (IV) the existence, perfection or priority of any
security interest granted in any Financing Document or the value of any material
Collateral or the ability to collect any portion of the Collateral.

      "MATURITY DATE" means the earlier to occur of: (I) October 6, 2008 and
(II) the date on which Agent or Required Lenders elect to terminate the
Commitment pursuant to Section 8.2.

      "MAXIMUM LAWFUL RATE" has the meaning set forth in subsection 2.6(b).

      "MEDICAID" means, collectively, the healthcare assistance program
established by Title XIX of the Social Security Act (42 U.S.C. Sections 1396 et
seq.) and any statutes succeeding thereto, and all laws, rules, regulations,
manuals, orders, guidelines or requirements pertaining to such program,
including: (I) all federal statutes (whether set forth in Title XIX of the
Social Security Act or elsewhere) affecting such program, (II) all state
statutes and plans for medical assistance enacted in connection with such
program and federal rules and regulations promulgated in connection with such
program, and (III) all applicable provisions of all rules, regulations, manuals,
orders and administrative, reimbursement, guidelines and requirements of all
government authorities promulgated in connection with such program (whether or
not having the force of law), in each case as the same may be amended,
supplemented or otherwise modified from time to time.

      "MEDICAID RECEIVABLE" shall mean any Receivable with respect to which the
Obligor is a state Governmental Authority (or agent thereof) obligated to pay,
pursuant to applicable Medicaid, public assistance or public welfare program
statutes and regulations, promulgated pursuant to Title XIX of the Social
Security Act and applicable state laws for services rendered to eligible
beneficiaries thereunder and not in contravention of any statute or regulation
applicable thereto.

      "MERRILL LYNCH" means Merrill Lynch Capital, a division of Merrill Lynch
Business Financial Services Inc., and its successors.

      "MOODY'S" means Moody's Investors Services, Inc.

      "NOTES" has the meaning set forth in Section 2.4.

      "OBLIGATIONS" means all obligations, liabilities and indebtedness
(monetary (including post-petition interest, whether or not allowed in a
bankruptcy, insolvency or other, similar proceeding) or otherwise) of Borrower
under this Agreement or any other Financing Document, in each case howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, now or hereafter existing, or due or to become due. The Obligations
shall include, without limitation, all Reimbursement Obligations.

                                       10
<PAGE>
      "OFAC LISTS" means, collectively, the specially Designated Nationals and
Blocked Persons List maintained by the Office of Foreign Asset Control,
Department of the Treasury pursuant to Executive Order No. 13224, 66 Fed. Reg.
49079 (Sept. 25, 2001) and/or any other list of terrorists or terrorist
organizations maintained pursuant to any of the rules and regulations of Office
of Foreign Asset Control, Department of the Treasury or pursuant to any other
applicable Executive Orders.

      "OPERATIVE DOCUMENTS" means the Financing Documents and the Account Sale
Documents.

      "ORGANIZATIONAL DOCUMENTS" means, with respect to any Person other than a
natural person, the documents by which such Person was organized (such as a
certificate of incorporation, certificate of limited partnership or articles of
organization, and including, without limitation, any certificates of designation
for preferred stock or other forms of preferred equity) and which relate to the
internal governance of such Person (such as bylaws, a partnership agreement or
an operating, limited liability or members agreement).

      "OUTSTANDING BALANCE" means, with respect to any Account and as of any
date of determination thereof, the amount (which amount shall not be less than
zero dollars) equal to the amount originally billed by any Selling Subsidiary
for such Account to the Account Debtor thereunder less: (I) all cash collections
and other Proceeds of such Account received from or on behalf of the Account
Debtor thereunder, and (II) all discounts or other modifications that reduce the
amount due on such Account.

      "OUTSTANDINGS" means at any time of calculation the sum of, without
duplication, the then existing aggregate outstanding principal amount of Loans
and the then existing Letter of Credit Liabilities.

      "PARTICIPANT" has the meaning set forth in subsection 11.6(b).

      "PAYMENT ACCOUNT" means Agent's Deposit Account, as specified on the
signature pages hereof below Agent's signature, or such other account as may be
designated by Agent to Borrower in writing from time to time.

      "PERMITTED CONTEST" means a contest maintained in good faith by
appropriate proceedings and with respect to which a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made.

      "PERMITTED LIENS" means Liens permitted pursuant to Section 5.2.

      "PERSON" means any natural person, corporation, limited liability company,
professional association, limited partnership, general partnership, joint stock
company, joint venture, association, company, trust, bank, trust company, land
trust, business trust or other organization, whether or not a legal entity, and
any government or agency or political subdivision thereof.

      "PRO RATA SHARE" means, for all purposes (including without limitation the
indemnification obligations arising under Section 10.6) with respect to any
Lender, the percentage obtained by dividing: (I) the Commitment Amount of such
Lender (or, in the event

                                       11
<PAGE>

the Commitment shall have been terminated, such Lender's then existing
Outstandings) by (II) the sum of the Commitment (or, in the event the Commitment
shall have been terminated, the then existing Outstandings of all Lenders).

      "RATING AGENCY" means Moody's, S&P, Fitch or such other rating agency as
may be acceptable to the Agent.

      "RECEIVABLES" shall mean each of (I) any Subsidiary's patient Accounts
sold to Borrower pursuant to the Account Sale Documents and (II) any and all
rights to receive payments due or to become due on such patient Accounts.

      "REIMBURSEMENT OBLIGATIONS" means, at any date, the obligations of
Borrower then outstanding to reimburse Merrill Lynch for payments made by
Merrill Lynch under a Support Agreement.

      "REPORTING COMPANY" means a reporting company under the Securities Act of
1934, as amended.

      "REQUIRED LENDERS" means at any time Lenders holding fifty one percent
(51%) or more of the sum of the Commitment.

      "RESPONSIBLE OFFICER" means any of the Chief Executive Officer, Chief
Financial Officer, Chief Accounting Officer, Controller, Treasurer, Assistant
Treasurer, Secretary or Assistant Secretary of Borrower.

      "S&P" means Standard & Poor's Rating Services.

      "SECURITY DOCUMENTS" means any agreement, document or instrument executed
concurrently herewith or at any time hereafter pursuant to which Borrower, any
Selling Subsidiary or any other Person either: (I) Guarantees payment or
performance of all or any portion of the Obligations, (II) provides, as security
for all or any portion of the Obligations, a Lien on any of its assets in favor
of Agent for its own benefit and the benefit of the Lenders, and/or (III) as any
or all of the same may be amended, supplemented, restated or otherwise modified
from time to time.

      "SELLING SUBSIDIARIES" means one or more of the Subsidiaries of Beverly
that operates one or more Facilities and generates Accounts that are sold to
Borrower pursuant to the Account Sale Documents.

      "SETTLEMENT DATE" has the meaning set forth in subsection 10.13(a).

      "SPECIFIED SELLING SUBSIDIARY" means any Selling Subsidiary with respect
to which all of the Medicaid Receivables generated by such Selling Subsidiary in
any state are subject to the Account Sale Documents, and as of the Closing Date,
are listed on Schedule 1.1 hereto.

      "STATED RATE" has the meaning set forth in subsection 2.6(b).

                                       12
<PAGE>

      "SUBSIDIARY" means, with respect to any Person, any corporation, limited
liability company, limited partnership or other entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by such Person.

      "SUPPORT AGREEMENT" has the meaning set forth in subsection 2.1(a).

      "SUPPORTING OBLIGATIONS" has the meaning ascribed to such phrase in the
UCC.

      "TAXES" has the meaning set forth in Section 2.7.

      "U.S. BANKRUPTCY CODE" means title 11, United States Code.

      "UCC" means the Uniform Commercial Code of the State of Illinois or of any
other state the laws of which are required to be applied in connection with the
perfection of security interests in any Collateral.

      "VA" means the United States Department of Veterans Affairs.

      "VA RECEIVABLE" shall mean any Receivable with respect to which the
Obligor is the United States (or an agency thereof) obligated to pay, pursuant
to applicable VA program statutes and regulations, for services rendered to
eligible beneficiaries thereunder and not in contravention of any statutes or
regulations applicable thereto.

      SECTION 1.2 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder (including without limitation determinations
made pursuant to the exhibits hereto) shall be made, and all financial
statements required to be delivered hereunder shall be prepared on a
consolidated basis in accordance with GAAP applied on a basis consistent (except
for changes concurred with by Borrower's independent public accountants) with
the most recent audited consolidated financial statements of the Beverly Group
delivered to Agent and each of the Lenders; provided, however, if: (A) Borrower
shall object to determining compliance with the provisions of this Agreement on
such basis by written notice delivered to Agent and the Lenders at the time of
delivery of required financial statements due to any change in GAAP or the rules
promulgated with respect thereto, or (B) Agent or the Required Lenders shall so
object in writing by written notice delivered to Borrower within sixty (60) days
after delivery of such financial statements, then such calculations shall be
made on a basis consistent with the most recent financial statements delivered
by Borrower to the Lenders as to which no such objection shall have been made.
All amounts used for purposes of financial calculations required to be made
herein shall be without duplication. Agent and the Lenders may rely, in
determining which Accounts are Eligible Accounts, on all statements and
representations made by Borrower with respect to any Account or Accounts.

      SECTION 1.3 OTHER DEFINITIONAL PROVISIONS. References in this Agreement to
"Articles," "Sections," "Annexes" or "Exhibits" shall be to Articles, Sections,
Annexes or Exhibits of or to this Agreement unless otherwise specifically
provided. Any term defined herein may be used in the singular or plural.
"Include," "includes" and "including" shall be deemed to be followed by "without
limitation." Except as otherwise specified herein, references

                                       13
<PAGE>

to any Person include the successors and assigns of such Person. References
"from" or "through" any date mean, unless otherwise specified, "from and
including" or "through and including", respectively. References to any statute
or act shall include all related current regulations and all amendments and any
successor statutes, acts and regulations.

                                   ARTICLE II
                           LOANS AND LETTERS OF CREDIT

      SECTION 2.1 LETTERS OF CREDIT AND LETTER OF CREDIT FEES.

      (A) LETTERS OF CREDIT. On the terms and subject to the conditions set
forth herein, Agent will, prior to the Commitment Expiry Date, issue letters of
credit or guarantees (each, a "SUPPORT AGREEMENT") to induce an LC Issuer to
issue or increase the amount of, or extend the expiry date of, a Letter of
Credit, so long as:

            (I) Agent shall have received a Letter of Credit Request at least
      five (5) Business Days before the relevant date of issuance, increase or
      extension;

            (II) after giving effect to such issuance or increase: (X) the
      amount of the aggregate Letter of Credit Liabilities under all Letters of
      Credit plus (Y) the amount of the Outstandings do not exceed the Loan
      Limit; and

            (III) if such Letter of Credit or Support Agreement is issued at any
      time during the ninety (90) day period immediately preceding the
      Commitment Expiry Date, Borrower deposits, with Agent for the benefit of
      all Lenders, cash in an amount equal to one hundred and five percent
      (105%) of the aggregate outstanding Letter of Credit Liabilities to be
      available to Agent to reimburse payments of drafts drawn under such Letter
      of Credit and pay any fees and expenses related thereto.

In the event that any LC Issuer will not extend the expiry date of any Letter of
Credit issued by it and has given notice of the same to the Agent, the Agent
will promptly (and in any event within two (2) Business Days) notify the
Borrower (or cause such LC Issuer to notify the Borrower) in writing of the
same.

      (B) LETTER OF CREDIT FEE. Borrower shall pay to Agent, for the benefit of
the Lenders which have committed to make Loans, a letter of credit fee with
respect to the Letter of Credit Liabilities for each Letter of Credit, computed
for each day from the date of issuance of such Letter of Credit to the date that
is the last day a drawing is available under such Letter of Credit, at a rate
per annum equal to two and 375/1000 percent (2.375%) of such Letter of Credit
Liabilities; provided, however, upon the occurrence and during the continuance
of a Default or Event of Default, such rate may be increased at the discretion
of Agent to four and 375/1000 percent (4.375%). Such fee shall be payable in
arrears on the first Business Day of each calendar quarter prior to the Maturity
Date and on such date. In addition, Borrower agrees to pay promptly to the LC
Issuer an amount equal to fifty percent (50%) of the aggregate amount of any
customary fronting or other fees that it may charge in connection with any
Letter of Credit; provided, however, the fees payable by Borrower pursuant to
this sentence shall not, with respect

                                       14
<PAGE>

to any Letter of Credit, exceed twenty five basis points (0.25%) of the face
amount of such Letter of Credit.

      (C) REIMBURSEMENT OBLIGATIONS OF BORROWER. In connection with any request
for a drawing under any Letter of Credit, Agent shall promptly notify Borrower
of such request. If Agent shall then make a payment to an LC Issuer pursuant to
a Support Agreement, Borrower shall immediately reimburse Agent for the amount
of such payment and, to the extent that Borrower does not immediately reimburse
Agent and to the extent doing so would not, to Agent's knowledge, cause the
Outstandings to exceed the Loan Limit, Borrower shall be deemed to have
requested a Loan in accordance with subsection 2.2(a) hereof, the proceeds of
which will be used to satisfy such Reimbursement Obligations.

      (D) REIMBURSEMENT AND OTHER PAYMENTS BY BORROWER. The obligations of
Borrower to reimburse Agent pursuant to subsection 2.1(c) shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement, under all circumstances whatsoever, including
the following:

            (I) any lack of validity or enforceability of, or any amendment or
      waiver of or any consent to departure from, any Letter of Credit or any
      related document;

            (II) the existence of any claim, set-off, defense or other right
      which Borrower may have at any time against the beneficiary of any Letter
      of Credit, the LC Issuer (including any claim for improper payment),
      Agent, any Lender or any other Person, whether in connection with any
      Financing Document or any unrelated transaction, provided nothing herein
      shall prevent the assertion of any such claim by separate suit or
      compulsory counterclaim;

            (III) any statement or any other document presented under any Letter
      of Credit proving to be forged, fraudulent, invalid or insufficient in any
      respect or any statement therein being untrue or inaccurate in any respect
      whatsoever;

            (IV) any affiliation between the LC Issuer and Agent; or

            (V) to the extent permitted under applicable law, any other
      circumstance or happening whatsoever, whether or not similar to any of the
      foregoing.

      (E) DEPOSIT OBLIGATIONS OF BORROWER. In the event any Letters of Credit
are outstanding at the time that Borrower is required to repay the Obligations
in full (it being understood that the reimbursement of Reimbursement Obligations
pursuant to and in accordance with the terms of subsection 2.1(c) shall not
constitute such a required repayment of the Obligations in full) or the
Commitment is terminated, Borrower shall deposit with Agent for the benefit of
all Lenders cash in an amount equal to one hundred and five percent (105%) of
the aggregate outstanding Letter of Credit Liabilities at such time to be
available to Agent to reimburse payments of drafts drawn under such Letters of
Credit and pay any fees and expenses related thereto. Upon termination of any
such Letter of Credit, the deposit described in the preceding sentence shall be
refunded to the Borrower to the extent not previously applied by Agent in the
manner described herein.

                                       15
<PAGE>

      (F) PARTICIPATIONS IN SUPPORT AGREEMENTS.

            (I) Concurrently with the issuance of each Letter of Credit, Agent
      shall be deemed to have sold and transferred to each Lender, and each
      Lender shall be deemed irrevocably and unconditionally to have purchased
      and received from Agent, without recourse or warranty, an undivided
      interest and participation in, to the extent of such Lender's Pro Rata
      Share of the Commitment, Agent's Support Agreement liabilities and
      obligations in respect of such Letters of Credit and Borrower's
      Reimbursement Obligations with respect thereto. If Borrower does not pay
      any Reimbursement Obligation when due, then Borrower shall be deemed to
      have immediately requested that Lenders make a Loan in a principal amount
      equal to such Reimbursement Obligation. Agent shall promptly notify
      Lenders of such deemed request and each Lender shall make available to
      Agent its Pro Rata Share of such Loan. The proceeds of such Loan shall be
      paid over by Agent to the LC Issuer for the account of Borrower in
      satisfaction of Reimbursement Obligations then owing by Borrower to such
      LC Issuer in respect of outstanding Letters of Credit.

            (II) If Agent makes any payment or disbursement under any Support
      Agreement and (X) Borrower has not reimbursed Agent in full for such
      payment or disbursement in accordance with subsection 2.1(c), (Y) a Loan
      may not be made pursuant to the immediately preceding clause (i), or (Z)
      any reimbursement received by Agent from Borrower is or must be returned
      or rescinded upon or during any bankruptcy or reorganization of any
      Borrower or otherwise, each Lender shall be irrevocably and
      unconditionally obligated to pay to Agent its Pro Rata Share of such
      payment or disbursement (but no such payment shall diminish the
      Obligations of Borrower under subsection 2.1(c)). To the extent any Lender
      shall not have made such amount available to Agent by noon (Chicago time)
      on the Business Day on which such Lender receives notice from Agent of
      such payment or disbursement, such Lender agrees to pay interest on such
      amount to Agent forthwith on demand accruing daily at LIBOR for the first
      three (3) days following such Lender's receipt of such notice, and
      thereafter at a per annum rate equal to LIBOR plus two and 375/1000
      percent (2.375%). Any Lender's failure to make available to Agent its Pro
      Rata Share of any such payment or disbursement shall not relieve any other
      Lender of its obligation hereunder to make available to Agent such other
      Lender's Pro Rata Share of such payment, but no Lender shall be
      responsible for the failure of any other Lender to make available to Agent
      such other Lender's Pro Rata Share of any such payment or disbursement.

      SECTION 2.2 LOANS AND BORROWINGS.

      (A) LOANS AND BORROWINGS.

Each Lender severally agrees to make Loans to Borrower from time to time as set
forth herein equal to such Lender's Pro Rata Share of revolving loans ("LOANS")
requested (or deemed requested) by Borrower solely for the purpose of satisfying
Borrower's Reimbursement Obligations under subsection 2.1(c); provided, however,
after giving effect thereto, the Outstandings shall not exceed the Loan Limit.
Within the foregoing limits, Borrower may borrow (or be deemed to borrow) under
this subsection 2.2(a), satisfy its Reimbursement

                                       16
<PAGE>

Obligations, prepay or repay Loans as required or permitted under this Section
2.2 and reborrow Loans pursuant to this subsection 2.2(a).

      (B) MANDATORY LOAN REPAYMENTS AND PREPAYMENTS.

            (I) The Commitment shall terminate upon the earlier to occur of: (A)
      the Commitment Expiry Date, and (B) the date on which Agent or Required
      Lenders elect to terminate the Commitment pursuant to Section 8.2, and
      there shall become due and Borrower shall pay on the Maturity Date, the
      entire outstanding principal amount of each Loan, together with accrued
      and unpaid interest thereon to but excluding the Maturity Date.

            (II) If, at any time, the Outstandings exceed the Loan Limit, then,
      on the next succeeding Business Day, Borrower shall, at Agent's election:
      (A) repay the Loans, cash collateralize Letter of Credit Liabilities in
      the manner specified in subsection 2.1(e), cancel outstanding Letters of
      Credit, reduce the face amounts of any outstanding Letters of Credit or
      any combination of the foregoing, in an aggregate amount equal to such
      excess; or (B) cease purchasing Accounts from Selling Subsidiaries
      pursuant to the Account Sale Documents, but continue to collect previously
      purchased Accounts, until the Borrowing Base equals or exceeds the amount
      of the Outstandings.

      (C) COLLECTION ACCOUNT AND LOCKBOX ACCOUNTS.

            (I) Borrower shall maintain a Deposit Account (the "COLLECTION
      ACCOUNT") with a United States depository institution reasonably
      acceptable to Agent (the "COLLECTION BANK"), subject to the provisions of
      this Agreement, and shall execute with such Collection Bank a Deposit
      Account Control Agreement and such other agreements related to the
      Collection Account as Agent may reasonably require.

            (II) Borrower shall cause each Specified Selling Subsidiary to
      maintain separate Deposit Accounts (each a "LOCKBOX ACCOUNT") with a
      United States depository institution reasonably acceptable to Agent (each
      a "LOCKBOX BANK"), subject to the provisions of this Agreement, and shall
      execute with such Lockbox Bank a Deposit Account Restriction Agreement and
      such other agreements reasonably and customarily related to such Lockbox
      Accounts as Agent may reasonably require. A separate Lockbox Account shall
      have been or be established and maintained for each Specified Selling
      Subsidiary. Borrower shall use its commercially reasonable efforts to
      ensure that all collections of Accounts purchased from each Specified
      Selling Subsidiary are paid directly from the applicable Account Debtors
      into the applicable Lockbox Account. All funds deposited into a Lockbox
      Account shall be transferred by the applicable Lockbox Bank into the
      Collection Account on each Business Day.

            (III) Borrower shall cause all collections of all Accounts purchased
      from Selling Subsidiaries other than Specified Selling Subsidiaries to be
      deposited into the Collection Account within two (2) Business Days
      following such Selling Subsidiary's receipt thereof.

                                       17
<PAGE>

            (IV) Notwithstanding anything in any documentation regarding or
      governing the Collection Account or any Lockbox Account to the contrary,
      Borrower agrees that either it or one of the Selling Subsidiaries shall be
      liable for any fees and charges in effect from time to time and charged by
      the Collection Bank or the applicable Lockbox Bank in connection with the
      Collection Account or the applicable Lockbox Account (as the case may be),
      and that Agent shall have no liability therefor. Borrower agrees to
      indemnify and hold Agent harmless from any and all liabilities, claims,
      losses and demands whatsoever, including reasonable attorneys' fees and
      expenses, arising from or relating to actions of Agent or the Collection
      Bank or any Lockbox Bank (as the case may be) pursuant to this subsection
      2.2(c) or any documentation regarding or governing the Collection Account
      or any Lockbox Account.

            (V) To the extent that any collections of Accounts (or any other
      proceeds thereof) that are sold or otherwise transferred to Borrower
      pursuant to the Account Sale Documents are not sent directly to the
      Collection Account but are otherwise received by Borrower, Beverly or any
      Selling Subsidiary, Borrower shall cause such collections to be remitted
      within two (2) Business Days after such receipt, to the Collection
      Account. Borrower shall not permit or cause any such funds received by
      Borrower, Beverly or any Selling Subsidiary to be commingled with any
      other funds of any entity other than Borrower, Beverly or the Selling
      Subsidiaries.

            (VI) Borrower acknowledges and agrees that its compliance with the
      terms of this subsection 2.2(c) is essential, and that Agent will suffer
      immediate and irreparable injury and have no adequate remedy at law, if
      Borrower, through its acts or omissions, causes or knowingly permits
      Account Debtors which owe payment to a Specified Selling Subsidiary to
      send payments other than to a Lockbox Account pursuant to the terms of
      this subsection 2.2(c), or if any other Selling Subsidiary fails to
      deposit collections of Accounts or proceeds of other Collateral received
      by it into the Collection Account within two (2) Business Days as required
      by the terms of subsection 2.2(c)(v).

            (VII) Except as otherwise permitted by this Agreement or the Account
      Sale Documents, Borrower shall not, and Borrower shall not suffer or
      permit any Selling Subsidiary, to: (I) upon the occurrence and during the
      continuance of an Event of Default, withdraw any amounts from the
      Collection Account, (II) change the procedures or sweep instructions under
      the agreements governing the Collection Account or any of the Lockbox
      Accounts (subject to the provisions of such documents), or (III) to the
      extent such Selling Subsidiary is a Specified Selling Subsidiary, send to
      or deposit in any Lockbox Account any funds other than payments made with
      respect to and proceeds of Receivables.

            (VIII) In addition to any powers of attorney granted hereunder, if
      Borrower breaches its obligation to cause other Persons to direct payments
      of the proceeds of the Collateral to the Collection Account, to the extent
      permitted by applicable law, Agent, as the irrevocably made, constituted
      and appointed true and lawful attorney for Borrower pursuant to such
      powers of attorney, may, by the signature or other act of any of Agent's
      officers (without requiring any of them to do so), direct any federal,
      state or private payor

                                       18
<PAGE>

      or fiscal intermediary to pay proceeds of the Collateral to Borrower by
      directing payment to the Collection Account.

      SECTION 2.3 INTEREST, INTEREST CALCULATIONS AND CERTAIN FEES.

      (A) INTEREST. From and following the Closing Date, the Loans and the other
Obligations (other than Obligations consisting of the Letter of Credit fees
which are governed by the provisions of subsection 2.1(b)) shall bear interest
at a rate equal to LIBOR plus two and 375/1000 percent (2.375%) per annum;
provided, however, upon the occurrence and during the continuance of an Event of
Default, the Obligations shall bear interest at a rate equal to a rate per annum
equal to the sum of two percent (2%) plus the then applicable interest rate for
such Loans.

      (B) UNUSED LINE FEE. From and following the Closing Date, Borrower shall
pay Agent, for the benefit of all Lenders committed to make Loans, in accordance
with their respective Pro Rata Shares, a fee in an amount equal to: (I) the
Commitment less the average daily balance of the Outstandings during the
preceding calendar quarter, multiplied by (II) one half of one percent (0.50%)
per annum. Such fee shall be paid quarterly in arrears on the first day of each
calendar quarter.

      (C) COMMITMENT AND AGENCY FEES. Borrower agrees to pay to Merrill Lynch,
individually, the following fees in the amounts and at the times set forth
below:

            (I) on the Closing Date, a fully-earned, non-refundable commitment
      fee in an amount equal to one and 125/1000 percent (1.125%) of the
      Commitment as of the Closing Date; and

            (II) a fully-earned, non-refundable annual agent's fee in the amount
      of $30,000, which shall be fully earned, due and payable annually, in
      advance, commencing on the Closing Date and continuing on each anniversary
      thereof so long as any Loan or Letter of Credit (or the Commitment) is
      outstanding.

      (D) COMPUTATION OF INTEREST AND RELATED FEES. All interest and fees under
each Financing Document shall be calculated on the basis of a three hundred
sixty (360) day year for the actual number of days elapsed. If a Loan is repaid
on the same day that it is made, one (1) days' interest shall be charged.
Interest on Loans shall be payable on the last day of each calendar month. In
addition, interest is due on the maturity of all Loans, whether by acceleration
or otherwise.

      (E) INCREASED COSTS. If, after the Closing Date, the adoption of, or any
change in, any applicable law, rule or regulation, or any change in the
interpretation or administration of any applicable law, rule or regulation by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Lender with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency: (I) shall impose, modify or deem
applicable any reserve (including any reserve imposed by the Board of Governors
of the Federal Reserve System, or any successor thereto, but excluding any
reserve included in the determination of the LIBOR pursuant to the provisions of
this Agreement), special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by any Lender; or (II)
shall

                                       19
<PAGE>

impose on any Lender any other condition affecting its Loans, its Notes or its
obligation to make Loans; and the result of anything described in clauses (i) or
(ii) above is to increase the cost to (or to impose a cost on) such Lender of
making or maintaining any Loan, or to reduce the amount of any sum received or
receivable by such Lender under this Agreement or under its Notes with respect
thereto, then upon demand by such Lender (which demand shall be accompanied by a
statement setting forth the basis for such demand and a calculation of the
amount thereof in reasonable detail, a copy of which shall be furnished to
Agent), Borrower shall pay directly to such Lender such additional amount as
will compensate such Lender for such increased cost or such reduction, so long
as such amounts have accrued on or after the day which is one hundred eighty
(180) days prior to the date on which such Lender first made demand therefor.

      (F) CAPITAL ADEQUACY. If any Lender shall reasonably determine that any
change in, or the adoption or phase-in of, any applicable law, rule or
regulation regarding capital adequacy, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or the
compliance by any Lender or any Person controlling such Lender with any request
or directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on such Lender's or such controlling
Person's capital as a consequence of such Lender's obligations hereunder or
under any Support Agreement to a level below that which such Lender or such
controlling Person could have achieved but for such change, adoption, phase-in
or compliance (taking into consideration such Lender's or such controlling
Person's policies with respect to capital adequacy) by an amount reasonably
deemed by such Lender or such controlling Person to be material, then from time
to time, upon demand by such Lender (which demand shall be accompanied by a
statement setting forth the basis for such demand and a calculation of the
amount thereof in reasonable detail, a copy of which shall be furnished to
Agent), Borrower shall pay to such Lender such additional amount as will
compensate such Lender or such controlling Person for such reduction, so long as
such amounts have accrued on or after the day which is one hundred eighty (180)
days prior to the date on which such Lender first made demand therefor.

      SECTION 2.4 NOTES. The portion of the Loans made by each Lender shall, at
the request of such Lender, be evidenced by a promissory note executed by
Borrower (a "NOTE") in an original principal amount equal to such Lender's Pro
Rata Share of the Commitment.

      SECTION 2.5 GENERAL PROVISIONS REGARDING PAYMENT; LOAN ACCOUNT.

      (A) All payments to be made by Borrower under any Financing Document,
including payments of principal and interest on the Notes, and all fees,
expenses, indemnities and reimbursements, shall be made without set-off or
counterclaim, in lawful money of the United States of America and in immediately
available funds. If any payment hereunder becomes due and payable on a day other
than a Business Day, such payment shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension. Borrower shall
make all payments in immediately available funds to the Payment Account before
noon (Chicago time) on the date when due.

                                       20
<PAGE>

      (B) Agent shall maintain a loan account (the "LOAN ACCOUNT") on its books
to record Loans and other extensions of credit made by the Lenders hereunder,
and all payments thereon made by Borrower or any other Person. All entries in
the Loan Account shall be made in accordance with Agent's customary accounting
practices as in effect from time to time. The balance in the Loan Account, as
recorded on Agent's most recent printout or other written statement, shall be
conclusive and binding evidence of the amounts due and owing to Agent by
Borrower manifest evidence to the contrary; provided that any failure to so
record or any error in so recording shall not limit or otherwise affect
Borrower's duty to pay all amounts owing hereunder or under any other Financing
Document. Unless Borrower notifies Agent in writing of any objection to any such
printout or statement (specifically describing the basis for such objection)
within thirty (30) days after the date of receipt thereof, it shall be deemed
final, binding and conclusive upon Borrower in all respects as to all matters
reflected therein.

      SECTION 2.6 MAXIMUM INTEREST.

      (A) In no event shall the interest charged with respect to the Notes or
any other obligations of Borrower under any Financing Document exceed the
maximum amount permitted under the laws of the State of Illinois or of any other
applicable jurisdiction.

      (B) Notwithstanding anything to the contrary herein or elsewhere, if at
any time the rate of interest payable hereunder or under any other Financing
Document (the "STATED RATE") would exceed the highest rate of interest permitted
under any applicable law to be charged (the "MAXIMUM LAWFUL RATE"), then for so
long as the Maximum Lawful Rate would be so exceeded, the rate of interest
payable shall be equal to the Maximum Lawful Rate; provided, that if at any time
thereafter the Stated Rate is less than the Maximum Lawful Rate, Borrower shall,
to the extent permitted by law, continue to pay interest at the Maximum Lawful
Rate until such time as the total interest received is equal to the total
interest which would have received had the Stated Rate been (but for the
operation of this provision) the interest rate payable. Thereafter, the interest
rate payable shall be the Stated Rate unless and until the Stated Rate again
would exceed the Maximum Lawful Rate, in which event this provision shall again
apply.

      (C) In no event shall the total interest received by any Lender exceed the
amount which it could lawfully have received had the interest been calculated
for the full term hereof at the Maximum Lawful Rate. If, notwithstanding the
prior sentence, any Lender has received interest hereunder in excess of the
Maximum Lawful Rate, such excess amount shall be applied to the reduction of the
principal balance of the Loans or to other amounts (other than interest) payable
hereunder, and if no such principal or other amounts are then outstanding, such
excess or part thereof remaining shall be paid to Borrower.

      (D) In computing interest payable with reference to the Maximum Lawful
Rate applicable to any Lender, such interest shall be calculated at a daily rate
equal to the Maximum Lawful Rate divided by the number of days in the year in
which such calculation is made.

      SECTION 2.7 TAXES.

      (A) All payments of principal and interest on the Loans and all other
amounts payable hereunder shall be made free and clear of and without deduction
for any present or future

                                       21
<PAGE>

income, excise, stamp, documentary, property or franchise taxes and other taxes,
fees, duties, levies, withholdings or other charges of any nature whatsoever
imposed by any taxing authority, excluding taxes imposed on or measured by
Agent's or any Lender's net income by the jurisdiction under which Agent or such
Lender is organized or conducts business (all non-excluded items being called
"TAXES"). If any withholding or deduction from any payment to be made by
Borrower hereunder is required in respect of any Taxes pursuant to any
applicable law, rule or regulation, then Borrower will: (I) pay directly to the
relevant authority the full amount required to be so withheld or deducted; (II)
promptly forward to Agent an official receipt or other documentation
satisfactory to Agent evidencing such payment to such authority; and (III) pay
to Agent for the account of Agent and Lenders such additional amount or amounts
as is necessary to ensure that the net amount actually received by Agent and
each Lender will equal the full amount Agent and such Lender would have received
had no such withholding or deduction been required. If any Taxes are directly
asserted against Agent or any Lender with respect to any payment received by
Agent or such Lender hereunder, Agent or such Lender may pay such Taxes and
Borrower will promptly pay such additional amounts (including any penalty,
interest or expense) as is necessary in order that the net amount received by
such Person after the payment of such Taxes (including any Taxes on such
additional amount) shall equal the amount such Person would have received had
such Taxes not been asserted so long as such amounts have accrued on or after
the day which is one hundred eighty (180) days prior to the date on which Agent
or such Lender first made demand therefor.

      (B) If Borrower fails to pay any Taxes when due to the appropriate taxing
authority or fails to remit to Agent, for the account of Agent and the
respective Lenders, the required receipts or other required documentary
evidence, Borrower shall indemnify Agent and Lenders for any incremental Taxes,
interest or penalties that may become payable by Agent or any Lender as a result
of any such failure.

      (C) Each Lender that is: (I) organized under the laws of a jurisdiction
other than the United States of America and (II)(A) a party hereto on the
Closing Date or (B) becomes an assignee of an interest under this Agreement
under subsection 11.6(a) after the Closing Date (unless such Lender was already
a Lender hereunder immediately prior to such assignment) shall execute and
deliver to Borrower and Agent one or more (as Borrower or Agent may reasonably
request) Forms W-8ECI, W-8BEN, W-8IMY (as applicable) or other applicable form,
certificate or document prescribed by the United States Internal Revenue Service
certifying as to such Lender's entitlement to exemption from withholding or
deduction of Taxes. Borrower shall not be required to pay additional amounts to
any Lender pursuant to this Section 2.7 to the extent that the obligation to pay
such additional amounts would not have arisen but for the failure of such Lender
to comply with this paragraph.

      SECTION 2.8 CREDIT RATING DOWNGRADES. In the event any Rating Agency
downgrades Beverly to a credit rating below "B+" (as currently used by S&P or a
rating with similar meaning issued by another Rating Agency), Borrower shall
promptly notify Agent of such downgrade, and if Beverly is unable to raise its
credit rating to "B+" (or its equivalent) or better with each such "downgrading"
Rating Agency within ninety (90) days following each such

                                       22
<PAGE>

downgrade, Borrower will, within one hundred twenty (120) days following each
such downgrade: (I) reduce the amount of outstanding Letters of Credit, and/or
(II) amend, until Beverly's credit rating is upgraded to "B+" (or its
equivalent) or better with each such "downgrading" Rating Agency, the definition
of "BORROWING BASE" such that: (A) the seventy five percent (75%) factor
described in clause (i) therein is replaced with sixty five percent (65%), and
(B) the ninety five percent (95%) factor described therein is replaced with one
hundred percent (100%). If necessary to effect the revision of the definitions
described in clause (ii) above, and thereafter to maintain compliance with the
terms of this Agreement and the other Financing Documents, Borrower shall cease
purchasing Accounts under the Account Sale Documents, but shall continue to
collect previously purchased Accounts until the Borrowing Base equals or exceeds
the outstanding amount of the Letters of Credit.

                                   ARTICLE III
                          REPRESENTATION AND WARRANTIES

      To induce Agent and Lenders to enter into this Agreement and to make the
Loans and other credit accommodations contemplated hereby, Borrower hereby
represents and warrants to Agent and each Lender that:

      SECTION 3.1 EXISTENCE AND POWER. Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
has an organizational identification number as specified on Schedule 3.1, and
has all powers and all governmental licenses, authorizations, consents and
approvals required to carry on its business as now conducted, except where the
failure to have such licenses, authorizations, consents and approvals could not
reasonably be expected to have a Material Adverse Effect. Borrower is qualified
to do business as a foreign entity in each jurisdiction in which it is required
to be so qualified, which jurisdictions as of the Closing Date are specified on
Schedule 3.1, except where the failure to be so qualified could not reasonably
be expected to have a Material Adverse Effect. Pursuant to its Organizational
Documents, Borrower's corporate purpose is limited solely to entering into and
conducting the transactions contemplated by the Operative Documents, together
with engaging in activities which are reasonably incidental thereto.

      SECTION 3.2 ORGANIZATION AND GOVERNMENTAL AUTHORIZATION; NO CONTRAVENTION.
The execution, delivery and performance by Borrower of the Operative Documents
to which it is a party are within its powers, have been duly authorized by all
necessary corporate action, require no further action by or in respect of, or
filing with, any governmental body, agency or official (other than those actions
and filings taken and duly filed, as the case may be, on or prior to the Closing
Date, as set forth on Schedule 3.2) and do not violate, conflict with or cause a
breach or a default under any provision of applicable law or regulation or of
the Organizational Documents of Borrower or of any agreement, judgment,
injunction, order, decree or other instrument binding upon it, except for such
violations, conflicts, breaches or defaults as could not reasonably be expected
to have a Material Adverse Effect.

      SECTION 3.3 BINDING EFFECT. Each of the Operative Documents to which
Borrower is a party constitutes a valid and binding agreement or instrument of
Borrower, enforceable against Borrower in accordance with its respective terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency or
other similar laws relating to the enforcement of creditors' rights generally
and by general equitable principles.

                                       23
<PAGE>

      SECTION 3.4 CAPITALIZATION. All issued and outstanding equity securities
of Borrower are duly authorized and validly issued, fully paid, nonassessable,
free and clear of all Liens, and such equity securities were issued in
compliance with all applicable state, federal and foreign laws concerning the
issuance of securities. The only holder of the equity securities of Borrower and
the one hundred percent (100%) holder of the fully-diluted ownership of the
equity securities of Borrower is Beverly. No shares of the capital stock or
other equity securities of Borrower, other than those described above, are
issued and outstanding. There are no preemptive or other outstanding rights,
options, warrants, conversion rights or similar agreements or understandings for
the purchase or acquisition from Borrower of any equity securities of any such
entity. Borrower has no Subsidiaries and holds no equity interest in any Person.

      SECTION 3.5 FINANCIAL INFORMATION.

      (A) The consolidated balance sheet of the Beverly Group as of December 31,
2003 and the related consolidated statements of operations, stockholders' equity
and cash flows for the fiscal year then ended, reported on by Ernst & Young LLP,
copies of which have been delivered to Agent, fairly present, in conformity with
GAAP, the consolidated financial position of the Beverly Group as of such date,
and their consolidated results of operations, changes in stockholders' equity
and cash flows for such period.

      (B) The unaudited consolidated balance sheet of the Beverly Group as of
June 30, 2004 (which includes the Borrower) and the related unaudited
consolidated statements of operations and cash flows for the six (6) months then
ended, copies of which have been delivered to Agent, fairly present, in
conformity with GAAP applied on a basis consistent with the financial statements
referred to in subsection 3.5(a), the consolidated financial position of the
Beverly Group as of such date and their consolidated results of operations and
cash flows for the six (6) months then ended (subject to normal year-end
adjustments and the condensed footnote disclosures).

      (C) The information contained in the most recently delivered Borrowing
Base Certificate is complete and correct in all material respects and the
amounts shown therein as "Eligible Accounts" have been determined as provided in
the Financing Documents.

      (D) Since December 31, 2003, there has been no material adverse change in
the business, operations, properties or condition (financial or otherwise) of
the Beverly Group, taken as a whole.

      (E) Except as contemplated by the Operative Documents, Borrower has no
other assets or liabilities, nor conducts any other business operations.

      SECTION 3.6 LITIGATION. There is no action, suit or proceeding pending
against, or to Borrower's knowledge threatened against or affecting Borrower or,
to Borrower's knowledge, any party to any Operative Document other than
Borrower, before any Governmental Authority which could reasonably be expected
to have a Material Adverse Effect.

      SECTION 3.7 OWNERSHIP OF PROPERTY. Borrower has good, marketable and
indefeasible title to, rights in and the power to transfer its properties and
assets, including the Collateral and the properties and assets reflected in the
financial statements described in Section

                                       24
<PAGE>

3.5, subject to no Lien, mortgage, pledge, encumbrance or charge of any kind,
other than Permitted Liens. Borrower has not agreed or consented to cause any of
its properties or assets, whether owned now or hereafter acquired to be subject
in the future (upon the happening of a contingency or otherwise) to any Lien,
mortgage, pledge, encumbrance or charge of any kind other than Permitted Liens.
All of the Collateral, and all other property and assets of Borrower that are
necessary to the conduct of Borrower's business, is owned by Borrower or the
rights to same are held by Borrower in its name, and none of the Collateral, or
any such property or assets are owned or the rights thereto held in the name of
any other entity.

      SECTION 3.8 NO DEFAULT. No Default or Event of Default has occurred and is
continuing and Borrower is not in breach or default under or with respect to any
contract, agreement, lease or other instrument to which it is a party or by
which its property is bound or affected, which breach or default could
reasonably be expected to have a Material Adverse Effect.

      SECTION 3.9 RESERVED.

      SECTION 3.10 REGULATED ENTITIES. Borrower is not an "investment company"
or a company "controlled" by an "investment company" or a "subsidiary" of an
"investment company," all within the meaning of the Investment Company Act of
1940. Borrower is not a "holding company," a "subsidiary company" of a "holding
company" or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company," all within the meaning of the Public Utility Holding
Company Act of 1935.

      SECTION 3.11 MARGIN REGULATIONS. None of the proceeds from the Loans have
been or will be used, directly or indirectly, for the purpose of purchasing or
carrying any Margin Stock, for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry any Margin Stock
or for any other purpose which might cause any of the Loans to be considered a
"purpose credit" within the meaning of Regulation T, U or X of the Federal
Reserve Board.

      SECTION 3.12 COMPLIANCE WITH LAWS. Borrower is in compliance with the
requirements of all applicable Laws and all requests of governmental
authorities, except for such Laws and requirements, the noncompliance with which
could not reasonably be expected to have a Material Adverse Effect.

      SECTION 3.13 TAXES. Except to the extent subject to a Permitted Contest,
all Federal, state and local tax returns, reports and statements required to be
filed by or on behalf of Borrower have been filed with the appropriate
governmental agencies in all jurisdictions in which such returns, reports and
statements are required to be filed, and all Taxes and other charges shown to be
due and payable in respect thereof have been timely paid prior to the date on
which any fine, penalty, interest, late charge or loss may be added thereto for
nonpayment thereof. Except to the extent subject to a Permitted Contest, all
state and local sales and use Taxes required to be paid by Borrower have been
paid. Except to the extent subject to a Permitted Contest, all Federal and state
returns have been filed by Borrower for all periods for which returns were due
with respect to employee income tax withholding, social security and

                                       25
<PAGE>

unemployment taxes, and the amounts shown thereon to be due and payable have
been paid in full or adequate provisions therefor have been made.

      SECTION 3.14 RESERVED.

      SECTION 3.15 RELATED TRANSACTIONS. The transactions contemplated to have
occurred on or prior to the date hereof by the Account Sale Documents have been
consummated in all material respects pursuant to the provisions of the Account
Sale Documents, true and complete copies of which have been delivered to Agent,
and in compliance with all applicable provisions of law. The transactions
contemplated by the other Operative Documents to be consummated on or prior to
the date hereof have been so consummated (including without limitation, the
disbursement and transfer of all funds in connection therewith) in all material
respects pursuant to the provisions of the applicable Operative Documents, true
and complete copies of which have been delivered to Agent, and in compliance
with all applicable provisions of law. Borrower has no Subsidiaries and holds no
equity interest in any Person.

      SECTION 3.16 EMPLOYMENT, EQUITYHOLDERS AND SUBSCRIPTION AGREEMENTS.
Borrower has no employees. Except for the Operative Documents and the other
agreements set forth on Schedule 3.16, as of the Closing Date, there are no: (I)
employment agreements covering the management of Borrower, (II) agreements for
managerial, consulting or similar services to which Borrower is a party or by
which it is bound, or (III) agreements regarding Borrower, its assets or
operations or any investment therein to which it is a party or by which it is
bound.

      SECTION 3.17 REAL PROPERTY INTERESTS. Borrower has no ownership, leasehold
or other interest in real property.

      SECTION 3.18 SOLVENCY. Borrower: (A) owns and will own assets, the fair
saleable value of which are: (I) greater than the total amount of its
liabilities (including contingent liabilities), and (II) greater than the amount
that will be required to pay the probable liabilities of its then existing debts
as they become absolute and matured considering all financing alternatives and
potential asset sales reasonably available to it; (B) has capital that is not
unreasonably small in relation to its business as presently conducted or after
giving effect to any contemplated transaction; and (C) does not intend to incur
and does not believe that it will incur debts beyond its ability to pay such
debts as they become due.

      SECTION 3.19 FULL DISCLOSURE. None of the information (financial or
otherwise) furnished by or on behalf of Borrower to Agent or any Lender in
connection with the consummation of the transactions contemplated by the
Operative Documents, including without limitation, the information set forth in
the Information Certificate, contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements contained herein
or therein not misleading in light of the circumstances under which such
statements were made. All financial projections delivered to Agent and the
Lenders have been prepared in good faith on the basis of the assumptions stated
therein. Such projections represent Borrower's best estimate of Borrower's
future financial performance and such assumptions are believed by Borrower to be
fair in light of current business conditions; provided that Borrower can give no
assurance that such projections will be attained.

                                       26
<PAGE>

      SECTION 3.20 ELIGIBLE ACCOUNTS. Borrower represents that, with respect to
each Eligible Account:

      (A) such Account is an Eligible Account;

      (B) the aging of such Eligible Account, as reflected in each applicable
Borrowing Base Certificate and other information submitted to Agent, reflects
the age of such Eligible Account from the original service date and not from the
date of any re-billing of the Eligible Account;

      (C) such Account is for a liquidated amount maturing as stated in the
claim or invoice covering such sale or rendition of Approved Goods and Services;

      (D) to the Borrower's knowledge, there are no facts, events or occurrences
which in any way impair the validity or enforceability of any such Eligible
Accounts or tend to reduce the amount payable thereunder from the face amount of
the claim or invoice and statements delivered to Agent with respect thereto,
including, without limitation, the failure of a Selling Subsidiary to provide
Approved Goods and Services in a manner that complies in all material respects
with all Laws applicable to the payment therefor;

      (E) to the best of Borrower's knowledge, there are no proceedings or
actions which are threatened or pending against any Account Debtor under the
Account which might result in any material adverse change in such Account
Debtor's financial condition or the collectibility of such Account;

      (F) each Selling Subsidiary has obtained and currently has government
approvals (other than for residents/patients whose entitlement to Medicaid or VA
reimbursement is pending) that are necessary in the generation of such Accounts;

      (G) each such Account has been validly and fully transferred from the
applicable Selling Subsidiary to Borrower pursuant to the Account Sale
Documents;

      (H) Agent has a perfected, first-priority security interest in such
Account to secure the Obligations, subject to Permitted Liens;

      (I) except in the ordinary course of business and consistent with
historical practices, neither Borrower nor any Selling Subsidiary has made, and
will not make, any agreement with any Account Debtor for any extension of the
time for payment of such Account, any compromise or settlement for less than the
full amount thereof, any release of any Account Debtor from liability therefor,
or any deduction therefrom;

      (J) except in the ordinary course of business and consistent with
historical practices, neither Borrower nor, to the knowledge of Borrower, any
Selling Subsidiary has any guaranty of, letter of credit support for, or
collateral security for, such Account; and

      (K) the fees and charges charged for the services constituting the basis
for such Account were when rendered consistent with negotiated fee contracts or
imposed fee schedules with or by the applicable Account Debtors.

                                       27
<PAGE>

      SECTION 3.21 REPRESENTATIONS AND WARRANTIES INCORPORATED FROM OTHER
OPERATIVE DOCUMENTS. As of the Closing Date, each of the representations and
warranties made in the Operative Documents by each of the parties thereto is
true and correct in all material respects, and such representations and
warranties are hereby incorporated herein by reference with the same effect as
though set forth in their entirety herein, as qualified therein, except to the
extent that such representation or warranty relates to a specific date, in which
case such representation and warranty shall be true as of such earlier date.

                                   ARTICLE IV
                              AFFIRMATIVE COVENANTS

      Borrower agrees that, so long as any Credit Exposure exists:

      SECTION 4.1 FINANCIAL STATEMENTS AND OTHER REPORTS. Borrower will maintain
a system of accounting established and administered in accordance with sound
business practices to permit preparation of financial statements in accordance
with GAAP and to provide the information required to be delivered to the Lenders
hereunder, and will deliver to Agent:

      (A) (I) as soon as practicable and in any event within forty five (45)
days after the end of each of the first three (3) quarterly fiscal periods of
each Fiscal Year, (A) so long as Beverly is a Reporting Company, a copy of
Beverly's Form 10Q filed with the Securities and Exchange Commission for each
such fiscal quarter and (B) if Beverly is not a Reporting Company, an unaudited
consolidated balance sheet of the Beverly Group and an unaudited consolidated
balance sheet of Borrower as at the end of such quarterly fiscal period and the
related unaudited consolidated statements of operations and of cash flows for
such period, setting forth in each case in comparative form the figures as of
the end of and for the corresponding periods of the previous Fiscal Year, all in
reasonable detail, and in each case, such financial statements shall be
certified by a Responsible Officer as fairly presenting the financial condition
and results of operations of the Beverly Group and of Borrower and as having
been prepared in accordance with GAAP applied on a basis consistent with the
audited financial statements of the Beverly Group, subject to changes resulting
from normal year-end adjustments and excluding footnote disclosures; and (II) as
soon as available, but in any event not later than forty five (45) days after
the end of each month occurring during each fiscal year of Beverly, the
following: (A) a current aging of all of Borrower's Accounts and (B) a current
roll-forward of all of Borrower's Accounts, all of which shall be complete and
correct in all material respects and to be prepared in reasonable detail and in
accordance with GAAP applied consistently throughout the periods reflected
therein and with prior periods (except as approved by such accountants or
officer, as the case may be, and disclosed therein).

      (B) as soon as available and in any event within ninety (90) days after
the end of each Fiscal Year, (A) so long as Beverly is a Reporting Company, a
copy of Beverly's Form 10K filed with the Securities and Exchange Commission for
each such Fiscal Year and (B) if Beverly is not a Reporting Company, a
consolidated balance sheet of the Beverly Group as of the end of such Fiscal
Year and the related consolidated statements of operations and cash flows for
such Fiscal Year, setting forth in each case in comparative form the figures for
the previous Fiscal Year certified (solely with respect to such consolidated
statements) without a "going concern" or

                                       28
<PAGE>

like qualification or exception by Ernst & Young LLP or other independent public
accountants of nationally recognized standing, all such financial statements to
be complete and correct in all material respects and to be prepared in
reasonable detail and in accordance with GAAP applied consistently throughout
the periods reflected therein and with prior periods (except as approved by such
accountants or officer, as the case may be, and disclosed therein);

      (C) together with each delivery of financial statements pursuant to
subsections 4.1(a) and 4.1(b), a Compliance Certificate;

      (D) as soon as available and in any event within five (5) Business Days
after each Distribution Date (as such terms defined in the Account Sale
Documents), and from time to time upon the request of Agent, a Borrowing Base
Certificate as of the last day of the month ended prior to the most recent
Distribution Date;

      (E) within five (5) days after the same are sent, copies of all financial
statements and reports that Beverly sends to the holders of any class of its
debt securities or public equity securities and, within five (5) days after the
same are filed, to the extent not publicly available, copies of all financial
statements and reports that Beverly may make to, or file with, the Securities
and Exchange Commission;

      (F) promptly upon any officer of Borrower obtaining knowledge: (I) of the
existence of any Event of Default or Default, or (II) the occurrence of any
event which would be required to be disclosed to the Lehman Agent under Section
6.7(b) of the Lehman Credit Agreement, a certificate of a Responsible Officer
specifying the nature and period of existence of any such condition or event, or
specifying the notice given or action taken by such holder or Person and the
nature of such claimed default (including any Event of Default or Default),
event or condition, and what action Borrower has taken, is taking or proposes to
take with respect thereto;

      (G) within five (5) Business Days after any request therefor, such
information in such detail concerning the amount, composition and manner of
calculation of the Borrowing Base as Agent or any Lender may reasonably request;

      (H) upon the request of Agent, which may be made not more than once each
year prior to an Event of Default and at any time (but not more often than
quarterly) while and so long as an Event of Default shall be continuing, (I) a
report with respect to the Borrowing Base by Ernst & Young LLP or another
independent collateral auditor of nationally-recognized standing satisfactory to
Agent (which may be, or be affiliated with, a Lender); and (II) solely if an
Event of Default shall be continuing, an independent collateral auditor
satisfactory to Agent (which may be, or be affiliated with, a Lender) with
respect to the components of the Borrowing Base, which report shall indicate
whether or not the information set forth in the Borrowing Base Certificate most
recently delivered is accurate and complete in all material respects based upon
a review by such auditors of the Accounts (including verification with respect
to the amount, aging, identity and credit of the respective account debtors and
the billing practices of Borrower); and

      (I) with reasonable promptness, such other information and data with
respect to Borrower as from time to time may be reasonably requested by Agent or
any Lender.

                                       29
<PAGE>

      SECTION 4.2 PAYMENT AND PERFORMANCE OF OBLIGATIONS. Borrower will: (I) pay
and discharge, at or before maturity, all of its respective obligations and
liabilities, including tax liabilities, except: (X) where the same may be the
subject of a Permitted Contest, and (Y) for such obligations and/or liabilities
the nonpayment or nondischarge of which could not reasonably be expected to have
a Material Adverse Effect; (II) maintain, in accordance with GAAP, appropriate
reserves for the accrual of all of its respective obligations and liabilities;
and (III) not breach or permit to exist any default under, the terms of any
lease, commitment, contract, instrument or obligation to which it is a party, or
by which its properties or assets are bound, except for such breaches or
defaults which could not reasonably be expected to have a Material Adverse
Effect.

      SECTION 4.3 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. Borrower
will continue to engage in business of the same general type as it now conducts
and will preserve, renew and keep in full force and effect its existence and its
rights, privileges and franchises necessary or reasonably desirable in the
normal conduct of business.

      SECTION 4.4 COMPLIANCE WITH LAWS. Borrower will comply with the
requirements of all applicable Laws and requirements of Governmental
Authorities, except for such Laws and requirements the noncompliance with which
could not reasonably be expected to have a Material Adverse Effect.

      SECTION 4.5 INSPECTION OF PROPERTY, BOOKS AND RECORDS. Borrower will keep
proper books of record and account in accordance with GAAP in which full, true
and correct entries shall be made of all dealings and transactions in relation
to its business and activities; and will permit at the reasonable cost of
Borrower, representatives of Agent and of any Lender (but at such Lender's
expense unless such visit or inspection is made concurrently with Agent) to
visit and inspect any of its properties, to examine and make abstracts or copies
from any of their respective books and records, to conduct a collateral audit
and analysis of its Accounts as provided herein and to discuss its affairs,
finances and accounts with its officers, employees and independent public
accountants as often as may reasonably be desired. In the absence of an Event of
Default, Agent or any Lender exercising any rights pursuant to this Section 4.6
shall give Borrower commercially reasonable prior written notice of such
exercise. No notice shall be required during the existence and continuance of
any Event of Default.

      SECTION 4.6 USE OF PROCEEDS. Borrower will use the proceeds of the Loans
solely to satisfy its Reimbursement Obligations arising under subsection 2.1(c)
with respect to Letters of Credit.

      SECTION 4.7 FURTHER ASSURANCES. Borrower will at its own cost and expense,
cause to be promptly and duly taken, executed, acknowledged and delivered all
such further acts, documents and assurances as may from time to time be
reasonably necessary or as Agent or the Required Lenders may from time to time
reasonably request in order to carry out the intent and purposes of the
Financing Documents and the transactions contemplated thereby, including all
such actions to establish, preserve, protect and perfect a first priority Lien
in favor of Agent for the benefit of the Lenders on the Collateral (including
Collateral acquired after the date hereof).

      SECTION 4.8 NOTICES TO LENDER. Borrower shall notify Agent within three
(3) Business Days (but in any event prior to Borrower submitting any further
requests for Loans or Letters of

                                       30
<PAGE>

Credit) following the occurrence of any of the following facts, events or
circumstances, whether threatened, existing or pending, together with such
supporting data and information as shall be necessary to explain to Agent in
reasonable detail the scope and nature of the fact, event or circumstance, and
shall provide to Agent within three (3) Business Days of Agent's request, such
additional information as Agent shall request regarding such disclosure:

      (A) that any Selling Subsidiary is currently or hereafter becomes subject
to any federal, state, local governmental or private payor civil or criminal
investigations involving and/or related to its compliance with Healthcare Laws,
to the extent such event could reasonably be expected to have or result in a
Material Adverse Effect;

      (B) that an owner, officer, manager, employee or Person with a "direct or
indirect ownership interest" (as that phrase is defined in 42 C.F.R. Section
420.201) in any Selling Subsidiary, since the Closing Date or prior to the
Closing Date (solely to the extent pending on the Closing Date): (I) has had a
civil monetary penalty assessed against him or her pursuant to 42 U.S.C. Section
1320a-7a or is the subject of a proceeding seeking to assess such penalty; (II)
has been excluded from participation in a Federal Health Care Program (as that
term is defined in 42 U.S.C. Section 1320a-7b) or is the subject of a proceeding
seeking to assess such penalty; (III) has been convicted (as that term is
defined in 42 C.F.R. Section 1001.2) of any of those offenses described in 42
U.S.C. Section 1320a-7b or 18 U.S.C. Sections 669, 1035, 1347, 1518 or is the
subject of a proceeding seeking to assess such penalty; or (IV) has been
involved or named in a U.S. Attorney complaint made or any other action taken
pursuant to the False Claims Act under 31 U.S.C. Sections 3729-3731 or qui tam
action brought pursuant to 31 U.S.C. Section 3729 et seq., in each case to the
extent they have had or could, either individually or taken together, reasonably
be expected to have or result in a Material Adverse Effect;

      (C) any claims, actions or appeals before any commission, board or agency
charged with administering Healthcare Laws or programs operated under Healthcare
Laws (including without limitation, any intermediary or carrier, the Provider
Reimbursement Review Board or the Administrator of CMS) with respect to any
state or federal Medicare or Medicaid cost reports or claims filed by Borrower,
or any disallowance by any commission, board or agency in connection with any
audit of such cost reports, in each case to the extent they have had or could,
either individually or taken together, reasonably be expected to have or result
in a Material Adverse Effect;

      (D) any validation review, program integrity review or reimbursement
audits related to any Selling Subsidiary by any commission, board or agency in
connection with the Medicare or Medicaid programs, to the extent they have had
or could, either individually or taken together, reasonably be expected to have
or result in a Material Adverse Effect;

      (E) any restrictions, deficiencies, required plans of correction actions
or other such remedial measures with respect to Medicare and Medicaid
certifications or state or local licensure of any Selling Subsidiary, to the
extent they have had or could, either individually or taken together, reasonably
be expected to have or result in a Material Adverse Effect;

      (F) the voluntary disclosure by any Selling Subsidiary to the Office of
the Inspector General of the United States Department of Health and Human
Services, a Medicare fiscal

                                       31
<PAGE>

intermediary or any state's Medicaid program of a potential overpayment matter
involving the submission of claims to such payor, in each case to the extent
such potential overpayment could reasonably be expected to have or result in a
Material Adverse Effect;

      (G) receipt by any Selling Subsidiary of any notice or communication from
the Joint Commission on Accreditation of Healthcare Organizations that a
Facility of a Selling Subsidiary is: (I) subject to or is required to file a
plan of correction with respect to any accreditation survey, or (II) in danger
of losing its accreditation due to a failure to comply with a plan of
correction, and, in each case, such event could reasonably be expected to have
or result in a Material Adverse Effect;

      (H) the filing of any lawsuits alleging patient abuse which have had or
could reasonably be expected to have or result in a Material Adverse Effect or
the issuance of correspondence by a Governmental Authority regarding or the
institution of formal written charges alleging or pursuing licensing violations
involving any Selling Subsidiary, to the extent such licensing violations could
reasonably be expected to have or result in a Material Adverse Effect;

      (I) any health care survey report related to licensure or certification
(including, without limitation, an annual or biannual Medicare or Medicaid
certification survey report) which includes any statement of deficiencies
pertaining to Borrower or any of its Facilities, to the extent they have had or
could, either individually or taken together, reasonably be expected to have or
result in a Material Adverse Effect; and/or

      (J) any revocation, suspension, termination, probation, restriction,
limitation, denial, or nonrenewal affecting any Selling Subsidiary with respect
to any Medicare and/or Medicaid participation or provider agreement,
certification, billing number, assignment (via CMS 855 forms or otherwise),
billing agent or electronic funds transfer instruction, to the extent they have
had or could, either individually or taken together, reasonably be expected to
have or result in a Material Adverse Effect.

                                    ARTICLE V
                               NEGATIVE COVENANTS

      Borrower agrees that, so long as any Credit Exposure exists:

      SECTION 5.1 DEBT. Borrower will not, directly or indirectly, create,
incur, assume, guarantee or otherwise become or remain directly or indirectly
liable with respect to, any Debt or any contingent obligations which would be
Debt hereunder if they were non-contingent, except for the Obligations.

      SECTION 5.2 LIENS. Borrower will not directly or indirectly create, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired by it,
except for Liens created by the Security Documents.

                                       32
<PAGE>

      SECTION 5.3 CONTINGENT OBLIGATIONS. Borrower will not directly or
indirectly create, assume, incur or suffer to exist any contingent obligations,
except for those arising in respect of the Letter of Credit Liabilities under
the Financing Documents.

      SECTION 5.4 RESTRICTED DISTRIBUTIONS. After the occurrence and during the
continuance of an Event of Default, Borrower shall not make any Distributions to
any of its Affiliates, to any shareholder, member, partner or other person
holding an equity interest in Borrower or to any other Person related to or
affiliated with any of the foregoing; provided, however, Borrower may sell
receivables as contemplated by Section 2.3 of the Account Sale Documents.

      SECTION 5.5 RESTRICTIVE AGREEMENTS. Borrower will not directly enter into
or assume any agreement (other than the Financing Documents) prohibiting the
creation or assumption of any Lien upon its properties or assets, whether now
owned or hereafter acquired.

      SECTION 5.6 CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. Borrower will not
directly or indirectly: (I) consolidate or merge with or into any other Person,
or (II) sell, lease, license or otherwise transfer, directly or indirectly, any
of its assets, other than as specifically permitted by the terms of the Account
Sale Documents .

      SECTION 5.7 PURCHASE OF ASSETS, SUBSIDIARIES. Borrower will not directly
or indirectly acquire any assets other than the Accounts to be purchased under
the Account Sale Documents and the proceeds thereof. Without limiting the
generality of the foregoing, Borrower will not: (I) acquire or create any
Subsidiary or (II) engage in any joint venture or partnership with any other
Person.

      SECTION 5.8 TRANSACTIONS WITH AFFILIATES. Except: (I) as otherwise
disclosed on Schedule 5.8, (II) as specifically permitted by the terms of the
Account Sale Documents, and (III) for transactions that are disclosed to Agent
in writing in advance of being entered into and which contain terms that are no
less favorable to Borrower than those which might be obtained from a third party
not an Affiliate of Borrower, Borrower will not directly or indirectly enter
into or permit to exist any transaction (including the purchase, sale, lease or
exchange of any property or the rendering of any service) with any Affiliate of
Borrower.

      SECTION 5.9 MODIFICATION OF OTHER DOCUMENTS. Borrower will not directly or
indirectly amend or otherwise modify: (I) except for such amendments or other
modifications required by law and fully disclosed to Agent, any Organizational
Documents of such Person (other than amendments to remove independent director
requirements and other "bankruptcy-remoteness" provisions), or (II) any
Operative Documents (other than modifications thereto which only add additional
Selling Subsidiaries to the Account Sale Documents in accordance with their
terms), unless the Agent shall have consented thereto in writing, which consent
shall not be unreasonably withheld or delayed.

      SECTION 5.10 FISCAL YEAR. Borrower will not change its Fiscal Year.

      SECTION 5.11 CONDUCT OF BUSINESS. Except as contemplated by the Operative
Documents, Borrower will not directly or indirectly own any other assets or
liabilities or conduct any other business operations.

                                       33
<PAGE>

      SECTION 5.12 FEES. Borrower will not directly or indirectly pay or become
obligated to pay any management, consulting or similar advisory fees or other
similar amounts.

      SECTION 5.13 LEASE. Borrower will not directly or indirectly incur or
assume (whether pursuant to a Guarantee or otherwise) any liability under any
lease agreement.

      SECTION 5.14 BANK ACCOUNTS. Borrower will not directly or indirectly
establish any new bank account without prior written notice to Agent and unless
Agent, Borrower and the bank at which the account is to be opened enter into an
agreement substantially similar to the Deposit Account Control Agreement
regarding such new bank account.

                                   ARTICLE VI
                               FINANCIAL COVENANTS

      SECTION 6.1 MINIMUM BORROWING BASE. Borrower agrees that, so long as any
Obligations are outstanding, Borrower will maintain a Borrowing Base of at least
$20,000,000 at all times.

                                   ARTICLE VII
                                   CONDITIONS

      SECTION 7.1 CONDITIONS TO CLOSING. The obligation of each Lender to make
any Loans and of Agent to issue any Support Agreements on the Closing Date shall
be subject to the receipt by Agent of each agreement, document and instrument
set forth on the Closing Checklist, each in form and substance satisfactory to
Agent, and to the consummation of the following conditions precedent, each to
the satisfaction of Agent and Lenders in their sole discretion:

      (A) evidence of the consummation of the transactions contemplated by the
Operative Documents;

      (B) the payment of all fees, expenses and other amounts due and payable
under each Financing Document;

      (C) the satisfaction of Agent as to the absence, since March 31, 2004, of
any material adverse change in any aspect of the business, operations,
properties or condition (financial or otherwise) of Borrower or any event or
condition which could reasonably be expected to result in such a material
adverse change;

      (D) the receipt of the initial Borrowing Base Certificate, prepared as of
the Closing Date, which certificate shall evidence a Borrowing Base of not less
than $20,000,000 prior to giving effect to any initial issuances of Letters of
Credit on the Closing Date and the consummation of the transactions contemplated
by the Operative Documents; and

      (E) receipt by Agent of such other documents, instruments and/or
agreements as Agent may reasonably request.

                                       34
<PAGE>

      SECTION 7.2 CONDITIONS TO EACH LOAN, ISSUANCE OF LETTER OF CREDIT, AND
SUPPORT AGREEMENT. The obligation of the Lenders to make a Loan or of Agent to
issue any Letter of Credit or issue any Support Agreement (including on the
Closing Date) is subject to the satisfaction of the following additional
conditions:

      (A) with respect to the issuance of any Letter of Credit or Support
Agreement, receipt by Agent of a Letter of Credit Request in accordance with
subsection 2.1(a);

      (B) the fact that, immediately after such borrowing and after application
of the proceeds thereof (or after such issuance, as the case may be), the
Outstandings will not exceed the Loan Limit;

      (C) the fact that, immediately before and after giving effect to such
borrowing or issuance, no Default or Event of Default shall have occurred and be
continuing; and

      (D) the fact that the representations and warranties of each Borrower and
Beverly contained in the Financing Documents shall be true and correct in all
material respects (unless any such representation or warranty is already
qualified by materiality, in which event it shall be true and correct in all
respects) on and as of the date of such borrowing or issuance, except to the
extent that any such representation or warranty relates to an earlier date in
which case such representation or warranty shall be true and correct as of such
earlier date.

Each borrowing, each issuance of a Letter of Credit and each giving of a Letter
of Credit Request hereunder shall be deemed to be a representation and warranty
by Borrower on the date of such borrowing, issuance or giving as to the facts
specified in subsections 7.2(b), 7.2(c) and 7.2(d).

                                  ARTICLE VIII
                                EVENTS OF DEFAULT

      SECTION 8.1 EVENTS OF DEFAULT. For purposes of the Financing Documents,
the occurrence of any of the following conditions and/or events, whether
voluntary or involuntary, by operation of law or otherwise, shall constitute an
"EVENT OF DEFAULT":

      (A) Borrower shall fail to pay: (I) when and as required to be paid
herein, any principal of any Loan or any Reimbursement Obligation, or (II)
within five (5) days after the same shall become due, any interest, premium or
fee under any Financing Document or any other amount payable under any Financing
Document;

      (B) Borrower shall fail to observe or perform any covenant contained in
subsection 2.2(c), Section 4.1, Section 4.7, Section 4.8, Article V, Article VI
or Article IX;

      (C) Borrower or Beverly defaults in the performance of or compliance with
any term contained in this Agreement or in any other Financing Document (other
than occurrences described in other provisions of this Section 8.1 for which a
different grace or cure period is specified or which constitute immediate Events
of Default) and such default is not remedied or waived within thirty (30) days
after the earlier of: (I) receipt by Borrower of notice from Agent

                                       35
<PAGE>

or Required Lenders of such default, or (II) actual knowledge of Borrower or
Beverly of such default;

      (D) any representation or warranty made by Borrower, Beverly or any other
Person in any Financing Document or in any certificate, financial statement or
other document delivered pursuant to any Financing Document is incorrect in any
respect (or in any material respect if such representation, warranty,
certification or statement is not by its terms already qualified as to
materiality) when made (or deemed made);

      (E) Borrower shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, or shall
consent to any such relief or to the appointment of or taking possession by any
such official in an involuntary case or other proceeding commenced against it,
or shall make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any corporate
action to authorize any of the foregoing;

      (F) an involuntary case or other proceeding shall be commenced against
Borrower seeking liquidation, reorganization or other relief with respect to it
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of sixty (60) days; or an order for relief
shall be entered against Borrower under the federal bankruptcy laws as now or
hereafter in effect;

      (G) one (1) or more judgments or orders for the payment of money
aggregating in excess of $100,000 shall be rendered against Borrower and such
judgments or orders shall continue unsatisfied and unstayed for a period of
thirty (30) days;

      (H) Beverly shall cease to directly own and control one hundred percent
(100%) of each class of the outstanding equity interests of Borrower;

      (I) any Lien created by any of the Security Documents shall at any time
fail to constitute a valid and perfected Lien on all of the Collateral purported
to be secured thereby, subject to no prior or equal Lien other than the
Permitted Liens, or Borrower shall so assert in writing;

      (J) Borrower shall be prohibited or otherwise materially restrained from
conducting the business theretofore conducted by it by virtue of any
determination, ruling, decision, decree or order of any court or regulatory
authority of competent jurisdiction or any other event and such determination,
ruling, decision, decree, order or other event remains unstayed and in effect
for any period of ten (10) Business Days;

      (K) (I) any of the Operative Documents shall for any reason fail to
constitute the valid and binding agreement of any party thereto, or any such
party shall so assert in writing, or (II) Beverly or any of the Selling
Subsidiaries shall default in their obligations to any "Bank Indemnified Person"
arising under (or otherwise breach any of the covenants and agreements set

                                       36
<PAGE>

forth in) Section 5.4 of that certain Receivables Purchase and Sale Agreement
dated as of even date herewith by and among Beverly and each of the Selling
Subsidiaries; or

      (L) there shall occur any "Event of Default" under the Lehman Credit
Agreement (as such term is defined therein) or the Lehman Credit Agreement shall
not be renewed, replaced, refinanced or otherwise repaid in full on or prior to
the maturity date thereof.

      SECTION 8.2 ACCELERATION AND SUSPENSION OR TERMINATION OF COMMITMENT. Upon
the occurrence and during the continuance of an Event of Default, Agent may, and
shall if requested by Required Lenders: (I) by notice to Borrower suspend or
terminate the Commitment, in whole or in part (and, if in part, such reduction
shall be pro rata among the Lenders having a Pro Rata Share of the Commitment),
and/or (II) by notice to the Borrower declare the Obligations to be, and the
Obligations shall thereupon become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by Borrower and Borrower will pay the same; provided, however, in
the case of any of the Events of Default specified in subsections 8.1(e) or
8.1(f) above, without any notice to Borrower or any other act by Agent or the
Lenders, the Commitment shall thereupon terminate and all of the Obligations
shall become immediately due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by Borrower and
Borrower will pay the same.

      SECTION 8.3 CASH COLLATERAL. If: (I) any Event of Default specified in
subsections 8.1(e) or 8.1(f) shall occur, (II) the Obligations shall have
otherwise been accelerated pursuant to Section 8.2, or (III) the Commitment
shall have been terminated pursuant to Section 8.2, then without any request or
the taking of any other action by Agent or the Lenders, Borrower shall
immediately comply with the provisions of subsection 2.1(e) with respect to the
deposit of cash collateral to secure the existing Letter of Credit Liabilities
and future payment of related fees.

      SECTION 8.4 SETOFF RIGHTS. During the continuance of any Event of Default,
each Lender is hereby authorized by Borrower at any time or from time to time,
with reasonably prompt subsequent notice to Borrower (any prior or
contemporaneous notice being hereby expressly waived) to set off and to
appropriate and to apply, in each case to the extent permitted by Law, any and
all: (I) balances held by such Lender at any of its offices for the account of
Borrower (regardless of whether such balances are then due to Borrower), and
(II) other property at any time held or owing by such Lender to or for the
credit or for the account of Borrower, against and on account of any of the
Obligations; except that no Lender shall exercise any such right without the
prior written consent of Agent. Any Lender exercising a right to set off shall
purchase for cash (and the other Lenders shall sell) interests in each of such
other Lender's Pro Rata Share of the Obligations as would be necessary to cause
all Lenders to share the amount so set off with each other Lender in accordance
with their respective Pro Rata Share of the Obligations. Borrower agrees, to the
fullest extent permitted by Law, that any Lender may exercise its right to set
off with respect to the Obligations as provided in this Section 8.4.

      SECTION 8.5 APPLICATION OF PROCEEDS. Notwithstanding anything to the
contrary contained in this Agreement, upon the occurrence and during the
continuance of an Event of Default: (I) Borrower irrevocably waives the right to
direct the application of any and all payments at any time or times thereafter
received by Agent from or on behalf of Borrower or any

                                       37
<PAGE>

guarantor of all or any part of the Obligations, and Agent shall have the
continuing and exclusive right to apply and to reapply any and all payments
received at any time or times after the occurrence and during the continuance of
an Event of Default against the Obligations in such manner as Agent may deem
advisable notwithstanding any previous application by Agent, and (II) in the
absence of a specific determination by Agent with respect thereto, the proceeds
of any sale of, or other realization upon, all or any part of the Collateral
shall be applied: first, to all fees, costs, indemnities and expenses incurred
by or owing to Agent with respect to this Agreement, the other Financing
Documents or the Collateral; second, to all fees, costs, indemnities and
expenses incurred by or owing to any Lender with respect to this Agreement, the
other Financing Documents or the Collateral; third, to accrued and unpaid
interest on the Obligations (including any interest which but for the provisions
of the U.S. Bankruptcy Code, would have accrued on such amounts); fourth, to the
principal amount of the Obligations outstanding; and fifth, to any other
indebtedness or obligations of Borrower owing to Agent or any Lender under the
Financing Documents. Any balance remaining shall be delivered to Borrower or to
whomever may be lawfully entitled to receive such balance or as a court of
competent jurisdiction may direct.

                                   ARTICLE IX
                 EXPENSES, INDEMNITY, TAXES AND RIGHT TO PERFORM

      SECTION 9.1 EXPENSES. Borrower hereby agrees to promptly pay: (I) all
reasonable and out-of-pocket costs and out-of-pocket expenses of Agent
(including, without limitation, the reasonable costs, expenses and fees of
counsel to the Agent and of independent appraisers and consultants retained by
Agent) in connection with (A) the examination, review, due diligence
investigation, documentation, negotiation, closing and syndication of the
transactions contemplated by the Financing Documents (provided that the Borrower
shall not be required to pay such costs, expenses and fees pursuant to this
subclause (A) in excess of $110,000 in the aggregate), (B) in connection with
the performance by Agent of its rights and remedies under the Financing
Documents and (C) in connection with the continued administration of the
Financing Documents including any amendments, modifications, consents and
waivers to and/or under any and all Financing Documents, (II) without limitation
of the preceding clause (i), all reasonable out-of-pocket expenses of Agent in
connection with the creation, perfection and maintenance of Liens pursuant to
the Financing Documents, (III) without limitation of the preceding clause (i),
reasonable out-of-pocket expenses of Agent in connection with protecting,
maintaining or selling any Collateral and in connection with any workout,
collection, bankruptcy, insolvency and other enforcement proceedings under any
and all of the Financing Documents, and (IV) all costs and expenses incurred by
Lenders in connection with any workout, collection, bankruptcy, insolvency and
other enforcement proceedings under any and all Financing Documents; provided,
however, to the extent that the costs and expenses referred to in this clause
(iv) consist of fees, costs and expenses of counsel, Borrower shall be obligated
to pay such fees, costs and expenses for only one counsel acting for all Lenders
(other than Agent); and provided, further, that so long as no Event of Default
shall exist or be continuing, Borrower shall not be required to pay in excess of
$20,000 per year in fees incurred by Agent in respect of any collateral audit or
examination, and the amount of any such other fees earned by Agent and required
under this Agreement to be reimbursed by Borrower shall be negotiated by the
parties at the time of the incurrence of such other fees; and provided, further,
that the Borrower shall not be required to

                                       38
<PAGE>

pay the fees of independent appraisers and consultants retained by Agent for the
purposes of any collateral audit or examination unless an Event of Default shall
have occurred and be continuing.

      SECTION 9.2 INDEMNITY. Borrower hereby agrees to indemnify, pay and hold
harmless Agent and Lenders and the officers, directors, employees and counsel of
Agent and Lenders (collectively called the "INDEMNITEES") from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, reasonable costs, reasonable expenses and reasonable
disbursements of any kind or nature whatsoever (including the reasonable fees
and disbursements of counsel for such Indemnitee) in connection with any
investigative, administrative or judicial proceeding, whether or not such
Indemnitee shall be designated a party thereto, which may be imposed on,
incurred by or asserted against such Indemnitee as a result of or in connection
with the transactions contemplated hereby or by the other Operative Documents
(including proposed and actual extensions of credit under this Agreement) and
the use or intended use of the proceeds of the Loans and Letters of Credit,
except that Borrower shall have no obligation hereunder to an Indemnitee with
respect to any liability resulting from the gross negligence or willful
misconduct of such Indemnitee, as determined by a court of competent
jurisdiction. To the extent that the undertaking set forth in the immediately
preceding sentence may be unenforceable, Borrower shall contribute the maximum
portion which it is permitted to pay and satisfy under applicable law to the
payment and satisfaction of all such indemnified liabilities incurred by the
Indemnitees or any of them.

      SECTION 9.3 TAXES. Borrower agrees to pay all governmental assessments,
charges or taxes (subject to the terms of Section 2.7 and except income or other
similar taxes imposed on Agent or Lenders), including any interest or penalties
thereon, at any time payable or ruled to be payable in respect of the existence,
execution or delivery of this Agreement or the other Financing Documents or the
issuance of the Notes or Letters of Credit and to indemnify and hold Agent and
Lenders harmless against liability in connection with any such assessments,
charges or taxes.

      SECTION 9.4 RIGHT TO PERFORM. If Borrower or Beverly fails to perform any
obligation hereunder or under any other Financing Document which results in a
Default or an Event of Default, Agent itself may, but shall not be obligated to,
cause such obligation to be performed at Borrower's expense and Borrower agrees
to reimburse Agent therefor on demand.

                                    ARTICLE X
                                      AGENT

      SECTION 10.1 APPOINTMENT AND AUTHORIZATION. Each Lender hereby irrevocably
appoints and authorizes Agent to enter into each of the Financing Documents on
its behalf and to take such actions as Agent on its behalf and to exercise such
powers under the Financing Documents as are delegated to Agent by the terms
thereof, together with all such powers as are reasonably incidental thereto.
Except as otherwise expressly provided in Section 11.5 or by the terms of the
Financing Documents, Agent is authorized and empowered to amend, modify, or
waive any provisions of this Agreement or the other Financing Documents on
behalf of Lenders. The provisions of this Article X are solely for the benefit
of Agent and Lenders and neither Borrower nor any other member of the Beverly
Group shall have any rights as a third party beneficiary of any of the
provisions hereof. In performing its functions and duties under this

                                       39
<PAGE>

Agreement, Agent shall act solely as agent of Lenders and does not assume and
shall not be deemed to have assumed any obligation toward or relationship of
agency or trust with or for Borrower or any other member of the Beverly Group.
Agent may perform any of its duties hereunder, or under the Financing Documents,
by or through its agents or employees.

      SECTION 10.2 AGENT AND AFFILIATES. Agent shall have the same rights and
powers under the Financing Documents as any other Lender and may exercise or
refrain from exercising the same as though it were not Agent, and Agent and its
Affiliates may lend money to, invest in and generally engage in any kind of
business with each member of the Beverly Group or Affiliate of any member of the
Beverly Group as if it were not Agent hereunder.

      SECTION 10.3 ACTION BY AGENT. The duties of Agent shall be mechanical and
administrative in nature. Agent shall not have by reason of this Agreement a
fiduciary relationship in respect of any Lender. Nothing in this Agreement or
any of the Financing Documents, express or implied, is intended to or shall be
construed to impose upon Agent any obligations in respect of this Agreement or
any of the Financing Documents except as expressly set forth herein or therein.

      SECTION 10.4 CONSULTATION WITH EXPERTS. Agent may consult with legal
counsel, independent public accountants and other experts selected by it and
shall not be liable for any action taken or omitted to be taken by it in good
faith in accordance with the advice of such counsel, accountants or experts.

      SECTION 10.5 LIABILITY OF AGENT. Neither Agent nor any of its directors,
officers, agents or employees shall be liable to any Lender for any action taken
or not taken by it in connection with the Financing Documents, except that Agent
shall be liable to the extent of its own gross negligence or willful misconduct
as determined by a court of competent jurisdiction. Neither Agent nor any of its
directors, officers, agents or employees shall be responsible for or have any
duty to ascertain, inquire into or verify: (I) any statement, warranty or
representation made in connection with any Financing Document or any borrowing
hereunder; (II) the performance or observance of any of the covenants or
agreements specified in any Financing Document; (III) the satisfaction of any
condition specified in any Financing Document, except receipt of items required
to be delivered to Agent; (IV) the validity, effectiveness, sufficiency or
genuineness of any Financing Document, any Lien purported to be created or
perfected thereby or any other instrument or writing furnished in connection
therewith; (V) the existence or non-existence of any Default or Event of
Default; or (VI) the financial condition of any member of the Beverly Group.
Agent shall not incur any liability by acting in reliance upon any notice,
consent, certificate, statement, or other writing (which may be a bank wire,
telex, facsimile or electronic transmission or similar writing) believed by it
to be genuine or to be signed by the proper party or parties. Agent shall not be
liable for any apportionment or distribution of payments made by it in good
faith and if any such apportionment or distribution is subsequently determined
to have been made in error the sole recourse of any Lender to whom payment was
due but not made, shall be to recover from other Lenders any payment in excess
of the amount to which they are determined to be entitled (and such other
Lenders hereby agree to return to such Lender any such erroneous payments
received by them).

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<PAGE>

      SECTION 10.6 INDEMNIFICATION. Each Lender shall, in accordance with its
Pro Rata Share, indemnify Agent (to the extent not reimbursed by Borrower)
against any cost, expense (including counsel fees and disbursements), claim,
demand, action, loss or liability (except such as result from Agent's gross
negligence or willful misconduct as determined by a court of competent
jurisdiction) that Agent may suffer or incur in connection with the Financing
Documents or any action taken or omitted by Agent hereunder or thereunder. If
any indemnity furnished to Agent for any purpose shall, in the opinion of Agent,
be insufficient or become impaired, Agent may call for additional indemnity and
cease, or not commence, to do the acts indemnified against even if so directed
by Required Lenders until such additional indemnity is furnished. The
obligations of Lenders under this Section 10.6 shall survive the payment in full
of the Obligations and the termination of this Agreement.

      SECTION 10.7 RIGHT TO REQUEST AND ACT ON INSTRUCTIONS. Agent may at any
time request instructions from Lenders with respect to any actions or approvals
which by the terms of this Agreement or of any of the Financing Documents Agent
is permitted or desires to take or to grant, and if such instructions are
promptly requested, Agent shall be absolutely entitled to refrain from taking
any action or to withhold any approval and shall not be under any liability
whatsoever to any Person for refraining from any action or withholding any
approval under any of the Financing Documents until it shall have received such
instructions from Required Lenders or all or such other portion of the Lenders
as shall be prescribed by this Agreement (which instructions shall not be
unreasonably withheld or delayed). Without limiting the foregoing, no Lender
shall have any right of action whatsoever against Agent as a result of Agent
acting or refraining from acting under this Agreement or any of the other
Financing Documents in accordance with the instructions of Required Lenders and,
notwithstanding the instructions of Required Lenders, Agent shall have no
obligation to take any action if it believes, in good faith, that such action
exposes Agent to any liability for which it has not received satisfactory
indemnification in accordance with the provisions of Section 10.6.

      SECTION 10.8 CREDIT DECISION. Each Lender acknowledges that it has,
independently and without reliance upon Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon Agent or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under the Financing Documents.

      SECTION 10.9 COLLATERAL MATTERS. Lenders irrevocably authorize Agent, at
its option and in its discretion, to release any Lien granted to or held by
Agent under any Security Document: (I) upon termination of the Commitment and
payment in full of all Obligations and the expiration, termination or cash
collateralization (to the satisfaction of Agent) of all Letters of Credit; or
(II) constituting property sold or to be sold or disposed of as part of or in
connection with any disposition permitted under any Financing Document (it being
understood and agreed that Agent may conclusively rely without further inquiry
on a certificate of a Responsible Officer as to the sale or other disposition of
property being made in full compliance with the provisions of the Financing
Documents). Upon request by Agent at any time, Lenders will confirm in writing
Agent's authority to release particular types or items of Collateral pursuant to
this Section 10.9.

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<PAGE>

      SECTION 10.10 AGENCY FOR PERFECTION. Agent and each Lender hereby appoint
each other Lender as agent for the purpose of perfecting Agent's security
interest in assets which, in accordance with the Uniform Commercial Code in any
applicable jurisdiction, can be perfected by possession or control. Should any
Lender (other than Agent) obtain possession or control of any such assets, such
Lender shall notify Agent thereof, and, promptly upon Agent's request therefore,
shall deliver such assets to Agent or in accordance with Agent's instructions or
transfer control to Agent in accordance with Agent's instructions. Each Lender
agrees that it will not have any right individually to enforce or seek to
enforce any Security Document or to realize upon any Collateral for the Loans
unless instructed to do so by Agent, it being understood and agreed that such
rights and remedies may be exercised only by Agent.

      SECTION 10.11 NOTICE OF DEFAULT. Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Event of Default except
with respect to defaults in the payment of principal, interest and fees required
to be paid to Agent for the account of Lenders, unless Agent shall have received
written notice from a Lender or Borrower referring to this Agreement, describing
such Default or Event of Default and stating that such notice is a "notice of
default." Agent will notify each Lender of its receipt of any such notice. Agent
shall take such action with respect to such Default or Event of Default as may
be requested by Required Lenders in accordance with the terms hereof. Unless and
until Agent has received any such request, Agent may (but shall not be obligated
to) take such action, or refrain from taking such action, with respect to such
Default or Event of Default as it shall deem advisable or in the best interests
of Lenders.

      SECTION 10.12 SUCCESSOR AGENT. Agent may resign at any time by giving
written notice thereof to the Lenders and Borrower. Upon any such resignation,
Required Lenders shall have the right to appoint a successor Agent. If no
successor Agent shall have been so appointed by Required Lenders, and shall have
accepted such appointment, within thirty (30) days after the retiring Agent
gives notice of resignation, then the retiring Agent may, on behalf of Lenders,
appoint a successor Agent, which shall be an institution organized or licensed
under the laws of the United States of America or of any State thereof. Upon the
acceptance of its appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the rights
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations hereunder. After any retiring Agent's
resignation hereunder as Agent, the provisions of this Article shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Agent.

      SECTION 10.13 DISBURSEMENTS OF LOANS; PAYMENT.

      (A) LOAN ADVANCES, PAYMENTS AND SETTLEMENTS; INTEREST AND FEE PAYMENTS.

            (I) Agent shall have the right, on behalf of Lenders, to disburse
      funds to Borrower for all Loans requested or deemed requested by Borrower
      pursuant to the terms of this Agreement. Absent the prior receipt by Agent
      of a written notice from any Lender pursuant to which such Lender notifies
      Agent that such Lender shall cease making Loans (whether due to the
      existence of a Default or Event of Default or otherwise), Agent shall be
      conclusively entitled to assume, for purposes of the preceding sentence,
      that each Lender will fund its Pro Rata Share of all Loans requested by
      Borrower. Each Lender

                                       42
<PAGE>

      shall reimburse Agent on demand, in accordance with the provisions of the
      immediately following paragraph, for all funds disbursed on its behalf by
      Agent pursuant to the first sentence of this clause (i), or if Agent so
      requests, each Lender will remit to Agent its Pro Rata Share of any Loan
      before Agent disburses the same to Borrower. If Agent elects to require
      that each Lender make funds available to Agent, prior to a disbursement by
      Agent to Borrower, Agent shall advise each Lender by telephone, facsimile
      or e-mail of the amount of such Lender's Pro Rata Share of the Loan
      requested by Borrower no later than noon (Chicago time) on the date of
      funding of such Loan, and each such Lender shall pay Agent on such date
      such Lender's Pro Rata Share of such requested Loan, in same day funds, by
      wire transfer to the Payment Account, or such other account as may be
      identified in writing by Agent to Lenders from time to time. If any Lender
      fails to pay the amount of its Pro Rata Share within one (1) Business Day
      after Agent's demand, Agent shall promptly notify Borrower, and Borrower
      shall immediately repay such amount to Agent. Any repayment required
      pursuant to this Section 10.13 shall be without premium or penalty.
      Nothing in this Section 10.13 or elsewhere in this Agreement or the other
      Financing Documents shall be deemed to require Agent to advance funds on
      behalf of any Lender or to relieve any Lender from its obligation to
      fulfill its commitments hereunder or to prejudice any rights that Agent or
      Borrower may have against any Lender as a result of any default by such
      Lender hereunder.

            (II) On a Business Day of each week as selected from time to time by
      Agent, or more frequently (including daily), if Agent so elects (each such
      day being a "SETTLEMENT DATE"), Agent will advise each Lender by
      telephone, facsimile or e-mail of the amount of each such Lender's Pro
      Rata Share of the Loan balance as of the close of business of the Business
      Day immediately preceding the Settlement Date. In the event that payments
      are necessary to adjust the amount of such Lender's actual Pro Rata Share
      of the Loan balance to such Lender's required Pro Rata Share of the Loan
      balance as of any Settlement Date, the party from which such payment is
      due: (X) shall be deemed, irrevocably and unconditionally, to have
      purchased, without recourse or warranty, an undivided interest and
      participation in the Loans sufficient to equate such Lender's actual Pro
      Rata Share of the Loan balance as of such Settlement Date with such
      Lender's required Pro Rata Share of the Loans as of such date and (Y)
      shall pay Agent, without setoff or discount, in same day funds, by wire
      transfer to the Payment Account not later than noon (Chicago time) on the
      Business Day following the Settlement Date the full purchase price for
      such interest and participation, equal to one hundred percent (100%) of
      the principal amount of the Loans being purchased and sold. In the event
      settlement shall not have occurred by the date and time specified in the
      immediately preceding sentence, interest shall accrue on the unsettled
      amount at the Federal Funds Rate, for the first three (3) days following
      the scheduled date of settlement, and thereafter at the Prime Rate plus
      the Prime Rate Margin.

            (III) On each Settlement Date, Agent shall advise each Lender by
      telephone, facsimile or e-mail of the amount of such Lender's Pro Rata
      Share of principal, interest and fees paid for the benefit of Lenders with
      respect to each applicable Loan, to the extent of such Lender's credit
      exposure with respect thereto, and shall make payment to such Lender not
      later than noon (Chicago time) on the Business Day following the
      Settlement Date of such amounts in accordance with wire instructions
      delivered by such

                                       43
<PAGE>

      Lender to Agent, as the same may be modified from time to time by written
      notice to Agent; provided, that, in the case such Lender is a Defaulted
      Lender, Agent shall be entitled to set off the funding short-fall against
      that Defaulted Lender's respective share of all payments received from
      Borrower.

            (IV) The provisions of this subsection 10.13(a) shall be deemed to
      be binding upon Agent and Lenders notwithstanding the occurrence of any
      Default or Event of Default, or any insolvency or bankruptcy proceeding
      pertaining to Borrower or any other member of the Beverly Group.

      (B) RETURN OF PAYMENTS.

            (I) If Agent pays an amount to a Lender under this Agreement in the
      belief or expectation that a related payment has been or will be received
      by Agent from Borrower and such related payment is not received by Agent,
      then Agent will be entitled to recover such amount from such Lender on
      demand without setoff, counterclaim or deduction of any kind, together
      with interest accruing on a daily basis at the Federal Funds Rate.

            (II) If Agent determines at any time that any amount received by
      Agent under this Agreement must be returned to Borrower or paid to any
      other Person pursuant to any insolvency law or otherwise, then,
      notwithstanding any other term or condition of this Agreement or any other
      Financing Document, Agent will not be required to distribute any portion
      thereof to any Lender. In addition, each Lender will repay to Agent on
      demand any portion of such amount that Agent has distributed to such
      Lender, together with interest at such rate, if any, as Agent is required
      to pay to Borrower or such other Person, without setoff, counterclaim or
      deduction of any kind.

      (C) DEFAULTED LENDERS. The failure of any Defaulted Lender to make any
Loan or any payment required by it hereunder shall not relieve any other Lender
of its obligations to make such Loan or payment, but neither any Lender nor
Agent shall be responsible for the failure of any Defaulted Lender to make a
Loan or make any other payment required hereunder. Notwithstanding anything set
forth herein to the contrary, a Defaulted Lender shall not have any voting or
consent rights under or with respect to any Financing Document or constitute a
"Lender" (or be included in the calculation of Required Lenders hereunder) for
any voting or consent rights under or with respect to any Financing Document. At
Borrower's request, Agent or a Person reasonably acceptable to Agent shall have
the right with Agent's consent and in Agent's sole discretion (but shall have no
obligation) to purchase from any Defaulted Lender, and each Defaulted Lender
agrees that it shall, at Agent's request, sell and assign to Agent or such
Person, all of the lending commitments and commitment interests of that
Defaulted Lender for an amount equal to the principal balance of all Loans held
by such Defaulted Lender and all accrued interest and fees with respect thereto
through the date of sale, such purchase and sale to be consummated pursuant to
an executed Assignment Agreement

                                   ARTICLE XI
                                  MISCELLANEOUS

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<PAGE>

      SECTION 11.1 SURVIVAL. All agreements, representations and warranties made
herein and in every other Financing Document shall survive the execution and
delivery of this Agreement and the other Financing Documents and the other
Operative Documents and the execution, sale and delivery of any Notes. The
indemnities and agreements set forth in Article IX shall survive the payment of
the Obligations and any termination of this Agreement.

      SECTION 11.2 NO WAIVERS. No failure or delay by Agent or any Lender in
exercising any right, power or privilege under any Financing Document shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein and therein provided
shall be cumulative and not exclusive of any rights or remedies provided by law.

      SECTION 11.3 NOTICES. All notices, requests and other communications to
any party hereunder shall be in writing (including prepaid overnight courier,
facsimile transmission or similar writing) and shall be given to such party at
its address, facsimile number or e-mail address set forth on the signature pages
hereof (or, in the case of any such Lender who becomes a Lender after the date
hereof, in an Assignment Agreement or in a notice delivered to Borrower and
Agent by the assignee Lender forthwith upon such assignment) or at such other
address, facsimile number or e-mail address as such party may hereafter specify
for the purpose by notice to Agent and Borrower; provided, that notices,
requests or other communications shall be permitted by e-mail only where
expressly provided in the Financing Documents. Each such notice, request or
other communication shall be effective: (I) if given by facsimile or e-mail,
when such notice is transmitted to the facsimile number or e-mail address
specified by this Section or (II) if given by mail, prepaid overnight courier or
any other means, when received at the applicable address specified by this
Section.

      SECTION 11.4 SEVERABILITY. In case any provision of or obligation under
this Agreement or the Notes or any other Financing Document shall be invalid,
illegal or unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions or obligations, or of such provision
or obligation in any other jurisdiction, shall not in any way be affected or
impaired thereby.

      SECTION 11.5 AMENDMENTS AND WAIVERS. Any provision of this Agreement or
any Notes may be amended or waived if, but only if, such amendment or waiver is
in writing and is signed by Borrower and the Required Lenders (and, if: (X) any
amendment would increase such Lender's Commitment Amount, by such Lender and (Y)
the rights or duties of Agent are affected thereby, by Agent; provided, however,
no such amendment or waiver shall, unless signed by all the Lenders: (I) reduce
the principal of, rate of interest on or any fees with respect to any Loan or
Reimbursement Obligation; (II) postpone the date fixed for any payment) of
principal of any Loan, or of any Reimbursement Obligation or of interest on any
Loan or any Reimbursement Obligation or any fees hereunder or for any
termination of any commitment; (III) change the definition of the term Required
Lenders or the percentage of Lenders which shall be required for Lenders to take
any action hereunder; (IV) amend or waive this Section 11.5 or the definitions
of the terms used in this Section 11.5 insofar as the definitions affect the
substance of this Section 11.5; (V) consent to the assignment, delegation or
other transfer by Borrower or Beverly of any of its rights and obligations under
any Financing Document; or (VI) increase any of the advance

                                       45
<PAGE>

rates by more than five (5) percentage points each in the aggregate set forth in
the definition of "BORROWING BASE."

      SECTION 11.6 ASSIGNMENTS; PARTICIPATIONS.

      (A) ASSIGNMENTS.

            (I) Any Lender may at any time assign to one or more Persons (any
      such Person, an "ASSIGNEE") all or any portion of such Lender's Loans and
      interest in the Commitment, with the prior written consent of Agent and,
      so long as no Event of Default exists, Borrower (which consent shall not
      be unreasonably withheld or delayed and shall not be required for an
      assignment by a Lender to a then existing Lender or to an Affiliate of a
      then existing Lender). Except as Agent may otherwise agree, any such
      assignment shall be in a minimum aggregate amount equal to $1,000,000 or,
      if less, the assignor's entire interests in the Commitment and outstanding
      Loans. Borrower and Agent shall be entitled to continue to deal solely and
      directly with such Lender in connection with the interests so assigned to
      an Assignee until Agent shall have received and accepted an effective
      Assignment Agreement executed, delivered and fully completed by the
      applicable parties thereto and a processing fee of $3,500 payable by the
      Assignor. Any attempted assignment not made in accordance with this
      subsection 11.6(a) shall be treated as the sale of a participation under
      subsection 11.6(b). Borrower shall be deemed to have granted its consent
      to any assignment requiring its consent hereunder unless Borrower has
      expressly objected to such assignment within five (5) Business Days after
      notice thereof.

            (II) From and after the date on which the conditions described above
      have been met: (A) such Assignee shall be deemed automatically to have
      become a party hereto and, to the extent that rights and obligations
      hereunder have been assigned to such Assignee pursuant to such Assignment
      Agreement, shall have the rights and obligations of a Lender hereunder and
      (B) the assigning Lender, to the extent that rights and obligations
      hereunder have been assigned by it pursuant to such Assignment Agreement,
      shall be released from its rights (other than its indemnification rights)
      and obligations hereunder. Upon the request of the Assignee (and, as
      applicable, the assigning Lender) pursuant to an effective Assignment
      Agreement, Borrower shall execute and deliver to Agent for delivery to the
      Assignee (and, as applicable, the assigning Lender) Notes in the aggregate
      principal amount of the Assignee's percentage interest in the Commitment
      (and, as applicable, Notes in the principal amount of that portion of the
      Commitment retained by the assigning Lender). Upon receipt by the
      assigning Lender of such Note, the assigning Lender shall return to
      Borrower any prior Note held by it.

            (III) Agent, acting solely for this purpose as an agent of the
      Borrower, shall maintain at one of its offices a copy of each Assignment
      Agreement delivered to it and a register for the recordation of the names
      and addresses of each Lender, and the commitments of, and principal amount
      of the Loans owing to, such Lender pursuant to the terms hereof. The
      entries in such register shall be conclusive absent manifest error, and
      Borrower, Agent and Lenders may treat each Person whose name is recorded
      therein pursuant to the terms hereof as a Lender hereunder for all
      purposes of this Agreement,

                                       46
<PAGE>

      notwithstanding notice to the contrary. Such register shall be available
      for inspection by Borrower and any Lender, at any reasonable time upon
      reasonable prior notice to Agent.

            (IV) Notwithstanding the foregoing provisions of this subsection
      11.6(a) or any other provision of this Agreement, any Lender may at any
      time assign all or any portion of its Loans and its Note as collateral
      security to a Federal Reserve Bank or, as applicable, to such Lender's
      trustee for the benefit of its investors (but no such assignment shall
      release any Lender from any of its obligations hereunder).

      (B) PARTICIPATIONS. Any Lender may at any time sell to one or more Persons
participating interests in its Loans, commitments or other interests hereunder
(any such Person, a "PARTICIPANT"). In the event of a sale by a Lender of a
participating interest to a Participant: (I) such Lender's obligations hereunder
shall remain unchanged for all purposes, (II) Borrower and Agent shall continue
to deal solely and directly with such Lender in connection with such Lender's
rights and obligations hereunder and (III) all amounts payable by Borrower shall
be determined as if such Lender had not sold such participation and shall be
paid directly to such Lender. No Participant shall have any direct or indirect
voting rights hereunder except with respect to any event described in Section
11.5 expressly requiring the unanimous vote of all Lenders or, as applicable,
all affected Lenders. Each Lender agrees to incorporate the requirements of the
preceding sentence into each participation agreement which such Lender enters
into with any Participant. Borrower agrees that if amounts outstanding under
this Agreement are due and payable (as a result of acceleration or otherwise),
each Participant shall be deemed to have the right of set-off in respect of its
participating interest in amounts owing under this Agreement and with respect to
any Letter of Credit to the same extent as if the amount of its participating
interest were owing directly to it as a Lender under this Agreement; provided
that such right of set-off shall be subject to the obligation of each
Participant to share with Lenders, and Lenders agree to share with each
Participant, as provided in Section 8.5.

      SECTION 11.7 HEADINGS. Headings and captions used in the Financing
Documents (including the Exhibits, Schedules and Annexes hereto and thereto) are
included for convenience of reference only and shall not be given any
substantive effect.

      SECTION 11.8 CONFIDENTIALITY. In handling any confidential information of
Borrower, Agent and each Lender shall exercise the same degree of care that it
exercises with respect to its own proprietary information of the same types to
maintain the confidentiality of any non-public information thereby received or
received pursuant to this Agreement, except that disclosure of such information
may be made: (I) to their respective agents, employees, Subsidiaries,
Affiliates, attorneys, auditors, professional consultants, rating agencies,
insurance industry associations and portfolio management services, (II) to
prospective transferees or purchasers of any interest in the Loans, provided
that they have agreed to be bound by the provisions of this Section 11.8, (III)
as required by Law, subpoena, judicial order or similar order and in connection
with any litigation and (IV) as may be required in connection with the
examination, audit or similar investigation of such Person. Confidential
information shall include only such information identified as such at the time
provided to Agent and shall not include information that either: (X) is in the
public domain, or becomes part of the public domain after disclosure to such
Person through no fault of such Person, or (Y) is disclosed to such Person by a
Person other than a member of the Beverly Group; provided, however, Agent does
not have actual knowledge that such Person is prohibited

                                       47
<PAGE>

from disclosing such information. The obligations of Agent and Lenders under
this Section 11.8 shall supersede and replace the obligations of Agent and
Lenders under any confidentiality agreement in respect of this financing
executed and delivered by Agent or any Lender prior to the date hereof.

      SECTION 11.9 GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT,
EACH NOTE AND EACH OTHER FINANCING DOCUMENT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. BORROWER HEREBY CONSENTS TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN (I) THE
COUNTY OF COOK, STATE OF ILLINOIS OR (II) THE COUNTY OF NEW YORK, STATE OF NEW
YORK, AND BORROWER IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, ALL
ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER
FINANCING DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. BORROWER EXPRESSLY
SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY
DEFENSE OF FORUM NON CONVENIENS. BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY
AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON
BORROWER BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO
BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE
COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.SECTION 11.9

      SECTION 11.10 WAIVER OF JURY TRIAL. EACH OF BORROWER, AGENT AND THE
LENDERS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS
OR THE TRANSACTIONS CONTEMPLATED THEREBY AND AGREES THAT ANY SUCH ACTION OR
PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

      SECTION 11.11 PUBLICATION; ADVERTISEMENT.

      (A) PUBLICATION. No member of the Beverly Group will directly or
indirectly publish, disclose or otherwise use in any public disclosure,
advertising material, promotional material, press release or interview, any
reference to the name, logo or any trademark of Merrill Lynch or any of its
Affiliates, in any case, without Merrill Lynch's prior written consent, which
consent shall not be unreasonably withheld or delayed.

      (B) ADVERTISEMENT. Borrower hereby authorizes Merrill Lynch to publish the
name of Borrower and the amount of the financing evidenced hereby in any
"tombstone" or comparable advertisement which Merrill Lynch elects to publish.
In addition, Borrower agrees that Merrill Lynch may provide lending industry
trade organizations with information necessary and customary for inclusion in
league table measurements after the Closing Date. With respect to any of the
foregoing, Merrill Lynch shall provide Borrower with an opportunity to review
and

                                       48
<PAGE>

confer with Merrill Lynch regarding the contents of any such tombstone,
advertisement or information, as applicable, prior to its publication.

      SECTION 11.12 COUNTERPARTS; INTEGRATION. This Agreement and the other
Financing Documents may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument. This Agreement and the other Financing
Documents constitute the entire agreement and understanding among the parties
hereto and supersede any and all prior agreements and understandings, oral or
written, relating to the subject matter hereof.

                 - Remainder of Page Intentionally Left Blank -
                            [Signature Pages Follow]

                                       49
<PAGE>

      IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.

                                      BEVERLY FUNDING CORPORATION,
                                      a Delaware corporation

                                      By:      /s/ Richard D. Skelly, Jr.
                                             -----------------------------------
                                      Name:  Richard D. Skelly, Jr.
                                             -----------------------------------
                                      Title: Senior Vice President and Treasurer
                                             -----------------------------------

                                      Address: c/o Beverly Enterprises, Inc.
                                               One Thousand Beverly Way
                                               Fort Smith, Arkansas 72919

                                      Facsimile number: (479) 201-5501
                                                        (479) 478-1883

                                      E-mail address:

                                      MERRILL LYNCH CAPITAL, a division of
                                      Merrill Lynch Business Financial Services
                                      Inc., individually as a Lender and as
                                      Agent

                                      By:    /s/ David G. Moore
                                             -----------------------------------
                                      Name:    David Moore
                                             -----------------------------------
                                      Title:   Director
                                             -----------------------------------

                                      Address: 7700 Wisconsin Ave. 4th Floor
                                               Bethesda, MD  20814
                                               Attn: Portfolio Management

                                      Facsimile number: (301) 907-2206
                                      E-mail address:   ___________________

                                      PAYMENT ACCOUNT DESIGNATION:

                                                                Credit Agreementexv10w1

 

Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

     This Securities Purchase Agreement (this “Agreement”) is dated as of
October 5, 2004, among Digital Recorders, Inc., a North Carolina corporation
(the “Company”), and the investors identified on the signature pages hereto
(each, an “Investor” and collectively, the “Investors”).

     WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act (as defined below) and Rule
506 promulgated thereunder, the Company desires to issue and sell to each
Investor, and each Investor, severally and not jointly, desires to purchase
from the Company certain securities of the Company, as more fully described in
this Agreement.

     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Investors agree
as follows:

ARTICLE I.

DEFINITIONS

     1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement, for all purposes of this Agreement, the following terms shall have
the meanings indicated in this Section 1.1:

          “Action” means any action, suit, inquiry, notice of violation, proceeding
(including any partial proceeding such as a deposition) or investigation
pending or threatened in writing against or affecting the Company, any
Subsidiary or any of their respective properties before or by any court,
arbitrator, governmental or administrative agency, regulatory authority
(federal, state, county, local or foreign), stock market, stock exchange or
trading facility.

          “Affiliate” means any Person that, directly or indirectly through one or
more intermediaries, controls or is controlled by or is under common control
with a Person, as such terms are used in and construed under Rule 144.

          “Business Day” means any day except Saturday, Sunday and any day which is
a federal legal holiday or a day on which banking institutions in the State of
New York are authorized or required by law or other governmental action to
close.

          “Closing” means the closing of the purchase and sale of the Securities
pursuant to Article II.

          “Closing Date” means the Business Day immediately following the date on
which all of the conditions set forth in Sections 5.1 and 5.2 hereof are
satisfied, or such other date as the parties may agree.

 

 

          “Commission” means the Securities and Exchange Commission.

          “Common Stock” means the common stock of the Company, par value $0.10 per
share, and any securities into which such common stock may hereafter be
reclassified.

          “Common Stock Equivalents” means any securities of the Company or any
Subsidiary which entitle the holder thereof to acquire Common Stock at any
time, including without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock or other securities that entitle the holder to receive, directly or
indirectly, Common Stock.

          “Company Counsel” means Carrington, Coleman, Sloman & Blumenthal, L.L.P.
and Gray, Layton, Kersh, Soloman, Sigmon, Furr & Smith, P.A.

          “Company Deliverables” has the meaning set forth in Section 2.2(a).

          “Disclosure Materials” has the meaning set forth in Section 3.1(h).

          “Effective Date” means the date that the Registration Statement required
by Section 2(a) of the Registration Rights Agreement is first declared
effective by the Commission.

          “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          “GAAP” means U.S. generally accepted accounting principals.

          “Intellectual Property Rights” has the meaning set forth in Section
3.1(n).

          “Investment Amount” means, with respect to each Investor, the Investment
Amount indicated on such Investor’s signature page to this Agreement.

          “Investor Deliverables” has the meaning set forth in Section 2.2(b).

          “Investor Party” has the meaning set forth in Section 4.7.

          “Lien” means any lien, charge, encumbrance, security interest, right of
first refusal or other restrictions of any kind, other than restrictions on
transfer of securities arising under federal or state securities laws and
regulations.

          “Material Adverse Effect” means any of (i) a material and adverse effect
on the legality, validity or enforceability of any Transaction Document, (ii) a
material and adverse effect on the results of operations, assets, prospects,
business or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) an adverse impairment to the Company’s
ability to perform on a timely basis its obligations under any Transaction
Document.

-2-

 

          “New York Courts” means the state and federal courts sitting in the City
of New York, Borough of Manhattan.

          “Per Unit Purchase Price” equals $4.14.

          “Person” means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.

          “Principal Market” means the NASDAQ Small Cap Market.

          “Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

          “Registration Statement” means the registration statement of the Company
meeting the requirements set forth in the Registration Rights Agreement and
covering the resale by the Investors of the Shares and the Warrant Shares.

          “Registration Rights Agreement” means the Registration Rights Agreement,
dated as of the date of this Agreement, among the Company and the Investors, in
the form of Exhibit B hereto.

          “Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

          “SEC Reports” has the meaning set forth in Section 3.1(h).

          “Securities” means the Shares, the Warrants and the Warrant Shares.

          “Securities Act” means the Securities Act of 1933, as amended.

          “Shares” means the shares of Common Stock issued or issuable to the
Investors pursuant to this Agreement.

          “Short Sales” has the meaning set forth in Section 3.2(f).

          “Subsidiary” means any “significant subsidiary” as defined in Rule 1-02(w)
of the Regulation S-X promulgated by the Commission under the Exchange Act.

          “Trading Day” means (i) a day on which the Common Stock is traded on a
Trading Market (other than the OTC Bulletin Board), or (ii) if the Common Stock
is not listed on a Trading Market (other than the OTC Bulletin Board), a day on
which the Common Stock is traded in the over-the-counter market, as reported by
the OTC Bulletin Board, or (iii) if the

-3-

 

Common Stock is not quoted on any Trading Market, a day on which the
Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding to its functions of reporting prices); provided, that in the event
that the Common Stock is not listed or quoted as set forth in (i), (ii) and
(iii) hereof, then Trading Day shall mean a Business Day.

          “Trading Market” means whichever of the New York Stock Exchange, the
American Stock Exchange, the NASDAQ National Market, the NASDAQ SmallCap Market
or OTC Bulletin Board on which the Common Stock is listed or quoted for trading
on the date in question.

          “Transaction Documents” means this Agreement, the Warrants, the
Registration Rights Agreement, and any other documents or agreements executed
in connection with the transactions contemplated hereunder.

          “Warrants” means the Common Stock purchase warrants in the form of Exhibit
A, which are issuable to the Investors at the Closing.

          “Warrant Shares” means the shares of Common Stock issuable upon exercise
of the Warrants.

ARTICLE II.

PURCHASE AND SALE

     2.1 Closing. Subject to the terms and conditions set forth in this
Agreement, at the Closing the Company shall issue and sell to each Investor,
and each Investor shall, severally and not jointly, purchase from the Company,
the Shares and the Warrants representing such Investor’s Investment Amount.
The Closing shall take place at the offices of Schulte Roth & Zabel LLP, 919
Third Avenue, New York, NY 10022 on the Closing Date or at such other location
or time as the parties may agree.

     2.2
Closing Deliveries. At the Closing, the Company shall deliver or
cause to be delivered to each Investor the following (the “Company
Deliverables”):

                  (i) a certificate evidencing a number of Shares equal to such Investor’s
Investment Amount divided by the Per Unit Purchase Price, registered in the
name of such Investor;

                  (ii) a Warrant, registered in the name of such Investor, pursuant to which
such Investor shall have the right to acquire a number of shares of Common
Stock equal to 20% of the number of Shares issuable to such Investor pursuant
to Section 2.2(a)(i);

                  (iii) the legal opinion of Company Counsel addressed to the Investors in
the form attached as Exhibit A-1 and Exhibit A-2 hereto;

-4-

 

                  (iv) the Registration Rights Agreement, duly executed by the Company; and

                  (v) the Irrevocable Transfer Agent Instructions in the form attached as
Exhibit B hereto, which instructions shall have been delivered to and
acknowledged in writing by the Company’s transfer agent.

          (b) At the Closing, each Investor shall deliver or cause to be delivered
to the Company the following (the “Investor Deliverables”):

                  (i) its Investment Amount, in United States dollars and in immediately
available funds, by wire transfer to an account designated in writing by the
Company for such purpose; and

                  (ii) the Registration Rights Agreement, duly executed by such Investor.

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

     3.1 Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to each Investor:

          (a) Subsidiaries. The Company has no direct or indirect Subsidiaries
other than as specified in the SEC Reports. Except as disclosed in Schedule
3.1(a), the Company owns, directly or indirectly, all of the capital stock of
each Subsidiary free and clear of any and all Liens, and all the issued and
outstanding shares of capital stock of each Subsidiary are validly issued and
are fully paid, non-assessable and free of preemptive and similar rights.

          (b) Organization and Qualification. The Company and each Subsidiary are
duly incorporated or otherwise organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization (as
applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company nor any Subsidiary is in violation of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. The Company and each Subsidiary are duly
qualified to conduct its respective businesses and are in good standing as a
foreign corporation or other entity in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect.

          (c) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated by each of

-5-

 

the Transaction Documents and otherwise to carry out its obligations
thereunder. The execution and delivery of each of the Transaction Documents by
the Company and the consummation by it of the transactions contemplated thereby
have been duly authorized by all necessary action on the part of the Company
and no further action is required by the Company in connection therewith. Each
Transaction Document has been (or upon delivery will have been) duly executed
by the Company and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of, creditors’ rights and remedies or by other equitable principles of general
application.

          (d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of the Company’s or any Subsidiary’s certificate or
articles of incorporation, bylaws or other organizational or charter documents,
or (ii) conflict with, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or
other instrument (evidencing a Company or Subsidiary debt or otherwise) or
other understanding to which the Company or any Subsidiary is a party or by
which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal
and state securities laws and regulations and the rules and regulations of the
Principal Market), or by which any property or asset of the Company or a
Subsidiary is bound or affected; except in the case of each of clauses (ii) and
(iii), such as would not, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect.

          (e) Filings, Consents and Approvals. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local
or other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the Transaction
Documents, other than (i) the filing with the Commission of one or more
Registration Statements in accordance with the requirements of the Registration
Rights Agreement, (ii) filings required by state securities laws, (iii) the
filing of a Notice of Sale of Securities on Form D with the Commission under
Regulation D of the Securities Act (iv) the filing required to be made pursuant
to Rule 4310(c)(17)(D) of the Nasdaq Stock Market, which will be made prior to
Closing, (v) the filings required in accordance with Section 4.5, and (vi)
those that have been made or obtained prior to the date of this Agreement.
Except as disclosed on Schedule 3.1(e), the Company and its Subsidiaries are
unaware of any facts or circumstances that might prevent the Company from
obtaining or effecting any of the registration, application

-6-

 

or filings pursuant to the preceding sentence. The Company is not in
violation of the listing requirements of the Principal Market and has no
knowledge of any facts that would reasonably lead to delisting or suspension of
the Common Stock in the foreseeable future.

          (f) Issuance of the Securities. The Securities have been duly authorized
and, when issued and paid for in accordance with the Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear
of all Liens. The Company has reserved from its duly authorized capital stock
the shares of Common Stock issuable pursuant to this Agreement and the Warrants
in order to issue the Shares and the Warrant Shares. The Securities are not
subject to any preemptive or similar rights to subscribe for or purchase
securities, except as have been waived prior to the Closing. The Company
shall, so long as any of the Warrants are outstanding, take all action
necessary to reserve and keep available out of its authorized and unissued
Capital Stock, solely for the purpose of effecting the exercise of the
Warrants, 100% of the number of shares of Common Stock issuable upon exercise
of the Warrants. Upon exercise in accordance with the Warrants, the Warrant
Shares will be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof, with the holders
being entitled to all rights accorded to a holder of Common Stock. Assuming
the accuracy of the representations and warranties of the Investor made herein,
the issuance by the Company of the Securities is exempt from registration under
the 1933 Act.

          (g) Capitalization. As of the date hereof, the authorized , issued and
outstanding capital stock of the Company and all shares of capital stock
reserved for issuance under the Company’s various option and incentive plans
convertible securities or other instruments, is as set forth on Schedule
3.1(g). Except as specified in the SEC Reports or on Schedule 3.1(g), no
security holders of the Company are entitled to preemptive or similar rights,
and no Person has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents. Except as specified in the SEC
Reports or on Schedule 3.1(g), there are no outstanding options, warrants,
scrip rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, rights or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. Except as specified in the SEC
Reports or on Schedule 3.1(g), the issue and sale of the Securities will not,
immediately or with the passage of time, obligate the Company to issue shares
of Common Stock or other securities to any Person (other than the Investors)
and will not result in a right of any holder of Company securities to adjust
the exercise, conversion, exchange or reset price under such securities.

          (h) SEC Reports; Financial Statements. Except as disclosed on Schedule
3.1(h), the Company has filed all reports required to be filed by it under the
Securities Act and the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the twelve months preceding the date hereof (the foregoing
materials, as amended, being collectively referred to

-7-

 

herein as the “SEC Reports” and, together with the Schedules to this
Agreement (if any), the “Disclosure Materials”) on a timely basis or has timely
filed a request for and obtained a valid extension of such time of filing and
has filed any such SEC Reports prior to the expiration of any such extension.
Except as disclosed on Schedule 3.1(h), as of their respective dates, the SEC
Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Reports comply in all material respects with applicable accounting requirements
and the rules and regulations of the Commission with respect thereto as in
effect at the time of filing. Such financial statements have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved,
except as may be otherwise specified in such financial statements or the notes
thereto, and fairly present in all material respects the financial position of
the Company and its consolidated Subsidiaries as of and for the dates thereof
and the results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal, immaterial, year-end
audit adjustments.

          (i) Press Releases. The press releases disseminated by the Company during
the twelve months preceding the date of this Agreement taken as a whole do not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made and when
made, not misleading.

          (j) Material Changes. Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
the SEC Reports, (i) there has been no event, occurrence or development that
has had or that would reasonably be expected to result in a Material Adverse
Effect, (ii) the Company has not incurred any liabilities (contingent or
otherwise) other than (A) trade payables, accrued expenses and other
liabilities incurred in the ordinary course of business consistent with past
practice and (B) liabilities reflected in the Company’s quarterly financial
statements pursuant to GAAP or disclosed in filings made with the Commission,
or not required to be so reflected or disclosed, (iii) the Company has not
altered its method of accounting, (iv) the Company has not declared or made any
dividend or distribution of cash or other property to its common stockholders
or purchased, redeemed or made any agreements to purchase or redeem any shares
of its capital stock, and (v) the Company has not issued any equity securities
to any officer, director or Affiliate, except pursuant to existing Company
stock option plans or previously issued warrants or convertible securities.
The Company does not have pending before the Commission any request for
confidential treatment of information.

          (k) Litigation. Except as disclosed on Schedule 3.1(k), there is no
Action which (i) adversely affects or challenges the legality, validity or
enforceability of any of the

-8-

 

Transaction Documents or the Securities or (ii) except as specifically
disclosed in the SEC Reports, would, if there were an unfavorable decision,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect. Neither the Company nor any Subsidiary, nor any
director or officer thereof (in his or her capacity as such), is or has been
the subject of any Action involving a claim of violation of or liability under
federal or state securities laws or a claim of breach of fiduciary duty, except
as specifically disclosed in the SEC Reports. There has not been, and to the
knowledge of the Company, there is not pending any investigation by the
Commission involving the Company or any current or former director or officer
of the Company (in his or her capacity as such). The Commission has not issued
any stop order or other order suspending the effectiveness of any registration
statement filed by the Company or any Subsidiary under the Exchange Act or the
Securities Act.

          (l) Labor Relations. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company.

          (m) Compliance. Neither the Company nor any Subsidiary (i) is in default
under or in violation of (and no event has occurred that has not been waived
that, with notice or lapse of time or both, would result in a default by the
Company or any Subsidiary under), nor has the Company or any Subsidiary
received notice of a claim that it is in default under or that it is in
violation of, any indenture, loan or credit agreement or any other agreement or
instrument to which it is a party or by which it or any of its properties is
bound (except to the extent such default or violation has been waived), (ii) is
in violation of any order of any court, arbitrator or governmental body, or
(iii) is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws relating to taxes, environmental protection, occupational
health and safety, product quality and safety and employment and labor matters,
except in each case as would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect. The Company is
in compliance with all effective requirements of the Sarbanes-Oxley Act of
2002, as amended, and the rules and regulations thereunder, that are applicable
to it, except where such noncompliance would not have or reasonably be expected
to result in a Material Adverse Effect.

          (n) Patents and Trademarks. The Company and the Subsidiaries have, or
have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and other
similar rights that are necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have would, individually or in the aggregate, have or reasonably be expected
to result in a Material Adverse Effect (collectively, the “Intellectual
Property Rights”). Except as set forth in the SEC Reports or on Schedule
3.1(n), neither the Company nor any Subsidiary has received a written notice
that the Intellectual Property Rights used by the Company or any Subsidiary
violates or infringes upon the rights of any Person. Except as set forth in
the SEC Reports, to the knowledge of the Company, all such Intellectual
Property Rights are enforceable and there is no existing infringement by
another Person of any of the Intellectual Property Rights.

-9-

 

          (o) Insurance. The Company and the Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which the
Company and the Subsidiaries are engaged. The Company has no reason to believe
that it will not be able to renew its and the Subsidiaries’ existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business on terms
substantially as currently in effect.

          (p) Transactions With Affiliates and Employees. None of the officers or
directors of the Company and, to the knowledge of the Company, none of the
employees of the Company is presently a party to any material transaction with
the Company or any Subsidiary (other than for services as employees, officers
and directors), that is required to be disclosed in the SEC Reports and is not
so disclosed.

          (q) Tax Status. The Company and each of its Subsidiaries (i) has made or
filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set
aside on its books provision reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.

          (r) Internal Accounting Controls. Except as disclosed on Schedule 3.1(r),
the Company and the Subsidiaries maintain a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures
(as defined in Exchange Act rules 13a-14 and 15d-14) for the Company and
designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its Subsidiaries, is made known
to the certifying officers by others within those entities, particularly during
the period in which the Company’s Form 10-K or 10-Q, as the case may be, is
being prepared. The Company’s certifying officers have evaluated the
effectiveness of the Company’s controls and procedures as of the last day of
the period covered by the Form 10-K/A for the Company’s most recently ended
fiscal year (such date, the “Evaluation Date”). The Company presented in its
most recently filed Form 10-K or Form 10-Q the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures
based on their evaluations as of the Evaluation Date. Except as disclosed on
Schedule 3.1(r), since the

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Evaluation Date, there have been no significant changes in the Company’s
internal controls (as such term is defined in Item 307(b) of Regulation S-K
under the Exchange Act) or, to the Company’s knowledge, in other factors that
would significantly affect the Company’s internal controls.

          (s) Solvency. Based on the financial condition of the Company as of the
Closing Date (and assuming that the Closing shall have occurred), the current
cash flow of the Company, together with the proceeds the Company would receive,
were it to liquidate all of its assets, after taking into account all
anticipated uses of the cash, would be sufficient to pay all amounts on or in
respect of its debt when such amounts are required to be paid. The Company
does not intend to incur debts beyond its ability to pay such debts as they
mature (taking into account the timing and amounts of cash to be payable on or
in respect of its debt).

          (t) Certain Fees. Except as described in Schedule 3.1(t), no brokerage or
finder’s fees or commissions are or will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment
banker, bank or other Person with respect to the transactions contemplated by
this Agreement. The Investors shall have no obligation with respect to any
fees or with respect to any claims (other than such fees or commissions owed by
an Investor pursuant to written agreements executed by such Investor which fees
or commissions shall be the sole responsibility of such Investor) made by or on
behalf of other Persons for fees of a type contemplated in this Section that
may be due in connection with the transactions contemplated by this Agreement.
The Company shall pay, and hold each Investor harmless against, any liability,
loss or expense (including, without limitation, attorney’s fees and
out-of-pocket expenses) arising in connection with any such claim.

          (u) Certain Registration Matters. Assuming the accuracy of the Investors’
representations and warranties set forth in Section 3.2(b)-(e), no registration
under the Securities Act is required for the offer and sale of the Shares and
Warrant Shares by the Company to the Investors under the Transaction Documents.
The Company is not currently eligible to register the resale of its Common
Stock for resale by the Investors under Form S-3 promulgated under the
Securities Act. The Company has not granted or agreed to grant to any Person
any rights (including “piggy-back” registration rights) to have any securities
of the Company registered with the Commission or any other governmental
authority that have not been satisfied.

          (v) No General Solicitation; Placement Agent’s Fees. Neither the Company,
nor any of its affiliates, nor any Person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D) in connection with the offer or sale of the
Securities.

          (w) No Integrated Offering. None of the Company, its Subsidiaries, any of
their affiliates, and any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of

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the Securities to be integrated with prior offerings by the Company for
purposes of the 1933 Act or any applicable stockholder approval provisions,
including, without limitation, under the rules and regulations of any Trading
Market on which any of the securities of the Company are listed or designated.
None of the Company, its Subsidiaries, their affiliates and any Person acting
on their behalf will take any action or steps referred to in the preceding
sentence that would require registration of any of the Securities under the
1933 Act or cause the offering of the Securities to be integrated with other
offerings.

          (x) Listing and Maintenance Requirements. Except as specified in the SEC
Reports or on Schedule 3.1(x), the Company has not, in the two years preceding
the date hereof, received notice from any Trading Market to the effect that the
Company is not in compliance with the listing or maintenance requirements
thereof. The Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with the listing and
maintenance requirements for continued listing of the Common Stock on the
Trading Market on which the Common Stock is currently listed or quoted. The
issuance and sale of the Securities under the Transaction Documents does not
contravene the rules and regulations of the Trading Market on which the Common
Stock is currently listed or quoted, and no approval of the shareholders of the
Company thereunder is required for the Company to issue and deliver to the
Investors the Securities contemplated by Transaction Documents.

          (y) Investment Company. The Company is not, and is not an Affiliate of,
and immediately following the Closing will not have become, an “investment
company” within the meaning of the Investment Company Act of 1940, as amended.

          (z) Application of Takeover Protections. The Company has taken all
necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution
under a rights agreement) or other similar anti-takeover provision under the
Company’s Certificate of Incorporation (or similar charter documents) or the
laws of its state of incorporation that is or would become applicable to the
Investors as a result of the Investors acquiring Securities at Closing
including the Warrant Shares issuable upon exercise of the Warrants, assuming
that no Investor or group of Investors (as defined in Rule 13d-1 of the
Exchange Act) acquires more than 15% of the Company’s Common Stock other than
solely by purchasing Shares and Warrant Shares from the Company.

          (aa) No Additional Agreements. The Company does not have any agreement or
understanding with any Investor with respect to the transactions contemplated
by the Transaction Documents other than as specified in the Transaction
Documents.

          (bb) Disclosure. The Company confirms that neither it nor any Person
acting on its behalf has provided any Investor or its respective agents or
counsel with any information that the Company believes constitutes material,
non-public information except insofar as the existence and terms of the
proposed transactions hereunder may constitute such information. The Company
understands and confirms that the Investors will rely on the foregoing
representations

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and covenants in effecting transactions in securities of the Company. The
Company’s representations and warranties set forth in this Agreement are true
and correct and do not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.

     3.2 Representations and Warranties of the Investors. Each Investor
hereby, for itself and for no other Investor, represents and warrants to the
Company as follows:

          (a) Organization; Authority. Such Investor is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the applicable
Transaction Documents and otherwise to carry out its obligations thereunder.
The execution, delivery and performance by such Investor of the transactions
contemplated by this Agreement has been duly authorized by all necessary
corporate or, if such Investor is not a corporation, such partnership, limited
liability company or other applicable like action, on the part of such
Investor. Each of this Agreement and the Registration Rights Agreement has
been duly executed by such Investor, and when delivered by such Investor in
accordance with terms hereof, will constitute the valid and legally binding
obligation of such Investor, enforceable against it in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating
to, or affecting generally the enforcement of, creditors’ rights and remedies
or by other equitable principles of general application.

          (b) Investment Intent. Such Investor is acquiring the Securities as
principal for its own account for investment purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof,
without prejudice, however, to such Investor’s right at all times to sell or
otherwise dispose of all or any part of such Securities in compliance with
applicable federal and state securities laws. Subject to the immediately
preceding sentence, nothing contained herein shall be deemed a representation
or warranty by such Investor to hold the Securities for any period of time.
Such Investor is acquiring the Securities hereunder in the ordinary course of
its business. Such Investor does not have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the Securities.

          (c) Investor Status. At the time such Investor was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
exercises Warrants it will be, an “accredited investor” as defined in Rule
501(a) under the Securities Act. Such Investor is not a registered
broker-dealer under Section 15 of the Exchange Act.

          (d) General Solicitation. Such Investor is not purchasing the Securities
as a result of any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media
or broadcast over television or radio or presented at any seminar.

-13-

 

          (e) Access to Information. Such Investor acknowledges that it has
reviewed the Disclosure Materials and has been afforded (i) the opportunity to
ask such questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Shares and the merits and risks of investing in the Securities;
(ii) access to information about the Company and the Subsidiaries and their
respective financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment;
and (iii) the opportunity to obtain such additional information that the
Company possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the
investment. Neither such inquiries nor any other investigation conducted by or
on behalf of such Investor or its representatives or counsel shall modify,
amend or affect such Investor’s right to rely on the truth, accuracy and
completeness of the Disclosure Materials and the Company’s representations and
warranties contained in the Transaction Documents.

          (f) Certain Trading Activities. Such Investor has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Investor, engaged in any transactions in the securities
of the Company (including, without limitation, any Short Sales involving the
Company’s securities) since the time that such Investor was first contacted by
the Company or Roth Capital Partners, LLC regarding an investment in the
Company. For purposes of this Section, “Short Sales” include, without
limitation, all “short sales” as defined in Rule 200 of Regulation SHO adopted
under the Exchange Act and include all types of direct and indirect stock
pledges, forward sale contracts, options, puts, calls, short sales, swaps and
similar arrangements (including on a total return basis), and sales and other
transactions through non-US broker-dealers or foreign regulated brokers having
the effect of hedging the securities or investment made under this Agreement.
Such Investor covenants that neither it, nor any person acting on its behalf or
pursuant to any understanding with it, will engage in any transactions in the
securities of the Company (including Short Sales) (a) prior to the time that
the transactions contemplated by this Agreement are publicly disclosed, or (b)
in violation of any laws or any rules or regulations of the Commission. Such
Investor is aware of the Commission’s position set forth in Item 65, Section 5,
under Section A, of the Manual of Publicly Available Telephone Interpretations,
dated July 1997, compiled by the Office of Chief Counsel, Division of
Corporation Finance.

          (g) Independent Investment Decision. Such Investor has independently
evaluated the merits of its decision to purchase Securities pursuant to the
Transaction Documents, and such Investor confirms that it has not relied on the
advice of any other Investor’s business and/or legal counsel in making such
decision. Such Investor has not relied on the business or legal advice of Roth
Capital Partners, LLC or any of its agents, counsel or Affiliates in making its
investment decision hereunder, and confirms that none of such Persons has made
any representations or warranties to such Investor in connection with the
transactions contemplated by the Transaction Documents.

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The Company acknowledges and agrees that no Investor has made or makes any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.

ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

     4.1 (a) Securities may only be disposed of in compliance with state and
federal securities laws. In connection with any transfer of the Securities
other than pursuant to an effective registration statement, to the Company, to
an Affiliate of an Investor or in connection with a pledge as contemplated in
Section 4.1(b), the Company may require the transferor thereof to provide to
the Company an opinion of counsel selected by the transferor, the form and
substance of which opinion shall be reasonably satisfactory to the Company, to
the effect that such transfer does not require registration of such transferred
Securities under the Securities Act.

          (b) Certificates evidencing the Securities will contain the following
legend, until such time as they are not required under Section 4.1(c):

[NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE
OF THESE SECURITIES HAVE BEEN REGISTERED] [THESE SECURITIES HAVE
NOT BEEN REGISTERED] WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE
OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. [THESE
SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES] [THESE SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

          The Company acknowledges and agrees that an Investor may from time to time
pledge, and/or grant a security interest in some or all of the Securities
pursuant to a bona fide margin agreement in connection with a bona fide margin
account of Investor and, if required under the terms of such agreement or
account, such Investor may transfer pledged or secured Securities to the
pledgees or secured parties. Such a pledge or transfer would not be subject to

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approval or consent of the Company and no legal opinion of legal counsel to the
pledgee, secured party or pledgor shall be required in connection with the
pledge, but such legal opinion may be required in connection with a subsequent
transfer by the pledgee or secured party, following default by the Investor or
otherwise. No notice shall be required of such pledge. At the appropriate
Investor’s expense, the Company will execute and deliver such reasonable
documentation as a pledgee or secured party of Securities may reasonably
request in connection with a pledge or transfer of the Securities including the
preparation and filing of any required prospectus supplement under Rule
424(b)(3) of the Securities Act or other applicable provision of the Securities
Act to appropriately amend the list of Selling Stockholders thereunder.

          (c) Certificates evidencing the Shares and Warrant Shares shall not
contain any legend (including the legend set forth in Section 4.1(b)): (i)
following a sale of such Securities pursuant to an effective registration
statement (including the Registration Statement) covering the resale of such
Securities, or (ii) following a sale of such Shares or Warrant Shares pursuant
to Rule 144 (assuming the transferor is not an Affiliate of the Company), or
(iii) while such Shares or Warrant Shares are eligible for sale under Rule
144(k). The Company shall use its best efforts to cause its counsel to issue
any legal opinion or instruction required by the Company’s transfer agent to
comply with the requirements set forth in this Section. Following such time as
restrictive legends are not required to be placed on certificates representing
Shares or Warrant Shares pursuant to the preceding sentence, the Company will,
no later than four Trading Days following the delivery by an Investor to the
Company or the Company’s transfer agent of a certificate representing Shares or
Warrant Shares containing a restrictive legend, deliver or cause to be
delivered to such Investor a certificate representing such Shares or Warrant
Shares that is free from all restrictive and other legends. The Company may
not make any notation on its records or give instructions to any transfer agent
of the Company that enlarge the restrictions on transfer set forth in this
Section.

     4.2 Furnishing of Information. As long as any Investor owns the
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. As long as any Investor owns Securities, if the Company is not
required to file reports pursuant to such laws, it will prepare and furnish to
the Investors and make publicly available in accordance with Rule 144(c) such
information as is required for the Investors to sell the Shares and Warrant
Shares in compliance with Rule 144. The Company further covenants that it will
take such further action as any holder of Shares may reasonably request, all to
the extent required from time to time to facilitate transfers without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.

     4.3 Integration. The Company shall not, and shall use its best efforts to
ensure that no Affiliate of the Company shall, sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or
sale of the Securities in a manner that would require the registration under
the Securities Act of the sale of the Securities to the Investors, or that
would be integrated with the

-16-

 

offer or sale of the Securities for purposes of the rules and regulations
of any Trading Market in a manner that would require stockholder approval of
the sale of the securities to the Investors.

     4.4 Subsequent Registrations. Other than pursuant to the Registration
Statement, prior to the Effective Date, the Company may not file any
registration statement with the Commission with respect to any securities of
the Company (other than on Form S-8).

     4.5 Securities Laws Disclosure; Publicity. By 9:45 a.m. (New York time)
on October 6, 2004, and by 9:30 a.m. (New York time) on the Closing Date, the
Company shall issue press releases disclosing the transactions contemplated
hereby and the Closing. On the Trading Day after the execution of this
Agreement the Company will file a Current Report on Form 8-K disclosing the
material terms of the Transaction Documents (and attach as exhibits thereto the
Transaction Documents), and on the Closing Date the Company will file an
additional Current Report on Form 8-K to disclose the Closing. In addition,
the Company will make such other filings and notices in the manner and time
required by the Commission and the Trading Market on which the Common Stock is
listed. Notwithstanding the foregoing, the Company shall not publicly disclose
the name of any Investor, or include the name of any Investor in any filing
with the Commission (other than the Registration Statement and any exhibits to
filings made in respect of this transaction in accordance with periodic filing
requirements under the Exchange Act) or any regulatory agency or Trading
Market, without the prior written consent of such Investor, except to the
extent such disclosure is required by law or Trading Market regulations.

     4.6 Limitation on Issuance of Future Priced Securities. During the six
months following the Closing Date, the Company shall not issue any “Future
Priced Securities” as such term is described by NASD IM-4350-1.

     4.7 Indemnification of Investors. In addition to the indemnity provided
in the Registration Rights Agreement, the Company will indemnify and hold the
Investors and their directors, officers, shareholders, partners, employees and
agents (each, an “Investor Party”) harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and
reasonable attorneys’ fees and costs of investigation (collectively, “Losses”)
that any such Investor Party may suffer or incur as a result of or relating to
any misrepresentation, breach or inaccuracy of any representation, warranty,
covenant or agreement made by the Company in any Transaction Document.

     4.8 Non-Public Information. The Company covenants and agrees that neither
it nor any other Person acting on its behalf will provide any Investor or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Investor shall have
expressly consented to such disclosure and have executed a written agreement
regarding the confidentiality and use of such information.

     4.9 Listing of Securities. The Company agrees, (i) if the Company applies
to have the Common Stock traded on any other Trading Market, it will include in
such application the

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Shares and Warrant Shares, and will take such other action as is necessary
or desirable to cause the Shares and Warrant Shares to be listed on such other
Trading Market as promptly as possible, and (ii) it will take all action
reasonably necessary to continue the listing and trading of its Common Stock on
the Principal Market and will comply in all material respects with the
Company’s reporting, filing and other obligations under the bylaws or rules of
the Trading Market.

     4.10 Use of Proceeds. The Company will use the net proceeds from the sale
of the Securities hereunder for working capital purposes, the retirement of any
indebtedness of the Company, the possible redemption of outstanding convertible
securities and potential business acquisitions.

     4.11 Form D and Blue Sky. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Investor promptly after such filing. The Company, on or before
the Closing Date, shall take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Investors at the Closing pursuant to this Agreement
under applicable securities or “Blue Sky” laws of the states of the United
States (or to obtain an exemption from such qualification), and shall provide
evidence of any such action so taken to the Investors on or prior to the
Closing Date. The Company shall make all filings and reports relating to the
offer and sale of the Securities required under applicable securities or “Blue
Sky” laws of the states of the United States following the Closing Date.

     4.12 Reporting Status. Until the date on which the Investors shall have
sold all the Common Shares and Warrant Shares and none of the Warrants is
outstanding (the “Reporting Period”), the Company shall timely file all reports
required to be filed with the SEC pursuant to the Exchange Act, and the Company
shall not terminate its status as an issuer required to file reports under the
Exchange Act even if the Exchange Act or the rules and regulations thereunder
would otherwise permit such termination.

     4.13 Reasonable Best Efforts. Each party shall use its reasonable best
efforts timely to satisfy each of the covenants and the conditions to be
satisfied by it as provided in Sections 5.1 and 5.2 of this Agreement.

ARTICLE V.

CONDITIONS PRECEDENT TO CLOSING

     5.1 Conditions Precedent to the Obligations of the Investors to Purchase
Securities. The obligation of each Investor to acquire Securities at the
Closing is subject to the satisfaction or waiver by such Investor, at or before
the Closing, of each of the following conditions:

          (a) Representations and Warranties. The representations and warranties of
the Company contained herein shall be true and correct in all material respects
as of the date when made and as of the Closing as though made on and as of such
date;

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          (b) Performance. The Company shall have performed, satisfied and complied
in all material respects with all covenants, agreements and conditions required
by the Transaction Documents to be performed, satisfied or complied with by it
at or prior to the Closing;

          (c) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction that prohibits
the consummation of any of the transactions contemplated by the Transaction
Documents;

          (d) Adverse Changes. Since the date of execution of this Agreement, no
event or series of events shall have occurred that reasonably would have or
result in a Material Adverse Effect;

          (e) No Suspensions of Trading in Common Stock; Listing. Trading in the
Common Stock shall not have been suspended by the Commission or any Trading
Market (except for any suspensions of trading of not more than one Trading Day
solely to permit dissemination of material information regarding the Company)
at any time since the date of execution of this Agreement, and the Common Stock
shall have been at all times since such date listed for trading on a Trading
Market;

          (f) Nasdaq Listing. The Nasdaq Stock Market shall have waived application
of the 15 day prior notice contained in NASD Marketplace Rule 4310(c)(17)(D) or
such timeframe shall have expired without objection;

          (g) Company Deliverables. The Company shall have delivered the Company
Deliverables in accordance with Section 2.2(a); and

          (h) Timing. The Closing shall have occurred no later than October 6,
2004.

     5.2 Conditions Precedent to the Obligations of the Company to sell
Securities. The obligation of the Company to sell Securities at the Closing is
subject to the satisfaction or waiver by the Company, at or before the Closing,
of each of the following conditions:

          (a) Representations and Warranties. The representations and warranties of
each Investor contained herein shall be true and correct in all material
respects as of the date when made and as of the Closing Date as though made on
and as of such date;

          (b) Performance. Each Investor shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by such Investor at or prior to the Closing;

-19-

 

          (c) Nasdaq Listing. The Nasdaq Stock Market shall have waived application
of the 15 day prior notice contained in NASD Marketplace Rule 4310(c)(17)(D) or
such timeframe shall have expired without objection;

          (d) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction that prohibits
the consummation of any of the transactions contemplated by the Transaction
Documents;

          (e) Investors Deliverables. Each Investor shall have delivered its
Investors Deliverables in accordance with Section 2.2(b); and

          (f) Timing. The Closing shall have occurred no later than October 6,
2004.

ARTICLE VI.

MISCELLANEOUS

     6.1 Fees and Expenses. At the Closing, the Company shall reimburse
Riverview Group, LLC, an Investor, for its legal and due diligence fees and
expenses in connection with the negotiation of the Transaction Documents by
paying up to $10,000 to Schulte Roth & Zabel LLP, which amount shall be
withheld by the Investor from its Purchase Price to be paid at Closing. Except
as specified in the immediately preceding sentence, each party shall pay the
fees and expenses of its advisers, counsel, accountants and other experts, if
any, and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of the Transaction Documents.
The Company shall pay all stamp and other taxes and duties levied in connection
with the sale of the Shares.

     6.2 Entire Agreement. The Transaction Documents, together with the
Exhibits and Schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements,
understandings, discussions and representations, oral or written, with respect
to such matters, which the parties acknowledge have been merged into such
documents, exhibits and schedules.

     6.3 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile (provided the sender
receives a machine-generated confirmation of successful transmission) at the
facsimile number specified in this Section prior to 6:30 p.m. (New York City
time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section on a day that is not a Trading Day
or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the
Trading Day following the date of mailing, if sent by U.S. nationally
recognized overnight courier service, or (d) upon actual receipt by the party
to whom such notice is required to be given. The address for such notices and
communications shall be as follows:

-20-

 

	 	 	 
	If to the Company:

	 	Digital Recorders, Inc.

5949 Sherry Lane, Suite 1050

Dallas, Texas 75225

Facsimile: (214) 378-8437

Attn.: David L. Turney
	 
	 	 
	With a copy to:

	 	Carrington, Coleman, Sloman & Blumenthal, L.L.P.

200 Crescent Court, Suite 1500

Dallas, Texas 75201

Facsimile: (214) 855-1333

Attn.: Kenn W. Webb, Esq.
	 
	 	 
	If to an Investor:

	 	To the address set forth under such Investor’s name on the signature pages hereof;
	 
	 	 
	With a copy (for informational

purposes only) to:

	 	Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Telephone: (212) 756-2000

Facsimile: (212) 593-5955

Attention: Eleazer Klein, Esq.

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

     6.4 Amendments; Waivers; No Additional Consideration. No provision of
this Agreement may be waived or amended except in a written instrument signed
by the Company and the Investors holding a majority of the Shares. No waiver
of any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver
of any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right. No
consideration shall be offered or paid to any Investor to amend or consent to a
waiver or modification of any provision of any Transaction Document unless the
same consideration is also offered to all Investors who then hold Shares.

     6.5 Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party. This
Agreement shall be construed as if drafted jointly by the parties, and no
presumption or

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burden of proof shall arise favoring or disfavoring any party by virtue of
the authorship of any provisions of this Agreement or any of the Transaction
Documents.

     6.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Investors. Any Investor may
assign any or all of its rights under this Agreement to any Person to whom such
Investor assigns or transfers any Securities, provided such transferee agrees
in writing to be bound, with respect to the transferred Securities, by the
provisions hereof that apply to the “Investors.”

     6.7 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.7 (as to each
Investor Party).

     6.8 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
Affiliates, employees or agents) shall be commenced exclusively in the New York
Courts. Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of the any of
the Transaction Documents), and hereby irrevocably waives, and agrees not to
assert in any Proceeding, any claim that it is not personally subject to the
jurisdiction of any such New York Court, or that such Proceeding has been
commenced in an improper or inconvenient forum. Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law. Each party hereto
hereby irrevocably waives, to the fullest extent permitted by applicable law,
any and all right to trial by jury in any legal proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby. If either
party shall commence a Proceeding to enforce any provisions of a Transaction
Document, then the prevailing party in such Proceeding shall be reimbursed by
the other party for its reasonable attorneys’ fees and other costs and expenses
incurred with the investigation, preparation and prosecution of such
Proceeding.

-22-

 

     6.9 Survival. The representations and warranties contained herein shall
survive until the second anniversary of the Closing. The agreements and
covenants contained herein shall survive the Closing and the delivery of the
Securities in accordance with their respective terms.

     6.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.

     6.11 Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

     6.12 Rescission and Withdrawal of Elections, Etc. Notwithstanding
anything to the contrary contained in (and without limiting any similar
provisions of) the Transaction Documents, whenever any Investor exercises a
right, election, demand or option under a Transaction Document and the Company
does not timely perform its related obligations within the periods therein
provided, then such Investor may rescind or withdraw, in its sole discretion
from time to time upon written notice to the Company, any relevant notice,
demand or election in whole or in part without prejudice to its future actions
and rights.

     6.13 Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new
certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary
and reasonable indemnity, if requested. The applicants for a new certificate
or instrument under such circumstances shall also pay any reasonable
third-party costs associated with the issuance of such replacement Securities.
If a replacement certificate or instrument evidencing any Securities is
requested due to a mutilation thereof, the Company may require delivery of such
mutilated certificate or instrument as a condition precedent to any issuance of
a replacement.

     6.14 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Investors and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any

-23-

 

action for specific performance of any such obligation the defense that a
remedy at law would be adequate.

     6.15 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Investor pursuant to any Transaction Document or an Investor
enforces or exercises its rights thereunder, and such payment or payments or
the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other person
under any law (including, without limitation, any bankruptcy law, state or
federal law, common law or equitable cause of action), then to the extent of
any such restoration the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.

     6.16 Independent Nature of Investors’ Obligations and Rights. The
obligations of each Investor under any Transaction Document are several and not
joint with the obligations of any other Investor, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor under any Transaction Document. The decision of each Investor to
purchase Securities pursuant to the Transaction Documents has been made by such
Investor independently of any other Investor. Nothing contained herein or in
any Transaction Document, and no action taken by any Investor pursuant thereto,
shall be deemed to constitute the Investors as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents.
Each Investor acknowledges that no other Investor has acted as agent for such
Investor in connection with making its investment hereunder and that no
Investor will be acting as agent of such Investor in connection with monitoring
its investment in the Securities or enforcing its rights under the Transaction
Documents. Each Investor shall be entitled to independently protect and
enforce its rights, including without limitation the rights arising out of this
Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Investor to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that each of the
Investors has been provided with the same Transaction Documents for the purpose
of closing a transaction with multiple Investors and not because it was
required or requested to do so by any Investor.

     6.17 Limitation of Liability. Notwithstanding anything herein to the
contrary, the Company acknowledges and agrees that the liability of an Investor
arising directly or indirectly, under any Transaction Document of any and every
nature whatsoever shall be satisfied solely out of the assets of such Investor,
and that no trustee, officer, other investment vehicle or any other Affiliate
of such Investor or any investor, shareholder or holder of shares of beneficial
interest of such a Investor shall be personally liable for any liabilities of
such Investor.

-24-

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOLLOW]

-25-

 

     IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

	 	 	 	 	 
	 	DIGITAL RECORDERS, INC.

 	 
	 	By:  	/s/ DAVID
L. TURNEY	 
	 	 	Name:  	David L. Turney 	 
	 	 	Title:  	Chairman, CEO and President	 
	 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOR INVESTORS FOLLOW]

-26-

 

                              IN WITNESS WHEREOF, the parties have executed this Security Purchase
Agreement as of the date first written above.

	 	 	 	 	 
	 	RIVERVIEW GROUP, LLC	 
	 
	 	By:  	/s/ TERRY
FEENEY	 
	 	 	Name:  	Terry Feeney 	 
	 	 	Title:  	Chief Operating Officer 
	 

	 	 	 	 	 
	 	Investment Amount: $5,000,000
	 	 	  	 	 
	 	Tax ID No.:  	 	 
	 
	 	Date:  	 	 
	 

	 	 	 	 	 
	 	ADDRESS FOR NOTICE
	 
	 	c/o:  	 	 
	 
	 	Street: 	666 Fifth Avenue, 8th Floor   	 
	 
	 	City/State/Zip:	New York, NY 10103	 
	 
	 	Attention:	 Daniel Cardella	 
	 
	 	Tel:	 (212) 841-4100	 
	 
	 	Fax:	(212) 977-1667 	 
	 

	 	 	 	 	 
	 	DELIVERY INSTRUCTIONS

(if different from above)
	 
	 	c/o:  	 	 
	 
	 	Street:  	 	 
	 
	 	City/State/Zip:  	 	 
	 
	 	Attention:  	 	 
	 
	 	Tel:  	 	 
	 

-27-

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